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earlbo: No More GOP Mistakes! (28/1)
Glenda: No More GOP Mistakes! (28/1)
earlbo: Reverse Lolita; Female Teacher Sexual Abuse! (16/1)
Glenda: Reverse Lolita; Female Teacher Sexual Abuse! (15/1)
earlbo: Dad Sells Kid For Beer, Beef & Cash! (14/1)
Glenda: Dad Sells Kid For Beer, Beef & Cash! (14/1)
earlbo: When social Scientists Go To War! (12/1)
sirona: When social Scientists Go To War! (12/1)
earlbo: It's Just Love; with Fury And Fists! (6/1)
earlbo: It's Just Love; with Fury And Fists! (6/1)
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| Peacetrain - Peace Gallery |
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| CODEPINK - Women for Peace |
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| We Are a Rich Country of Poor People |
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It is expensive to be poor and unbanked in America
---James Baldwin
Republican economics at work - foreclosures and loan defaults
But that's OK, because heaven forbid anyone ever offers regulation because the finance industry that is taking the system to the verge of a crash might not like it. The MIA Republicans have made it their gospel to allow industry - any industry that's willing to fork over campaign cash - to self regulate, telling supporters that government regulation only complicates matters and that the government has made a mess of everything. Take one guess who will be first in line with their hands out, asking for money when the system they built comes crashing down?
"Many families are going to lose their homes," says Deborah Goldstein, executive vice president of the CRL in Durham, N.C. "There's a need for federal regulators to address the kinds of abusive mortgage practices that we're seeing."
Housing advocates believe the regulators are reacting too late. "They're good positive steps but it's not close to being enough – the genie's already out of the bottle," says Mr. Rheingold. "What we're seeing now with the incredibly high foreclosure rates ... is a product of the complete deregulation of the mortgage industry over the last 10 to 15 years."
Republican economics at work and another case study in how to give the shaft to consumers while coddling political donors. Yes, banks have become predatory lenders over the last few years because of de-regulation. But, people should take some responsibility too for their actions and do some more realistic analysis before borrowing insane amounts of money without reading the fine print. I'm not excusing the banks, but some inherent poor human judgement is at play here about home ownership. The greed of "gottcha Loan sharks" who prey on the working poor is not so much people's poor judgement as the poor circumstances fostered by the current "voodoo economics".
You see them along urban thoroughfares and on the corners in poor neighborhoods: check-cashing centers, pawnshops, "payday loan" establishments and rent-to-own furniture stores. This industry comprises what University of Houston professor Howard Karger refers to in his new book as the "fringe economy."
This new phenomenon, according to Shortchanged: Life and Debt in the Fringe Economy, experienced "almost exponential growth during the mid-1990s." In 2001, the "fringe economy" accumulated $78 billion in gross revenue. These fringe businesses make their money off the poor by charging them exorbitant interest rates or bloated or hidden fees because their customers lack good credit, bank accounts or other options.
Today, 53% of Americans live paycheck to paycheck, and 56 million don't have bank accounts. The robust fringe economy has also come at a time when household debt is increasing rapidly, when many banks are increasing minimum payments, late penalties and interest rates on credit card debt, and when bankruptcies, according to the American Bankruptcy Institute, skyrocketed more than 400% from 1975 to 2003.
Where once pawn shops were perceived as havens of the thief, gambler or crackhead, and rent-to-own stores were used primarily by college students, today they are frequented by the working poor. Karger notes that the average payday loan customer is a woman ages 24 to 44 with a high school diploma and earning less than $40,000 a year. With such a tight budget, one unexpected event becomes a crisis.
Ron Cook is a department manager at a Wal-Mart store in Atlanta. Maria Guzman is an undocumented worker from Mexico; she lives in Houston with her three children and cleans office buildings at night. (The names have been changed to protect the privacy of the individuals.) What do these two people have in common? They are all regular fringe economy customers.
The Payday Lending Trap
Ron and Deanna Cook have two children and a combined family income of $48,000 -- more than twice the federal poverty line but still $10,000 below Georgia's median income. They are the working poor.
To make ends meet, the Cooks borrow from payday lenders. When Ron and Deanna borrow $300 for 14 days they pay $60 in interest -- an annual interest rate of 520%! If they can't pay the full $360, they pay just the $60 interest fee and roll over the loan for another two weeks. The original $300 loan now costs $120 in interest for 30 days. If they roll over the loan for another two-week cycle, they pay $180 in interest on a $300 loan for 45 days. If the payday lender permits only four rollovers, the Cooks sometimes take out a payday loan from another lender to repay the original loan. This costly cycle can be devastating. The Center for Responsible Lending tells the tale of one borrower who entered into 35 back-to-back payday loans over 17 months, paying $1,254 in fees on a $300 loan.
