How the Working Poor Became Big Business and Tempted the Collection Industry
Jerry Ashton
Once again, the ARM industry is caught up in the age-old quandary: do we follow the Golden Rule, or the Rule of Gold?
That this decision is made almost daily (and the temptation of “going for the gold” seems to be the default choice) was brought into sharp relief in a recent PWRNradio.net interview I conducted with Gary Rivlin, author of Broke, USA: From Pawnshops to Poverty, Inc. – How the Working Poor Became Big Business.
This book, “with the potential to stimulate outrage – and political reform” as one reviewer described it, served as the inspiration for me to devote my show and this blog to its author, his book, and this particularly callous – and even criminal – treatment of sub-prime borrowers in the U.S. Oh yes, and the role of the debt collector in this matter.
“Whooaa,” I can hear my brothers and sisters in the debt collection industry saying, “we have nothing to do with running pawnshops or lending money to people who are in between paydays – don’t include us in this scenario.” We may not be as innocent as we think.
In one fashion or another, too many of us in our line of work are complicit in furthering and sustaining the damage being done by predatory lenders. Whether it be that of collecting on such debt in order to secure “legitimate” collection business, or to turn a blind eye on the activities of those who do take on such portfolios, we are enablers at best and conspirators at worse.
The working poor are big business in this country
No less than seven publicly-traded companies are in the payday lending business and six are in the check cashing business — or seven if you include Wal-Mart, which started cashing checks for a fee a few years back.
On the face of it, what could be so bad about helping a guy get from one paycheck to another? A good question. How a payday loan of $100 works:
- Consumer with an ID and proof of employment writes a check for $100
- Consumer gets $85
- In two to four weeks, the lender cashes the check
- APR is 459 percent; the borrower paid $15 to use $85
Pretty tempting “vig,” wouldn’t you agree?
It should be noted that Social Security recipients comprise one-quarter of all these borrowers.
Rent-to-own, pawnshops, subprime auto lenders – that’s just a few of the family of multibillion dollar players that make up what Gary Rivlin dubs “Poverty, Inc.” These businesses manage to stay so under the radar, despite their size and the millions of people they call customers. But, they are a group as “venal as the most heartless hedge fund manager,” Gary states in his book and his interview with me, as he details the “systematic, widespread economic abuse of the poor by supposedly respectable corporations.”
It may be tempting to view me as an industry “turncoat” for championing this book and Gary’s pillorying those involved in furthering the pain of the poor. Be reminded, I cut my teeth in the collections industry, ran multi-state sales forces selling account recovery services to help businesses extract monies owed by debtors, and eventually created a successful staff outsourcing and consulting firm (CFO Advisors, Inc.) that quite successfully chased after and recovered millions and millions of dollars. Unpaid loans of any sort have always been a profitable source of business for the collection industry…and me.
But I made it a policy to work only with reputable clients who generated a clean receivable for services and goods. That they were delivered to a customer who had – for whatever reason – chosen not to pay in a timely fashion simply enabled my entry into the picture. My job? Get the money and bring back the (good) customer. Never would I have elected to chase down victims of mortgage fraud, payday loans, monies owed pawnbrokers or loan sharks, or credit card issuers.
Because these abuses are more glaring in light of the Great Recession, and because our industry is being tarred and feathered unfairly, it has become necessary to expose the practices of rogue debt collection agencies and debt purchasers who violate federal and state statutes. And let us not forget the rapacious lenders and businesses for whom they collect.
Today’s predators, whether lenders, debt buyers and by extension their collectors, have no compunction about putting people at risk driving them over the edge with their aggressive, cradle-to-grave tactics. Because this is being done on a daily and ongoing basis and reflects on our industry, we must draw a line in the sand and say: Enough!
Take a close look at your clients and the portfolios they provide you. The argument that there is nothing wrong with making money on the working poor sounds fair enough, until you realize that these businesses – and we include Wall Street and Big Banks – generally make more money dealing with the “single mom working as waitress” than more prosperous customers. Why not? They are easily victimized and cannot afford to mount a defense. The poorer they get, the more profitable they are.
Have you noticed the percentage they take up in your portfolio? Not a lot of “Wall Streeters” there.
Our industry needs a gut-check. Are we willing partners in extortion, or savvy businesspeople who work hard to earn a legitimate profit on debt, regardless of its origin? However justified, your answers will tell me a lot about which “rule” you follow.
Until the ‘WORKING POOR’ consumer gets educated and involved in their own life’s perils, industries will continue to sell them products and services that mainly benefit the seller. I do not agree that the government using tax $$$ should be ‘protecting’ those unwwilling to know the difference between a good opportunity and stupid! Consumers want their cake and they also want to eat it, so until the pain becomes too much for them to bear and the consumer starts having to depend their own ability to know the difference between a get rich scheme and a solid opportunity when it comes to them eagerly grabbing for the gold, there will always be someone ahead of the law utilizing the loopholes available. Our goverment has proven it cannot forcast , prevent or enforce much of anything so sooner or later consumers will have to lie in the bed they have made.
Isn’t it amazing that out of the 1,000′s of insideARM subscribers, you are the only one with a big enough set of “huevos” to actually post a comment?
But, since you have raised your head above the foxhole, here’s my take on your thoughts.
“Until the ‘WORKING POOR’ consumer gets educated and involved in their own life’s perils, industries will continue to sell them products and services that mainly benefit the seller.”
Donald, would you not acknowledge that the “bad guys” have the time, money and influence to make sure that they are always a step or two ahead of the consumer – whether it be a payday loan or a securitized financial instrument (and even those who made them up couldn’t even understand them…they just smelled the money)?
GOOD LAWS and EFFECTIVE GOVERNMENT are the first line of defense. How well have we done there?
“…consumers will have to lie in the bed they have made.”
Dude, they DIDN’T make that bed. They didn’t invent payday loans or toxic mortgages. A classic case of blaming the victim.
What’s in it for you to have this attitude – or anyone else in our industry? Shall I follow the money? Or, simply enjoying being “righteous?” Please go back and listen to the interview with Gary Rivlin and come back to tell me you still feel the same way.
I don’t think anyone would argue that collections activities on fraudulent loans or purely predatory loans are at best not fruitful, and at worst unethical. But you seem to create little distinction between ethical collections on debt of questionable quality, and unethical collections practices themselves.
In all my years of studying and pricing debt portfolios, I have yet to see a liquid, let alone profitable, portfolio that consists of the kinds of debts and debtors that you describe. Poorly underwritten and poorly serviced loan portfolios are generally not economic to collect, and abusive practices on those portfolios are the exception rather than the rule. This observation is probably borne out in the poll results, which imply a lack of interest in payday loan portfolios by at least a 2/1 margin. Payday loans are in general not economic to collect for the very reason that they can be so profitable for the lenders: low borrower credit quality, low balances, and repeat borrowing (this also shoots a hole in the ludicrous APR number. If losses were calculated the same way, the loss rate would be in the hundreds of percentage points as well).
In fact, most of the consumers whose plights you rightfully and correctly describe become de facto protected classes when collections strategy is developed: their ability to pay and the dollar amounts involved generally prohibit more than a simple validation letter.