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Article Excerpt
Forty-five years ago, the sociologist David Caplovitz wrote a ground-breaking Expose, The Poor Pay More, about low-income households in New York City. He revealed that poor inner-city families were kept in perpetual debt by having to pay excessive prices for basic necessities like food and housing and having few choices for buying other household items like furniture other than to purchase them "on time" at high interest rates from local mom-and-pop stores and neighborhood peddlers. (1)
The poor have long been easy targets for unscrupulous lenders. Scholars have traced the use of credit and the growth of predatory lending back to pre-biblical times. (2) And 45 years after Caplovitz's book, we still hear stories about shady sales practices and misrepresentations of prices that lead to repossessions, endlessly revolving debt, and other dire consequences of high-cost lending.
Making predatory loans to the poor has become big business. In fact, it occupies an entire sector of the economy referred to as "fringe banking" (3) or the alternative financial sector (AFS):
The AFS targets low-income and working poor consumers, minorities, and those with blemished credit histories--consumers most vulnerable to exploitation and least able to protect their interests. This has resulted in a two-tiered economy, often referred to as a system of "financial apartheid" or a "second-class" market, in which middle-income and affluent consumers are served by federally insured and regulated banks and other lenders, and the poor and near-poor are relegated to expensive and, in many cases, poorly regulated alternatives. (4)
There are now nearly twice as many payday lending storefronts in the United States as there are McDonald's fast-food outlets--only 12,401 McDonald's versus 23,417 payday lenders, according to data from a leading researcher. (5)
The biggest specialist companies in the business, like the rent-to-own giant Rent-A-Center and the payday lender behemoth Advance America, are multi-billion-dollar companies that trade on the major exchanges. In 2007, for example, Advance America reported that it had made profits of $54 million on revenues of $710 million. (6) In just eight years, the payday loan industry grew from $10 billion to $28 billion. (7)
The predatory small-loan business has organized and grown during the last 20 years by pursuing the following actions.
Consolidating local firms into larger entities, with dominance by a few market leaders in each predatory small-loan sector, and going public to raise more capital.
Using an effective state political strategy fueled by campaign contributions to enact industry-favorable legislation on a state-by-state basis. The goal is to essentially legalize usury by exempting predatory small-loan products from small-loan regulations and legalizing their practices under a permissive self-serving statute.
Taking the advice of "crisis-management" public relations firms and creating front groups with consumer-friendly names, such as the payday lenders' Community Financial Services Association, which enforces a code of "best practices" and coordinates various feel-good weekend community services projects. (8)
Limiting consumer legal rights by placing mandatory arbitration clauses in lending contracts.
"Shape-shifting" when facing regulatory barriers. Payday lenders especially have used a variety of legal legerdemain to avoid state regulations. Firms have pretended to sell catalog ads or yellow pages listings (9) or operated on the Internet beyond the reach of state enforcers to avoid regulation.
Some payday lenders used a successful but now defunct "rent-a-bank" strategy, which allowed them to hide from state regulation under the guise of agents of state or national banks, whose loans were exempt from state small-loan laws; eventually, bank regulators were convinced to crack down on the practice. (10) More recently, lenders have used the credit services organization model to evade usury caps in Texas, probably the most profitable state for payday lending. The payday loan industry now claims an exemption from Texas interest rate regulation by having stores act as "registered" credit services organizations rather than "licensed" lenders. (11)
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Diversifying their business. Rent-A-Center, for example, is diversifying aggressively by providing payday loans and other financial products. It advertises that its Cash AdvantEdge "provides short-term loans, check cashing, money transfers, and other convenient financial services and operates within some of our Rent-A-Center stores." (12) A short-term loan, in this case, is a payday loan.
Expanding internationally. For example, First Cash Financial Services, based in Arlington, Texas, owns pawn shops with attached company-owned payday lenders, as well as Auto Master, a high-cost "Buy Here/Pay Here" car dealership. In 2007, the company said it "anticipates opening 80 new stores in 2008, of which approximately 60 will be in Mexico. In the United States, the company plans to open approximately 15 new short-term advance stores and five Auto Master dealerships." (13)
How loans are predatory
The industry's main players include rent-to-own stores, payday lenders, tax-refund-anticipation loan providers, traditional check cashers, foreign remittance shops, auto-title pawn stores, and traditional pawn shops. These lenders share certain predatory characteristics, including
* storefronts that are clustered in low-income neighborhoods or outside military bases
* products that are poorly regulated, with triple-digit interest rates the rule, not the exception
* the freedom to operate under safe-harbor laws and rules drafted by the industry itself
* threatening...
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