Payday loans and other abusive high-interest loans targeting the working poor are one of the scourges of our financial system. Last month, the Consumer Financial Protection Board proposed new rules for the industry to help families avoid what the Board calls “Payday Debt Traps.”
To understand why payday loans are so noxious, there are a number of great studies (see here, here and here for examples), but I highly recommend people read this in-depth profile of the payday industry in Kansas City written up in the city’s alternative paper. This post will summarize some of the story it tells, but it’s worth reading the whole thing (although it’s long and in two parts).
What the story highlights is the way the Internet metasized local payday industry players from shady storefront operators into respectable national financial players backed by mainstream financial firms and respectable investors. In many ways, it’s a story of how the vices of shady exploitation have used the sanitary interface of the Internet to mainstream loansharking among wealthy elites.
The technology of big data became a key to this transformation since it made it easy both to find new victims and largely hide the identities of the payday lenders. As Pitch describes the typical approach:
Say you need a quick loan. You type "fast loan online Kansas City" into Google and click on one of the sites that pops up. There's a good chance that the site is not an actual lender but instead is a middleman of sorts that processes your information, evaluates your credit in a matter of seconds, and creates a profile for you.
Such “lead generation” means there’s little accountability in the industry with so many layers between borrowers and lenders and borrowers often find their data has been resold multiple times as people get barraged by calls from offshore payday lending companies. As U.S. Senator Jeff Merkley argued in 2012,"These websites mask the true identity of the lender so it is harder to track down and prosecute deceptive lenders."
Two Churches at Each End of the Online Payday Loan Pipeline
The article starts with a story contrasting two Catholic parishes in Kansas City. At the wealthy Prairie Village Catholic church, wealthy investors in the local online payday lending industry suddenly start showing up throwing around money:
"It was most obvious at the school auctions," says one member of the Prairie Village Catholic church. "You'd see these cliques of people pulling up in limos, acting wild, dropping a lot of money on exotic two-week vacations and the other lavish items up for bidding...And you see it enough times and you start to go, 'Where is this money coming from?"
That the money was coming from exploiting the poor did not go unnoticed among other parishioners: “People on the finance committee and the school board were talking about the morality of taking that money. But in the end, I think they just looked the other way." The local pastor furiously fundraising argued that he wasn’t about to make a judgment about “what constitutes a legitimate interest rate versus what constitutes an exorbitant interest rate.”
Across town at a much poorer Catholic parish where many members had been victims of payday loans, Rev. Ernie Davis was scornful of just hedging. "There's no justification for it [payday lending] in the faith we share. Anything that oppresses the poor is condemned in both Jewish and Christian Scriptures.”
The Kansas City Elite Who Pioneered Online Payday Loan Exploitation
What makes payday loans so oppressive is that while they are advertised as a short-term emergency solution, every credible study has found that the high interest rates and fees end up trapping customers in cycles of new loans and escalating debt.
The Online Lenders Alliance is the Washington, D.C. lobbying outfit for the payday industry online and was founded by Mark Curry, a Kansas City native who founded a range of payday loan related businesses. His roster of members includes a disproportionate number of Kansas City locals who have often done business with each other in a byzantine web of interlocking relationships—many of which came to legal blows, whose legal filings created much of the window into the industry that Pitch details. Big financial LLCs and financial firms backed up these exploitive companies with large infusions of cash. Many investors came from local Kansas City families, thus the culture of folks getting rich in the industry around KC, with companies promising twenty-five percent per year returns on money invested.
One of the acknowledged pioneers of some of the sleaziest tactics of the industry is another KC native, Scott Tucker, who launched nearly 500 different Internet-based payday lending companies, creating “byzantine trails of front companies.” To escape state regulation and lawsuits, he also cut deals with Indian tribes to front his businesses, since only the federal government can sue tribal-based businesses. For a payment of 1 to 2 percent of revenues to the Modoc Tribe of Oklahoma, Tucker had virtual immunity from any state regulation for years.
Finally, Tucker was sued by the Federal Trade Commission in 2012 to stop some of his most abusive tactics, but kept his massive wealth and continued to be celebrated in local Kansas City write-ups for his side hobby as a race car driver, just as the local Home Design magazine did an interior design spread on his brother’s palatial home.
For Tucker’s and other companies’ customers, the story is very different. One former employee at a firm described how he regularly “saw a customer loan of $300 turn into a $900 debt in a very short period of time, due to interest, rollover and late fees." Another internal document revealed that :
The Company's average customer will borrow ~$1200 (~3 loans) and repay ~$2350 over a 4-year timeframe. Margins on loans to repeat customers average 150% higher than loans to new customers."
The most profitable customers were taking out a loan, falling deeper into debt, taking out new loans to service that debt, and falling deeper into poverty.
While the operations have a high-tech sheen, the dirty collection tactics are highlighted by this anecdote. A whole set of front businesses are located at 909 Baltimore street, but no one know it:
Not a lot of sunlight finds its way into 908 Baltimore. Workers are prohibited from speaking with the media. No sign hangs outside the building. "It's because the owners are afraid of shootings and retribution for their collection practices," says a former employee. "
Targeting Online Payday Lenders Through Bank and Search Engine Intermediaries
An Achilles heel of the online payday lenders is that they usually use the national check cashing system to enforce payments by borrowers. To get a loan, a borrower usually gives the lender access to their bank account to initially drop funds in and then later takes out repayments, fees and interest payments.
In 2013, the Federal Deposit Insurance Corporation (FDIC) began auditing banks to see whether they were assisting payday loan companies in evading state lending laws or otherwise violating consumers’ rights. Backed by the U.S. Department of Justice issuing subpoenas to banks and processors, many banks stopped accepting lenders as customers. More recently, the Consumer Financial Protection Bureau (CFPB) has been bringing suit against companies and even freezing their assets.
The proposed CFPB regulations overall for the payday lending industry will help as well, but the targeting of bank intermediaries as a tool also raises the issue of the role and responsibility of online platforms providing the lead generation services that allow companies to find their victims in the first place. California actually took the lead this month in announcing an initiative to work with major search engines to stop taking advertisements from unlicensed companies the state has issued cease and desist orders against. As California Department of Business Oversight Commissioner Jan Lynn Owen argued in launching the new program:
“Unlicensed payday lenders who operate online rank as one of the most significant consumer protection threats the DBO fights…They prey on our most vulnerable consumers and break our laws designed to protect borrowers from paying excessive fees and getting trapped in a debt spiral. Curbing their search engine advertising through this protocol with Microsoft and Google will help us fight the problem.”
All of these are encouraging steps in stopping the problem. But the culture of financial exploitation of the poor has been flexible over the years as the range of subprime mortgages, payday lending and other financial weapons targeting low-income families have shown. Targeting the worst offenders who violate the law is only part of the problem. As long as companies have so much data about borrowers, their desperation and their likelihood to accept bad financial terms, we can expect the rising inequality described between the two Kansas City parishes in Pitch’s story to continue.