Bad Credit: How Payday Lenders Evade Regulation

The following article first appeared in The Nation magazine. For more great content from The Nation, sign up for their email newsletters here.

Sam Black woke up one morning not long after retiring to Charleston, South Carolina, with chest pains he didn’t realize would change his life. He took a shower and ate breakfast before his wife, Elsie, got him out the door to see his heart doctor. Within hours, the doctor cracked Sam’s chest open to do a triple bypass.

“They had the surgery early that morning,” Elsie recalls, piecing together the fragmented memory of someone who has survived a sudden trauma. Sam made it through the first operation all right, but later that night the hospital called Elsie. “We gonna have to take your husband back to surgery,” she says they told her. “Something went wrong.”

For the next seven weeks, Sam lay in a coma in the intensive care unit. Elsie says the doctor told her that when Sam comes to, “he might not know nobody. He ain’t gonna be able to drive.”

Today, roughly a decade later, Sam still labors over his words, speaking with a slow, gravelly slur. He sleeps with an oxygen mask and walks with more of a shuffle than a stride. But he walks and drives and lives independently. “They call him the walking miracle,” says Elsie. He also shells out more than $400 a month for prescriptions and owes his heart doctor what he estimates to be about $1,000 in co-pays. Elsie says she owes the same physician another $1,000. They’re both in the doctor’s office every few months for what feels like endless testing.

“See, our biggest thing is these co-payments,” Elsie fusses. “It’s like $35. And then when you go to these specialists, and you have tests done, the insurance pays a portion, and then they send you a portion—and you have all these bills coming in. You can’t really keep up with them.”

The Blacks are the first to admit they’ve never been good with money, but Sam’s heart attack began a remarkable financial tailspin that illustrates a deeper problem than their personal failings. They’ve been through a bankruptcy, gotten caught in a subprime refinance and narrowly avoided a foreclosure. But for years their most debilitating financial burden has been the weight of hundreds of small-dollar loans with triple-digit interest rates—short-term, wildly expensive credit that they took in order to keep the lights on and afford occasional luxuries like Christmas presents while paying those medical bills.

The Blacks are not unusual. Like millions of Americans with stagnant or shrinking incomes and considered too risky by mainstream banks, they have managed to pay for unexpected expenses by relying on an ever-changing catalog of expensive, shady consumer loans. This subprime lending industry exploded in the past decade and now stretches from Wall Street banks to strip-mall stores in working-class neighborhoods all over the country. It includes the infamous subprime mortgages sliced and diced into securities by the financial sector but also short-term loans against car titles, rent-to-own shops, personal finance companies, rapid-refund tax preparers and, perhaps most ubiquitous, payday lenders. These products are interdependent—often deliberately so—with one high-cost loan feeding into another, as struggling borrowers like the Blacks churn through fees and finance charges.

Payday lenders alone have turned millions of small loans, most for $500 or less, into a $30 billion-a-year industry, according to an analysis of SEC filings by consumer advocate National People’s Action. The payday industry’s lobby group, Community Financial Services Association (CFSA), boasts that its members lend to more than 19 million households. Researchers estimate that there are more than 22,300 payday lending shops nationwide, a scale that rivals the number of Starbucks and McDonald’s franchises. Stores are concentrated in the South, where consumer lending laws remain loose, but they crop up across the Midwest and West as well. It’s a sprawling industry that ranges from small mom-and-pop stores to a handful of national chains like Advance America, the nation’s largest payday lender; in 2010 it issued almost $4 billion in loans averaging less than $400.