The Society of the Owned: Deeper In Debt

Part Three of a series.

Let's return to our metaphorical street corner from the previous post [1], because to understand the current economic crisis it might help to consider how many have been run down at that economic intersection, as conservatism stands by and watches. There's another lending crisis that's gone on for a while now, making far fewer headlines than the subprime crisis, the credit crunch, or the housing slump—because of the people it affected. But as those crises intensify and affect more and more people, this one may become even bigger news than it has been so far.

Back in December 2006, when the subprime crisis was just getting started, The New York Times ran a story about short-term "payday" loans and their devastating impact on the poor [2], who get caught in a never ending cycle of debt.

While such lending is effectively banned in 11 states, including New York, through usury or other laws, it is flourishing in 39 others. The practice is unusually rampant and unregulated in New Mexico, where it has become a contentious political issue. The Center for Responsible Lending, a private consumer group based in Durham, N.C., calculates that nationally payday loans totaled at least $28 billion in 2005, doubling in five years.

The loans are quick and easy. Customers are usually required to leave a predated personal check that the lender can cash on the next payday, two or four weeks later. They must show a pay stub or proof of regular income, like Social Security, but there is no credit check, which leads to some defaults but, more often, continued extension of the loan, with repeated fees.

Drive through any low-income neighborhood and you'll see as many of them as you will banks, if not more, with signs advertising cash checking services and short-term loans, money wiring service, and phone cards.

The article focused on the effect payday lenders have had on a Native American community near Gallup, NM. Since then, payday lenders have spread to a wide range of communities, ostensibly to serve a new and growing demographic of customers. Their tactics have changed, too. Earlier this month, an article in The Wall Street Journal revealed that payday lenders are targeting the elderly and disabled [3] now, tapping into their bank accounts, taking control of their Social Security and disability benefits, and giving them "allowances" after the lenders subtract their chunk.

One recent morning, dozens of elderly and disabled people, some propped on walkers and canes, gathered at Small Loans Inc. Many had borrowed money from Small Loans and turned over their Social Security benefits to pay back the high-interest lender. Now they were waiting for their "allowance"—their monthly check, minus Small Loans' cut.

The crowd represents the newest twist for a fast-growing industry—lenders that make high-interest loans, often called "payday" loans, that are secured by upcoming paychecks. Such lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veteran's benefits. "These people always get paid, rain or shine," says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries "will always have money, every 30 days."

The law bars the government from sending a recipient's benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.

In the first post in this series [4], I referred to the long dead practice of sharecropping. In many the images of people lined up outside a lender's storefront reminds me of sharecroppers lined up to get their pay after harvest, usually getting less than they had coming to them, and finding themselves still in debt with little hope of getting out.

According to the article, the elderly and disabled are actively targeted by payday lenders.

An analysis of data from the U.S. Department of Housing and Urban Development shows many payday lenders are clustered around government-subsidized housing for seniors and the disabled. The research was done by Steven Graves, a geographer at California State University at Northridge, at The Wall Street Journal's request. His previous work was cited by the Department of Defense in its effort to cap the amounts lenders can charge military personnel.

...But some industry critics say fixed-income borrowers are not only more reliable, they are also more lucrative. Often elderly or disabled, they are typically dependent on smaller fixed incomes and are rarely able to pay off their loans quickly. "It's not like they can work more hours," says David Rothstein, an analyst at Policy Matters Ohio, an economic research group in Cleveland. "They're trapped."

The stories of some of the people interviewed for the article include Harrod, the former manager who quit after supervisors encouraged him to recruit the elderly, a 80-year-old man who lives off of $180 a month after payday lenders take their cut of his Social Security benefits, and single mother who actually spent a few hours in jail as a result of entanglement with payday lenders. Their decisions to apply for short-term loans were usually linked to needs to pay unexpected bills—a car repair here, a vet bill there, etc. But in the cases of the elderly and disabled, who come bearing regular Social Security benefits, the lenders go the extra mile of setting up bank accounts and direct deposit.

