'Shortchanged': Preying on Low-Income Americans

Payday loans, pawn shops, and check-cashing services offer low-income earners easy money at high interest rates. Madeleine Brand speaks with Howard Karger, author of Shortchanged: Life and Debt in the Fringe Economy, a study of predatory lending and its practitioners and patrons.

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MADELEINE BRAND, host:

This is DAY TO DAY. I'm Madeleine Brand.

Imagine, if you will, a multibillion-dollar industry reaping profit by selling nothing. In his new book "Shortchanged," Howard Karger documents the dark side to the American economy, businesses that charge excessive fees and grant loans whose terms are often impossible to meet. Their customers: the working poor and middle class, who become entangled in a vicious cycle of high interest rates and steadily increasing debt. Howard Karger says this fringe economy manifests itself in several ways.

Professor HOWARD KARGER (University of Houston; Author, "Shortchanged"): If you drive through any major city, you see payday lenders and check cashers and rent-to-own stores and buy-here-pay-here car lots. That's the more visible part of the fringe economy. The companies that these payday lenders and check cashers that you see scattered through cities are actually Nasdaq-traded companies with revenues in the 2, 300 million, in some cases a half a billion dollars in revenues.

BRAND: You talk a lot about payday loans and payday lenders in your book. What are they?

Prof. KARGER: A payday lender is an operation or a storefront usually where you go in and you borrow money short-term--it's 14 days--and you borrow it up until your next paycheck. So you write a check for, let's say, $360 and you receive $300 in cash. At the end of that 14 days, the payday lender then takes your check and deposits it. If you take out a payday--a $300 payday loan for 14 days, what are the chances in 14 days that you'll have the $300 to repay the loan? Not very high. So typically if you don't have it, you'll have to take another payday loan in order to pay out the first payday loan or roll the loan over. So that means in a total of 28 days you'll have paid $120 in interest on a $300 loan.

BRAND: Sounds like the Mafia, in a way.

Prof. KARGER: Actually the rates for the Mafia are actually better.

BRAND: So this is not a mom-and-pop pawnshop economy you're talking about?

Prof. KARGER: No. As a matter of fact, the mom-and-pop pawnshops are actually now owned--most of them are now owned by about five or six national conglomerates.

BRAND: And who are their customers?

Prof. KARGER: Well, predominantly the customers are poor, low-income people, but more and more the customers are becoming the financially stretched middle classes--people who have maxed out on their credit cards, people perhaps who have lost a job, people who just--whose income is less than outflow.

Let me just bounce back for a second. We often think that banks are not involved in it, and perhaps they're not involved directly in the fringe economy, but these large payday lenders and check cashers are actually financed by banks. In other words, that's where they borrow their money. That's where their operating capital comes from.

BRAND: And you actually go further in your book and say that some of these large banks actually have offshoots that deal with this market exclusively.

Prof. KARGER: Exactly. Subprime lending, particularly in mortgages. Most of the big banks actually have affiliates that do subprime mortgages, including Citibank.

BRAND: So what is wrong with that? I assume they're going after customers who have bad credit or can't for some reason get a traditional loan, and it's enabling them to buy a house if they couldn't in the other means.

Prof. KARGER: Well, I mean, you're correct. And they do. They enable people to buy houses. But the interest rate that people pay puts them in jeopardy later on. When we think of a prime rate mortgage, a house mortgage, we think 6 percent. For some of these people, it's 11, 12, 13, 14 percent. That puts them in jeopardy. When we talk about, for example, payday lenders, it puts people in a worse financial situation than they were in before they started.

BRAND: Although they might say, `Well, thank God somebody will give me a loan because otherwise I wouldn't be able to afford to buy groceries.'

Prof. KARGER: And you're right. And that's why it's really dicey whether or not we want to actually outlaw the fringe economy, because what would these people do? You're absolutely correct.

BRAND: And what about rent-to-own places?

Prof. KARGER: Well, rent-to-own is a $6 billion a year industry. And if you were to buy, let's say, a leather couch, it might cost you 400, $500 to buy a leather couch. If you go though the rent-to-own process, it could be 1,800 or more. The profit is extraordinary. And of course the profit increases in rent-to-own if you don't make your payments 'cause then they repossess what you've rented and then re-rent it again. So in theory, a $100 VCR they could make several thousand dollars on by re-renting it to various people.

BRAND: The other side of the argument is personal responsibility, and the argument that people don't need to have brand-new sofas from rent-to-own places; that they--people should try to live within their means and not succumb to the lures of the marketplace so easily.

Prof. KARGER: I would absolutely agree with you. In the best of all possible worlds, that would be the case. But unfortunately in our world, there is a need, a desire to have these things and to have them now. And certainly for the middle class, that's something that in part accounts for the high levels of debt.

BRAND: According to the 1977 Community Reinvestment Act, banks are required to have a presence in poorer neighborhoods, so why aren't there banks making these kinds of low-interest loans to poorer consumers? Why aren't there banks fulfilling their consumer needs in these poor neighborhoods?

Prof. KARGER: Banks have not, in fact, served low-income neighborhoods; and actually, as you know, since the '70s and '80s they've been deserting them at a fairly rapid rate. The vacuum left by the banks having left has been filled by the payday lenders, check cashers--all of whom really provide a lot of the functions that a bank would provide.

BRAND: You say this industry is also--has also spawned a getting-out-of-debt industry, which is interesting. What is that?

Prof. KARGER: Well, it's the consumer credit counseling agencies, which have sprung across all over the United States, some of which are quite legitimate--old, established agencies--and others are debt mills where the client pays one month up front, which they don't get back. That's considered a fee. Supposedly they're non-profit, but several of them have been indicted by state grand juries for corruption. It's a mixed industry. And what's interesting is that the bankruptcy law will now require anybody going into bankruptcy to have credit counseling.

BRAND: What are the other options that poor people might have? Are there any that you would recommend?

Prof. KARGER: Several options, I think. One is to use credit unions, community banks, to stay away from anything having to do with predatory lending and the fringe economy. Because money in the fringe economy only goes one way. There's no interest. They've never paid a penny in interest, any of these fringe lenders. Consumers involved in the fringe economy never, ever, ever get any money back.

BRAND: Howard Karger, a social policy professor at the University of Houston and author of the new book "Shortchanged: Life and Debt in the Fringe Economy."

And, Howard Karger, thank you very much for joining us.

Prof. KARGER: My pleasure.

BRAND: DAY TO DAY continues. I'm Madeleine Brand.

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