Seth, over at Samaritanity has a great post about some of the reasons the poor stay poor. Like those handy rent-to-own stores with "No Credit Check" where you pay 1200 bucks for a $200 television. Or the economic risk assessment that's driving auto insurance premiums for the poor. Or my own favorite: the ubiquitous Payday Lenders.
Unlike our more enlightened northern neighbor, South Carolina has decided that the payday lending should be the century's growth industry. In fact, Loan Sharking is big business here with some of the country's biggest usurists setting up fancy corporate headquarters, like Advance America in Spartanburg. If you want to see how this new version of the Mafia's old business model works, just drive around any small town in South Carolina and look at the type of businesses hanging up their shingle in strip malls and abandoned ice cream shops.
In Greenwood, for example, an Upstate manufacturing town of 35,000 that lost a great deal of its job base when manufacturers left for El Salvador or Indonesia, I once counted 65 payday lenders inside the highway loop that surrounds the city. They've got names like Payday Advance and Title Max (where they loan you money on the old heap that you just paid off at the buy-here-pay-here dealer). According to The State: "The number of S.C. payday stores grew by 14 percent last year. Locations in the border counties of York and Lancaster grew by 25 percent. There are now about 1,100 of them in our state. In the 12 months ending August 2004, payday lenders collected more than $150 million in fees on almost 4.4 million loans."
I once asked a local Greenwood banker about why his company, which prides itself on being the "community's bank," wasn't interested in working with me to throw these bums out. After all, they were taking his business, keeping people from opening accounts at his bank. "Hell," he laughed, "those guys give loans to people we'd never touch." When I mentioned the conversation to a friend who is a passionate advocate for the poor, he remarked, "They probably own a few themselves." Probably so.
And that's the problem. The banking industry often forms partnerships with these companies, who, under South Carolina law, can charge up to 459% on a 14 day loan. (And you thought your new ARM rate was high!) It's called "sub-prime lending" in banking parlance. In an article on Bloomberg.com, not exactly your left-wing anti-capitalist rag, they tag the practice "loan sharking." They also talk about the Palmetto State Star Loan Shark, Advance America.
"Advance America CEO William Webster, who served as chief of staff to U.S. Secretary of Education Richard Riley from 1993 to 1994, didn't return telephone calls seeking comment. In the first three quarters of 2004, the company earned $69 million on $350 million in net revenue. Its net income has soared 12-fold since 1999. In July 2004, Wachovia Corp., the No. 5 U.S. bank, and Bank of America Corp., the No. 3 U.S. bank, co-arranged a $265 million syndicated credit line for Advance America, according to SEC documents. Two months later, Advance America announced an IPO to raise $183 million." According to its website, South Carolina's Advance America earnings continue to soar.
The poor don't have the economic savvy to realize that a $15 "fee" on a $100 cash advance for two weeks is a mind-boggling 390% APR. Sometimes they take out loans to pay off their other loans (the poor's version of refinancing your mortgage to pay off your credit card debt), and they end up in a mess from which there's no escape.
Rebekah O'Connell, a consumer credit counselor at Triangle Family Services, (a United Way agency in Raleigh, N.C.) commented, "It'd be great if it was the middle class and it was just the plumber and all they need is $200 this one time to get them by. But that’s just not the reality. These are people who are really not making it. . . .They’re not fixing a blown tire or a pipe—they’re paying the rent.[Payday lenders are] taking advantage of people in time of need . . . .We’ve got to get some controls on the interest rates. Three, four hundred percent? There ought to be a law."
There ought to be. But there isn't.