Legalized Loan Sharks

The town where I grew up in Northern Kentucky was a haven for organized crime. My father was a bookie and professional gambler who worked in several of the area's "hot spots."

In a town full of hustlers, prostitutes, and gamblers, the profession they looked down on was loan sharking.

It wasn't unusual for a loan shark to wind up floating in the Ohio River. One of the biggest names in the business, Frank "Screw" Andrews, a central character in journalist Hank Messick's non-fiction book, Syndicate Wife, "accidentally fell" out of a fourth-floor window.

If Andrews were in business today, he would be a captain of industry. Loan sharking is now legalized, in the form of "payday lenders."

The stock of payday lenders is traded on the New York Stock Exchange and NASDAQ. Many payday lending companies do business with Wall Street's biggest banks.

As Gary Rivlin notes in his outstanding book, Broke USA, "[T]he working poor have become big business."

You wouldn't think that poor people would be a growth market, but businesses make big money off people who live paycheck to paycheck.

There is a whole segment of society that does not use traditional banking services. They cash their paychecks at Wal-Marts, liquor stores, and payday lenders.

Andrews met his fate out of a hospital window in 1973. I'm sure when he fell out of that window he never dreamed that nearly forty years later his business would operate legally in almost every city in the country.

Andrews knew how to bribe local officials with cash payments. He didn't live to see such bribery legalized in the form of lobbying and political fundraising.

Broke USA makes it clear that the public and those in the media don't care for payday lenders, much the way the prostitutes and hustlers hadn't.

The poverty industry has given huge contributions to lawmakers. According to the Citizens for Responsibility and Ethics in Washington, payday lenders donated more than $1.5 million to federal office holders during the 2010 election cycle. Substantial donations were made to state and local lawmakers as well.

Until I read Broke USA, I didn't realize what a big hand the "too big to fail" banks have in creating the poverty industry. Many payday lenders would not exist if Wall Street had not given them the money to get started.

Citigroup, JP Morgan Chase, and Bank of America are just some of the big banks that make huge profits, directly or indirectly, from the poverty industry.

The banks that fund the poverty industry have another common bond. They received bailout money from the American taxpayers in 2008.

If there was ever a shining example of why you should move your money from Wall Street, legalized loan sharking is a good one.

The people peddling poverty products have figured out there is a strain of Americans who are the financial equivalent of drug addicts. They will pay any price, fee, or interest rate as long as they can get an immediate fix. They don't care about tomorrow. They just want money today.

Another insight I got from Broke USA is that many people use payday lenders because they don't have access to traditional banks. I didn't realize that many banks won't give a checking account to people with bad credit.

Since the alleged "financial reform" that passed Congress in 2010, banking services for lower income people are getting worse.

"Too big to fail" banks are charging fees for checking, raising the minimum balance required to get free checking, and hitting consumers with a bunch of nickel and dime charges.

Those nickels and dimes will add up to billions in profits for the banks we bailed out in 2008.

In reaction to financial reform, the head of JP Morgan Chase, Jamie Dimon, seemed to speak for all of Wall Street when he told the New York Times, "If you're a restaurant and you can't charge for the soda, you're going to charge more for the burger."

The burger is going to come out of the hides of the banks' poorest customers.

As payday lenders and others in the poverty business have found, it is easy to stick it to poor people. They have the fewest options.

More and more of them will fall out of the traditional banking system altogether.

"Financial reform" is a boon for people in the payday loan business. When people fall out of the world of traditional banking, they are still going to need bank-like services. Payday lenders will be in position to fill the gap.

Gary Rivlin and I have become friends since I did a review of Broke USA for Huffington Post. We both agree that payday lending is not going to go away unless the government steps up to the plate to regulate it.

In 2006, the U.S. Department of Defense realized that soldiers had a problem with payday lenders. They found that 17 percent of all military personnel were using payday loans, and soldiers' financial stresses were impacting their ability to function while fighting in Iraq and Afghanistan.

It was estimated that payday lenders were charging members of the U.S. military interest rates between 360 percent and 720 percent. Congress cut it down to a maximum of 36 percent.

Despite losing the military market, payday lenders showed they still had plenty of clout. It would have been simple for Congress to extend that 36 percent cap to all Americans, but Congress did not.

Instead, the battle has become one each state must fight individually.

I suspect if you let everyone vote on the issue, payday lenders would go away quickly.

Broke USA detailed an Ohio referendum capping payday lenders at 28 percent. The referendum got 63 percent of the vote. The study of how Ohio did it is a roadmap for other states trying to do the same thing.

Unfortunately for the people fighting payday lending, most states don't offer ballot initiatives and referendums. They elect legislators and ask them to represent us.

Many of the groups fighting payday lending are part of larger coalitions with a litany of other legislative interests. Fighting payday lending is merely one of many issues on their plates.

The payday lenders are all-in. It's life or death for them. They hire the best lobbyists.

Payday lenders have a well-organized, well-financed front, and they are going to fight with everything they've got. They make lots of contributions to all the right people.

One of the reasons it was easy for Congress to put a 36 percent cap on payday lending for military people is that it was easy to imagine a soldier, serving in Iraq or Afghanistan, being taken advantage of.

If you are dealing with a payday lender, the idea that you might achieve wealth, with or without Wall Street, is very remote. It is hard to get ahead when you are paying 300 percent or more in fees and interest payments.

Wealth cannot be sustained over a long period of time when the poorest of a community are exploited.

I've yet to see an election lost on the payday lending issue. That needs to happen before elected officials will take the opponents seriously.

Don McNay, CLU, ChFC, MSFS, CSSC of Richmond Kentucky is an award-winning financial columnist and Huffington Post Contributor. He is the author of the book, Wealth Without Wall Street: A Main Street Guide to Making Money, which will be released on September 5.

McNay founded McNay Settlement Group, a structured settlement and financial consulting firm, in 1983, and Kentucky Guardianship Administrators LLC in 2000.

McNay has Master's Degrees from Vanderbilt and the American College and is in the Hall of Distinguished Alumni of Eastern Kentucky University. McNay is a Quarter Century member of the Million Dollar Round Table and has four professional designations in the financial services