Predatory Lending: Robin Hood in Reverse

The story of Robin Hood – of the noble bandit stealing from the rich in order to give to the poor – is a popular cultural motif. It’s a shame that that’s just not true, that the real scenario is the rich stealing from the poor in order to give to themselves. Predatory lending has become one of the more common ways that this is now happening. Unfortunately, these practices are not even thought of as stealing. Actually, they are perfectly legal.

So-called “payday” services, including check-cashing and short-term loans, are the most scurrilous of these business activities. When I typed “payday services” into the Google search engine, I found one directory that included 66 separate providers, and that was only on the first page of results!

In Columbus, Ohio, a local community advocacy group has been calling for legal limits on these services. BREAD (Building Responsibility, Equality and Dignity) is demanding that the Ohio legislature limit the interest rates that can be charged. In a story written by Sherri Williams for the Columbus Dispatch (May 8, 2007), an example was given of a woman who borrowed $500 and ended up paying back $3,000. Loan sharks might actually provide better interest rates than that! Obviously, these are lucrative businesses, since the number of shops in Ohio grew from 107 to 1,562 in the ten years between 1996 and 2006. Of course, when interest rates can be as high as 390% a year, who should be surprised?

In an earlier post in Credit Slips (“Being Poor in America”), I noted that the bottom quintile of the household income distribution for 2005 had an upper limit of $19,178, and a mean of $10,655. With one in five households in this country struggling to get by on these below poverty threshold incomes, there are plenty of victims for predatory lenders. But the “market” is actually much bigger than that. The second quintile has a lower limit of $19,179 and an upper limit of $36,000, with a mean of $27,357. That’s better than the $29.19 per household per day for the bottom quintile, but only amounts to $74.95 a day (or $29.16 per person per day). Those households are still going to struggle to pay their bills, and those incomes (gross incomes, by the way) will put them above the poverty and limit their access to various types of government assistance. That includes programs such as Food Stamps that are capped not at the poverty threshold but at 130% of it. But now the market for payday services has been doubled, including at least two of every five U. S. households.

Even the third quintile includes a lot of struggling households. Here, the lower limit is $36,001, and the upper limit is $57,660, and the mean is $46,301 – just about the same as the median for the whole population. The market for payday services could well include at least half the households in the country. The proliferation of these payday service locations in suburbs suggests precisely that.

Actually, predatory lending includes other types of financial services as well, particularly so-called “subprime” mortgages. These are loans for individuals with low credit scores who would otherwise not qualify for home mortgages. Interest rates are generally higher, and there are likely to be prepayment penalties and balloon payments. Most lenders do not use the term “subprime” when making offers to prospects, since “subprime” carries a negative tone.

Recent increases in mortgage loan defaults are likely being driven by these types of predatory loans. I live in Ohio, which is one of the states leading this increase, according to Policy Matters Ohio (http://www.policymattersohio.org/pdf/ForeclosureGrowthOhio2007.pdf). In fact, the problem is so severe here that the Ohio Attorney General filed suit against ten mortgage companies on June 7, 2007. In a story headlined “10 mortgage lenders sued; state alleges illegal practices,” all ten companies are identified (Columbus Dispatch, June 8, 2007).

Cashing in on poverty is nothing new. The Nation actually had a cover story with that title on May 20, 1996 (http://www.policymattersohio.org/pdf/ForeclosureGrowthOhio2007.pdf). Right after welfare reform became the law of the land in 1996, a number of large corporations, including Lockheed, began to contract with various state governments to provide the new Temporary Assistance to Needy Families (TANF) program authorized under the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996. The only way to make a profit from such services is to not qualify potential or to disqualify active recipients of public assistance. Now with legal predatory lending practices corporate entities have found even slimier ways to rip off the poor, the near-poor, and middle-income families in America.

What is most disturbing about these practices is the fact that major corporations often participate in them. According to Froma Harrop in her column, “Soaking the poor is now big business” (Columbus Dispatch, June 8, 2007), such corporations as Wells Fargo and U. S. Bancorp operate payday services, at interest rates up to 120%. As I pointed out in another post in Credit Slips (“Targeting the Elderly”), major banks work with telemarketing fraud schemes and continue to do so, even when government authorities make them aware of what they are doing.

That corporations – major and minor – participate in stealing from the poor should not be a surprise. Corporations may be legal fictions as entities, but they are not human. Rather, they are owned and run by human beings who hide behind their corporate shields. Typically those owners and operators are rich and know full well what they are doing. We are living in a time of excess and conspicuous consumption that rivals the Gilded Age and the Roaring Twenties. Even such conservative writers as Kevin Phillips have raised concerns about the continuing viability of democracy in a society where the gap between rich and poor is as extreme as it is in the U. S. (see The Politics of Rich and Poor, 1990, and Wealth and Democracy, 2002).

We live in an era of extreme wealth and extreme poverty, where the gap between the privileged and the oppressed is growing at an unprecedented rate, as United for a Fair Economy (http://www.faireconomy.org/) and Too Much (http://www.cipa-apex.org/toomuch/) have documented. We live in a time when the average male makes less than his father, as the Economic Mobility Project demonstrates in its report, Is the American Dream Alive and Well? (http://www.cipa-apex.org/toomuch/). The wealth of the nation is increasingly slipping away from those who need it most and into the hands of those who need it the least.

This sordid story is about greed, about the affluent and the wealthy taking from those who have the least – and the least means for stopping these practices. This story is about people who know what they are doing – and apparently have little or no consideration for the common good – only their own pocketbooks. These thieves know what they are doing. And what they are doing is unconscionable. That’s the bottom line.

Comments

[Jim Hawkins]

This is a great post, and I am very interested in the data. The argument, however, against payday lenders would be more persuasive to me (1) if there was data that people were getting rich off payday lending; and (2) if there were viable alternatives. The only paper I've seen about the profitability of payday lending suggests that payday lenders are not getting rich off the poor--it's: Aaron Huckstep, Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?, 12 FORDHAM J. CORP. & FIN. L. 203 (2007). Huckstep found that payday lenders’ profits are lower than Starbucks, etc. If no one is getting rich from this, is the high price alone enough of a reason to shut payday lending down?
On the other hand, where will people get emergency cash if we outlaw payday lending?
Great post! I'm curious about your research on this.

[Mahlon]

I sorry, did you start this post by advocating theft if done for "moral" purposes? Think before you write.

Although I am no fan of payday lending, I'm convinced that it serves a purpose in the market. The underlying problem is that the people who fall into the payday lending trap make bad decisions. If you are so concerned about the rate of interest being charged by payday lenders, here's an idea. Start your own payday lending company which charges exceedingly reasonable rates (or not interest, if you think you can do it). You will be in charge and you will be able to help people to your heart's delight. If the rates charged by the current market are so unreasonably, you can no only provide a service that is needed by the poor, you can make a modest profit to put back into any number of community projects, such as financial education for low income people. To boot, if you start taking business away from the "thiefs," they will be forced to lower their rates to compete with you. You can actually change the way these companies do business.

As an aside, I don't see you railing against state lotteries. I hear most of their customers are low income as well.

[David for No Fax Payday Loans]

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