Opinionator: Making Money Off the Poor

Tom Edsall on politics inside and outside of Washington.

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Banking and Financial Institutions, Cash Call Inc, Center for Responsible Lending, Coalition for the Homeless, Consumer Financial Protection Bureau, credit and debt, Deutsche Bank AG, Evictions, Foreclosures, JPMorgan Chase & Company, Morgenson, Gretchen, Mullainathan, Sendhil, Shafir, Eldar, Silver-Greenberg, Jessica, United States Economy, Wells Fargo & Company

A lot of people are making money off the poor. The Center for Responsible Lending, a North Carolina non-profit that tracks predatory lending practices, issued a revealing report earlier this month on payday loans, which carry annual interest rates as high as 400 percent. Using data compiled by the Consumer Financial Protection Bureau, the center found that most borrowers repeatedly rolled over or renewed loans.

The center's analysis also found that "the median annual income of a borrower was $22,476, with an average loan amount of $350." Most crucially, though,

the median consumer in our sample conducted 10 transactions over the 12-month period and paid a total of $458 in fees, which do not include the loan principal. One quarter of borrowers paid $781 or more in fees.

You might think these companies are making enough money from their usurious interest rates, but the center's report makes it clear that payday lenders are dependent for profits on borrowers who take out repeated loans:

The leading payday industry trade association — the Community Financial Services Association (CFSA) — states in a recent letter to the CFPB,"[i]n any large, mature payday loan portfolio, loans to repeat borrowers generally constitute between 70 and 90% of the portfolio, and for some lenders, even more."

The center cites the following industry analysis, which is remarkably clear on how this scheme plays out in practice:

In a state with a $15 [fee] per $100 [loan] rate, an operator … will need a new customer to take out 4 to 5 loans before that customer becomes profitable. Indeed, Dan Feehan, C.E.O. of Cash America, remarked at a Jeffries Financial Services Conference in 2007, "[T]he theory in the business is [that] you've got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that's really where the profitability is." Lender marketing materials offer incentives to promote frequent loan usage, such as discounts to promote repeat borrowing.

Payday loans, the report concludes, "create a debt treadmill that makes struggling families worse off than they were before they received a payday loan."

The payday loan industry operates out of storefronts in poor neighborhoods, but a share of its profits filter into some of the nation's most prestigious banks.

Jessica Silver-Greenberg, a banking and consumer finance reporter for The Times, disclosed on Feb. 23 that major banks, including JPMorgan Chase, Bank of America and Wells Fargo, have been acting as key intermediaries, allowing online lenders to directly collect money from the bank accounts of those borrowers who have accounts.

The intermediary role of the banks is particularly controversial, Silver-Greenberg writes, because

a growing number of the [payday] lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.

Banks have been profiting from their customers' "shaky financial footing," according to Silver-Greenberg, by collecting "a cascade of fees from problems like overdrafts."

The Times financial columnist Gretchen Morgenson separately reported on Sept. 7 that court papers filed in 2007 revealed that Deutsche Bank and Citigroup were providing financial banking to Cash Call, a payday lender specializing in loans to the working poor at annual interest rates as high as 343 percent. (Spokespersons for both Deutsche Bank and Citi told Morgenson that they no longer do business with Cash Call.)

Another of the multiple pathways eager moneylenders have found to profit from the cash needs of the poor is through title loans to low-income car owners who need to make monthly payments. Title loans offer lenders another chance to collect astronomical interest rates. In a Feb. 28 report, the center found that the average title loan, secured by an automobile, is $951, and carries a monthly interest rate of 25 percent. That's 300 percent a year. Customers typically renew these loan eight times.

The center determined that for a typical borrower the total amount paid in interest and principal for a car loan of $951 is $3,093.

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It is not only the middle class and the wealthy who exploit the poor. There is plenty of anecdotal evidence that at times the poor exploit each other.

For his doctoral research in 2008 and 2009, Jacob Avery, now a professor of sociology at the University of California at Irvine, spent 17 months with homeless men in Atlantic City. What he found was a hierarchy of exploitation.

Avery describes the way that cab drivers would purchase SNAP food stamp cards — at half their face value — from homeless men desperate for cash to buy liquor or drugs. Other homeless men, who qualify for a meager supplemental-security stipend, took advantage of people with even less money, using their S.S.I. income to buy cartons of cigarettes that they then sold to their fellow homeless men for 50 cents apiece.

As Avery dove deeper into his research, he came to see the organization of society as a whole "like layers on a cake, with those at the highest level of each layer exploiting those below."

The exploitation of those on the bottom is also revealed in the work of Gretchen Purser, an assistant professor of sociology at Syracuse University. For her dissertation, Purser spent time with a group of largely "homeless, formerly-incarcerated, African-American men" who were paid $6.15 an hour by a major Baltimore property management company to evict tenants behind in their rent.

