Merchants of Misery: How Corporate America Profits From Poverty
The rise of America's poverty industry is getting harder to miss these days. Turn on the TV, late night or daytime. Tucked amid the ads for psychic hotlines you'll hear announcers offering "rent-to-own" TVs, stereos and dinette sets with pitches like this: "Just $8.95 a week! We make your dreams come true -- one week at a time." Or drive down the main drag in an inner city or a blue-collar suburb and read the signs outside the storefront loan offices: "Bad Credit? No Credit? No Problem." If you live in a neighborhood with modest incomes or a large minority population, you might open your mailbox one day to find a loan company come-on fraught with double meaning: "The Credit You Deserve."Pawn shops, check-cashing outlets, rent-to-own stores, finance companies, high-interest mortgage lenders and many others are raking in big money by targeting people on the bottom third of the economic ladder -- perhaps 60 million consumers who are virtually shut out by banks and other conventional merchants. The poverty industry fills a niche for them -- at a stiff price. An affluent credit-card holder can shop around and pay as little as 6 or 8 percent annual interest. But a sheet-metal worker with a dubious credit record pays as much as 240 percent for a loan from a pawnbroker, 300 percent for a finance-company loan, 20 percent for a second mortgage, even 2,000 percent for a quick "payday" loan from a check-cashing outlet.There's another place you can run across the poverty industry these days: Turn to the stock pages of your newspaper. More and more, the merchants who profit from the disadvantaged are owned or bankrolled by the big names on Wall Street -- Ford, Citibank, NationsBank, Bank America, American Express, Western Union. Add up all the businesses big and small that bottom-feed on the "fringe economy" and you'll come up with a market of $200 billion to $300 billion a year:* Ford, NationsBank and defense contractor Textron are big players in the $100 billion-plus consumer-finance market. Nonbank finance companies make small loans at rates of up to 30 percent or more -- and as much as 300 percent in a few states. These companies also dominate the high-interest mortgage market, which analysts now estimate at $70 billion to $100 billion a year.* NationsBank and other banks have provided the growth capital to America's largest pawn chain, Cash America, a burgeoning company now traded on the New York Stock Exchange. By the fall of 1995, Cash America had 325 outlets in the United States, thirty-four in the United Kingdom and ten in Sweden. In the United States, Cash America's typical loan rate hovers around 200 percent.* American Express has provided financial backing to ACE Cash Express, a rapidly growing chain of check-cashing outlets. ACE now has 630-plus outlets nationwide. The overall number of check-cashing outlets has nearly tripled since the late 1980s, to an estimated 5,500. ACE generally charges from 3 percent to 6 percent of a check's value to turn it into cash.* Thorn EMI PLC -- a British conglomerate that owns the Beatles' label, EMI Records -- is the dominant player in America's $4.5 billion-a-year rent-to-own market. "Rent-to-own" stores sell TVs and furniture on weekly and monthly installment plans at markup prices that equal interest rates of 100, 200, even 300 percent. The number of rent-to-own stores has grown from about 2,000 to 7,500 since the early 1980s.These businesses are flourishing because there's money to be made in serving the downscale market. Associates Corporation of North America, a Ford subsidiary that specializes in downscale lending, has posted record profits each year for the past two decades -- including $972 million before taxes in 1994. In fact, consumer-finance companies routinely earn double or triple the return on assets that banks do. Mercury Finance, the used-car financier, rang up a return on assets in 1994 of 9.4 percent -- six times as much, Forbes admiringly noted, as what the best-run banks earn. From 1989 to 1995, Mercury's stock value soared eightfold.Storefront merchants that prey on the poor have always been around. But big companies are fueling the "corporatization" and expansion of the poverty industry by pouring in growth capital and providing the sheen of brand-name respectability to transactions that Wall Street once viewed with distaste. They're using sophisticated marketing to lure in consumers who are tired of being snubbed by mainstream merchants -- and thus are susceptible to businesses that offer well-scrubbed images and friendly faces behind the counter. "Rent-A-Center is a very good friend of mine," a smiling customer in one TV commercial says. "No matter what I do," another Rent-A-Center customer says, "they still take me back." At the same time, these companies play on desperation -- people who need cash fast to stave off the landlord, the power company, the tax man.Frequently they ensnare folks who aren't initiated into the world of banking and credit. Along with sky-high prices, many consumers are victimized by slick sales pitches, hidden charges, forged loan documents, strong-arm collection tactics. A 1992 Louis Harris poll found that while 31 percent of Americans say they have been "cheated out of money" sometime in their lives, 53 percent of people who have been turned down for credit say they have been cheated at one time or another.A home-repair company persuaded 72-year-old Mattie Foster to sign a contract for a new roof and new carpet for her home in Jacksonville, Florida. According to a later lawsuit, the roof work was poor -- rain eventually began leaking in -- and she never got the carpet. What she did get was a loan with First Family Financial Services, a growing lender that was soon to be purchased by Ford Motor Company.The contractor arranged for a loan for her through the lender. Foster paid a $1,700 broker's fee to get $4,380 to cover the work. The lender also paid off her original mortgage, bringing her total debt to First Family to $18,000. Then First Family persuaded her to refinance four times -- each time giving