Most American citizens believe that voters elect our state and federal legislators. They would be wrong. Elections are rigged by the massive amounts of money that fund them, and legislators are bought and sold in accordance with their campaign fund contributors. This money does not come from you or me. We could never hope to contribute enough to sway an election, we just don’t have enough to compete. The money comes from corporations. How do I know (besides from the minimal reports politicians must file)? I know from the end result, from the laws that result.
Imagine yourself a working mother or father. You work hard everyday. You earn your paycheck, and like nearly everyone, it is spent when you get it. If you are a poor family, maybe your optional luxuries include pizza out one night. If your family is a little better off, maybe it means a real dinner out. Then a little ‘hitch’ arises. The electric bill comes in, and because it has been so hot, it is more than anticipated. Or maybe the car needs new brakes. Or maybe, heaven help you, someone gets really ill and you have bad or no health insurance.
So you borrow money. You go to the payday lender down the street. You know the kind, they are popping up all over the place. Despite this kind of lending being legal (or thought up) only for the past couple of years, there are already more payday lending stores in this country than there are McDonald’s. You borrow a few hundred dollars from the payday loan store, and the interest rate is 365%. That is not a typo, THREE HUNDRED SIXTY FIVE percent per year.
That’s right, we have laws that permit usurious interest rates of 200, 300, 400, and believe it or not, I’ve actually seen a loan with an interest rate of 969% interest. I think the Sopranos only charged 50% and a broken limb as a late payment fee.
The lenders get away with this for several reasons; here are my two favorite:
- the lender affiliates themselves with a national bank and/or
- the lender has you sign a contract waiving virtually all your rights to hold the lender accountable.
The bank affiliation scheme is an interesting one. Say I decide I want to start making a bundle by loaning money. I affiliate myself with a national bank by ‘renting’ their charter. I pay the bank a little money, a thousand or two a year, and pay a little fee to the state (in one state, the fee is $300 per year), and then put a sign over my door that indicates I am a branch of the Bank of XYZ, and then I start lending money.
Current law, and recent actions by the administrative branches (Office of the Comptroller of the Currency, Office of Thrift Supervision, who monitor banks and credit unions, for example) make it possible for the Bank of XYZ to import into the state where I open my payday lending store, the laws of the state where Bank of XYZ is chartered. In other words, if you live in North Carolina, it is not North Carolina law that applies to this lending, it is the laws of the state where Bank of XYZ is chartered, or incorporated. Where is that bank chartered? Delaware or South Dakota, of course.
Delaware and South Dakota have had a race to the bottom to get banks or thrift organizations to incorporate in their state. Each one has been stripping themselves of whatever small bit of consumer protection laws they have had in order to entice the bank to file papers in their state. And to top that off, the administrative agencies that regulate such entities have been in a similar race to entice entities to become a bank vs. a credit union or vice versa. The agency’s budget is based in large part on the number of organizations it regulates, so they do what they can to entice an organization into becoming their type of regulated entity. It is a lot like two wh***s on a street corner, each of them underbidding another for your business.
So the end result is that you live in a state that has some laws that protect you from this kind of gangster type lending. But the bullies come in armed with a rented sign that says “Bank of XYZ of Delaware” and they get to use Delaware law. What does Delaware say about interest rates? Not much. It doesn’t say much about anything else, either, at least from the point of what cannot be done to consumers.
How did this happen? A national bank act was passed in the federal legislature. Who are major contributors to lawmakers in Washington? Would you be surprised to hear it includes national banks and credit card companies, their subsidiaries?
Then there is strategy number 2: have consumers waive their rights to enforce the law. The payday lenders now use arbitration clauses, waivers of your right to sue, and waivers of your right to a jury.
In the documents you sign for the loan, and very often extremely prominent (so you can’t claim you didn’t know about it), is a contract term that attempts to bind you to never sue the lender, no matter how many laws have been violated. The contract you sign says if you have a problem, you can hire a private arbitrator, who is not bound to follow any law of any kind, or even use the facts as agreed by both you and the lender, and requires you to pay arbitration fees (even if the lender has committed itself to pay the filing fee, there are lots more fees involved). The arbitrator’s decision is final, there is no appeal to anyone.
Even if arbitrators attempt to be fair and impartial, they are bound by several things, including: the arbitration company’s rules, which seriously limit the consumer’s right to obtain and present all the evidence, and the need to obtain repeat business. You and I are not going to hire an arbitrator frequently enough that they want to keep our business. If the arbitrator sides against a particular lender, that arbitrator will likely never have another case with that lender.
Arbitration clauses are a type of “get out of jail free” card for these lenders. So not only do they have the laws written for them, if the lender does violate the law, the consumer has signed a contract saying the lender will not be held accountable in a court of law.
Tell me this system isn’t rigged.
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