The Cooks take out about ten payday loans a year, which is close to the national average for payday loan customers. Although the industry claims payday loans are intended only for emergencies, a 2003 study of Pima County, Ariz., by the Financial services for the poor and credit-challenged are big business.
Southwest Center for Economic Integrity found that 67% of borrowers used their loans for general non-emergency bills. The Center for Responsible Lending found that 66% of borrowers initiate five or more loans a year, and 31% take out twelve or more loans yearly. Over 90% of payday loans go to borrowers with five or more loans a year. Customers who take out 13 or more loans a year account for over half of payday lenders' total revenues.
The Unbanked
Maria Guzman and her family are part of the 10% of U.S. households -- more than 12 million -- that have no relationship with a bank, savings institution, credit union, or other mainstream financial service provider. Being "unbanked," the Guzmans turn to the fringe economy for check cashing, bill payment, short-term pawn or payday loans, furniture and appliance rentals, and a host of other financial services. In each case, they face high user fees and exorbitant interest rates.
Without credit, the Guzmans must buy a car either for cash or through a "buy-here/pay-here" (BHPH) used car lot. At a BHPH lot they are saddled with a 28% annual percentage rate (APR) on a high-mileage and grossly overpriced vehicle. They also pay weekly, and one missed payment means a repossession. Since the Guzmans have no checking account, they use a check-casher who charges 2.7% for cashing their monthly $1,500 in payroll checks, which costs them $40.50 a month or $486 a year.
Like many immigrants, the Guzmans send money to relatives in their home country. (Money transfers from the United States to Latin America are expected to reach $25 billion by 2010.) If they sent $500 to Mexico on June 26, 2006, using Western Union's "Money in Minutes," they would have paid a $32 transfer fee. Moreover, Western Union's exchange rate for the transaction was 11.12 pesos for the U.S. dollar, while the official exchange rate that day was 11.44. The difference on $500 was almost $14, which raised the real costs of the transaction to $46, or almost 10% of the transfer amount. Without a checking account, the Guzmans turn to money orders or direct bill pay, both of which add to their financial expenses. For example, ACE Cash Express charges 79 cents per money order and $1 or more for each direct bill payment. If the Guzmans use money orders to pay six bills a month, the fees total nearly $57 a year; using direct bill pay, they would pay a minimum of $72 in fees per year.
All told, the Guzmans spend more than 10% of their income on alternative financial services, which is average for unbanked households. It ain't cheap to be poor.
The Cooks and the Guzmans, and most other people may not fully appreciate the economic entity they are dealing with. Far from a mom-and-pop industry, America's fringe economy is largely dominated by a handful of large, well-financed multinational corporations with strong ties to mainstream financial institutions. It is a comprehensive and fully formed parallel economy that addresses the financial needs of the poor and credit-challenged in the same way as the mainstream economy meets the needs of the middle class. The main difference is the exorbitant interest rates, high fees, and onerous loan terms that mark fringe economy transactions.
Click Here to Read More. . .
The Scope of the Fringe Economy
The unassuming and often shoddy storefronts of the fringe economy mask the true scope of this economic sector. Checkcashers, payday lenders, pawnshops, and rent-to-own stores alone engaged in at least 280 million transactions in 2001, generating about $78 billion in gross revenues. Businesses, these merchants of misery, that target the "fringe economy" - the poor, the working-class, and often the minorities - who can't get loans from traditional institutions. And yet, many of the traditional institutions that deny service to the poor - by not placing banks in working-class neighborhoods, by refusing mortgages in minority neighborhoods , etc. - these same institutions own a majority of the businesses that profit from the poor, through this nontraditional fringe economic market.
By comparison, in 2003 combined state and federal spending on the core U.S. social welfare programs -- Temporary Aid to Needy Families (AFDC's replacement), Supplemental Security Income, Food Stamps, the Women, Infants and Children (WIC) food program, school lunch programs, and the U.S. Department of Housing and Urban Development's (HUD) low-income housing programs -- totaled less than $125 billion.
The fringe economy plays a big role in the housing market, where subprime home mortgages rose from 35,000 in 1994 to 332,000 in 2003, a 25% a year growth rate and a tenfold increase in just nine years. (A subprime loan is a loan extended to less creditworthy customers at a rate that is higher than the prime rate.) According to Edward Gramlich, former member of the Board of Governors of the Federal Reserve System, subprime mortgages accounted for almost $300 billion or 9% of all mortgages in 2003.
