August 8, 2008
BILL MOYERS:There's always been money to be made from people who have no money. That's because low income families turn to fast, easy, and pre-approved credit to make ends meet. But once they've signed on the dotted line, they often find their troubles have just begun. According to the Federal Reserve, the amount of money owed by households earning $30,000 or less between 1989 and 2004, soared to $691 billion that's an increase of nearly 250%.
These households are what one entrepreneur describes as "low-hanging fruit" just waiting to be plucked. Nothing new about this.
Loan sharks have been around to prey on the poor for centuries, but now the sharks are trying to spiff up their image, relocating from back alleyways to friendly-looking storefronts.
They hide their sharp teeth behind promises of ready cash to people who need it now. BUSINESSWEEK magazine dubbed this industry "the poverty business."
Its reporters looked at companies ranging from subprime credit card dealers and rent-to-own electronics stores to some of the biggest financial institutions in America, all of them turning the needs and desires of the working poor into bottom-line, bottom-feeding profits. Here's a report from our colleagues at "Expose."
Sylvia Chase narrates.
SILVIA CHASE:Central Avenue in Albuquerque, New Mexico part of fabled Route 66.
But the old romance of the open road now competes with the confines of modern reality: some call this area the "war zone."
ROXANNE TSOSIE:On Central right here there's like a bunch of prostitution; girls walking up and down the street. And then sometimes you'll find needles on the sidewalk.
SILVIA CHASE:Three years ago, Roxanne Tsosie decided it was time to escape the war zone. 28 years old, a single mother with four children she had just gotten a $15,000 a year job. There was a catch though: it required her to have a car.
ROXANNE TSOSIE:I'm a caregiver at a home with six guys that had HIV. And that was the main thing I needed the vehicle to take my clients to their appointment, to get groceries, to pick up their prescription, get, you know whatever they need.
SILVIA CHASE:She had no credit and little cash. But just a block away from her apartment was an attractive building with a lot full of cars and something else: a bright orange and blue sign easy credit.
ROXANNE TSOSIE:So I went over there and when they told me yeah you can leave with a vehicle, I was like, cool. Guess I'll stay here and get one then I was really happy I cried. I was like, 'Oh my gosh, I got me a vehicle.'
SILVIA CHASE:Consumers like Roxanne Tsotsie have little money individually. But together they number in the tens of millions, and represent a massive pool of wealth. And there's what amounts to an entire industry devoted to seeking riches in their pockets one customer at a time. That day at the Albuquerque used car lot, Roxanne Tsosie got herself a 1999 Saturn. It had 103,000 miles on it. The purchase price: $7,922. She bought it entirely on credit. Her payments: $150 every two weeks. Her interest rate: 24.9 per cent. Within months, she realized that what she thought was her ticket out, was actually weighing her down. Her family couldn't live on what was left over after she made her car payments. She returned the Saturn to the people who sold it her.
ROXANNE TSOSIE:I was sad when I had to give it back. That was my first vehicle. I was proud, you know, I did this on my own but after all this happened it just crushed me. And I'm like oh my gosh, I'm back to square one again.
SILVIA CHASE:For Roxanne Tsosie that would have been the end of the story if, across the country in Atlanta, a colorful ad hadn't caught the eye of a commuter on his way to work.
BRIAN GROW:You can't help but notice it, it's bright it's orange and blue. And there's a bright smiling face of a pretty young girl. And the ad says get credit, drive today. But there's an asterisks, and it says subject to approval. It talks about how $399 delivers, i.e. $399 down, delivers the car. But there's two asterisks next to that one.
The ad says, by purchasing a car you can rebuild your credit. But there's three asterisks after that one, sitting on the train every day, you know, over time I read all the fine print and it just stuck with me. Financing for all? No credit, bad credit? No problem. What does that mean?
SILVIA CHASE:Brian Grow is a reporter in Atlanta for BUSINESSWEEKmagazine. It was late 2006 when that advertisement with a slew of asterisks caught his attention. Soon after, a think tank report arrived on his desk. As he read it, Brian grow began to connect some dots.
BRIAN GROW:Matt Fellowes, at Brookings Institution, published a report called "From Poverty, Opportunity" how more companies were looking at low income Americans as a very attractive business opportunity.
