Wall Street Journal on Payday Lenders Targeting the Elderly

One robin does not make a spring, but this front page Wall Street Journal article, “High-Interest Lenders Tap Elderly, Disabled,” is a real surprise. It’s not at all the sort of story one expects to see in the Journal, and comes one day after a very favorable piece on Michelle Obama.

Is Murdoch having a Nixon goes to China moment? Is he channeling a change in the zeitgeist? Or are these mere coincidences?

The Journal ran an op-ed on January 24, co-authored by Bill Clinton and Arnold Schwarzenegger, “Beyond Payday Loans.” Its theme:

The American dream is founded on the belief that people who work hard and play by the rules will be able to earn a good living, raise a family in comfort and retire with dignity.

But that dream is harder to achieve for millions of Americans because they spend too much of their hard-earned money on fees to cash their paychecks or pay off high-priced loans meant to carry them over until they get paid at work.

Here is one initiative that can unite progressives and conservatives as well as business leaders and community activists: helping the “unbanked” enter the financial mainstream by opening checking and savings accounts, and working collaboratively with financial institutions and community groups to develop and market products that work for this untapped market. This will put money in the pockets of individuals and grow the economy. And it won’t cost taxpayers a dime.

Now this was an op-ed piece, so it could have run for a host of reasons, and the Guvernator is half-way to being a Democrat.

On the one hand, even in the land of payday lending, the enterprises covered in this story are particularly despicable. And it’s one thing for the Journal to publish an unflattering piece about low-lifes, quite another to take on the bastions of capitalism. Nevertheless, the Journal took this article quite seriously, commissioning research from Steven Graves, a geographer at California State University at Northridge, who had done work cited by the Department of Defense on payday lending (the DOD doesn’t like it either). There’s an interactive graphic showing the concentration of payday lenders near complexes where the elderly live, links to court documents on two two trials mentioned, and a video. And the story has the bare minimum of industry self defense, only one paragraph of the “these loans provide a useful service” cant.

From the Wall Street Journal:

One recent morning, dozens of elderly and disabled people, some propped on walkers and canes, gathered at Small Loans Inc. Many had borrowed money from Small Loans and turned over their Social Security benefits to pay back the high-interest lender. Now they were waiting for their “allowance” — their monthly check, minus Small Loans’ cut.

The crowd represents the newest twist for a fast-growing industry — lenders that make high-interest loans, often called “payday” loans, that are secured by upcoming paychecks. Such lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veteran’s benefits. “These people always get paid, rain or shine,” says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries “will always have money, every 30 days.”

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 of data from the U.S. Department of Housing and Urban Development shows many payday lenders are clustered around government-subsidized housing for seniors and the disabled…

But some industry critics say fixed-income borrowers are not only more reliable, they are also more lucrative. Often elderly or disabled, they are typically dependent on smaller fixed incomes and are rarely able to pay off their loans quickly. “It’s not like they can work more hours,” says David Rothstein, an analyst at Policy Matters Ohio, an economic research group in Cleveland. “They’re trapped.”

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.

Mr. Harrod quit his job in August over concerns that the company exploited its customers and targeted vulnerable groups and began working with groups seeking limits on payday lending….

Social Security recipients weren’t always a natural market for payday lenders, which typically require borrowers to have a bank account and a regular source of income. For years, a large percentage of government beneficiaries lacked traditional bank accounts, choosing to just cash their checks instead.

But by the late 1990s, the federal government began requiring that Social Security beneficiaries receive their benefits by electronic deposit to a bank account, unless they opt out. The number of recipients with direct deposit soared to more than 80% today, up from 56% in 1996. Citing taxpayer savings and greater security and convenience for recipients, the government is making a fresh push to get the remaining holdouts to participate.

With direct deposit, Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans….

In November 2002, when Melvin Bevels was short of money for groceries and rent, the elderly man visited a Small Loans store in Sylacauga, Ala., and borrowed money — he thinks it was $200. Small Loans is part of a sprawling network of more than a hundred lenders in four states, including Georgia, Florida and Louisiana, owned by Money Tree Inc., a closely held Bainbridge, Ga., firm.

Mr. Bevels’s bank statement shows that every time the U.S. Treasury deposited his Social Security check, the bank transferred the benefits to the Money Tree, a high-interest storefront lender.

Mr. Bevels, who can’t read, says a clerk helped him fill out papers that instructed Social Security to send Mr. Bevels’s $565 monthly benefits to an account at an out-of-state bank, which transferred the money back to Small Loans or its parent, usually within a day. As is often the case, Mr. Bevels’s bank earned no interest and didn’t come with either ATM cards or checks.

Every month for nearly four years, Mr. Bevels, who is known around town as “Buckwheat” because of his thatch of yellow-white hair, rode his motorized mobility scooter to Small Loans to pick up his “allowance,” which was sometimes as little as $180 a month, he says.

In a written statement, Money Tree’s general counsel, Natasha Wood, declined to comment on Mr. Bevels’s case but said: “Anyone who sets up a direct deposit arrangement with Small Loans Inc. does so completely voluntarily.”

Mr. Bevels, who believes he’s 80 but isn’t sure, quickly lost control of his finances. When his utilities were shut off, a neighbor gave Mr. Bevels water in a plastic jug and ran an extension cord to Mr. Bevels’s trailer a few hours a day to power his nebulizer, which delivers aerosol medication to people with chronic lung conditions. Mr. Bevels was facing eviction when his trailer burned down, leaving him homeless.

A county social worker arranged for Mr. Bevels to move to public housing and got his Social Security benefits redirected to a local bank. When Small Loans sued Mr. Bevels for repayment in small-claims court in Talladega County, Ala., a legal-aid attorney headed to court. The judge threw out the case when the lender failed to appear with documentation for the loan.

“It just isn’t fair, what they do to old people,” says Mr. Bevels, crying quietly. “It isn’t right.”

Ms. Wood, the lawyer for Small Loans, said in her statement: “Small Loans Inc. does not file suit against anyone because they move their direct deposit service elsewhere.”

There were more stories like this in the article….