Could you explain what you mean by it going back to the nineties. Usury is mentioned in the bible and loan sharks have been around for decades. In the UK I had a loan with the Provident back in the 80s. They were a payday loan company lending small amounts for ridiculously high rates to see you through to the next payday.
Alan, this is a very good point you make. The history of usury is much longer than just the time period I pointed out in the post.
If you'll allow me to digress for a few decades before and after, I'll get to my main issue with why the early 1990's were so critical in the rise of predatory lending (often not discussed in the literature).
Three resources that have been invaluable in helping me understand this history are:
1. The Secret History of the Credit Card - Frontline (PBS)
https://www.filmsforaction.org/watch/secret-history-of-the-credit-card/2. Howard Karger's Book - Shortchanged: Life & Debt in the Fringe Economy
3. (pdf) Flannery & Samolyk (2005) - Payday Loans: Do the Costs Justify the Price (Free FDIC - working paper online)
Plus, my colleagues and I did a small study in the state of Michigan (qualitative research) interviewing payday lenders (individual operators) and unearthing how they came into the industry. This informed my view significantly, but I'll save those resources for another time.
A couple of points that need to be made at the outset - one which you cite excellently.
A) History of usurious lending is a long one and deeply connected to the prevention of trans-generational wealth accumulation, often targeting groups of people based upon culture, religion, income, gender or ethnicity. The location density of these lenders is predominantly in working and poorer neighborhoods where unbanked populations reside.
B) In the US, there is a history of resisting usury (Usury laws federal and state statutes), as well as recent entity charged with helping consumers try to eliminate this kind of product from their financial diets CFPB (consumer financial protection bureau --- Brain child of Elizabeth Warren).
C) The recent last 35 years are critical in understanding how these institutions have proliferated so much in light of A & B
Critical EventsThe secret history of credit card discusses how banks in the US in the late 70's were struggling to make a profit (almost out of business said the CEO Citibank (Walter Wriston) at the time with inflation, bank savings rates in the upper double digits, and petro-dollars flooding the global economy after moving to the dollar as the world's reserve currency - off the gold standard). So they got their research team together and decided to wage a war on individual states with the weakest usury laws (South Dakota and Delaware were two of them).
The idea was to redomicile financial institutions charter (where they officially register their companies) from New York to states with no or weak usury regulation. At this time, there was a great deal of discussion about beginning the process of financialization (or deregulating financial markets so that new oligopolies could form) as a means to stay competitive in the global market place. Their thinking was: "someone is going to do this, it should be us". The central idea by NY banks was how can we create a mechanism to export debt using a bank charter as foundation, but also demonstrate their reach into global markets by mission creep.
This resulted in the Marquette Decision of 1978 (Marquette National Bank in Minnesota vs. First Bank of Omaha)
a Supreme Court decision ruled that state anti-usury laws could not enforce against nationally-chartered banks in other states. This decision upheld the constitutionality of the National Bank Act, permitting chartered banks to charge their highest home-state interest rates in any state in which they operated. Subsequently, as payday lenders were partnering with banks and seeing their product repackaged as ‘bank loans’, some lenders were setting up shop in states where usury laws were more relaxed and lending to people in states where usury laws were tighter, but effectively overriden.This decision created a loophole that the credit card would fill --- making all major banks much more healthy almost immediately by 1983 as they domiciled their banks in states with the weakest usury enforcement and regulation. Even today, credit card companies dominate South Dakota and Delaware as the main engines of business for these states ----> directly connected to the Marquette Decision.
As a result, this ruling plus the wave of deregulations all over the financial industry (junk bonds, risk S&L loans) led to smaller community banks going out of business in droves or being bought out by new regional powerhouse banks buying up all the smaller community assets and having their stocks double and triple as a result.
So, two things here to follow.
First, the laws were moving away from regulation and protecting against usury.
In financial milieus, this signaled to the financiers that it would now be more profitable (like tabacco industry) to lend to the public at high interest rates and string them along like a debt junkie and prosecute them if they cannot pay (develop FICO scores to legitimize individual credit, and punish this score if repayment is not made on credit cards) than to create a model customer who meets the needs of the product and will have a high likelihood of paying back the debt. BIG BIG signal here in the 80's. It created a gigantic hole for the industry to begin peeling away at regulatory infrastructure on usury for later businesses to run rampant.
Second, there was a huge vacuum left by community banks when they failed or moved to the big city. This left hundreds of thousands in America unbanked. So, now not only did the banks have a new product (credit cards driving profit-based consumption) but they were making in-roads to destroying solid regulation and left a population in the wake without access to local, trusted banking.
