Bad Credit: How Payday Lenders Evade Regulation
Research support for this article was provided by The Investigative Fund at The Nation Institute and by an Alfred Knobler Fellowship.
Sam Black woke up one morning not long after retiring to Charleston, South Carolina, with chest pains he didn’t realize would change his life. He took a shower and ate breakfast before his wife, Elsie, got him out the door to see his heart doctor. Within hours, the doctor cracked Sam’s chest open to do a triple bypass.
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“They had the surgery early that morning,” Elsie recalls, piecing together the fragmented memory of someone who has survived a sudden trauma. Sam made it through the first operation all right, but later that night the hospital called Elsie. “We gonna have to take your husband back to surgery,” she says they told her. “Something went wrong.”
For the next seven weeks, Sam lay in a coma in the intensive care unit. Elsie says the doctor told her that when Sam comes to, “he might not know nobody. He ain’t gonna be able to drive.”
Today, roughly a decade later, Sam still labors over his words, speaking with a slow, gravelly slur. He sleeps with an oxygen mask and walks with more of a shuffle than a stride. But he walks and drives and lives independently. “They call him the walking miracle,” says Elsie. He also shells out more than $400 a month for prescriptions and owes his heart doctor what he estimates to be about $1,000 in co-pays. Elsie says she owes the same physician another $1,000. They’re both in the doctor’s office every few months for what feels like endless testing.
“See, our biggest thing is these co-payments,” Elsie fusses. “It’s like $35. And then when you go to these specialists, and you have tests done, the insurance pays a portion, and then they send you a portion—and you have all these bills coming in. You can’t really keep up with them.”
The Blacks are the first to admit they’ve never been good with money, but Sam’s heart attack began a remarkable financial tailspin that illustrates a deeper problem than their personal failings. They’ve been through a bankruptcy, gotten caught in a subprime refinance and narrowly avoided a foreclosure. But for years their most debilitating financial burden has been the weight of hundreds of small-dollar loans with triple-digit interest rates—short-term, wildly expensive credit that they took in order to keep the lights on and afford occasional luxuries like Christmas presents while paying those medical bills.
The Blacks are not unusual. Like millions of Americans with stagnant or shrinking incomes and considered too risky by mainstream banks, they have managed to pay for unexpected expenses by relying on an ever-changing catalog of expensive, shady consumer loans. This subprime lending industry exploded in the past decade and now stretches from Wall Street banks to strip-mall stores in working-class neighborhoods all over the country. It includes the infamous subprime mortgages sliced and diced into securities by the financial sector but also short-term loans against car titles, rent-to-own shops, personal finance companies, rapid-refund tax preparers and, perhaps most ubiquitous, payday lenders. These products are interdependent—often deliberately so—with one high-cost loan feeding into another, as struggling borrowers like the Blacks churn through fees and finance charges.
Payday lenders alone have turned millions of small loans, most for $500 or less, into a $30 billion-a-year industry, according to an analysis of SEC filings by consumer advocate National People’s Action. The payday industry’s lobby group, Community Financial Services Association (CFSA), boasts that its members lend to more than 19 million households. Researchers estimate that there are more than 22,300 payday lending shops nationwide, a scale that rivals the number of Starbucks and McDonald’s franchises. Stores are concentrated in the South, where consumer lending laws remain loose, but they crop up across the Midwest and West as well. It’s a sprawling industry that ranges from small mom-and-pop stores to a handful of national chains like Advance America, the nation’s largest payday lender; in 2010 it issued almost $4 billion in loans averaging less than $400.
Between 2000 and 2004, the payday industry more than doubled in size. Like the subprime mortgage bubble, which blew up during the same period, the payday lenders boom was enabled by two factors—deregulation and Wall Street money. For much of the twentieth century, most states imposed interest rate caps of 24–42 percent on consumer loans. But Reagan-era deregulation witnessed a steady erosion of state lending laws, opening the door for a range of nonbank lenders. In the late ’90s a handful of entrepreneurs stepped in to build national payday lending companies, exploiting the new ethos of deregulation to win exemptions from existing rate caps.
The relaxation of state laws made usurious lending legal, but easy credit from Wall Street’s more reputable players made it possible—and profitable. As Advance America’s co-founder, William Webster, recounts to journalist Gary Rivlin in Broke, USA, it was Webster’s Wall Street connections—he was in the Clinton administration, in the Education Department and then the White House—that allowed his company to quickly dominate the market, growing from 300 stores in 1997 to more than 2,300 today. In 2010 Advance America operated with $270 million in revolving credit—sort of the business equivalent of a credit card—primarily from Bank of America.
All told, banks offered more than $1.5 billion in credit to publicly traded payday lenders in 2010, according to National People’s Action. The group identified Wells Fargo as the largest payday lending financier; it backs five of the six largest firms. Consumer advocates also worry that mainstream banks are losing their skittishness about entering the market. At least three banks—Wells Fargo, US Bank and Fifth Third—have explored checking account products that operate much like payday loans.
In some ways, however, the industry is in retreat. Of all the types of subprime lenders, it has drawn the most scrutiny from lawmakers over the past decade. Congress outlawed payday loans for active-duty service members in 2006, and at least seventeen states have passed interest rate caps for cash advance loans.
But the industry is moving fast to adapt to the changing regulatory climate—and watchdogs warn that state lawmakers and regulators may be surprised to see the same payday products under different names. “Pretty much any state that tries to get at the bottom line of payday lenders, we see some attempt at subterfuge,” says Sara Weed, co-author of a Center for Responsible Lending report on how payday firms evade state regulations.
The problem is that most states narrowly regulate specific payday lending activities—say, on how many loans a borrower can take in a given time period—rather than putting broad boundaries on the range of high-cost lending that dominates poor neighborhoods. So lenders have skirted new regulations by making surface changes to their businesses that don’t alter their core products: high-cost, small-dollar loans for people who aren’t able to pay them back.
“Our approach is to continue to work with policymakers and grassroots organizations to provide a predictable and favorable legislative environment,” Advance America’s latest investor report explains. The industry’s growth era is over, the report predicts, so the company is focused on growing its market share in the thirty states where payday lenders operate freely or where there is “a regulatory framework that balances consumer interests while allowing profitable cash advance operations.”
South Carolina is among those thirty states. The Blacks didn’t know it then, but when they retired to South Carolina in 1999, they stepped into the middle of what is perhaps the most highly charged battleground in the war between regulators and payday lenders. As home to Advance America’s headquarters, the state has long been one of the industry’s most active markets. Payday lenders made more than 4.3 million loans in South Carolina between 2006 and 2007—the equivalent of nearly one loan per state resident. Had the Blacks stayed in New York, one of the states with interest rate caps for consumer loans, they might have avoided the predatory lending traps that have mired them in constant anxiety. But Charleston is where Sam and Elsie Black grew up, and in their later years the city beckoned them back.
Sam left home two days after high school graduation in search of the job opportunities black folks couldn’t get in the Jim Crow South. He and Elsie met and fell in love upstate, then moved to Queens and raised four sons on their own physical labor—Elsie walked nursing home floors for twenty-seven years while Sam hauled bags at Kennedy and Newark international airports.