And the names behind the names have a familiar ring: NationsBank, Transamerica, Ford Motor Company, American Express. Thanks to the deregulation frenzy of the last decade, many of America's biggest and most powerful corporations now own or finance the fringe businesses that target low-income, working-class, and minority consumers.
Melvin Adams, a black truck driver from Augusta, Ga., borrowed $10,500 from Transamerica Financial Services after his house was gutted by fire. He says the company "kept rolling it over," lending him more money but also tacking on new costs, until his debt totaled $42,700. His interest rate: 17 percent.
Grassroots organizations are springing up to help hardworking people like Melvin Adams fight these higher prices. But the banks and other mainstream businesses that have locked the poor out of the market for competitively priced financial services--and forced them to go to lenders who charge exorbitant rates--are using their money and power to protect their profits.
In the 1980s, Congress and most states threw out interest-rate caps and other vital protections. Supporters of deregulation said it would spark competition and drive rates down. That may have proven true for people who drive BMWs and minivans. But taking the lid off drove up prices for those who ride the bus or drive '84 Chevettes. Georgia, for example, kept only its turn-of-the-century loan-sharking statute, which limits mortgage interest to 60 percent a year. Today all but two Southern states allow pawnshops to charge annual rates of 240 percent on loans.
This feeding frenzy of predatory lending has been perpetrated by corporations that are protected by the sheen of Wall Street respectability and the cushion of their generous campaign contributions. These top-down financiers are making big money. Because the one thing that hasn't changed is the painful price exacted from disadvantaged consumers.
- The number of pawnshops has doubled in the past decade to about 10,000. At least five pawn chains are publicly traded. The "PWN" that runs across the New York Stock Exchange's electronic ticker stands for Cash America--a chain of 251 U.S. pawnshops financed by NationsBank and other banks. Cash America charges up to 200 percent annually on its loans.
- The number of check-cashing outlets has doubled since the late 1980s to an estimated 5,000. ACE America's Cash Express, a national chain of 340 outlets, is expanding with financing from American Express. It charges its customers up to 6 percent to convert their paychecks into cash.
- "Rent-to-own" stores have replaced old-time ghetto merchants with a new, cleaner look--and higher prices, selling TVs and furniture on installment plans at prices that consumer advocates say 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. Rent-A-Center controls about one-fourth of the $2.8 billion market.
- Finance companies make small personal loans at rates that can reach 30 percent or more. Household, Beneficial, NationsBank, ITT, and other big names dominate this $100-billion-plus market.
- Mortgage companies target homeowners who've been turned down for going-rate mortgages, signing them up for loans with high fees and interest rates that often exceed 20 percent. Wall Street analysts estimate the market for high-rate mortgages to disadvantaged consumers at $25 billion.
Why do people pay these prices?
Some are snared by their lack of education or financial savvy. But many simply have no place else to go for credit. A 1992 Federal Reserve Bank of Boston study shows that banks and S&Ls are 60 percent more likely to turn down blacks for loans than whites--even when their incomes and credit histories are the same.
After the fire at his house, Melvin Adams tried to get loans from several banks around Augusta. "We were turned down by the national banks--just flat turned down," he says.
Then Transamerica Financial Services, a subsidiary of the San Francisco-based Transamerica Corporation, stepped in. "We were targeted by them," Adams says. "We just kept getting brochure after brochure in the mail."
His family needed the money. They'd moved back into their house, but they had no furniture and nothing but space heaters to keep them warm.
Adams borrowed $10,500. He needed more, and Transamerica gladly refinanced the loan for him twice in the next 11 months. Each time it added in more closing costs and charged him prepaid finance fees of 5 percent to 8 percent--at a time when the average mortgage borrower was paying less than 2 percent. His interest rates were 17 percent to 18 percent, almost twice the going rate. Transamerica also charged him up to $2,700 per loan for credit insurance, an item consumer advocates say is lucrative for lenders but virtually worthless for borrowers.