Sort of defies conventional wisdom that the low income consumer is a segment of the market, where most companies wouldn't want to play. And it was pretty powerful and fascinating.
MATT FELLOWES:I've estimated in my research that among the bottom 25 percent of households, they're collectively bringing in about 650 billion dollars every year.
So you can imagine why an amount of money that large is attractive to a great variety of businesses, from large financial services companies to new, uh, to entrepreneurs looking for innovations to serve this market.
SILVIA CHASE:That the poor can be lucrative to big business was intriguing enough to the reporter. But Matt Fellowes' evidence for that case was even more so. The Fellowes report noted that wages have been stagnant for years; to compensate the working poor are buying items small and large by taking out loans from companies all too happy to lend them the money at a very high rate.
MATT FELLOWES:Lower income families tend to pay higher prices for nearly every basic necessity from groceries to the price of a car to the price of a mortgage.
MATT FELLOWES:Between 1989 and 2004, they borrowed about 240 percent more debt than they did in1989. So there is this enormous increase in the amount of debt held by low and moderate level income houses.
SILVIA CHASE:BUSINESSWEEK may be considered an unlikely publication to take on a poverty investigation based in New York City, it is a magazine that, like the corporations it covers, has traditionally viewed the world from the top down. But the think tank report hinted at a story a business magazine could embrace: an industry based on poverty, serving 25 percent of the American population.
PAUL BARRETT:The aha moment was that we could show a marketplace could be exploited, both in the neutral sense of exploited, just profits could be found; and exploited with the connotation of people being taken advantage of.
SILVIA CHASE:One player which for BUSINESSWEEKepitomizes what the magazine calls 'the poverty business' is the company that sold Roxanne Tsotsie her car: the company with the bright orange and blue signs. It's called J.D. Byrider.
BRIAN GROW:When you go to a J.D. Byrider lot, if you're paying attention then what will strike you as different, is that there are no prices on the cars. Which for most people would be what, how, why?
PAUL BARRETT:Their method is quite creative. The interest rate depends on what they think they can get out of you. So they basically debrief their customers to a much great degree than you could imagine.
SILVIA CHASE:The company uses sales techniques that brought lawsuits from Attorneys General in Kentucky and Ohio alleging that customers were being misled. The Kentucky case created a public docket that included J.D. Byrider corporate papers.
BRIAN GROW:So in the Kentucky Attorney General's lawsuit they introduce evidence from a J.D. Byrider operation's manual that points to a system in which sales staff are encouraged not to discuss the price of a car, when a prospective buyer comes in.
SILVIA CHASE:What sales agents do is try to learn everything they can about the earnings, spending habits and credit history of the customer. Then they crunch those numbers to create an extraordinary financial profile
MATT FELLOWES:It's difficult, I think, to underestimate how significant this ability to analyze and share, uh and gather data has been on illuminating business opportunities where they might not have been seen in the past.
What that has allowed these businesses to do is identify the specific risk level of an individual and do so in a nanosecond. That's an incredibly powerful innovation in the market.
SILVIA CHASE:And that's exactly what J.D. Byrider says it uses the information for: assessing its credit risk with each customer.
Consumer advocates say something else: that the company's software decides how much it can get someone to pay for one of its used cars. The software program is called the Automated Risk Evaluator A.R.E.
BRIAN GROW:Here you go, take a look, this is great, this is the beginning of A.R.E. at Byrider so this is the form that they fill out on the individual borrower, in this case they've blacked out the name.
SILVIA CHASE:During a visit to J.D. Byrider headquarters in Indiana, Brian Grow was given a revealing document: a completed customer form, the kind Roxanne Tsosie would have filled out.
BRIAN GROW:I remember the CEO said "I probably shouldn't give this to you."
Look at what the analysis tells you about the individual it's fascinating. The individual rents and pays $300 a month in rent to Marco. That's their landlord. Spends $75 a month on groceries. Spends $64 a month eating the dollar menu at fast foods chains four times a week maximum. Has no home phone. Does not purchase clothes, rather uses hand me downs. $345 on the car payment to J.D. Byrider was going to be by far the biggest payment the individual had, per month.
And if you add in the insurance costs they were going to be paying in total insurance, car payment but not gas $546 per month.
Oh, and this is interesting too, they're making $8.00 and hour wherever they may work.
