Broke USA: An Expose of Subprime Lending and Its Impact on the Economy

In marketing, identifying customer segments is extremely important to strategy development and ultimately business success.  But what is the ethical line between serving a neglected market segment and taking unfair advantage of that segment?

Broke USA, Gary Rivlin’s new book, postulates that question in its examination of the impact of alternative financing on the working poor. I picked up a copy to get a personal look at the other complications from subprime lending. I definitely found the right book.

Broke USA is neutral in its tone but it grabs a reader’s attention in showing how interconnected the issue of subprime lending is to the economic well-being of this country. A question Rivlin poses early on summarizes the book perfectly:

“All these major corporations, chain franchises, and newly hatched enterprises specifically catering to the working poor – were they financial angels to the country’s great hardworking masses, by making homes and cars and emergency cash available to those otherwise shunned by the mainstream financial institutions? Or were these businesses tilling the country’s working-class neighborhoods so aggressively that they endangered the very survival of these communities?”

Looking at all sides to see how we arrived at this point

The book covers events from the 1990s to the present day.  Players from both sides of the subprime lending industry are examined clearly.  Some of the persons examined include:

• Tennessee native Allan Jones, who inherits his father’s debt-collection agency  but grows a lucrative payday loan company after seeing market potential for quick loans.
• Bill Brennan, a dedicated crusader for Atlanta homeowners who have been targeted by subprime lenders.
• Chris Browning, who rises as an outspoken and promising Check N Go manager, only to leave when asked to press customers.
• Fesum Ogbazion, the Dayton, Ohio, founder of Instant Tax Service, a 6,000-employee chain that provides advance loans on tax returns.

Each of these persons provide confessions that give insights into an industry where companies make loans with interest rates of 20 percent per year to a market of 40 million U.S. citizens living on an average annual income of $31,000.

Ogbazion explains the market for his service, advance loans on tax returns, as a response to critics’ concerns:

“They look at our customers and say, ‘Why don’t they just borrow the money from an uncle?’ Why don’t they just wait two or three weeks?’” he said. “But they don’t get it. These are people who can’t wait. Gas and electric is off at home. They’re facing eviction notices. They’ve been putting off all these bills.”….As (Ogbazion) views it, he’s a positive force for economic development in communities desperate for commerce….‘Look at where our stores are….There’s no Gap. There’s no Nordstrom. We employ people from the neighborhood. We’re paying rents in those neighborhoods.’”

Profiles like Browning and Ogbazion humanize those in the industry without downplaying the economic costs of their doings. Comments from Browning’s situation are refreshingly honest, as are those from Jerry Robinson, a former banker and payday loan “cheerleader” who laments the growth of the industry.  “There are just too many stores.  That’s the bottom line…Customers have two loans, then three loans, then five.”

Yet there is profit for the players despite competition.  The author estimates that Allan Jones made $22 million in after-tax profits from his 1,600 stores, while the profit margin of publicly traded Advance America — 8 percent in 2008 — “would place it ahead of more than 60 percent of the companies in the Fortune 500.” The data is more intriguing when examining the industry as a whole.

….The Poverty Inc. economy was around $150 billion at its peak. In comparison, the country’s casinos, Indian casinos included, collectively raked in around $60 billion, and U.S. cigarette makers book $40 billion in annual revenue.

Broke USA thoroughly shows how much of the country is affected.  From Fleet Finance’s financing collusion with home repair workers in Boston’s predominantly black neighborhoods to the legislation fights in Georgia, Ohio and North Carolina, readers will definite come away understanding the nuances that led to the subprime lending legislation proposed in various regions of the U.S. and the lobbying around it.  For example, Jim Mccarthy, an advocate for lending legislation, comments on Senator Gramm’s allegiance to subprime lending, an allegiance based on a home purchase by Gramm’s mother through a subprime loan in his youth:

We wanted to go with a federal fix…Because that was really the way to deal with predatory lending. [But] basically Senator Gramm’s view was ‘Over my dead body’, and so we said fine, we’ll start from the bottom up.

Takeaways

Broke Inc. is an excellent compliment to books like The Economics of Integrity and shows the degree to which a marketing segment can be unforgivably exploited.  The legal struggles depicted will remind ethical business owners that it may be in their best interest to ensure their customers understand the benefits and pitfalls of the kind of service or product being presented. The book also illustrates how federal interventions have some advantages, as both sides of the subprime lending debate lament that their battles will potentially replay endlessly in state legislatures.

There are also examples of small businesses that are in league with financial institutions, such as Boston-area home contractors that offer financing backed by Fleet Finance. The result? Homeowners who thought they would pay $6,000 end up owing as much as 10 times that amount.  Bill Brennan offers a worse scenario, as he fought Brown Realty Associates, an Atlanta realtor that takes over homeowners’ homes if a single payment is missed; Brown had a line of credit from a large bank that refused to make legitimate loans to qualified would-be homeowners in the same neighborhoods Brown served. 

Broke USA will make you question anyone who believes only large corporations can be negligent and ruthless.

(Editor’s note:  this review originally listed the book incorrectly as “Broke Inc”)

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