Montana voters on Tuesday approved a ballot initiative to cap interest rates on short-term credit at 36 percent, effectively banning payday loans -- paycheck advances of several hundred dollars with fees that amount to annualized interest rates of 400 percent or so.
During the payday's peak in the mid-2000s, storefronts hawking high-interest short-term loans in 38 states outnumbered the nation's McDonald's and Burger King venues combined, reports author Gary Rivlin in "Broke, USA: From Pawnshops to Poverty, Inc. -- How the Working Poor Became Big Business."
With the help of brand-name banks like JPMorgan Chase, Bank of America, Wells Fargo, and Wachovia, subprime and payday lenders raked in $150 billion in annual revenues, in what Rivlin concludes amounted to a 15 percent "poverty tax" on the working poor.
Payday proponents hate when the cost of their product is expressed annually, like in the Montana ballot battle. "People will always vote to make something cheaper, whether it's payday loans, electric bills or taxes," said Steven Schlein, spokesman for a payday PR outfit called the Community Financial Services Association. "If they were asked about 'banning' the service the outcome would have been different."
And fringe finance entrepreneurs point out that while their rates are steep, 400 annualized percent interest on a loan paid back in just two weeks is better than having your kneecaps broken by the mob. When they need money in an emergency, what alternative do the working poor really have?
Or, as Rivlin puts it, "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?"
Rivlin recalls the exact moment -- he was on an airplane toward Dayton, Ohio -- when his view crystallized on this question. He reached it partly through the extensive interviews with payday pioneers and their do-gooder opponents whose profiles fill his book.
There's consumer advocate Martin Eakes, the force behind the Self-Help Credit Union and the Center for Responsible Lending, who never drinks, owns just one suit, and gets haircuts from his wife to save money. It's largely thanks to him that payday lending is effectively illegal in 17 states plus Washington, D.C. (Eakes' critics say he's only out to benefit his own credit union.)
There's Chris Browning, the former Check 'n Go payday employee who couldn't stand that her company demanded she call customers who hadn't taken out a loan in a while and tell them they should come back. "The whole thing came to be about money and greed," said Browning, whose home is "overstuffed with Beanie Babies and other collectibles."
And then there's payday godfather Allan Jones, who can thank high-interest loans to poor people for all his fancy cars, yachts, and jets. When Rivlin mentioned to him that Cleveland seems like kind of a white town, Jones said, "That's why I can leave my keys in the car with the door unlocked....We have just enough so that our football and basketball teams are good." (Rivlin wrote in a HuffPost blog that he doesn't consider the payday industry inherently racist.)
Steven Schlein, Rivlin writes, is "more than a little obsessed with money" and didn't understand how someone could work so hard as a business reporter for so little reward.
"The thing about dealing with the subprime consumer is that it's just a nickel-and-dime business," former subprime lender Jerry Robinson, who dislikes the industry for the same reason as Browning, told Rivlin. "But the good news is there's a whole lot of nickels and dimes."
Wall Street Reform's Consumer Financial Protection Bureau will have significant power to regulate the payday industry (but not to impose an interest rate cap), despite the industry's best lobbying efforts. Which makes Rivlin's comparison of payday lenders "to those energy companies whose strip-mining destroyed vast tracts of wilderness areas until the practice was made illegal in the 1980s" an apt one.