Broke, USA

by Gary Rivlin

  Payday lenders charged their customers a collective $7 billion in fees in 2008. The country’s rent-to-own shops collectively took in about $7 billion in revenues that year. By comparison, movie theaters in North America generated $11 billion in ticket sales in 2008.

  The pawnbrokers booked roughly $4 billion in revenues that year and the check cashers $3 billion. Toss in businesses like the auto title lenders (short-term loans in which a car serves as collateral) and all those tax preparers offering instant tax refunds (one chain, Jackson Hewitt, with 6,500 offices scattered across the country, is more pervasive than KFC) and that adds up to $25 billion. By comparison, the nation’s funeral business is around a $15 billion a year industry and the country’s liquor stores and other retailers sell around $30 billion in beer, wine, and spirits each year. Include the revenues generated by the money-wiring business (Western Union alone did $5 billion in revenues in 2008 and MoneyGram $1.3 billion) plus all those billions the banks and other companies selling debit cards charge in activation fees, withdrawal fees, monthly maintenance fees, and the dollar some charge for every customer service inquiry, and revenues in the poverty industry easily exceed those of the booze business.

  There are any number of ways of describing this relatively new financial subculture that has exploded in popularity over the past two decades. I typically used “fringe financing” or the “poverty business” when describing this project, but FiSCA chairman Joe Coleman absolutely beamed when I used the term “alternative financing” to describe his world. Investment bankers tend to stick to even safer rhetorical shores and use the more genteel “specialty financing.”

  But whatever descriptor one prefers, this sector of the economy encompasses a wider cast than was represented in Las Vegas in the fall of 2008. The Poverty, Inc. economy includes the subprime credit card business—the issuing of cards to those with tarnished credit who are so thankful to have plastic in their pocket that they’re willing to pay almost any interest rate (one lender, First Premier Bank, sent a mailer to prospective customers in the fall of 2009 offering an APR of 79.9 percent)—and the used auto financing business. Regulators don’t require banks to publicly disclose what portion of their revenues are derived from subprime borrowers versus those with higher credit scores, but the Wall Street financial analysts monitoring the publicly-traded companies issuing subprime credit cards (a list that includes Capital One, American Express, and JPMorgan Chase) estimate that the banks and others in the business are making at least $50 billion a year off subprime credit card borrowers. A sampling of Wall Street analysts estimate the size of the subprime auto financing world at somewhere between $25 billion and $30 billion a year in revenues. And there’s also all those subprime mortgage lenders that had peddled products at once so destructive and so popular that they triggered the worst economic downturn since the Great Depression.

  In time subprime lenders would target a demographic much broader than those who could reasonably be called the working poor or the lower middle class. CNBC’s Rick Santelli would infamously rant on the floor of the Chicago Mercantile Exchange about being forced to bail out neighbors who borrowed to build new bathrooms they could not afford. Even Edmund Andrews, a New York Times economics reporter who earned a six-figure salary—he was responsible for covering the Federal Reserve Bank, no less—would write a book about getting caught up in the subprime madness. Rather than rent or find a suitable place in a less expensive neighborhood, Andrews was able to buy a handsome brick home in Silver Spring, Maryland, using what people in the industry called a “liar’s loan” because they required so little in documentation that they practically begged an applicant to fib.

  Yet long before the subprime loan became an easy way for all those people desiring a $500,000 or $600,000 house on a salary good enough to buy a home for half that price, they targeted people who owned properties worth $100,000 or less. In that regard, the subprime industry serves as more than a unique lens for examining America’s prolonged and unhealthy love affair with debt; it also offers a street-level narrative exposing the very roots of the subprime crisis. The poverty industry pioneered the noxious subprime mortgage loan during the 1980s and it was the huge profits generated by companies like Household Finance that inspired the likes of Countrywide Financial and Ameriquest to get into the business and eventually expand their market to include the middle class. In the early days there would be no debate about whether homeowners relying on a subprime loan were greedy or foolish or somehow had themselves to blame. There was something unmistakably predatory about this earliest iteration of the subprime story. Solicitations for easy money came in the mail and over the phone and sometimes with a knock on the door by a home repair huckster working in tandem with a mortgage broker. As it played out in working-class enclaves through the 1990s and into the early 2000s, the subprime mortgage was often a scam, an easy way for many big banks to goose their profits. However, it was nearly always as toxic for a borrower as eventually it would be for the world economy.

  There were plenty of would-be heroes offering urgent warnings about the destructiveness of these loans, but they might as well have been wearing tinfoil hats and grousing about radio devices implanted in their teeth; those in power failed to heed their cries. The contagion needed to enter the general population—or at least spread to neighborhoods where editors and reporters and the politicians and their friends live—before the rest of the populace could be warned of its dangers. And then of course it wasn’t people’s individual tales of woe but the stock market’s great fall and the failure of a few investment banks that functioned as a collective smack to the head.