These corporations represent the tip of the iceberg. Low-income consumers spent $1.75 billion for tax refund loans in 2002. Many lost as much as 16% of their tax refunds because of expensive tax preparation fees and/or interest incurred in tax refund anticipation loans. The interest and fees on such loans can translate into triple-digit annualized interest rates, according to the Consumer Federation of America, which has also reported that 11 million tax filers received refund anticipation loans in 2000, almost half through H&R Block. According to a Brookings Institution report, the nation's largest tax preparers earned about $357 million from fringe economy "fast cash" products in 2001, more than double their earnings in 1998. All for essentially lending people their own money!
Fringe-economy corporations argue that the high interest rates and fees they charge reflect the heightened risks of doing business with an economically unstable population. While fringe businesses have never made their pricing criteria public, some risks are clearly overstated. For example, ACE assesses the risk of each check-cashing transaction and reports losses of less than 1%.
Since tax preparers file a borrower's taxes, they are reasonably assured that refund anticipation loans will not exceed refunds. To further guarantee repayment, they often establish an escrow account into which the IRS directly deposits the tax refund check. Pawnshops lend only about 50% of a pawned item's value, which leaves them a large buffer if the pawn goes unclaimed (industry trade groups claim that 70% of customers do redeem their goods). The rent-to-own furniture and appliance industry charges well above the "street price" for furniture and appliances, which is more than enough to offset any losses. Payday lenders require a post-dated check or electronic debit to assure repayment. Payday loan losses are about 6% or less, according to the Center for Responsible Lending.
Much of the profit in the fringe economy comes from financing rather than the sale of a product. For example, if a used car lot buys a vehicle for $3,000 and sells it for $5,000 cash, their profit is $2,000. But if they finance that vehicle for two years at a 25% APR, the profit jumps to $3,242. This dynamic is true for virtually every sector of the fringe economy. A customer who pays off a loan or purchases a good or service outright is much less profitable for fringe economy businesses than customers who maintain an ongoing financial relationship with the business. In that sense, profit in the fringe economy lies with keeping customers continually trapped in an expensive web of debt.
What Can be Done?
The fringe economy is one of the few venues that credit-challenged or low-income families can turn to for financial help. This is especially true for those facing a stingy welfare system with a lifetime benefit cap and few mechanisms for emergency assistance. In that sense, enforcing strident credit and banking laws to curb the fringe economy while providing no legal and accessible alternatives would hurt the very people such laws are intended to help by driving these transactions into a criminal underground. Instead of ending up in court, non-paying debtors would wind up in the hospital. Simply outlawing a demand-driven industry is rarely successful.
- Repeal the current Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
"The big winners under the new law is the special interests that literally wrote it, particularly the credit card industry. This is particularly ironic because reckless and abusive lending practices by credit card companies have driven many Americans to the brink of bankruptcy." Like many of my fellow citizens, I receive in the mail from one to two credit card applications a week. So just imagine if you are seriously in hock to these "Stranglehold Finance Co." types, how easy it is to get more deeply in debt to them. These same companies also run commercials to the same tune, repeatedly, on your TV and Cable channels. There is hardly any way a person can escape being mesmerized by all of this come-and-get-it loan propaganda.
The Credit Cartel made a staggering $31.6 billion in profits last year. Rates as high as 29 percent are now legal. Americans are over $800 billion in debt to these predators. Meanwhile, Congress, which received $8 million in donations in 2004 from the Cartel has just passed a new Bankruptcy law to put the squeeze further on consumers. It’s time for Congress to put a reasonable cap on interest payments and to repeal that Bankruptcy law.
- The fringe economy needs to really be regulated, something like the tobacco industry. There should be warning signs, in these places of business, warning that use of this credit is dangerous for your economic health. Regulations should include new restrictions on advertising, limits on interest rates and fees, possible bans on certain kinds of loans, and requirements to establish no/low-cost non-profit credit counseling services in their service areas to help people get out of debt and help keep them out of debt.
- One strategy to limit the growth of the fringe economy is to develop a national policy to support more community-based lending institutions modeled on the Grameen Bank - banking for the poor, credit unions where people are worth more than money, and cooperative banks also called Mutual savings and loans. Although community banks might charge a higher interest rate than what commercial banks charge prime rate customers, the rates would still be significantly lower than in the existing fringe sector.
- Another policy option is to make work pay, or at least make it pay better. In other words, we need to increase the minimum wage and the salaries of the lower middle class and working poor. One reason for the rapid growth of the fringe economy is the growing gap between low and stagnant wages and higher prices, especially for necessities like housing, health care, pharmaceuticals, and energy. The GOP likes to say that raising the minimum wage will cost jobs and hurt the economy, it's amazing how whopping increases for CEOs and managers doesn't have any bad effects at all.
