Instant payday loan 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 an instant payday loan for her through the lender. Foster paid a $1,700 brokers 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 $ 25.66in 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 Fosters 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 Englands 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.