"Sometimes we have to let other things go to pay," says Adams. "But think about poor people who can't pay--they lose their homes and end up on the welfare system. And everybody loses."
The growth in predatory lending has been fueled by the "secondary market." Banks that refuse to lend to disadvantaged borrowers directly nonetheless "buy" homeowners' mortgages and other loans from street-level brokers and home-repair contractors--purchasing the right to collect the monthly payments from the borrowers. Those corporate dollars help the street-level brokers expand their businesses and target more victims.
In a few places activists are rising up to expose the scandal. In Augusta, Citizens Addressing Public Service grew out of its members' experiences with Fleet Finance, a subsidiary of New England's largest bank. Fleet used "bird dog" salespeople to target as many as 18,000 Georgians for high-rate mortgages.
CAPS marched on Fleet's office in Augusta, lobbied the Georgia legislature, and staged a sit-in at the Federal Reserve. At the American Financial Services Association in Washington, D.C., Adams and other CAPS members grilled Senior Vice President Jeff Tassey.
"Maybe you're trying to extinguish black people from having anything," said James Brantley, who once had a 21 percent loan from Fleet.
"We're aware of the abuses that have occurred," Tassey offered. "I think we have dealt with them."
But another CAPS member, Bert Maxwell, wasn't buying that. The pattern of fraud and price gouging he perceived "just didn't happen haphazardly," he said. "It sprung up in the brain room. It left with a corporate stamp: Go out and steal."
This kind of pressure from activists has forced a response. In the U.S. House of Representatives, Joe Kennedy, D-Mass., sponsored the Home Equity Protection Act. The legislation requires cigarette-warning-like disclosures to consumers about the dangers of high-interest mortgages. It also limits "balloon payments" and a few other onerous types of loan provisions and makes banks and other big corporations accountable for fraudulent loans they purchase from smaller lenders.
However, Capitol Hill staffers say interest-rate caps were never considered--the finance industry wouldn't stand for them. But consumer advocates say interest limits would be the best way to make a dent in the predatory loan market. Without them, they say, the bill can best be described as "better than nothing."
Even so, the finance industry fought hard to water down what was left. The American Financial Services Association claimed the bill would cut off legitimate credit to disadvantaged neighborhoods. The industry succeeded in getting home-equity bills in both the House and Senate rewritten. In the House, for example, Kennedy agreed to reduce the number of loans and lenders covered by the act.
Susannah Goodman, a consumer lobbyist with Public Citizen's Congress Watch, says the sponsors for these bills had to give in--or risk not getting them through at all. "People are afraid of the financial gatekeepers," Goodman says. "They don't want to be seen as getting in the way of somebody who is in charge of capital. When somebody says, 'You're gonna destroy the second-mortgage market,' they sit up and listen."
How to change this? "If we were in everybody's face a lot more," she says, "there'd be less reason to appease the conservatives."
Grassroots activists have won some victories.
Fleet Financial Group was riding high in the early 1990s, when its high-rate mortgage operation was pulling in profits of $50 million a year. Then Union Neighborhood Assistance Corp., a grassroots group based in Boston, accused the bank of fleecing low-income homeowners. UNAC dug into court records and deed books, released studies to the news media, and staged sit-ins at bank branches.
Their efforts paid off. Fleet never admitted wrongdoing, but it still coughed up settlements of $23 million in Massachusetts and $115 million in Georgia to end attorney general investigations. Early this year Fleet committed $800 million in low-cost loans to impoverished neighborhoods--including a $140 million share to be controlled by its nemesis, UNAC.
Transamerica has also been charged with fleecing disadvantaged borrowers. In Pennsylvania, Transamerica and Mellon Bank paid $6.2 million in a settlement after the two companies were accused of a kickback scheme involving auto loans. In 1990, Transamerica tried to foreclose on the home of an impoverished, mentally disabled Arizona widow who was unable to pay $499 a month to the company. Her income was just $438 a month. A judge ruled the company "knew or should have known" she did not know what she was doing when she signed the loan papers. In both cases, the company denied wrongdoing.