By the late 1980's, this vacuum was starting to get filled by fringe banking businesses. When it was clear that larger banks were comfortable selling debt to large swathes of the population --- seeing the profitability, the very large banks soon began to align with these fringe banking entities (often small business like check cashing outlets, payday lenders, and family owned pawn shops). All of the work of Thomas Dewey in the 40's, new deal legislation around the separation of commercial and consumer banking in late 20's (Glass-Stegall) were now under attack by death from 1000 cuts.
This led to a showdown in many US states (some the industry won and some they lost) but the high-interest loan industry was just getting going. It was at this crucial juncture where many of the recent gains could have been snipped in its infancy, but many advisors in the Clinton administration wanted a bigger slice of the economy coming to the financial sector (Robert Rubin --- Citigroup/Travelers merger - was the last cut in Glass Stegall) and a big signal to fringe lenders that there is no sheriff in town.
Other Crucial EventsBusinesses started migrating to where the regulations were the weakest -- i.e. overseas (London & UK)
"
By the early 1990s, large parts of the industry had exported their product to the UK, most notably The Money Shop, which opened its first UK shop in 1992, slowly expanding its estate to 273 by 2009, even before the effects of the credit crunch were being keenly felt in people's pockets. It's interesting that the payday lending market in the UK is still dominated by large US businesses, with five of the seven largest UK payday lenders controlled by US companies." https://www.newstatesman.com/2014/03/sponsored-post-history-payday-loans In states like Tennessee, we saw the Allan Jones (Check-into-Cash) fame build the largest payday lending firm in the country.
They sprung up everywhere -- 1990's saw the rise of store fronts from 500 at the beginning to over 22,000 -- more than McNasty's or Starbucks. This kind of proliferation of supply, vacuum created by a regulatory loophole, and mirroring of the financialized contempt for the consumer from the credit card, meant that the millions of unbanked customers were funneled into a system they did not understand nor were prepared to handle. And it was our politicians and a few economists at the time which suggested the free market works best with fewer regulations as the corporations were the good guys. Repainting usury as creative destruction. Some real bullshit.
So, the industry had new markets home and abroad, new political clout aligning with larger banks (never using their direct name or cache mind you) and were putting a whole generation of americans through the financial ringer (as we all know, there is no getting out of unsustainable debt rolled over getting interest at 20% let alone 400%). Their decades of profits now fund political action groups, specific research to promote their use, and few pundits exclaiming their virtues.
Consumer advocates have been playing a game of catch up ever since as the best way to fight this is to get a very powerful congressman or senator to establish state laws prohibiting their use (often appealing to the moral sense of a politician does not bode well).
And by 2010, the internet became the sphicter of the industry, almost suddenly forming these tremendously foul loans for customers online to pass through, not being able to decipher the most basic of loan terms, and issues that arise when one is indebted to a private financial company.
One very interesting aspect here in the states is that there is quite a bit of blow back in the recent 5 years. CFPB, Scott Tucker arrest etc..
In answering your question, what is it about the 1990's that was different in this history of this kind of predatory loan?
It was the utter and total recklessness of a variety of decisions which paved the way for the industry's massive growth, amplified the product's profitability as there was a race to the top interest rate in the industry in some places, all while they popped up in neighborhoods where resources were scarce already, and had a high percentage of people without financial literacy nor a history of managing resources (i.e. redlining issues, and a history of poor access to credit --- this amplified the idea of "I need to get mine" as there was no way they would have lent to a single mom, a person of color or an immigrant previously in the 70's when credit was tighter (and white men decided who got it and who did not).
https://www.revealnews.org/article/for-people-of-color-banks-are-shutting-the-door-to-homeownership/The ascendance of this product travels the same trajectory as gambling in our country. Before 1990's, the only two places one could gamble legally was in Vegas and Atlantic City. Anti-regulatory mission creep occurred here as well and now is sanctioned all throughout our society, often impacting the poorest communities with the least amount of education.
My own stories with payday lending research? Well, lets just say that the owner shared with me that after one week in a new business, he knew he would never leave it by choice. He was making $30K as a janitor and his annual income jumped 10 fold --- as he became known in his community as someone who could "help".... Pretty interesting how our society prays on people to make choices maybe they would not make otherwise if there were social investments.
Anyhow, thanks for the question.
Apologize for the long winded nature of the response.
