TOPICS > Economy

What Will Financial Reform Mean for the Poorest?

July 19, 2010 at 12:00 AM EDT
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With President Obama set to sign financial reform legislation, much of the attention has been on the biggest U.S. banks lately. But what about lending practices that affect the poorest Americans? Hari Sreenivsan discusses the "poverty industry" with "Broke, USA" author Gary Rivlin.
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JUDY WOODRUFF: The fight over unemployment assistance is not the only economic story capturing Washington’s attention this week. The president will sign legislation to reform the financial sector on Wednesday. Most attention surrounding that bill has focused on Wall Street and big banks. But there’s been considerably less discussion about lending practices to poorer and working Americans.

Earlier today, Hari Sreenivasan had a conversation on that subject.

HARI SREENIVASAN: The economy has rebounded from its worst lows of the recession, but, for millions of Americans, it remains far too weak to have made a meaningful difference in their lives. And, for some, the poorest Americans, the bad news just keeps coming.

And there’s a whole industry focused on providing financial assistance to those Americans. But there are big questions about the practices of the industry.

That’s the subject of a new book. Gary Rivlin is the author of “Broke, USA: From Pawnshops to Poverty, Inc., How the Working Poor Became Big Business.” He’s a former reporter for The New York Times.

Thanks for being with us.

GARY RIVLIN, author, “Broke, USA: From Pawnshops to Poverty, Inc., How the Working Poor Became Big Business“: Thank you, Hari.

HARI SREENIVASAN: It seems like there is almost a correlation. The worse the economy gets, the better off this industry does.

GARY RIVLIN: Well, what really drew me to this topic a couple of years ago as we were heading into a recession that these would be good times for some of the industries I’m writing about, pawnbrokers, payday lenders, because people with no money in their pockets is good for these businesses.

You don’t go to the pawnbroker when you have a few hundred dollars of cash in your pocket. You go when you are broke. You go to the payday lender when you are out of cash and payday is next Friday. And so I just thought it would be really interesting to explore these industries at a time when they would be boom times for the payday lenders, pawnbrokers, et cetera.

HARI SREENIVASAN: Let’s talk a little bit about payday loans. We’re talking about an industry that’s at least, what, $7 billion? I mean, this is enormous.

GARY RIVLIN: Well, the amazing part of about the payday lenders, the business just started in 1993. By 2006, there were more payday loan shops in the U.S. than McDonald’s and Burger Kings combined.

These are loans of $300, $400, $500 at a time, but they are making $40 billion in loans a year, which turns out to be $7 billion in fees. And, you know, in theory, it makes sense. What do you do if your car breaks down and you don’t have a rich uncle, you don’t have a credit card? You need to get to work.

The problem is that the — with the fees they charge. The person who is so desperate for $300 today, that they will pay a fee that is equivalent to an interest rate of 400, 500, 600 percent or more, how are they in two weeks going to have the $300 plus the fees to pay it back on top of their other bills?

So, what you see happening are people roll these loans over in states where it is legal just to roll them over. In those states where they don’t permit that, there is kind of a human pinball. You go to store B to pay back store A.

HARI SREENIVASAN: Yes.

GARY RIVLIN: You owe A and B. You end up owing to store C.

You look at — you look at the payday lending statistics, two million or so people a year essentially owe money for the entire year. So, instead of a theoretical interest rate of 400, 500, 600 percent, there are two million people every year who are paying those kind of interest rates.

So, a $500 loan, that is $2,000 in fees over the course of the year. And, of course, these are people who could least afford it.

HARI SREENIVASAN: Yes.

Now, what are the new laws on the books with financial regulation going to do about that? Right now, we seem to have a patchwork on what type of percentage interest you can be paying on these payday loans from one place to the next.

GARY RIVLIN: Well, it’s up to the states. Every state has their own set of laws around how much you can charge for check cashing. In New York, it is under 2 percent of the face value of a check. In Georgia, it is 5 percent of the face value. In one-third of the states, there is no limit on how much you can charge someone to cash a payroll check or any other kind of check.