Mr. Bevels, who can't read, says a clerk helped him fill out papers that instructed Social Security to send Mr. Bevels's $565 monthly benefits to an account at an out-of-state bank, which transferred the money back to Small Loans or its parent, usually within a day. As is often the case, Mr. Bevels's bank earned no interest and didn't come with either ATM cards or checks.

Every month for nearly four years, Mr. Bevels, who is known around town as "Buckwheat" because of his thatch of yellow-white hair, rode his motorized mobility scooter to Small Loans to pick up his "allowance," which was sometimes as little as $180 a month, he says.

...The company had Ms. Rumph, 43, sign documents directing her teenage son's Social Security disability check, which is $623 a month, to the company by way of an intermediary bank—a condition for getting the loan, she says. The Social Security Administration says it doesn't have a problem with lenders capturing Social Security checks of disabled or orphaned children as long as the benefits money ultimately goes to the "current needs" of the child.

Like Mr. Bevels, Ms. Rumph didn't receive an ATM card or a checkbook. Each month she would go to Miracle Finance 30 miles away in Abbeville, Ala., to pick up what remained of her son Jeremiah's benefits after the company subtracted fees, interest and loan repayments, usually leaving her with less than $300 of her son's check.

This is all made possible by the absence of regulations. Back in 1990, the government required Social Security beneficiaries to receive their benefits via direct deposit, unless they opt out. That made it easier for recipients to pledge their benefit payments as collateral for short term loans. But privacy rules prohibit the government from monitoring beneficiaries' bank accounts, and no regulatory agency tracks how much money, in Social Security benefits, is going to payday lenders.

That relationship to non-existent or lax regulations continues on the state level, but with an interesting twist. Eleven states have effectively banned payday loans through usury laws and other measures, but it is a growing industry in the other 39 states. (Last year the District of Columbia capped payday loans at 24%, virtually banning them, and now Virginia is considering a similar measure [5].)

According to a new study [6] by the two researchers who previously found geographic evidence of payday lenders targeting the military, there's a correlation between conservative Christian legislative power and the proliferation of payday lenders.

We conclude that there is a strong correlation between the density of payday lending industry and the political power of conservative Christians.

In an interview with Newsweek [7] researcher Christopher Pederson talked about the surprising results of the study.

What's interesting and surprising to us is that we found a strong correlation between the number of payday lenders within a geographic area and the political power of conservative Christians within a state. It's a surprising result to us because the natural hypothesis would have been to assume that given biblical condemnation of usury, there would be aggressive regulation and less demand for payday loans in those types of states. I think it's ironic that we actually found that the opposite tended to be true.

States throughout the Bible Belt and in the Mormon west, Pederson said, tend to have very little regulation of short-term or payday lending. He offered a possible reason why.

I don't think anybody's going to come up with a study that answers that. That's more a matter of political speculation, but here's what I suspect may be part of the story: in the 1980s and continuing perhaps even stronger in the 1990s, I think it's fair to say that the Christian right and conservative Christians came to align themselves with conservative Wall Street big-business interests...

...I think that part of the explanation is that the alliance between social-values conservatives and big-business conservatives was a big change in the balance of power with respect to consumer protection law or limits on usury. Once that happened, around the country a lot of states started to deregulate, started to less aggressively prevent usurious loans.

That may change, given recent economic trends. The mortgage crisis is spreading beyond subprime [8] now, touching people who have thus far been prime borrowers, with good credit, but who are finding themselves squeezed between falling house values and climbing mortgage payments — including some who have tapped into their equity and used credit to "keep up the facade of wealth," [8] and perhaps to convince others and themselves of their membership in the ownership class.

Those same "former members" of the ownership class are now heading to the nearest pawn shop [9], selling off what they do own, in order to continue making ends meet. From there, they won't have far to travel to get to the nearest payday loan shop, because payday loans are moving to the suburbs [10], and homeowners are starting to spend big bucks on these little loans [11].

What happens when people who thought they were members of the ownership society find out they're not, and find out which club they really belong to?

We'll look more closely at them next in the series.