Broke, USA; From Pawnshops to Poverty, Inc. – How the Working Poor Became Big Business by Gary Rivlin, Harper Collins, 2011, paper.
This is an impressive example of investigative journalism. In past times we would have called it muckraking. Gary Rivlin has investigated the myriad of companies whose business it is to loan money to the less well-off. Pay-day loans, pawnshops, check cashing, rent-to-own, the cash-in-advance tax return business, the second mortgage market, and used auto-loan financing are categories of enterprises in the poverty business. And the companies described in Broke, USA are all over our town, though more commonly in east Gainesville.
It is also true, and he admits this, that these businesses provide a service to their customers. Not everyone has an uncle or aunt who will spot them for $500 until the next paycheck. Moreover, these companies are often in lieu of branch banking, which has generally vacated the poorer areas of our cities. It is estimated that seventeen million Americans no longer have bank accounts. So they need to obtain financial services including that small loan to tide them over until the next paycheck,
Rivlin describes a number of ironies. For example, the tax refund anticipation loan business profited from the earned income tax credit inaugurated by the Nixon Administration as part of its welfare reform. Rather than making direct payments, welfare recipients are given a tax credit. A family with two children and less than a stipulated annual income receives a tax credit. H & R Block would happily loan that in advance of their tax return, but at a substantial interest rate. The tax credit for health insurance that is part of the recent overhaul of healthcare will also profit the tax-anticipation business.
Broke, USA. points out that many of the poverty industry’s “victims” are middle-class Americans, but living from paycheck to paycheck and occasionally using these lenders to solve short-run liquidity problems. They could resort to short-term borrowing from a bank via their Visa Card. And be charged much higher effective interest rates than does Advance America, a leading company in the payday loan business. Gasp, a bounced check of $100.00, subject to a $35.00 bank overdraft charge, is equivalent to a short term loan carrying a 910% interest, if made good in two weeks.
Rivlin was at first swayed by the arguments for these new financial institutions. But the more he thought about the situation, the more confident he became about the exploitive nature of subprime lending. He argues persuasively that there has been an “unmooring” of interest rates from any calculation of risks. Most of the working poor manage their debt and are not substantially greater risks than the rest of us, he claims.
One of the heroes of Rivlin’s book, Martin Eakes, started a company in North Carolina that makes affordable loans to people purchasing homes, and his company can make a go of it at 1 to 2% points above the going interest rate. He looks for borrowers who have proven to be hard workers with secure jobs and not buying a home beyond their means. An insider and vehement critic of the poverty industry, the MacArthur Foundation gave him one of their genius awards.
Eakes and Rivlin aren’t happy with the big banks. NationsBank, First Union, Citigroup, Bank of America, and others became involved in subprime lending, securitizing its financial products with disastrous results. That involvement has provided another good reason to enact substantial financial regulations. One useful beginning is the Consumer Financial Protection Bureau which President Obama has created. Also many the states’ Attorneys General are taking an interest. And the big banks may eventually bring some greater integrity to the subprime enterprise. At least they can be more easily shamed.
On the other hand, the problem may grow if real incomes of middle class Americans continue to shrink as they have in recent years. We would like to hope that Americans will, nevertheless, begin to put away some savings for a rainy day and be less dependent upon short-term, expensive credit. But that depends on their earning a decent wage and being given a decent interest rate.