7. CASHING IN ON POVERTY

Sources: THE NATION*, Date: May 20, 1996, Title: "Cashing in on Poverty," Author: Michael Hudson; THE HOUSTON CHRONICLE*, Date: July 15, 1996, Title: "Bordering on Scandal What Some Pay for Credit," Author: Michael Hudson [*Excerpted from the book, Merchants of Misery. How Corporate America Profits from Poverty, Edited by Michael Hudson (Common Courage Press, 1996)].

Corporate America is in the poverty business and making huge profits from the destitute in the United States. Sixty million poor people without bank accounts or access to competitive-rate loans must instead use pawn shops, check-cashing outlets, rent-to-own stores, finance companies, and high-interest mortgage lenders. These businesses generate yearly revenues of $200 to $300 billion and are increasingly owned or subsidized by Wall Street giants such as American Express, Bank America, Citibank, Ford, Nations Bank, and Western Union.

While affluent credit card holders can pay as little as six to eight percent annual interest, low-income people are paying as much as 240 percent for a loan from a pawnbroker, 300 percent for a finance company loan, and even an amazing 2,000 percent for a fast "payday" loan from a check-cashing outlet. Large corporations use sophisticated marketing strategies to lure in new customers and increase their business. The overall number of check-cashing outlets in this country has nearly tripled to 5,500 since the late 1980s, and rent-to-own stores have skyrocketed from 2,000 to 7,500 in the same period. With a typical loan rate of 200 percent, Cash America's chain of pawn shops has quickly grown to 325 in the United States and expanded abroad with thirty-four outlets in the United Kingdom and ten in Sweden.

The main investor in America's $4.5 billion rent-to-own market is Thorn EMI PLC, a British conglomerate. American Express finances ACE Cash Express, a national chain of 630 check-cashing outlets. Charges average three to six percent of each check's value. Cash America, the country's largest chain of pawnshops, is bankrolled by Nations Bank and traded on the New York Stock Exchange.

Even though many of us think of Ford Motor Company in terms of its automobile sales, their Fortune 500 status has actually been achieved through financial services holdings. In 1993, three-fifths of Ford's earnings came from car loans, mortgages, and consumer loans. Associates Corporation of North America is a Ford subsidiary targeting low-income, blue-collar, and minority consumers. In 1994, it financed $18.5 billion in mortgages and consumer loans and earned just under $1 billion in pretax profits. Stock analysts estimate that used-car loans for people with shaky credit now top $60 billion a year. Non-bank finance companies like Ford and defense contractor Textron make small loans at rates as high as 300 percent in some states.

Along with astronomically high charges, many low-income consumers are also victimized by additional hidden fees, forged loan documents, and harassing collection tactics. And unless there is increased government protection for the destitute or a growth in alternative nonprofit financial institutions, big business will continue to expand these practices.

SSU Censored Researchers: Jody Howard, Anne Shea

COMMENTS: Michael Hudson coauthored and edited the book, Merchants of Misery. How Corporate America Profits from Poverty (Common Courage Press, 1996), from which both of these articles were excerpted. According to Hudson, this issue has received very little media attention. "I know of no significant network TV stories on the `poverty industry' in 1996. (The most recent network TV story was a 1993 60 Minutes piece on a single company, Fleet Financial Group, that was accused of fleecing minority borrowers. Since then, a number of companies have moved, without much fanfare, to fill the void left by Fleet's departure from the high-rate mortgage market.) Several magazines and newspapers have done stories on the extraordinary growth of the 'downscale' lending market, but almost none of them have looked in depth at the price gouging and predatory practices that are widespread in this `poverty industry'... but these articles typically fail to report the vast number of lawsuits and law enforcement investigations that have raised questions of fraud, usury, and other illegal practices in the industry. These allegations have involved some of the biggest players in the downscale market, such as subsidiaries of Ford Motor Co. and Nations Bank."

Hudson believes media exposure of this subject "would inform the American public about a nationwide scandal that directly affects as many as 60 million consumers. Widespread attention would help warn potential victims of credit gouging, fraudulent practices, and collection harassment -- giving them the information they need to avoid predatory credit deals in the first place, or at least informing them of their rights to fight back after they realize they've been mistreated. Further, if the full extent of the problem were known, it's likely the public and policy makers would take steps to improve consumer protection and fair-lending laws and create alternatives to high rate predatory financial services. Exposure might also help fuel broader political reforms by exposing the influence that the finance industry wields with lawmakers sympathetic to its profit margins and unsympathetic to consumers. Greater exposure of this story would also encourage more questions in general about corporate conduct and corporate responsibility in America.

"Given the wide array of abuses against low-income and minority consumers, it's impossible for this story to be completely ignored," says Hudson. He says a growing number of local newspapers -- such as the Boston Globe, Atlanta Journal-Constitution, and Richmond Times-Dispatch -- have dug into the subject in recent years. An op-ed piece that accompanied release of the book, Merchants of Misery, was picked up by 15 newspapers, including the Houston Chronicle, but mainly smaller papers.

"In the end," says Hudson, "the story will just keep getting bigger and bigger. More and more Wall Street companies are getting into the market as word spreads about the potential for profits. As Time noted, the industry's wild growth `has sparked some 25 initial public stock offerings, many in the last year. [The value of] shares in a number of the newly public mortgage and auto-finance companies [is] up astronomically: Southern Pacific Funding is up 82 percent, Cityscape Financial has risen 288 percent, and RAC Financial Group Inc. has appreciated 300 percent ... Another shot in the arm has come from Wall Street underwriters including Lehman Bros., Alex Brown & Sons, and Merrill Lynch, which bundle sub-prime loans, selling them off to investors as asset-backed (mobile homes, for example) securities.' In fact, the nation's highest paid chief executive is Larry Coss, CEO of Green Tree Financial of St. Paul, Minnesota, a company that makes higher-interest mobile-home loans to people with weak credit histories. He earned $65.6 million in salary and bonuses in 1995, and was projected to earn $100 million in 1996," says Hudson.