Purser writes that while poor, homeless African-Americans evicting poor, soon-to-be homeless African-Americans would seem to present "an opportunity for solidaristic identification amongst the poor," it didn't work out that way.

Laborers on eviction crews tend to espouse the same disparaging characterizations of tenants as do the property managers who hire them, thus reinforcing the belief that eviction is rooted in the individual moral deficiencies of the tenant. In this social drama of eviction, the vertical conflict between landlord and tenant is subtly transmuted into a lateral conflict amongst the propertyless.

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Those profiteering off the most vulnerable are nothing if not innovative.

In a Washington Post series that began running on Sept. 8, Debbie Cenziper, Michael Sallah and Steven Rich disclose how an effort by the District of Columbia to collect overdue property taxes has turned into a bonanza for enterprising real estate operators:

For decades, the District placed liens on properties when homeowners failed to pay their bills, then sold those liens at public auctions to mom-and-pop investors who drew a profit by charging owners interest on top of the tax debt until the money was repaid.

But on the watch of local leaders, the program has morphed into a predatory system of debt collection for well-financed, out-of-town companies that turned $500 delinquencies into $5,000 debts — then foreclosed on homes when families couldn't pay.

Real estate in Washington has been booming, leading to greater interest in buying tax liens:

As the housing market soared, such investors scooped up liens in every corner of the city, then started charging homeowners thousands in legal fees and other costs that far exceeded their original tax bills, with rates for attorneys reaching $450 an hour.

The Post series focused on Bennie Coleman, a 76-year-old former Marine suffering from dementia, who lost his home in 2011 to foreclosure. The process began in 2006 when he failed to pay a $134 tax bill, which was then sold to a Maryland company. In 2010, the Maryland company, claiming Coleman owned a total $4,999 in legal fees and expenses, 37 times the original tax bill, won a court-ordered foreclosure. "Not only did Coleman lose his $197,000 house, but he also was stripped of the equity because tax lien purchasers are entitled to everything," the Post reported.

While predatory practices and rising levels of inequality have been gaining media attention, poverty itself has been the subject of news coverage less often.

In May, the University of Michigan's National Poverty Center found that 1.65 million households in the United States — with 3.55 million children living in them — are now in "extreme poverty." In 1996, there were 636,000 extremely poor households. The center uses the World Bank definition of extreme poverty — "surviving on less than $2 per day, per person, each month," or $8 dollars a day for a family of four.

Since the start of the recovery in 2009, the number of homeless people in the New York City shelter system has grown steadily, reaching a high (Fig. 1) of 50,926 people in June 2013, according to the Coalition for the Homeless.

Figure 1.

Pending applications for New York city public housing have reached 227,000, and the queue moves slowly. Only 5,400 to 5,800 open up annually. Waiting lists across the country are growing.

Payday lending, title loans, tax-lien foreclosures and the growing scarcity of affordable housing exacerbate the anxiety and insecurity of the poor. Inflation hurts too. In contrast to the relatively low official inflation rate calculated by the Bureau of Labor Statistics, the centrist American Institute for Economic Research has developed the Everyday Price Index. According to a report in Time magazine using the Everyday Price Index, in 2011 the official Consumer Price Index rose 2.9 percent, but the cost of certain basic necessities rose much more:  meat and milk rose more than 9 percent; coffee, 19 percent; peanut butter, 27 percent; heating oil, 18 percent; children's clothes for boys, 6 percent, and for girls, 9 percent.

The rising price of milk and peanut butter is just one facet of the inflation that takes a higher share of a poor family's resources than those of a middle or upper income family. Not only are the poor disproportionately exploited, the very fact of being poor creates extraordinary vulnerability to countless major and minor daily roadblocks. Recent research by Sendhil Mullainathan of Harvard and Eldar Shafir of Princeton demonstrates that, as a post on Truthdig put it:

There is a strong connection between scarce resources and cognition: The more a person struggles financially, the less he or she can channel brain processes to completing other tasks. When you can't make ends meet, the weight of worry occupies a large portion of the mind.

This doesn't just mean those who suffer due to poverty are just stressed but rather, incapable of dedicating themselves to other endeavors because their mind is so fully engrossed in finding ways to survive. It goes beyond the ability to pay bills, and stretches out to other important everyday responsibilities, such as parenting, going to night school or even remembering to take prescribed medicine.

In the current political climate, there is little prospect for a major initiative to improve life chances for those at the bottom. But there is more we can do: enact restraints on predatory lending and corrupt eviction procedures, for one. Even more important would be to revive public discussion about the multiple impediments that restrict opportunity for those who are already confronted with hurdles to advancement far higher than those facing the affluent.

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