After buying a car from Byrider, that individual had $67 left over per month. And I actually said to the Byrider CEO "that's pretty tight." He acknowledged that it was.
SILVIA CHASE:Byrider's critics contend the system is unfair to consumers with limited means. They call it "opportunity pricing."
KEITH EPSTEIN: Opportunity pricing is a way of setting the price second. First thing you do is figure out what they can pay then figure out what the payments they can make are and work backwards to the price.
SILVIA CHASE:Online, J.D. Byrider denies that its application process affects the price of its cars.
Byrider goes on to say, "Our core business is selling good cars to people who need credit. By providing affordable financing and we make sure it's affordable we can enable those customers to advance in life."
But what if a customer like Roxanne Tsosie finds herself falling behind and has to default on her loan? For companies like Byrider, defaults are acceptable, even profitable, according to Matt Fellowes.
MATT FELLOWES: So for instance there's a used car business out there that knows very well when it is selling a car to an individual that that individual will not likely be able to hold on to their car for the duration of their loan payment. And so therefore they'll return the car after a few months into the duration of the loan.
But that's OK with them because they've charged a high enough interest to cover the costs associated with that car being returned before the end of the loan.
SILVIA CHASE:In other words, Byrider has sold a car, made a profit on the loan and gotten the car back. What's more, BuisinessWeek would report that nearly half of Byrider's Albuquerque car sales don't result in a final payoff.
BRIAN GROW: Byrider knows it can repossess cars, assuming it can find them, and resell them which it does.
SILVIA CHASE:That cycle appears to be part of a successful business model in 2006 J.D. Bryider 131 dealerships most of which are franchisees reported total sales of $700 million. The average gross profit margin at the 10 percent of stores which are company-owned was a robust 37.25%.
BRIAN GROW: There was a map I remember that had all of these colored pins on it and I asked them what is this? And that's their expansion plans.
The 372 additional franchises it aims to open from California to Florida. It said this business model works despite the type of consumer that they're selling to. That map absolutely suggested there is money to be made in poverty.
SILVIA CHASE:Making money off people in need of money has always been around: pawn shops ready to take valuable goods for a song. Store-front operators willing to cash a paycheck on the spot in exchange for a cut.
But now, BUSINESSWEEK was finding, it was all going big-time.
PAUL BARRETT: That kind of business was now franchising and getting much, much bigger and much more sophisticated. And employing the modern tools of credit technology, the ability to look at your financial profile.
And they're big businesses where the product is often the loan.
SILVIA CHASE:BUSINESSWEEK would also report that mainstream banks are helping fuel what the magazine calls an "explosion in subprime lending to the working poor." For example: Bank of America Corp. provides a revolving credit line of up to $110 million to J.D. Byrider.
Wells Fargo and US Bancorp are offering what the magazine called their own versions of "payday loans" to people in need of quick cash charging two dollars for every twenty borrowed. The annual interest rate based on a 30-day repayment period? One hundred twenty per cent. A buyer in a difficult circumstance takes out a loan, a company provides it at a high rate: criminal, or simply a case of caveat emptor let the buyer beware?
PAUL BARRETT:Companies can often stay within the law, and still basically exploit the unsophistication of their borrowers. A lot of financial misbehavior stops well short of something that can be prosecuted criminally. Or to put it differently, clever financial engineers don't necessarily look like a guy with a gun going into a bank.
And often, the perilous aspect of the loan would be hidden in fine print, or it may just be a person taking advantage of another person, which isn't always illegal.
SILVIA CHASE:BUSINESSWEEK would learn that even nonprofit hospitals are getting into the poverty business, making deals with companies that transform medical bills into consumer debt.
BRIAN GROW: And as we were reporting during poverty business, we would see credit reports of some of the people we talked to. And on those credit reports inevitably was a hospital bill. Oh I went to the emergency room and I didn't have insurance and I'm paying that bill.
Has ER bills on credit, outstanding of $1328 and $318 but is making $25 monthly payments they said.
SILVIA CHASE:In America there are now close to 50 million people without health insurance. At hospitals they are called "self pay" patients and each year they ring up hundreds of billions of dollars in services money paid off slowly, if at all.
For American finance firms that kind of money cannot be ignored: BUSINESSWEEK found some are now pitching their services as hospital debt collectors for a cut of the self-pay pie.
