Usury: Nashville’s Favorite Sin
In you are people who accept bribes to shed blood; you take interest and make a profit from the poor. You extort unjust gain from your neighbors. And you have forgotten me, declares the Sovereign Lord.
The South (Tennessee included) has a poverty problem. Even with an economy that has solid unemployment numbers, our citizens aren’t rising out of poverty. Why that is the case involves a lot of factors ranging from lack of affordable healthcare to lack of enough good jobs paying a living wage or better consistently throughout the state. However, I want to talk about one obvious cause of perpetuating poverty that gets no attention in Nashville: predatory lending. Equally as important, I want to talk about why this problem gets no attention.
First, I have an unpopular opinion for some on the left. Banks are a good and essential part of the economy. The whole banking sector gets a bad reputation for the egregious problems from the “big banks” leading to the housing collapse. The banking sector has also had a troubling history with equitable lending through practices like “redlining” (refusing to lend money to certain low income and minority communities). However, today, most community and regional banks and credit unions work hard to invest their assets in affordable housing for consumers and to help small businesses grow. Many are rooted in seeing their communities succeed. The main problem with these lenders is that there aren’t more of them in the areas that desperately need them. And there are many unbanked citizens, who are living paycheck to paycheck with no bank accounts or resources to tap into when they encounter a cash crunch. As a result, they turn to payday and title lenders for short term loans, instead. The predatory lending sector fills the gap left in the absence of the reputable banks that service more stable communities.
So, first off, what do we mean by predatory lenders? Well, there are many ways to define this, but I am going to borrow some terms from debt.org (we aren’t endorsing the site, but it does do a good job of describing predatory lending practices).
Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford.
What this translates to in Tennessee is aggressive marketing to certain communities (in numerous communities, these predatory lenders have multiple bricks and mortar locations on the same streets) to take out loans under terms that will be all but impossible to fully repay. Indeed, with certain used auto title lenders and payday lenders, Tennessee now has an issue with “reverse redlining” where predatory lenders actually target limited-resource neighborhoods that conventional banks may shy away from. However, they target them so that they can offer loans at exorbitantly high rates, regardless of credit history, income or ability to repay.
This practice may take the form of a used car company employing a call center to market to poorer neighborhoods. The cars they end up selling for several thousand down and 25%/year interest rate on the loan often prove to be unaffordable for the buyer. (https://www.google.com/amp/s/jalopnik.com/how-subprime-car-loans-are-ruining-lives-and-repeating-1796893288/amp ). Being without transportation in TN is likely to mean that you are unemployable, so many people are stuck paying these rates. Those that can’t end up having their car repossessed (after the car company has already made a nice profit on fees and interest) and the vehicle will subsequently be resold under similar terms as before.
Similarly, the payday lenders and title lending companies fill another niche. It is no secret that most Americans don’t have adequate emergency savings. According to a report by the Federal Reserve last year, 40% of Americans did not have the funds to pay for a $400 emergency. (https://money.cnn.com/2018/05/22/pf/emergency-expenses-household-finances/index.html ). Now, take that data point and put it in Tennessee where 7.2% don’t have health insurance and many more have high deductible health insurance policies they are barely able to afford. This is the group of working poor “serviced” by payday lenders. People desperate to take care of a medical emergency or unexpected car repair have to find someone to step in to loan them some short-term cash. Enter the payday lender with terms that will leave the borrower indebted for years to pay that $400 expense.
There are many side problems as well. First, these lenders disproportionately target African American and minority communities. Next, though there are federal consumer protection laws, many of the payday lending branches skirt those regulations. Much of this has to do with a pay system that in no way resembles a traditional bank. Branch managers are often on what is effectively a commission system. They make more money if they sell more junk loans to consumers. This creates a strong incentive to sell people on taking out more debt, irrespective of their ability to pay.
The baseline problem with these companies is that they get vulnerable and desperate people on the hook for loans with extremely high interest rates, causing interest to add to the amount borrowed until the loan balance is so high they will never be able to repay the loan. They effectively create a poverty trap. Once someone is in it, it is difficult or impossible to escape. For those that want to see working Tennesseans build wealth, be financially independent and not rely on the government for support, allowing this kind of debt trap to exist is counterintuitive.
The problem gets worse when one realizes that aside from the predatory nature of its business model, many of these companies skirt existing state and federal laws. However, they use (and abuse) employment contracts to keep their practices quiet. To start work at a payday lender, a $11/hr employee will have to sign an employment agreement. She will have to waive her right to sue (forced arbitration) if a dispute arises. She might be forced to sign non-disparagement and non-disclosure agreements that say she cannot say anything derogatory about the company or reveal information about the company practices even after she leaves. As you might expect, your average $11/hr employee doesn’t understand what she is signing. These sorts of contractual provisions are then aggressively enforced to threaten employees from trying to blow the whistle on bad behavior by the companies.
Now, no non-disclosure agreement can prohibit anyone from telling the truth when responding to a subpoena. As luck would have it, the legislature in Nashville has the power to subpoena witnesses to get them to talk about the lending practices of these payday lenders. But in recent memory, the legislature has never come close to using this power. Why?
I cannot speak for any of the Representatives or Senators in Nashville, but my guess as to their motive is the massive amount of funds that payday lenders funnel to legislators. These funds went primarily (though not entirely) to Republican officials and Republican- aligned PACS. If you want to see what is happening, take a look at just one of the innocuous sounding groups “FLEX PAC.” The PAC started the second quarter 2018 with $127,900 in cash. Throughout 2018, it distributed that money with large contributions to Glen Casada’s CAS-PAC, the House Republican Caucus, as well as Diane Black and Randy Boyd. Its largest contribution was $23,600.00 to Gov. Bill Lee. However, it was most notable in how widespread its “giving” was with pretty much everyone from Rep. Chris Hurt to Rep. Tom Leatherwood to Rep. Mark White to dozens of others, all getting a little taste of payday lender cash. Its primary contributor is Harpeth Financial Services, though it also has contributions from payday lenders Cash Express and Community Choice Financial. ( https://apps.tn.gov/tncamp-app/search/pub/report_full.htm?reportId=74360 ). Notably, this PAC was just one of the payday lender PACs, with others like Tennessee First also distributing massive funds.
Ultimately, I don’t think I am going out on a limb to say that a couple hundred thousand dollars a year in donations does a good job of getting the Legislature to not look into your business practices. Meanwhile, exploitation continues. Hard working Tennesseans remain trapped in poverty. This will continue until we decide to send representatives to Nashville who are more concerned with their struggling constituents than the predatory-lender blood money.
Written By Robert Donati, Future901 Co-Founder & President