Hey, all he wants is his money. Since he can't rely on the courts to enforce a technically valid but completely illegal contract, you can understand why he would need to have some, well, unorthodox methods of securing his capital. Since many of his clients are themselves violent lowlifes, criminals and other trash, stern dunning letters and threats to report late payers to credit bureaus won't have the desired effect. Generally speaking baseball bats and tire irons are more effective than plaintive phone calls at getting people's undivided attention.
But if you're a loan shark all this can be hectic and dangerous. Your clientele is often armed themselves. If you kill a debtor you lose that payment stream. Harassing or beating up debtors, while occasionally satisfying, can bring in the police or worse, scare the deadbeat so much that he scurries down to the local FBI office. And then you'd probably be convicted of several racketeering, conspiracy, usury and assault charges and spend the next 40 years in a federal penitentiary. No good. So what's an ambitious hoodlum to do?
Well if he was smart he'd realize that the risks of dealing with criminals and degenerate gamblers, ordering or carrying out beatings and murders, sharing profits with bosses who are even more paranoid and brutal than he is, and spending time worrying that a customer or associate might be an undercover FBI agent or informant don't really justify his shylock profits. I mean you can't spend your money if you're dead or in jail right? And really, who needs all the stress? What if you could make similar profits in a related venture that not only was completely legal (more or less) but also put banks and lawyers on your side for a change? I mean how cool would that be? Wouldn't a loan shark like to have a regular nine to five gig with above board profits, vacation and sick days, 401K opportunities and incentive bonuses without all the messy illegality and violence that used to go along with his business? Classic loan sharks aren't as common as they used to be. They got smart.
A loan shark should enter the payday loan/online lending business. Now, in payday loan lending you might not attain the 1040% annualized nominal interest rate on a typical 6-for-5 mob loan but then again you don't have to pay hoodlums who will beat up, intimidate or kill delinquent clients either. You can start your car without wondering if a co-worker put a bomb under the seat. You can attend last minute meetings with the franchise president without being frightened because the conference room is empty. Your overhead shrinks. You can pay taxes and bank your profits. And banks will help you with your business instead of informing the IRS. And if you like, you can even keep your two-tone pinstripe suits for old time's sake. What a country, eh??
Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent. With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.
While the banks, which include giants like JP Morgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals. “Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.
For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.
Ivy Brodsky, 37, thought she had figured out a way to stop six payday lenders from taking money from her account when she visited her Chase branch in Brighton Beach in Brooklyn in March to close it. But Chase kept the account open and between April and May, the six Internet lenders tried to withdraw money from Ms. Brodsky’s account 55 times, according to bank records reviewed by The New York Times. Chase charged her $1,523 in fees — a combination of 44 insufficient fund fees, extended overdraft fees and service fees.
For Subrina Baptiste, 33, an educational assistant in Brooklyn, the overdraft fees levied by Chase cannibalized her child support income. She said she applied for a $400 loan from Loanshoponline.com and a $700 loan from Advancemetoday.com in 2011. The loans, with annual interest rates of 730 percent and 584 percent respectively, skirt New York law. Ms. Baptiste said she asked Chase to revoke the automatic withdrawals in October 2011, but was told that she had to ask the lenders instead. In one month, her bank records show, the lenders tried to take money from her account at least six times. Chase charged her $812 in fees and deducted over $600 from her child-support payments to cover them.“I don’t understand why my own bank just wouldn’t listen to me,” Ms. Baptiste said, adding that Chase ultimately closed her account last January, three months after she asked.
Or viewed another way if they really did need them then this is another good reason we need to raise the minimum wage here and work to increase income in this country for our citizens as opposed to helping people in China, India or elsewhere. If people are taking loans just to make ends meet then something has gone drastically wrong with our job generating machine. I view payday/online lending not just as a symptom of poor personal financial management or temporary desperation but as a wholly predictable outcome of a deunionized workforce with stagnant income growth. JP Morgan Chase, not content with aiding legal loan sharks to rip off low income citizens, also allegedly ripped off other banks by selling them crap mortgages. HSBC escaped criminal charges after willingly assisting drug cartels in laundering their profits. Apparently something has gone drastically wrong with the financial superstructure in this country and world. We need to fix this ASAP because otherwise not only will we continue to have record levels of income inequality as well as financial corruption but growth will also stay anemic. You can't grow when you're spending so much of your income servicing debt.
What we ought to be worried about is not the mob shark but all of the other debttrappers that have proliferated since our credit markets were deregulated. There are more of them now than ever before and most of them have been issued licenses. That is the loan-shark problem regulators should confront.It looks like financial market deregulation hasn't so much gotten rid of the classic loan shark as it's made him clean up and operate above board, with almost the same business model. It looks like Lucky Luciano was right on the money with his insight.
‘I’d do it legal. I learned too late that you need just as good a brain to make a crooked million, as an honest million. These days, you apply for a license to steal from the public. If I had my time again, I’d make sure I got that license first!’
Charles "Lucky" Luciano