Broke, USA

1. Poverty, Inc.: A Booming Business Built on Financial Exclusion

But the poverty industry—making money off the impoverished and the working poor as big business—can be said to have started in 1983 when an oversized Texan named Jack Daugherty sought to strike it hundreds-of-millions-of-dollars rich as a pawnbroker.

Financial exclusion fuels growth. The poverty industry thrives by providing services to those excluded from traditional banking. Check cashers, payday lenders, rent-to-own stores, and subprime lenders fill a void, offering credit and financial services to individuals with tarnished or nonexistent credit histories. This exclusion creates a captive market willing to pay high fees for access to essential services.

From pawnshops to payday loans. The industry's evolution began with pawnbrokers and expanded to include check cashers, rent-to-own businesses, and, most notably, payday lenders. Jack Daugherty's Cash America exemplified the potential for growth, transforming a small pawnshop into a publicly traded company with hundreds of locations. This expansion demonstrates the increasing sophistication and profitability of catering to the financially vulnerable.

A multi-billion dollar market. The poverty industry generates billions in annual revenue, rivaling or exceeding established sectors like movie theaters, funeral homes, and liquor stores. This vast market encompasses subprime credit cards, used auto financing, and subprime mortgages, highlighting the pervasive nature of high-cost financial services targeting those with limited options.

2. Predatory Lending's Roots: Targeting Vulnerable Communities

It was no longer a matter of lenders refusing to make loans in certain neighborhoods; rather, it was now something like its opposite: Lenders were now targeting those same neighborhoods and aggressively peddling mortgages and home equity loans on terms that left borrowers worse off than if they had been denied a loan in the first place.

Reverse redlining. Predatory lenders actively target vulnerable communities, often those historically excluded by traditional banks. This "reverse redlining" involves aggressively marketing high-cost loans and financial products to residents, exploiting their limited access to mainstream financial services and their lack of financial literacy.

Home equity stripping. A common tactic involves convincing homeowners to refinance their mortgages or take out home equity loans, often with hidden fees and unfavorable terms. This "equity stripping" siphons off the wealth built up in their homes, leaving them in a precarious financial position and at risk of foreclosure. Annie Lou Collier's story exemplifies this, losing her home due to a predatory loan for unnecessary repairs.

Early warnings unheeded. Advocates like Bill Brennan recognized the dangers of predatory lending early on, but their warnings were largely ignored by policymakers and regulators. The focus on individual cases obscured the systemic nature of the problem, allowing it to spread and ultimately contribute to the subprime mortgage crisis.

3. Payday Lending Emerges: Quick Cash, Steep Price

“Ale-ann. Ale-ann,” Eaton drawled, and then pointed out that his customers’ banks would charge them at least that much on a bounced check.

A solution or a trap? Payday loans offer quick access to cash for individuals facing immediate financial needs. However, these loans come with exorbitant interest rates and fees, often trapping borrowers in a cycle of debt. The industry argues it provides a valuable service, but critics contend it preys on the financially vulnerable.

The business model. Payday lenders profit by charging high fees for short-term loans, typically secured by a postdated check or electronic access to a borrower's bank account. The fees, often expressed as a percentage of the loan amount, translate to annual percentage rates (APRs) that can exceed 300%, making them among the most expensive forms of credit available.

The cycle of debt. The structure of payday loans makes it difficult for borrowers to repay the loan on time, leading to rollovers and additional fees. This cycle of debt can quickly spiral out of control, leaving borrowers owing far more than the original loan amount. Shari Harris's story exemplifies this, owing $1,900 after initially borrowing $150.

4. The Subprime Mortgage Crisis: A Contagion Spreads

In time subprime lenders would target a demographic much broader than those who could reasonably be called the working poor or the lower middle class.

From fringe to mainstream. The subprime mortgage market, initially focused on low-income borrowers, expanded to include middle-class individuals seeking larger homes or easier access to credit. This expansion fueled a housing bubble and ultimately contributed to the global financial crisis.

Liar's loans and lax underwriting. Subprime lenders often offered "liar's loans" that required little or no documentation, making it easy for borrowers to overstate their income or assets. This lax underwriting fueled the housing bubble and increased the risk of defaults. Edmund Andrews, a New York Times economics reporter, was able to buy a home using a "liar's loan."

Securitization and risk. The practice of securitizing subprime mortgages and selling them to investors around the world spread the risk of default, masking the underlying problems and creating a false sense of security. This complex financial engineering ultimately amplified the impact of the housing market collapse.

5. The Players: From Pioneers to Wall Street Giants

We’re the George Baileys here,” he blurted. “We’re Jimmy Stewart!”

The pioneers. Individuals like Jack Daugherty (Cash America) and Allan Jones (Check Into Cash) built empires by catering to the financially excluded. These pioneers identified unmet needs and developed innovative business models to profit from them.

Wall Street's embrace. Major financial institutions, including Citigroup, Bank of America, and Wells Fargo, entered the subprime market through acquisitions or internal divisions. This influx of capital and expertise fueled the industry's growth and expansion, but also introduced a focus on maximizing profits at the expense of responsible lending practices.

