This writer is quickly growing convinced that payday lenders are the modern version of indentured servitude, trapping consumers in cycles of debt that simply cannot be broken in their lifetimes. The Wall Street Journal published a story last week about payday lenders who make loans to the elderly and effectively take over their Social Security or disability payments, handing back whatever remains after they take their cut. Though it sounds like it should be illegal, payday loan companies are partnering with banks to pull this off.
The law bars the government from sending a recipient’s benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.
As a result, these lenders, which pitch loans with effective annual interest as high as 400% or more, can gain almost total control over Social Security recipients’ finances.
An analysis by geographer Steven Graves (one of the two researchers who discovered that payday lenders pop up disproportionately in areas with strong Christian conservative political power, which we discussed here) “shows many payday lenders are clustered around government-subsidized housing for seniors and the disabled.”
One former payday lender employee says he was tasked with recruiting the elderly to come in for loans:
Mr. Harrod was a manager of a Check ‘n Go store across the street from Fort Lincoln Senior Citizen’s Village, a subsidized-housing complex for the elderly and disabled in Washington, D.C. Mr. Harrod says he was encouraged by his supervisors to recruit the elderly, and did so by often eating his lunch on nearby benches to strike up conversations with the complex’s residents. According to Mr. Graves’s analysis, there are at least four payday lenders within a mile-and-a-half of Fort Lincoln.
The article describes a worst-case scenario of this sort of practice, where an elderly man with schizophrenia and a $1,013 monthly income from Social Security took out a payday loan for $200 “after his car broke down and his 13-year-old terrier racked up a big vet bill.”
Like many payday borrowers, Mr. Hummel realized he couldn’t pay off the loan when it was due so he went to another “payday” lender. Lenders rarely ask about other loans and debt, and borrowers often take out multiple loans in an effort to avoid defaulting. By February, Mr. Hummel had eight loans from eight lenders, at effective annual interest rates that ranged from 180% to 406%.
Another man who can’t read and “believes he’s 80 but isn’t sure” had a clerk (we’re not sure if the clerk was with a bank or the payday lender) help him set up the paperwork to transfer his Social Security payments directly from his account to Small Loans, which is owned by Money Tree, Inc. His debt quickly spiraled out of control until he was receiving as little as $180 a month from Small Loans. After his utilities were cut off, a county social worker transferred his Social Security payments to another bank and cut off Small Loans—at which point Small Loans sued him. (The case was thrown out when Small Loans failed to appear before the court on the date of the hearing.)
There should be a lender’s prison, perhaps.
(Thanks to Diana!)