PAUL BARRETT:Hospitals are now operating much more like other businesses. They don't want to settle for getting their money over such a long period of time, with the chance that after a while the person will stop paying altogether.
They want some cash now. Lo and behold, an industry pops up that is willing to help them do that. We'll buy your loan basically, or you'll transfer the loan to us hospital's happy, great, 80 cents on the dollar right now, we're done. Now, the finance company or the credit card person is suddenly the one knocking on that person's door, and they're not so merciful. They didn't go into the healthcare business to save people's lives; they're in the money business.
SILVIA CHASE:Traditionally, at non-profit hospitals, the approach has been "pay what you can when you can." No longer. Many are now requiring patients to pay their bills through interest -charging third parties sometimes without the patient fully understanding what she's getting into.
A case in point: April Dial, a 24-year-old woman living in rural Arkansas.
BRIAN GROW: April earns about $17,000 a year. She has no health insurance. She's a diabetic meaning her medical situation is, is pretty significant: She has ongoing medical issues, that she can control to the best of her ability but, as with many diabetics, can often result in sudden drops in blood sugar level that will require a visit to the hospital.
SILVIA CHASE:April Dial and her mother Carolyn live outside the small town of Malvern, Arkansas. They both wait tables at a truck-stop, where Carolyn took over her daughter's shift one day in September 2007.
CAROLYN DIAL: I had worked for her that day because she was sick. And she called me from home and she was just, she couldn't breathe. You could tell she couldn't breathe, she was hyperventilating.
And she was in the floor, she couldn't get up. So I got her in her car, we flew to Hot Spring County Hospital. Soon as I walked in, one of the nurses looked at me, I said she's bad.
APRIL DIAL:I couldn't walk, I was so weak. And they admitted me into ICU.
SILVIA CHASE:April's mom signed the admission papers without fully reading them.
CAROLYN DIAL:But they told me they're not going to see them unless they sign admission papers. Well I wasn't worried about admission papers; I was worried about her, because she comes first.
I don't think I've ever known anybody that's ever went in the hospital that has sit down and read the fine print.
SILVIA CHASE:April Dial's experience with Hot Spring County Medical Center goes way back this is where she was born. And her three-day stay in September was only the latest diabetes care she received there over the past decade.
Since her father's death seven years ago left the family uninsured, she and her mom have accumulated thousands of dollars in bills from the non-profit hospital. But despite living on their truck-stop waitress wages, the dials had slowly paid down their debt.
CAROLYN DIAL:Hot Spring County would let you make a payment. Even if you only paid them $5 a month, you were still making a payment. And I mean I was, I was going to pay the bill, but I couldn't just dish out 4 or 5,000 6,000 dollars at a time. I was paying about $50 to $100 a month.
SILVIA CHASE:But when April showed up at the ER in September there were new rules ever since Hot Spring County Medical Center sold its past-due accounts to this private company in nearby little rock. It specializes in collecting medical debt.
APRIL DIAL:I got this in the mail too. It's Complete Care Inter- Incorporated. I've never heard of it before.
BRIAN GROW: A bill shows up from Complete Care and it's a debt owed to Hot Spring County Medical Center, but now they're charging 5.75 % interest. Here you are not dealing with sky high interest rates. But what you have is $455 minimum payments, which would be difficult for anyone, let alone a truck-stop waitress.
APRIL DIAL:It was like a credit card almost. Audio hit I mean, it was interest due.
SILVIA CHASE:The news would get worse for APRIL DIAL: the hospital had sold not only her new debt, but her past bills, too. In all, she was now told to pay off $7300. Without knowing, April Dial had become a debtor to a new player in the poverty industry.
BRIAN GROW:The fine print which she says she didn't read, says I agree that if payment in full is not made within thirty days I will have the option to pay the outstanding balance over time under the conditions set by Hot Spring County Medical Center or its billing company, Complete Care.
Goes on to say that by electing to pay such balance over time I consent to and agree with all conditions disclosed on the back of my Complete Care Statement, including the charging of a fee and/or interest on any outstanding balance.
APRIL DIAL:I was supposed to pay either 10% or I would be delinquent on my credit.
SILVIA CHASE:On its website Complete Care does not hide its perspective on patients.