  “This whole crisis we’re in has been an emergency situation for a long time,” said Howard Rothbloom, an Atlanta lawyer who is among those who have been complaining the longest about the perils of the subprime loan. “But it only became a crisis once it was investors who lost all that money.”

  The country’s subprime mortgage lenders and their confederates were generating an estimated $100 billion in annual revenues at the peak of the subprime bubble in the mid-2000s. And no doubt a large portion of that $100 billion a year was still being sold to the working poor. There’s a race element to the story as well. How else does one explain all those studies that repeatedly show that a black applicant was several times more likely to be put into a subprime loan than someone white at the same income level and with the same general credit rating? But even if the lower classes account for just half of the subprime mortgage industry’s revenues, that would mean the Poverty, Inc. economy was around a $150 billion a year industry at its peak. By comparison, the country’s casinos, Indian casinos included, collectively rake in around $60 billion in gambling revenues each year, and U.S. cigarette makers book $40 billion in annual revenues.

  “The thing about dealing with the subprime consumer is that it’s just a nickel-and-dime business.” That’s what Jerry Robinson, a former investment banker who had logged nearly twenty years in the subprime business, told me. Robinson’s résumé includes stints in rent-to-own, payday, used car finance, and four years with a subprime credit card company. “But the good news,” Robinson continued, “is there’s a whole lot of nickels and dimes” to be had. All those waitresses and store clerks and home health-care workers might not make much, but in the aggregate they can mean big bucks. Whereas the banker seeks 100 customers with $1 million, people inside the payday industry like to say they covet a million people who only have $100 to their name. Bad credit. No credit. No problem.

  The corner pawnbroker can be a lifesaver for the person needing quick cash for a bus ticket home to attend a favorite aunt’s funeral. A person without a bank account needs someone like a check casher to survive in today’s modern world. I spent a day in Spartanburg, South Carolina, with Billy Webster, who had a net worth exceeding $100 million on the day his company, Advance America, the country’s largest payday lending chain, went public in 2004. To him there is something noble about the way he attained his wealth. How el
se could a person struggling by on $20,000 or $25,000 or $30,000 survive if not for access to the quick cash his company and its competitors offer? “People who use our service like us and appreciate us,” Webster said. “It’s only the consumer critics who don’t like us.”

  Yet the poverty industry can seem less lofty when one considers the collective financial burden these businesses place on all those that regularly use its services. There are 40 million or so people in the United States living on $30,000 or less a year, according to the Federal Reserve. There are no doubt some people making more than $30,000 a year borrowing against their next paycheck with a payday lender (just as there are people getting by on $20,000 who would never use a check casher or a subprime credit card), but $30,000 seems a useful cutoff if trying to describe the working poor: those who earn too much to qualify for government entitlements but who earn so little there’s no hope they’ll ever save much money given the rising cost of housing, health care, transportation, and everything else one needs to live life in twenty-first-century America. If each person living on under $30,000 a year donated equally to the poverty industry, that would mean their annual share of that $150 billion is $3,800. For the warehouse worker supporting a family on $25,000 per year, that works out to a 15 percent annual poverty tax.

  Publicly traded companies feel great pressure to grow their revenues year over year. So too does any ambitious entrepreneur. It doesn’t make a difference that the target market is those who can least afford to lose another $1,000 or $2,000 or $3,000 a year from their take-home checks. The task of teaching the country’s payday lenders and check cashers and pawnbrokers tricks for shaking even more from their customers falls to people like Jim Higgins, who arrived in Las Vegas for the twentieth annual check cashers’ convention to give a ninety-minute presentation he dubbed “Effective Marketing Strategies to Dominate Your Market.”

  Higgins, a squat man with silver-framed glasses and aquiline nose who calls to mind Vincent Gardenia, the actor who played Cher’s father in Moonstruck, gave his talk twice that weekend. The session I attended was standing-room only and Higgins’s talk brimmed with practical suggestions. Employ customer loyalty programs, as the airlines have done so effectively. Mine your databases and divide customers into several categories, from those who have only visited you once or twice to those who come in at least a couple of times a month. Devise a targeted mailer for each. Send out “Welcome!” mailers to each new customer and sweeten the hello with a cash incentive to return. For those who are semi-regulars offer a “cash 3, get 1 free” deal. “These are people not used to getting anything free,” Higgins said. “These are people not used to getting anything, really.” Use these tried-and-true methods, he advised, and you can “turn your store into an effective selling machine.”

  It’s not hard, he reassured them. Pens scribbled furiously as he tossed out specifics such as various ideas for contests and giveaways and other come-ons that have worked for the big boys. Raffle off an iPod or consider a scratch-and-win contest. Do whatever it takes to turn someone into a loyal customer, he counseled them. “Get a customer coming to you regularly,” Higgins said, “and they could be worth $2,000 to $4,000 a year.”

