Tuesday, July 25, 2006

Banking on Poverty: Payday Lending is South Carolina's Growth Industry

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.

16 comments:

Rick @ shrimp and grits said...

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.

It's not necessarily economic savvy. It's often basic math savvy. Far, far too many people simply don't know what that percentage (or any other percentage) represents.

JRClark said...

I think it is interesting that even well-meaning people assume that the poor are just stupid. From what I have seen, most people who use these places KNOW what the interest rate means and no how unfair it is. But if it is a choice between say, desperately needing $200 for a dentist visit or to keep the utilities turned on this week and paying 400 percent interest next week, desperate people will choose the interest rate.

It isn't like anyone else is going to give them the money and as your banker friend said, no bank would touch them.

What is even less known about these shysters is that the capper to getting sucked down this financial drain is what happens when you default. Now, that $200 loan turns into a $1,000+ judgment from a friendly court, and as part of the loan approval process have signed away your rights to arbitration.

OpinionatedBstrd said...

I live in Las Vegas, where the payday cash advance business, probably overshadows it's existence anywhere else in the United States.

I know an independent individual who has been in the business of making high-risk/high interest loans for 12 years. He has no storefront, no business cards and does no advertising other than word of mouth. His interest rates are 520% annual, he does not charge interest on interest and only adds fees and late charges if he has to take the client (who is fully advised with the standard disclosure bar) to small claims court. He further goes over the contract verbally in "plain" language and realizes that they are just sitting there nodding their heads. They're not stupid.

The problem is the people who borrow are blinded by their "absolute need" for the cash RIGT NOW! They've exhausted all other sources and have no where else to turn.

Until something better comes along they'll always be a need for these lenders.

Anonymous said...

Great blog -

These loan sharks are just as bad as the banks who charge $27.00 for a bounced check. Only in America.

Fish-N-Travel

Anonymous said...

Check out "Shortchanged: Life and Debt in the Fringe Economy" by Howard Krager for a lot more information about this business.

Anonymous said...

I have used pawn shops for emergency money at 259% apr I think. It saved my ass at the time but sure did suck that my $500 loan against my beloved guitar cost me nearly $700 to get out 3 months later. But self employment has its downsides as well as rewards, so I have "down" times. This was not a matter of my being stupid by any means, just bad credit from years of struggling through the American dream. So these lenders are evil in many ways but to some who use them cautiously and ONLY when absolutely necessary they are a God send. As has been stated, "banks won't touch this loan."

I think this is part of a much bigger problem for the poor. The $27 hot check fee, the late fees on your utilities, etc. It all creates a spiral that costs money you don't have to get out of. The punishment being that you are going to be sucked deeper into the quicksand.

In Texas in 2003 they passed a law that if you get a no insurance ticket (about $450 fine to the city) you also get a fine from the state. The state charges $250 per year for three years in order to keep your driver's license. They send letters via mail and no signature is required to receive the latters. A friend who didn't get the letter and didn't know about the law went to jail last night for driving on a license that she had no idea weas suspended. This means that that time between jobs 2 years ago where she couldn't afford insurance is still haunting her. She now will be required to pay $250 per year for three years because she drove on a suspended license. So on top of the $450 ticket, she will pay out at least $1500 to the state. Double jeopardy? Damn right. But until someone gets it into the supreme court, this is a very fine example of what the poor can be made to suffer. And the laws that help to make them suffer more.

Not all poor folks are stupid or bad with money or anything else. There are a lot who work hard and get laid off or get hurt or sick or any number of other things that can happen on any given Tuesday who fall on hard times. This is how the rich get richer and the poor get poorer.

The stupid people are the ones who use those damn machines to count their change and pay %15 to get "cash" for it. They had cash! Anyone who uses those really is kinda stupid.

Rick @ shrimp and grits said...

I think it is interesting that even well-meaning people assume that the poor are just stupid.

Since half my incoming students (not a made-up statistic - I give a basic math assessment at the beginning of each of my courses) cannot figure what percent two is of six, I will stand by my assertion that a poor knowledge of math helps these loan sharks stay in business.

It's not just the "poor", either. Look at the number of college students who bury themselves in credit card debt. (About 20% of those in my college-level courses, by the way, have trouble with percentages.)

It's a failure of our educational system and our math-phobic society.

Anonymous said...

You'll be pleased to know (I think) that Citibank (yes, that would be the one HQ'd in Manhattan) charges Austr.$50 for a bounced cheque. This is about US$37.50 at today's exchange rate.

So, not only in the US :( . Sadly, loan sharking has been noted to be big business here, too.

R.

eric said...

one of the most-damaging ones i see are the credit cards that companies will give out to just about any student on a college campus ... usually for poorly made t-shirt.

e+

Irene M. said...

Most people go ahead and go into these payday loans and small business cash advances without thinking about it because they don't have a choice. When it is the last stop before bankruptcy, people will do whatever they can to keep their heads above water.

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raya said...

Payday loans bring me peace of mind as I am assured that if something unforeseen occurs, which these days and age often occurs, I can get the money I need in minutes. thus i need not stress out about how to make ends meet.

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Payday Loan said...

It isn't like anyone else is going to give them the money and as your banker friend said, no bank would touch them.