The enablers. Credit rating agencies, mortgage brokers, and appraisers played key roles in the subprime ecosystem. Rating agencies assigned high ratings to risky mortgage-backed securities, while brokers steered borrowers into high-cost loans, and appraisers inflated property values to justify larger loans.

6. The Fight Back: Activists, Regulators, and Limited Victories

“This whole crisis we’re in has been an emergency situation for a long time,” said Howard Rothbloom, an Atlanta lawyer who is among those who have been complaining the longest about the perils of the subprime loan. “But it only became a crisis once it was investors who lost all that money.”

Early voices of dissent. Activists like Bill Brennan and Kathleen Keest sounded the alarm about predatory lending practices long before the subprime crisis gained widespread attention. They fought for stronger regulations and consumer protections, but faced resistance from powerful industry lobbyists and a political climate that favored deregulation.

HOEPA and its limitations. The Home Ownership and Equity Protection Act (HOEPA) of 1994 was a landmark piece of legislation aimed at curbing predatory lending. However, lenders quickly found ways to evade its provisions, leading to a new wave of abusive practices.

Public pressure and settlements. Public awareness campaigns, media exposés, and lawsuits brought by attorneys general and consumer groups forced some lenders to pay settlements and change their practices. However, these victories were often limited in scope and did little to address the underlying systemic problems. Fleet Financial paid $6 million to settle a class-action lawsuit.

7. Ohio: A Microcosm of the Predatory Lending Battle

“Believe me, Ohio was the wake-up call for a lot of us,” Joe Coleman said.

A battleground state. Ohio became a key battleground in the fight against predatory lending, with a high concentration of payday lenders and a strong activist community. The state's experience illustrates the challenges of regulating the industry and the power of industry lobbying.

Local vs. state control. The struggle between Dayton and the state legislature highlights the tension between local control and state preemption in regulating financial services. The industry's ability to overturn local ordinances demonstrates its political influence and its willingness to fight regulations that threaten its profits.

The 36% rate cap. The passage of a 36% rate cap on payday loans in Ohio was a significant victory for consumer advocates. However, the industry's subsequent efforts to circumvent the law and its continued presence in the state underscore the ongoing challenges of regulating predatory lending.

8. The Human Cost: Stories of Debt and Despair

“After I first found out about the shafting I took, I felt dumb,” he said. “I felt really, really dumb for a good long while there.”

Personal tragedies. The book is filled with stories of individuals and families whose lives were devastated by predatory lending. Tommy Myers, Annie Lou Collier, and Freddie Rogers are just a few examples of people who lost their homes, savings, and sense of security due to abusive lending practices.

Beyond the statistics. These personal stories highlight the human cost of the poverty industry, illustrating the emotional distress, financial hardship, and social consequences that result from predatory lending. They serve as a powerful reminder of the need for stronger consumer protections and greater financial literacy.

A cycle of shame and blame. Many victims of predatory lending feel ashamed and blame themselves for their financial troubles. This shame can prevent them from seeking help or speaking out against abusive lenders, perpetuating the cycle of exploitation.

9. The Industry's Defense: "We Provide a Valuable Service"

“No one matches the service we give our customers,” Coleman, who runs a small chain of check-cashing stores in the Bronx, New York, reassured his cohorts. “No bank matches our hours. Our products fit our customers’ lifestyle.”

Access to credit. The poverty industry argues that it provides access to credit and financial services for individuals who are underserved by traditional banks. They claim to offer a valuable service to those who need quick cash or have limited banking options.

Convenience and speed. Payday lenders and check cashers emphasize the convenience and speed of their services, arguing that they provide a valuable alternative to traditional banks for those who need immediate access to funds. They also point to their extended hours and convenient locations as advantages over traditional financial institutions.

Customer satisfaction. Industry representatives often cite customer satisfaction surveys and testimonials to support their claims that their services are beneficial. They argue that customers choose to use their services because they find them helpful and affordable. Billy Webster said, “People who use our service like us and appreciate us. It’s only the consumer critics who don’t like us.”

10. The Cycle Continues: Innovation and Exploitation in Low-Income Finance

“The thing about dealing with the subprime consumer is that it’s just a nickel-and-dime business.”

New products, same problems. The poverty industry is constantly evolving, with new products and services emerging to cater to the needs of the financially vulnerable. These innovations often come with new risks and opportunities for exploitation.

The lure of technology. Online payday lending, prepaid debit cards, and other technology-driven financial services offer convenience and accessibility, but also create new avenues for predatory practices. The anonymity and reach of the internet make it easier for lenders to target vulnerable consumers and evade regulations.

A call for vigilance. The book serves as a cautionary tale, urging consumers, policymakers, and regulators to remain vigilant in the face of evolving financial products and practices. It emphasizes the need for strong consumer protections, financial literacy education, and a commitment to ensuring that all individuals have access to fair and affordable financial services.

Last updated: April 10, 2025