  I had the good fortune to have knocked on the door of the people at FiSCA—and on the doors of any number of swashbuckling entrepreneurs who have figured out how to get very rich off those with very little—at a time when many of the pioneers of this industry felt misunderstood and under public attack. A few harbored resentment toward the press and declined to talk, but most proved eager to meet with me. FiSCA was typical. The check cashers don’t normally allow outsiders to attend their events, Stephen Altobelli, who works for an agency that does public relations for FiSCA, had told me. But I was granted an all-access pass that allowed me to roam the halls freely and chat with whoever was willing to talk with me. I had told Altobelli that I would be spending time with critics such as Martin Eakes, whose name had come up any number of times in Las Vegas as the crusader the people in the room most love to hate. I told him, too, that I would be meeting with people, such as Tommy Myers, who consider themselves victims of the poverty industry. He didn’t care. “Our people want to get their stories out there,” Altobelli said.

  That seemed fine by me. Our country was experiencing the worst economic times since the Great Depression and his people resided in an upside-down world in which people with little money in their pockets boded well for their bottom lines. There’s something undeniably brilliant about the person who figures out how to make a 150 percent markup on a $500 television by renting it by the week, or a person like Allan Jones who sees the potential to become a triple-digit millionaire several times over by loaning people $200 or $400 at a time. Who are these people who one day wake up and decide that they’re going to make their mark and their millions charging potentially confiscatory interest rates to the working poor?

  These were jittery times inside the Mandalay conference center. Less than one month earlier the government had allowed Lehman Brothers to fail while helping to arrange a shotgun marriage between Merrill Lynch and Bank of America. The financial industry’s future looked tenuous and even if those in this room could expect to see demand for their products go up, so too would defaults rise. If nothing else, the deep credit freeze that had descended on much of the world meant the end, at least temporarily, of the days when a small entrepreneur could dream of the inflated payout from a chain anxious to grow big fast. And then there were the normal competitive pressures of running a business in twenty-first-century America. The big threat in 2008 was Walmart, which was moving aggressively into a couple of the poverty industry’s more lucrative areas. Other giant retailers were starting to nibble around the edges of their market as well.

  Yet all these seemed minor concerns compared to changes in the political climate. From the podium, in the corridors, in breakout sessions, and in the bars you could hear the fear and also the rage. They were blameless for the current financial meltdown, they told themselves, victims of a crazy housing bubble just like everyone else. But of course that wasn’t quite true. They, like the country’s subprime mortgage lenders, had taken advantage of the same deep and restless pools of capital looking for a high return. The fall of real wages among working Americans had created an artificial demand for expensive credit and the people gathering in meeting rooms on the grounds of the Mandalay Bay were among those who had moved in to meet the need, amassing fortunes in the process. And even if they didn’t buy the idea that they were partially responsible for the nation’s financial woes, they recognized that others would blame them. The country’s biggest banks and Wall Street’s best-known financial houses had belly-flopped into the subprime soup and the members of FiSCA knew they were in danger of being swamped by the wash. “You better hurry on down to Cleveland [Tennessee] if you want to meet with me,” Allan Jones, the man who invented the modern-day payday industry, drawled over the phone when we spoke a few weeks before the FiSCA meeting. “I’m not sure I’ll have any business to still visit next year.” Even as people were commemorating their twentieth meeting, there were already those who were anticipating a much smaller crowd for the twenty-fifth. The obsession in Las Vegas that weekend was Ohio, where, in three weeks, voters would be asked to greatly restrict the fees a payday lender could charge on a loan. Ohio was a top-five payday market and in fact prime territory for any number of Poverty, Inc. businesses.

  “Believe me, Ohio was the wake-up call for a lot of us,” Joe Coleman said.

  All these major corporations, chain franchises, and newly hatched enterprises specifically catering to the working poor—were they financial angels to the country’s great hardworking masses, by making homes and cars and emergency cash available to those otherwise shunned by the mainstream financial institutions? Or were these businesses tilling the country’s working-class neighborhoods so aggressively that they endangered the very survival of these communities? Were they vultures carelessly adding to the economic woes of a single
mother of two working as a chambermaid at the local Holiday Inn? This question, which preoccupied me in my time on the subprime fringes—the morality of making a much higher profit on the working poor than on more prosperous citizens—was also one the country would need to ask once the new administration was out of crisis mode and legislators could turn their attention to various bills addressing the profits being earned by the poverty industry.

  “When someone makes a profit in low-income communities, the presumption is that they must be doing something wrong,” Joe Coleman had said to me in Las Vegas when I ran into him in the hallway between events. An excitable man, Coleman got so revved up during our talk that he told me that if his life were a movie, he wouldn’t be Mr. Potter in It’s a Wonderful Life but rather the man who protects the working stiff from the rapacious and coldhearted financier. “We’re the George Baileys here,” he blurted. “We’re Jimmy Stewart!”

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