BRIAN GROW:You can pretty succinctly understand what their business model is: the patient becomes a consumer, the minute they walk out the hospital door. They're converting the medical debt into a consumer debt. They charge interest that's the mechanism for converting a medical debt into a consumer debt.
SILVIA CHASE:For background on billing at nonprofit hospitals, Brian Grow interviewed the CFO of Methodist Le Bonheur in Memphis Chris McLean.
CHRIS MCLEAN:There's a belief especially in hospitals we're not very good at collecting self pay accounts, and so that's their pitch, that we've left money on the table.
CHRIS MCLEAN:What they are pitching there is the belief and there's quite honestly some truth to it that people will pay a credit card company first and a health care company second, under the belief that a credit card company will hurt their credit reputation and come back to haunt them in the future affect their ability to get a house, affect their ability to get a loan for a car, affect their ability to get another credit card.
APRIL DIAL:Everything OK?
APRIL DIAL: What's wrong?
SILVIA CHASE:April Dial is accustomed to most of her paycheck going to pay for her diabetic care.
APRIL DIAL: I'm pretty tired, so if you wanted to run you coulda ran. . .
SILVIA CHASE:But after learning of the hospital's new finance rules she contacted a patient advocacy group for help a group coincidentally in contact with Brian Grow at BUSINESSWEEK.
APRIL DIAL: Everything OK?
MAN 2: Just fine.
APRIL DIAL: Good.
SILVIA CHASE:In its series on the poverty industry, BUSINESSWEEKreported that Complete Care agreed to reduce April Dial's monthly payments to $125. And the hospital, Hot Spring County Medical Center, decided patients billed by complete care would no longer be charged interest.
In Albuquerque, BUSINESSWEEK's reporting resulted in the local J.D. Byrider franchise reimbursing Roxanne Tsosie the $900 she had paid on her used car before returning it to the dealer.
The power of the national media spotlight may have forced changes in a few cases. But the bigger story remains: exploiting poverty is now big business.
BILL MOYERS: Most people aren't so fortunate as to have a reporter from BUSINESSWEEK show up to investigate, but many individual state governments have been defending their citizens against poverty businesses and predatory lending.
Those lawsuits filed by the Attorneys General of Kentucky and Ohio against J.D. Byrider were settled. The car dealer did not admit liability but agreed to reimburse past customers and inform new ones of the "maximum retail price" of the automobiles on sale. However, BUSINESSWEEK says prices still are not posted on the cars themselves.
In June, Ohio Governor Ted Strickland signed tough legislation that caps the interest rate for payday loans.
GOV. TED STRICKLAND:We will not tolerate individuals being exposed to exorbitant rates, which does contribute to the cycle of indebtedness.
BILL MOYERS: The new cap is set at an interest rate of 28 percent. Sound high? Well, that's down from -brace yourself 391 percent.
But the poverty business isn't taking Ohio's new law lying down. Under the innocuous-sounding name of Ohioans for Financial Freedom, the industry is circulating this petition to overturn the law. They have already raised $850,000 to try to drum up enough signatures. All of the money comes from a single donor, the payday lenders' lobbyist, the Community Financial Services Association.
MAN IN CFSA AD: I got one when my car broke down.
WOMAN IN CFSA AD: I used one when I had a larger than expected water bill, but it wasn't a decision I took lightly.
BILL MOYERS: CFSA has been especially active in urban, African American communities that's a primary target for predatory lenders. On our website at PBS.org, you can link to a startling investigation in the current online issue of MOTHER JONES.
The magazine reports that the CFSA and the subprime credit card company CompuCredit, have co-opted several prominent civil rights organizations to bolster their efforts to fend off stricter regulation. Seals of approval for payday lending have come from CORE that's the Congress of Racial Equality, the National Conference of Black Mayors and local chapters of the National Urban League.
Even the WASHINGTON POST was caught off guard.
Charles Steele Jr., president of the Southern Christian Leadership Conference, invoked Martin Luther King Jr. as he argued against the proposed Credit Cardholders' Bill of Rights Act. He defended subprime credit card lending.
The POST later had to issue a clarification that the Southern Christian Leadership Conference has a partnership with CompuCredit that includes plans to market "SCLC-branded" credit cards. Shameful.