by Joe Kirkpatrick
"Broke USA" is the title of a newly released book by New York Times journalist Gary Rivlin. The book is very interesting reading, as it chronicles the growth of various "predatory lending" companies Rivlin attributes to being a large part of the current economic meltdown. The most interesting thing I gathered from reading the book is the fact there are now more payday advance locations in the United States than there are locations of McDonalds and Burger King combined. In fact, the total gross revenues of the payday advance industry in our country is just short of those of the liquor industry!
Rivlin also points out a much larger problem of predatory lending that exists within the mortgage industry. "Sub prime" mortgages have been a growing blight in our economy for almost 25 years. For years, they were confined to a few high interest finance company chains, but 10 to 15 years ago large banking institutions such as Citibank began to open subsidy businesses to target that market. For those of you who have heard the term "sub prime" but don't really understand it, I will give you a brief run down of what it means. "Prime" interest rate is the rate reserved for a lending institution's customers with the highest credit score. The term "sub prime" implies "lower." Actually, sub prime has nothing to do with the loan interest rate, but means a borrowers credit score is lower than it needs to be to qualify for a "prime" interest loan. A basic formula in the lending industry is the lower a persons credit score, the higher rate of interest they pay. Unfortunately, it goes way beyond that. Predatory mortgage lenders not only charged much higher interest, they packed on a variety of charges and fees that many times would double or triple the total amount of the loan. Many of these fees would be buried in pages of documents the borrower had to sign, and only when they received their payment book would they realize the mistake they had unwittingly made.
For those of you who have read my column for years know I am not against pay day lenders. Out of all companies in the lending industry, their fees are simple and clearly posted. That does not imply customers cannot get in trouble using them. A good analogy would be to compare a payday advance store with a liquor store. With both businesses, some will use them responsibly, and others will abuse them. On an online forum concerning pay day advance lenders, one person said it best: "they have already borrowed from friends and relatives all they can, and the friends and relatives know they won't pay them back, so pay day advance is their only resource."
I feel regulating some predatory lenders is necessary. Sub prime mortgage lenders actually send representatives out into lower economic neighborhoods to knock on doors to solicit business. "Mrs. Smith, I was driving by and noticed you sure need a new roof - I can help finance you so you can get that done." The only problem is with the terms of the loan they get Mrs. Smith to sign, she might still owe more than the original amount 15-20 years later. Unfortunately, most people who get into the position to use pay day lenders, as well as those who fall victim to predatory mortgage lenders, are like "perfect credit storms." The vast majority have never been formally taught anything about credit.
Where does the real problem lie in predatory lending? In our educational system. Credit is a complex animal that virtually 100% of the people in our country will use throughout their lives. Our educational system teaches math, social studies, English, history, and science, but where is the credit management course? I do some pro bono financial counseling, and I can tell you credit abuse problems occur from the poorest to the richest. I know people who make $150,000 plus per year that if they missed a payday, they would go into a financial free fall. The educational system gave them the skills to make the money, but never gave them any skills on how to manage it once they made it.
I often feel I am a lone voice for revamping our educational system, but I won't shut up until improvements are made. We may need more science and math the education "experts" constantly call for, but it's time to get some common sense in our educational system. It's time to add some mandatory courses that can actually help a majority of students throughout their lifetime manage what income they do make. We have "No Child Left Behind," but when will we get "No Adult Left Behind?"
"Broke USA" by Gary Rivlin is a real eye opener and unlike many books on finance, it has Rivlin's home spun stories about different players in the industry that keeps the book interesting.
He also has some interesting stories about some of the players right here in Cleveland, Tennessee.
If you are in credit trouble, don't just sit there - do something about it. There are many non profit agencies who offer financial counseling. Many churches also offer financial courses that will teach you the tools you need to get a grip on your credit.