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JP Morgan and Payday Loans

by CHRISTOPHER BRAUCHLI

“It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.”

— Attributed to Henry Ford

JP Morgan Chase did a good thing and everyone should applaud. Its good thing was noted at the same time its bad things were making news.  A good thing too.  The good thing came within days of Senate hearings that would have caused all but Jamie Dimon to think there was little good to be said for the institution.

On March 15, 2013, the United States Senate Subcommittee on Investigations issued a 307 page report entitled “JPMorgan Chase Whale Trades: A case History of Derivatives Risk and Abuses.” The report was issued on the same date the subcommittee was conducting a hearing on the same subject.  The hearing and report focused on the bank and its top executives as a result of the multi-billion dollar trading losses it suffered in 2012.  Credit for the losses was primarily given to the activities of outsize derivative trades effected by one of the bank’s traders known as the “London Whale.”  In the “Overview” of the report that appears in the Executive Summary, the Subcommittee states that the investigation determined, among other things, “that JPMorgan Chase’s Chief Investment Office used its Synthetic Credit Portfolio (SCP) to engage in high risk derivatives trading; mismarked the SCP book to hide hundreds of millions of dollars of losses; disregarded multiple internal indicators of increasing risk. . . . and misinformed investors, regulators , and the public about the nature of its risky derivatives trading.“  A lay person would not think well of an institution that engages in that kind of activity (to the extent a layperson understands things like “Synthetic Credit Portfolio”).  The report then goes on for 304 more pages to describe in some detail the activities in which the bank engaged. It observes that in April 2012 when media reports were beginning to circulate about the financial difficulties of the bank,  Jamie Dimon, Chief Executive Officer of the bank described those reports as a “tempest in a teapot.”

Responding to the report and the Senate hearing Joe Evangelisti, a spokesman for the bank, who may have been hired as much for his name as his skills, said: “Our management always said what they believed to be true at the time.  In hindsight, we discovered some of the information they had was wrong.”  Three hundred seven pages of the senate report consist of hindsight. The teapot to which Mr. Dimon had earlier referred was probably the bank and as a result of the tempest some of its tea leaves were removed by the board.  Mr. Dimon’s 2012 compensation went from $23 million to $11.5 million.  $11.5 million in tea leaves is not chicken feed but as Mr. Dimon jokingly told a questioner at a bank investor day in February, “I’m richer than you.” It is not clear from press reports that either Mr. Dimon or the bank is chastened.  Nonetheless, they should be given credit for their good works.  The bank has parted company with other large banks and cracked down on payday lenders.

Payday loans are loans designed to give momentary financial relief to workers and permanent relief to those making the loans. According to the Center for Responsible Lending, pay day loans interest rates can run as high as 465%, a rate that benefits the lender more than the borrower. Banks have joined the typical store front payday lenders and arrange with debtors for automatic withdrawals from the borrower’s checking accounts in order to repay the borrowed amounts.  That is a real convenience for the borrowers since they don’t have to do anything except make sure there are adequate funds to repay the loan on payday.  If the checking account does not have adequate funds to repay the loan the banks charge overdraft fees and continue to attempt to collect from the borrowers’ checking account, adding an additional overdraft fee each time the payment is declined. The bank is, of course, pleased to generate the income from the overdraft fee and the borrower is pleased that it got the money it needed before pay day and slightly less pleased at the fees charged when the loan is not repaid in a timely fashion. There are presently six banks, including Wells Fargo and US Bank that engage in payday lending.  And here is JPMorgan Chase’s good news.

JPMorgan Chase has decided to place limits on procedures involving payday loans, both those made by the bank and those made by storefront lenders. Beginning in May the bank will limit overdraft fees that can be collected and will permit customers to close accounts or have stop payment orders promptly enforced.  Heretofore customers found it could be impossible to put an end to automatic withdrawals by terminating the authority or closing the account with the result that fees continued to mount.  JPMorgan will now make it easier to close accounts even when there are accrued charges.  It goes to show that even an institution as venal as JPMorgan appears to have been, occasionally gets something right.

Christopher Brauchli is attorney in Boulder, Colorado. He can be emailed at brauchli.56@post.harvard.edu

 

 

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