News & Politics

Swimming With the Sharks

Predatory lenders like LoanMax have interest rates that would make even Tony Soprano green with envy.
Reverend Al Sharpton finds solace in strange places.

"When I'm out fighting for the little guy and I need quick cash, I find comfort in knowing that LoanMax is here for me."

This is from a television ad he did in early December for LoanMax, a predatory auto title lender. After some criticism, Sharpton relented and declared a moratorium on the ads, saying he wants more financial data from LoanMax.

What data does Sharpton need? To get an auto title loan, a borrowers put up their car title as collateral along with an extra set of keys. They get a 30-day loan equal to a maximum of 50 percent of their vehicle's trade-in value. If the loan is repaid on time, the borrower gets the title back. If not, the vehicle is repossessed and sent to auction. In some states, the lender keeps the full proceeds of the auction, even if it exceeds the loan. To be fair, LoanMax isn't interested in repossession since it makes more money from customers' rolling over their debt from month to month. Trapping customers in a cycle of debt is the cornerstone of fringe lending.

LoanMax makes 500,000 title loans a year through 200 stores in 21 states. Its average car title loan is $400, and at a 30 percent monthly interest rate, it makes $120 on a $400 loan for 30 days. Since LoanMax claims that most borrowers repay their loan in two to three months, in only 90 days the average customer pays $360 in interest on a $400 loan. If customers take a year to pay off the debt, they'll spend a whopping $1,440 in interest on a $400 loan. Borrowers also pay title recording fees, plus some lenders add a $50 annual membership fee.

LoanMax's interest rates would make even Tony Soprano green with envy. According to the Justice Department, one underworld crew operated a large-scale loan sharking and bookmaking operation that preyed upon employees of stock brokerage firms. The crew made illegal loans at interest rates of one percent to five percent a week, or the equivalent of a 52 percent to 240 percent APR. This would be a bargain for auto title pawn customers. In fact, the phenomenal growth of legal fringe lenders may be cutting more into Mafia profits than the FBI's anti-racketeering efforts.

Sharpton claims he was recruited for LoanMax by Lamell McMorris, a civil rights activist and founder and CEO of Perennial Strategy Group, a consulting and lobbying firm. Quoted in the New Pittsburgh Courier, McMorris said, "I know a great deal about LoanMax because the owner of the company [Rod Aycox] is my best friend. LoanMax is not a predatory lending institution. As far as I'm concerned, they're green-lining a redlined America." Perennial wrote and disseminated LoanMax's rebuttal to attacks on the Sharpton commercial.

Predatory lenders like LoanMax crave respectability, and Lamell McMorris has the credentials to deliver. In 1998 Ebony named him one of the "30 leaders of the future, 30 and under." McMorris has worked with Jesse Jackson, the Chicago Urban League, the NAACP and the Rainbow/PUSH Coalition, and was director of the Southern Christian Leadership Conference. What better friend for a predatory lender?

The fringe economy represents an economic war targeted at the old, minorities and the poor. At its root, predatory lending is a class- and race-based industry. Check the zip codes. I doubt there's a LoanMax office located in a posh or upper-middle-class neighborhood. When Sharpton and McMorris work to make a rogue industry respectable, they are little more than well-paid mercenaries in an economic war against the poor. Promoting a debt culture also doesn't help the economic base of African American communities.

The main opposition to predatory lending comes from Democrats, and if fringe lenders can divide the leadership, the industry will be more secure. Part of the industry's strategy involves neutralizing or dividing African Americans over the issue. Unfortunately, this tactic seems to be working, at least on the basis of the silence of prominent civil rights activists like Jesse Jackson, Julian Bond and Bill Cosby. So far, no black leader has commented on Sharpton's swim with the LoanMax shark.

On the other hand, Congressional Black Caucus member Stephanie Tubbs-Jones refers to predatory lending as the "civil rights issue of this century." Take heed, she's probably right.
Howard Karger is the author of "Shortchanged: Life and Debt in the Fringe Economy" (Berrett-Koehler, 2005).
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