The same with the payday lenders — one-third of the states don’t permit payday lending. They either have a usury cap that doesn’t work for the payday lenders, so they don’t bother setting up shop there, or they just have laws not allowing them.

But it depends on the state. If you live in Missouri, you could charge $22.50 for every $100 borrowed, which works out to an annual interest rate of 650 percent.

HARI SREENIVASAN: Wow.

GARY RIVLIN: You live in a different state, it could be 400 percent. So, it’s really state by states.

But there has been talk of national laws that cap the number of payday loans you could take in a year at six. There’s been talk of a national usury cap of maybe 36 percent, which still sounds high, but…

(CROSSTALK)

HARI SREENIVASAN: Yes. Compared to 650 percent, that is not so bad.

So, some of these payday lenders are coming back and saying, listen, instead of trying to tackle us, why don’t you fix the real mess, which was the subprime mortgages that got so many people into this problem in the first place? They shouldn’t have been signing financial paperwork that they didn’t understand.

GARY RIVLIN: The difference between the subprime mortgage lending disaster and payday lenders, auto title lenders, instant tax mills — some of the fun of doing this book was exploring the many, many ways that entrepreneurs have figured out how to get wealthy off the working poor.

HARI SREENIVASAN: Yes.

GARY RIVLIN: There doesn’t tend to be a deception in the deal. You go to a payday lending store, it’s going to be posted that you are going to pay $15 for every $100, and that works out to an annual interest rate of 400 percent.

The thing is that people are so desperate for the money that they don’t care.

HARI SREENIVASAN: Yes.

GARY RIVLIN: They just want the $300 now. They will worry about how they are going to pay it back in a couple of weeks.

HARI SREENIVASAN: And there are also the rent-to-own furniture things. We see these ads on TV all the time. Some of these entrepreneurs have become very wealthy on these programs and these plans.

GARY RIVLIN: Right.

So, rent to own is another huge industry. It is about $7 billion a year. It’s dominated by two publicly traded companies. All of these industries we have been talking about, all these businesses are dominated by publicly-traded companies.

And the banks have provided huge funding that has let them grow to this size. It is really — at the same time that the banks have been pulling back from some services, they have been putting money into these various poverty — poverty industries. And thus we see that they have become multibillion-dollar industries.

HARI SREENIVASAN: And what about the people that say this is just the free market at work, that, basically, we’re actually creating — I guess, on Wall Street, you would call it liquidity. On Main Street, you would say, listen, I’m providing a service. They don’t have to come to me. They don’t have to take out this very-high-interest loan. I’m advertising it up front, whether it is a payday loan or rent-to-own furniture.

GARY RIVLIN: Well, it needs to be pointed out that they got exemptions, the payday lenders got exemptions from existing usury laws, that this was about deregulation.

So, our country has had a long tradition of putting a cap on the interest rates we charge people.

HARI SREENIVASAN: We call it loan-sharking.

(LAUGHTER)

GARY RIVLIN: And — well, actually, a loan shark works out to about 150 percent annual interest rate.

(LAUGHTER)

GARY RIVLIN: So, they don’t break kneecaps in the payday lending industry, but they do charge much, much more.

But, you know, the problem is that this is the kind of pill that feels good short-term. You need the money, and you get it. But, long-term, it’s really destructive for people’s health. And I’m not saying we should outlaw the payday lenders.

You, in fact, do need ways for people of modest means to get cash. I’m saying it needs to be much further regulated. We have taken some steps. The financial reform package that the president seems like he’s about to sign does, in fact, provide some regulation over the payday lenders, the pawnbrokers, the check cashers, the various businesses I wrote about. But it’s just a start.

HARI SREENIVASAN: All right, Gary Rivlin, thanks so much for your time.

GARY RIVLIN: Great. Thank you.