The ratio of average CEO pay (now $11.8 million) to worker pay (now $27,460) spiked up from 301-to-1 in 2003 to 431-to-1 in 2004. If the minimum wage had risen as fast as CEO pay since 1990, the lowest paid workers in the US would be earning $23.03 an hour today, not $5.15 an hour. At the 34 publicly traded US corporations among the 2004 top 100 defense contractors with 10% or more of their revenues from defense contracts – companies such as United Technologies, Textron, and General Dynamics – average CEO pay increased 200% from 2001 to 2004, versus 7% for all CEOs.
You’ve got banks targeting subprime lenders for credit cards and mortgages, and then whining about how they should pay! Pay! Pay! You have banks pushing crap like adjustable rate mortgages, mortgages that were made for the wealthy and then pushed onto the middle-class and low-income people as a way to have a house right now. I care about the fact that despite productivity, people are still poor, and everyday people are blamed for "bad choices and envy" when the reality is greed and corruption that is doing much more to hurt people. Executives are free to enjoy the fruits of their labor– and workers deserve to enjoy some of the fruits of their labor as well. If fringe businesses can make billions in low-income neighborhoods, less predatory economic institutions should be able to profit there too and create a better life for everybody.
I get indignant when kids are dying because their mothers can’t afford an $80 tooth extraction. That’s the kind of story that makes me wonder what kind of fucked-up priorities we have in this country where it’s more important for Paris Hilton to avoid being taxed than it is for us to keep kids from dying easily preventable deaths. I’m not envious. I’m mad as hell. I believe given the fact that almost every aspect of life is commercialized and that society almost always purchases everything from the food eaten, the clothes worn, the toilet paper used, and the water you drink, that those corporations deserve and should be required to contribute to the society that supports them. So many people (worker and CEO alike) contribute a good chunk of their lives to work and more often than not, an organization/business will not adequately repay those who worked hard to create it's success. When a worker is just a replaceable cog that is easily replaced, often and cheaply, it is easy to keep taking advantage of people in any and all manner of ways that furthers the organization. I don’t care if you work 20 hours a week or 120 hours a week, if you run the company or clean the company toilets. Every person is entitled to be treated humanely and with some basic respect. The way that the current wages and benefits are passed around doesn't even come close to meeting that standard and corporations need to be held to account. Why is it so unthinkable to expect corporations to treat their workers fairly?
The percentage of poor Americans who are living in severe poverty has reached a 32-year high, millions of working Americans are falling closer to the poverty line and the gulf between the "Bush's base - haves" and the "have-nots" widens. When you're poor, the only solution offered to you is to remain poor. It's a cycle, and it's a trap, and it means being looked down upon because you aren't doing better for yourself, when the whole system is geared towards keeping you down and poor. How the hell is someone supposed to pull themselves up by the bootstraps when they have no goddamn boots? And the people with boots, look down on them, sneering…"well I pulled myself up, wtf is YOUR problem?" They won’t even acknowledge that they are talking to barefeet people who would just be happy to have some goddamn socks.
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Posted on Saturday, March 03 @ 21:57:10 EST by earlbo |
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Re: We Are a Rich Country of Poor People (Score: 1)
by Beth on Sunday, March 04 @ 05:51:37 EST
(User Info | Send a Message) | You're singing to the choir on this one. Love this article. I think it all started with Regan and his "tickle down" politics.
Forgive me now (and I know not everyone is going to like me for this--oh, God, whatever shall I do?), to some extent, it contiinued with Clinton selling himself by signing off on that Nafta bill. |
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Re: We Are a Rich Country of Poor People (Score: 1)
by Glenda (renderuntoME@mail.com) on Sunday, March 04 @ 13:26:11 EST
(User Info | Send a Message) | I echo that, Beth.
NAFTA was a case of good intentions lobbied very intelligently by big business. It has ruined the working por of Mexico and one of the major reason we have so many flooding across the brder...the prolifereation of maquiladoras across the border have closed down so many mom and pop shops in the border towns, as they fail to compete with the larger stores.
Our middle class is shrinking more and more each year. Thanks, Earl, for a very thoughtful piece. |
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Re: We Are a Rich Country of Poor People (Score: 1)
by Louise on Sunday, March 04 @ 20:30:12 EST
(User Info | Send a Message) | | as somebody kicked off disability, but stlll not able to work, this one cuts sharply. great research job. |
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Re: We Are a Rich Country of Poor People (Score: 1)
by landsker on Monday, March 05 @ 00:36:51 EST
(User Info | Send a Message) | I`m not a "Christian", but I have respect for the man who lashed out at the money lenders.
He is reputed to have used force.
A lot of force.
I like the article, it illustrates the gap between the rich and the poor, and indeed the increasing contempt with which the rich seem to hold their less fortunate bretheren.
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