Melvin Adams's lawyer, John Long, filed a lawsuit accusing Transamerica of usury, but withdrew it after a Georgia Supreme Court ruling made it more difficult to win cases alleging interest-rate violations. He says he is now preparing a class action suit accusing Transamerica of racial discrimination by targeting up to 1,500 African-American borrowers for higher rates. "These nationwide finance companies are completely unregulated," Long says. "They're charging rates that have no reasonable relationship at all to the cost of funds or market rates."
In a written response, Transamerica spokesman Richard Olsen says Long's charges are "totally untrue" and "an outrageous lie." He adds that Transamerica is a "highly ethical company that does not practice racial discrimination in any aspect of its activities."
Other big companies have also run into legal problems as they've dived into the high-rate loan market. ITT had to come up with settlements totaling over $70 million to end class-action lawsuits in Minnesota and Arizona and avoid attorney general investigations in California and Wisconsin. Associates Financial Services, a subsidiary of Ford Motor Company, paid more than $3 million to settle credit-abuse allegations in Arizona.
The battle is not over. Other lenders are fighting for a piece of the high-rate mortgage market--and fighting any legislation that might slow them down.
United Companies Financial Corp. is a $1.8 billion lender based in Baton Rouge, La., that targets customers who are locked out of the bank-loan market. In two years the company has expanded from 17 states to 30, and its loan production has grown from $301 million to a projected $900 million this year. Wall Street has noticed--United Companies' stock price grew 340 percent last year.
What's behind this frenzy?
United Companies began in 1946. Its late founder, Lloyd F. Collette, swore by this motto: "Mama might let some other payments slide, but she's going to be sure to pay that house note first."
The company reached critical mass in 1992, when it jumped into the "mortgage-backed" securities market. Mortgage-backed securities are a refinement of the "secondary" market of buying and selling mortgages. They allow lenders to increase their cash flow by selling securities backed by income from their mortgages. Gary Klein, an attorney at the National Consumer Law Center, says this market has opened a vast pool of money for shady lenders.
United Companies itself has been hit with allegations of abuse. Among others, the company paid $4.45 million to settle a lawsuit involving 1,500 Alabama borrowers; one homeowner paid the equivalent of 61 percent interest to borrow a few thousand dollars.
A United Companies spokesman denies that the company fleeces its borrowers. "If you look at the hundreds of thousands of loans we've made, I don't think you are going to see anything but a track record that is commendable and exemplary."
And they have sought lobbying help to fight the congressional predatory-lending bills that might slow their growth. United Companies settled on a powerful hired gun--the Long Law Firm, the new domain of Russell Long, the former U.S. senator from Louisiana and ex-chairman of the Senate Finance Committee.
That's why, at the end of a long day lobbying Congress and the American Financial Services Association, the CAPS activists from Georgia made one more stop: Russell Long's law firm.
In the outer lobby, there was thick carpet, a grandfather clock, and a marble-topped reception desk. But Mr. Long was not there. Apparently, he had been tipped off by a note in Legal Times that revealed the activists' plan to invade his office.
The receptionist made a call. A dignified, dark-suited black man strode out. The Rev. Minnie Davis explained that she wanted to talk to whoever was in charge in Russell Long's absence.
"I'm here," the man said.
Davis told him the Georgians had come to ask Long and his partners to stop trying to gut the home-equity bill.
The man cut her off: "I've got nothing to do with that part--I'm just the chauffeur."
Davis was speechless. For a moment.
Then she told everyone, "Please leave our calling cards." CAPS members approached the marble desktop and dropped blaze-orange flyers that shouted: "United Companies Financial Corporation Uses Blood Money To Lobby Congress."
They headed out the door just as a phalanx of well-dressed security guards filed in.
Mike Hudson was nominated for a National Magazine Award for his coverage of the poverty industry in Southern Exposure.