her a bit of new money but charging her much more in closing costs. On one loan, she received $25.66 in new money but paid more than twenty times that in closing costs -- $524.47. She ended up with a $22,000 mortgage on her home at 18 percent interest, and soon found herself struggling to keep up the monthly payments of $385 a month, more than half her Social Security income.Mattie Foster is now in the early stages of Alzheimer's. The only reason First Family didn't get her to sign a sixth loan was that her daughter stepped in. After a local legal-aid clinic sued, the lender agreed -- without admitting guilt -- to pay Foster a settlement that wiped out her mortgage so she could own her home free and clear.As more stories like Mattie Foster's have emerged around the country, some people have begun to fight back: consumer attorneys, neighborhood activists and, increasingly, consumers who are tired of being ripped off.Fleet Financial Group, New England's largest bank, was chased out of the high-interest mortgage business after allegations of abuse emerged in the early 1990s -- charges that it was cheating tens of thousands of low-income minority homeowners on mortgages that were fraudulently obtained and carried interest rates as high as 20 percent. Fleet stood its ground at first. But community groups and crusading attorneys targeted the bank for class-action lawsuits, protest marches and old-fashioned door-to-door organizing. The campaign sparked a 60 Minutes expose and Congressional hearings. Fleet blinked. It dropped out of the high-cost mortgage market and eventually agreed to come up with nearly $300 million in refunds and special loan programs to settle its legal problems.In Georgia, the movement against Fleet started with lawsuits but was bolstered by folks at the grass roots. In Augusta, a group of Fleet victims calling themselves Citizens Addressing Public Service (CAPS) drew as many as 300 people to its meetings, marched on Fleet offices and the state capitol and even filled buses that went to Washington as a show of force during the Congressional hearing. The Rev. Minnie Davis, CAPS' leader, said it took a while for them to get organized because most people thought they were alone -- that they had somehow brought their problems on themselves. "They were ashamed at first," Davis says. "Because nobody was saying anything. When other people start speaking out, they kinda overcome their shyness and say, 'That's happened to me, too. You need to do something to help these people.'"If real change is going to come, consumers must keep confronting the credit sharks -- and pressuring policy-makers for tougher consumer laws and regulatory efforts. At the same time, they have to keep pushing banks to open branches and make fair-rate loans in disadvantaged communities. And consumer advocates should work to create more "community-development" credit unions and other nonprofit institutions that serve red-lined neighborhoods. In the end, it's the absence of affordable financial services in these neighborhoods that allows predatory lenders to prosper.Change won't come easy. The companies that profit from the poor understand they're able to do so because of weak-kneed government oversight. Over the past fifteen years, they've used their money and clout to gut legal protections for borrowers -- and get industry-written statutes put on the books in the guise of "consumer protection." More than thirty states, for example, have passed laws that require rent-to-own stores to disclose accurately their prices, but exempt them from interest-rate caps on installment sales.Along with better laws, people desperately need solid consumer education that's not bankrolled or controlled by the finance industry. Gene Marsh, a University of Alabama professor who is an expert on his state's credit laws, has seen the abuses of the finance industry up close. But he also says disadvantaged consumers often dig themselves into holes through reckless borrowing. "Some people are like the Will Rogers of credit," he says. "They've never seen a loan they didn't like."There's some truth in that. These days millions of Americans of all economic classes are mortgaging their futures by using credit to live beyond their means -- or simply make ends meet. But companies that use advanced marketing to target the most vulnerable consumers should also be held accountable. The same banks that discriminate against minority borrowers are profiting from the nonbank lenders that gouge these consumers. The truth is that the free market doesn't work well when consumers have few real choices and limited education. The less affluent often don't know their rights and don't know where to report ripoffs. A study by the Wisconsin attorney general's office, for example, estimated that just one in 100 people harassed by bill collectors ever complains to authorities.It's not a burden on the free market to limit usury and crack down on clearly unfair tactics, such as "packing" credit insurance onto loan contracts or trapping customers into debt by enticing them to refinance again and again. Getting a loan or buying credit insurance is not the same as buying a gallon of milk. Comparison shopping is more complicated when it comes to credit; and going into debt brings with it the very real threat of losing your home, your car, your financial and mental well-being. It's not paternalistic to give downscale consumers a measure of protection when they're up against billion-dollar companies that benefit from immense marketing know-how, $200-an-hour legal help and mega-dollar political clout.Many merchants who cater to the poor and credit-damaged manage to make a respectable profit and yet offer decent prices and much-needed service to their customers. But fraud and manipulation are all too frequent in the downscale market. Often the attitude is that disadvantaged consumers deserve what they get: They're poor, they're deadbeats, they brought it on themselves. That sort of thinking helps keep millions of Americans down and insures that the nation will continue to be divided by class and race. It also makes it easier for financial