9. There’s A Lot Of Money To Be Made In Poverty

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Source: SOUTHERN EXPOSURE, Date: Fall 1993, Title: “Poverty, Inc. Why the poor pay more-and who really profits,” Authors: Mike Hudson, Eric Bates, Barry Yeoman, Adam Feuerstem

SYNOPSIS: Want to know what is the hottest new profit center for big blue-chip corporations like ITT, General Motors, American Express, and others? The acceptable term is “fringe banking;” the less accept­able, but more accurate, term is “loan sharking.”

Fringe banks are pawn shops and check cashing outlets-operations that serve low-income people, usu­ally in urban ghettos, who don’t fit into the picture at mainstream banks. Interest on pawn shop loans typically runs over 200 percent, and check cashers charge two to 10 per­cent of a check’s value for cashing it. These are just two examples of the ways some large U.S. corpora­tions are profiting from the cycle of poverty, particularly in the South.

The Fall 1993 cover article of Southern Exposure magazine docu­ments how huge national and inter­national corporations own and finance a growing “poverty industry” that targets low-income, blue-collar, and minority consumers for fraud, exploitation, and price gouging.

In addition to “fringe banks,” other money-making endeavors include:

* Second-mortgage companies­ making loans with 30 percent interest to pay off bills or make repairs

* Used-car dealers-working in tandem with banks and finance companies to bilk people with “bad credit”

* Finance companies (ITT is a standout here)-charging huge interest rates by acting as a lender of last resort for borrowers with lim­ited incomes

* Rent-to-own stores-which constitute a $3.7-billion-a-year business, charging customers about five times what they’d pay at tradi­tional retailers

* Trade schools-lending out federal loan money on the promise of giving usable skills to low-­income students, then leaving them with no skills and a big debt

* Debt collectors-the not-so­-friendly people who badger, threaten, and coerce low-income borrowers to pay back funds regard­less of their circumstances

It is a normal practice for com­panies engaged in these activities to entice low-income people into deeper and deeper debt, at interest rates many times higher than those paid by middle-class Americans. A typical example: a 66-year-old Atlanta man pawned his car for $300. He agreed to pay back $545 over twelve weeks, but fell behind in his payments. The pawn broker tacked on late charges and threat­ened to have the man arrested. When the borrower went to Legal Aid for help, the attorney discov­ered that the loan contract listed the annual interest rate as 24 per­cent; the real rate was 550 percent.

Unlike banks and S&Ls, huge financial service businesses-part of such mega-corporations as American Express, Sears, General Electric, General Motors, and Westinghouse-are not subject to federal regulations that require financial disclosures, limit wheeling-and-dealing, combat racial discrimination in lending, and put caps on interest rates. Ironically, banks are crying foul, while simultaneously extending huge lines of credit to the very companies they’re accusing of undermining them.

SSU Censored Researcher: Jesse Boggs

COMMENTS: This is an extraor­dinary untold story of how some of America’s biggest corporations are making billions of dollars by tar­geting the poor for profit. In the introduction to the special 28-page section on “Poverty, Inc.” published in Southern Exposure, Mike Hudson, a reporter with the

Roanoke Times & World-News, and Eric Bates, editor of Southern Exposure, describe this feature as an explanation of how the poverty industry really works-and how average citizens are fighting back. Support for the extensive investiga­tive project was provided by the Alicia Patterson Foundation, the Fund for Investigative Journalism, and the Dick Goldensohn Fund. Mike Hudson, who spent two years investigating the poverty industry, provides the background on this story.

“The nation’s news media have largely ignored the story and its ram­ifications. To our knowledge, no major news outlet-or small one for that matter-has identified the broad scope of corporate America’s role in profiteering from the poor via credit fraud and usury. No one has called the `poverty industry’ what it is-a huge, multi-billion-dollar col­lection of companies fueled by Wall Street funding and propped up by a new veneer of corporate respectability. Nor have the media reported in a comprehensive way on how these businesses are using their polish and resources to engineer leg­islative `deregulation’ in nearly every state-gutting laws that had once given low-income and minority con­sumers a measure of protection from predatory lending.

“There have been a few notable exceptions to this rule of media inattention. These including reporting by the Boston Globe and the Atlanta newspapers on second­ mortgage fraud against minority homeowners, Mary Kane’s excellent coverage of inner-city economics for Newhouse News Service, and a Wall Street journal story by Alix Freedman on how the nation’s largest rent-to-own chain takes advantage of the poor.

“But, once again, these stories are the exceptions. The major media have missed the big picture either by ignoring the story altogether, or by limiting their critical scrutiny to narrow segments of the poverty industry (or specific com­panies such as Fleet Finance) and failing to make connections between the various businesses that market to the poor.

`And, to make matters worse, national business magazines and major daily newspapers have quite frequently produced stories that read like press releases from these businesses.

‘A typical example: a business­ page article in one major Midwest newspaper (`Pssst! Hocking your VCR has gotten respectable’), which trumpeted the arrival of a national pawn chain but failed to point out that a loan at a `respectable’ pawn broker in the state could carry an annual interest rate of 276 percent.

“The general public would ben­efit in a number of ways from greater exposure to this subject. Such exposure would:

* alert the public to a silent but devastating crisis that is pushing people deeper into poverty and destabilizing neighborhoods.

* warn individual consumers so that they could protect themselves from being preyed upon and seek redress for past exploitation.

* provide citizens and activists the information they need to fight for tougher legislation and law enforcement efforts aimed at reining in these practices.

* offer investors and stock­holders in these companies a clearer picture of how their money is being used, and who is being hurt by their investments.

* give citizens a fuller under­standing of the nature of poverty and economics in disadvantaged neighborhoods, thus fueling the debate about welfare, inner-city blight and related issues.

“The primary beneficiaries of limited coverage are the corpora­tions that profit from these prac­tices, along with their stockholders and investors. The less scrutiny they receive, the more effective they can be in attracting invest­ment capital and in cultivating pos­itive images with legislators and consumers. The profits they make from these ventures, as our stories show, are huge.

“Others who benefit include leg­islators who receive campaign con­tributions from these companies (and in the case of many lawyer/leg­islators, lucrative private legal work). Likewise, corporate news media benefit from the advertising that these businesses buy from them.

“When the [Southern Exposure] issue came out, we sent out press releases to a number of other publi­cations, but have received limited response. The Associated Press wrote a story on our study, but dis­tribution of the article was limited to North Carolina and was picked up only by a few papers.

“We are trying to get the article reprinted in other alternative publi­cations and are encouraging other journalists to pursue the story. In addition, the publisher of Southern Exposure, the Institute for Southern Studies, is in the process of creating a quarterly newsletter, Poverty, Inc., which will continue to track these issues and serve as a networking vehicle for journalists, activists, attorneys, and others con­cerned about the subject.

“Since the Southern Exposure is­sue came out, Rep. Henry Gonzalez, D -Texas, has introduced legislation that would put tough federal limits on the rent-to-own industry.”

Meanwhile, on December 16, it was announced that the State Attorney General of Georgia and Fleet Finance have agreed on a set­tlement of the state’s criminal investigation for a sum of $115 mil­lion (the equivalent of about two year’s profits for Fleet Finance in the early 1990s.)