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Eighty-year-old Annie Lou Collier had long paid off the Atlanta home that she’d lived in since 1953 when a con man posing as a contractor approached her in 1990, took a look at her roof, and told Collier it needed replacing. Collier balked, saying that she couldn’t afford it on her modest fixed income. That doesn’t matter, the man told her. Collier could simply borrow the money against the value of her home; he would even drive her to the lender to borrow the $6,900 that same day.
Collier, who has a second grade education and can’t read, signed the loan. It turned out to have a whopping 25.3 percent annual percentage rate, and one year later, Collier was in default. The roof was never even fixed.
In “Broke, USA: From Pawnshops to Poverty, Inc.—How the Working Poor Became Big Business,” Gary Rivlin presents story after heartbreaking story in the same mold as Collier’s, demonstrating the real-life implications of what happens when big business tries to make big money off people who are struggling to get by. “Broke: USA” doesn’t stop at human interest, however. It digs deep into the history and evolution of the poverty industry’s business model, outlines regulatory failures, and documents advocates’ struggle to hold financial institutions accountable and protect consumers. Rivlin’s book is an engaging and often infuriating read that provides a broad context for the headlines about the subprime lending crisis and depicts the grim financial choices available to families living paycheck to paycheck in communities targeted by predatory lenders.
Rivlin traces the growth of the poverty industry from mom-and-pop pawn shops to the wild proliferation of businesses seen today that offer mortgages with unaffordable terms and exploding payments, cash checks, rent household goods with an option to buy, make payday loans, offer credit against car titles and expected income tax refunds, arrange money transfers, and more, often at exorbitant rates. Today, the poverty industry is well connected, profitable even in a recession, and financed by mainstream financial institutions. Rivlin argues that the industry’s profitability comes not from offering the best product at the best price, but from aggressive marketing and creating repeat customers by sucking them into a cycle of unaffordable debt. An executive from Household Finance, a subprime mortgage lender that went bust in the crisis, is quoted as saying, “Nobody applies for a loan. It’s all push.” A session at the annual check cashers’ conference in 2008 entitled “Effective Marketing Strategies to Dominate Your Market” advised fringe financial service providers to turn occasional customers into repeat customers by offering customer loyalty programs, flooding them with mail promising special offers, and hosting iPod raffles or scratch-and-win contests. “Get a customer coming to you regularly, and they could be worth $2,000 to $4,000 a year,” the presenter said. While it may be profitable, the active push to create repeat customers makes lenders sound disingenuous at best when they justify high rates by saying that their products are only for emergencies.
The result? Big profits for those at the top. Rent-A-Center, which rents household goods and electronics, regularly delivers more than twice the profit margins of Best Buy, which sells electronics and appliances. An investment banker who worked for a payday lender told Business Week that, at the beginning of the decade, the average payday lender was seeing an average return of 23.8 percent, compared to returns of 13 to 18 percent on traditional loans. Allan Jones, the founder of Check into Cash, has a Tennessee estate large enough to include a beach, stables, a greenhouse, two lakes, an aviary, and a regulation-size football field complete with bleachers, lights, and a field house.
Sky-high profits are a strong incentive for fringe financial service providers to skirt regulations that protect consumers and threaten those profits. We saw it happen in Illinois and, this year, we successfully closed the loophole by instituting an interest rate cap and other protections for all payday loans. Nonetheless, “Broke USA” is a reminder that, as advocates, we must remain vigilant to new high-cost financial products that continue to evolve as regulators crack down. We must also work with mainstream financial institutions to create more sustainable alternative products, as well as expand the Community Reinvestment Act so that a broader range of financial institutions must meet the credit needs of low-wealth communities. As long as there are people living from paycheck to paycheck, there will be businesses offering ways to stretch those paychecks—for a price, of course.
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