predators to rationalize their conduct. Many truly believe they're doing "these folks" a favor, treating them like a member of one big happy family -- even as they charge them $1,000 for a $300 television, or sign them into debt at triple-digit interest rates.SIDEBAR: Driven a Ford Lately?Mention Ford Motor Company and most folks think: Mustang, Escort, Taurus, Aerostar, Bronco. But building cars, trucks and vans isn't what has put Ford near the top of the Fortune 500 list year after year. What's pushed it so high? Car loans, mortgages and consumer loans.The business press has called Ford's financial services empire the engine that makes the company go -- even its savior during rocky times in the auto business. In 1993, three-fifths of Ford's earnings came from its financial services holdings. The biggest earner among its lending units is Ford Motor Credit Corporation, which finances cars the automaker sells. But a large chunk of its profits come from a lesser-known subsidiary: Associates Corporation of North America. The Dallas-based company targets low-income, blue-collar and minority consumers -- perhaps 25 million to 30 million U.S. households -- who don't have relationships with banks. In 1994 it made $18.5 billion in mortgages and consumer loans and earned just under $1 billion in pre-tax profits.As the money has flowed in from its lending empire, Ford has also become the target of lawsuits charging it with cheating disadvantaged borrowers. The allegations include trickery, fraud, forgery. In Arizona, for example, Associates paid almost $3.4 million to settle a private lawsuit and an attorney-general investigation over claims it had manipulated about 8,000 customers into buying high-priced insurance with their loans. And Ford Motor Credit has agreed to pay more than $120 million to settle charges it "force-placed" overpriced accident insurance onto the loans of car buyers who had let their original insurance lapse. The lawsuits against the auto company's various lending arms have involved as many as three-quarters of a million customers nationwide.A few more examples:* In 1991, Associates Credit Card Services agreed to pay $48,000 to settle allegations by the Texas attorney general's office that its collectors had harassed fifty-six debtors by calling them repeatedly, cursing at them and calling their co-workers and bosses. "We felt that there were some instances that could have been handled in a different manner," a company spokesman said.* In 1994 an Alabama jury slapped Associates with a $34.5 million verdict for trying to foreclose on a homeowner who claimed her name had been forged on loan papers. Two other customers testified they believed their loan documents had also been forged. The judge ordered a retrial, saying he had erred by letting the woman's attorneys describe Associates as a company without conscience. Before the new trial, Associates settled for an undisclosed sum.* In 1995 another Ford subsidiary, First Family Financial Services, paid an estimated $3.5 million to settle a lawsuit accusing it of fleecing about 2,500 Alabama borrowers. The suit claimed the company paid secret kickbacks to brokers to encourage them to steer homeowners into higher-cost loans. This year First Family settled another Alabama lawsuit alleging it had overcharged about three dozen borrowers on credit insurance. So far the complaints against Ford haven't gained national attention. Ford concedes no wrongdoing in any of the cases, whether they're still pending or they've been settled. Industry observers contend Ford's credit units are victims of greedy trial attorneys looking for a payday; critics don't understand the nature of the business, they say."A lot of people need our services," says Bob Williams, manager of Associates' Roanoke, Virginia, branch. "All we're trying to provide is a service to people who might not be able to get credit elsewhere -- and let them have the opportunity that an upper-class person might have.... They're willing to pay a little bit higher rate for us to take a chance."Philip White sees things differently. A former loan officer and assistant manager for Associates in Alabama, White claims that Associates routinely takes advantage of vulnerable consumers. It's a world, he says, where cunning and deception are standard tools of the trade, where customers are routinely snowed by confusing paperwork and sleight-of-hand salesmanship.White says many of the customers who came into the Associates branches where he worked didn't -- or couldn't -- read their loan documents. According to him, they frequently never saw forms disclosing brokers' fees, and loan officers often added in hundreds, even thousands of dollars in fees for credit insurance -- without asking if it was needed. And he claims that customers were often misled about up-front points and other finance charges. White says the attitude around the office was: "If you had to lie about the points that we charged, lie to 'em. They're stupid anyway."If customers fell behind on their payments, he says, loan officers were expected to refinance their loans to jack up their interest rates and debt. When customers were panicky and in the hole, he says, you could get them to sign just about anything. They had a phrase for this around the office: "nut-squeezing."A Ford spokesman maintains that White's allegations are groundless and suggests the circumstances of his leaving the company may have something to do with his claim. The spokesman also says the company sent auditors to check White's claims that loan officers had forged some customers' documents in the two branches where he'd worked and "they found no basis for his allegations." White concedes that he resigned because he was about to be fired but says he has stepped forward to talk about Associates because he wants the truth to come out.The way White sees it, the finance-company business is a high-wire act: When the game's played well, Associates and other lenders squeeze a customer to the limit and keep him there. "They skin you," White says, but "leave a little bit of skin" so they can come back later -- "and skin you again."