So the feds say they’ve rooted out a Ponzi scheme built around a bankrupt payday-loan business.
Hundreds of investors in the Little Loan Shoppe – gotta love that quaint touch! – were taken for tens of millions of dollars, according to the Securities and Exchange Commission. If the SEC is correct, the Little Loan Shoppe was an illegal scheme to take advantage of investors – with the owners using new investors to pay off old ones, and living a Beemers and Vegas lifestyle in the meantime. Now, in addition to the SEC going after owner Doris “Dee” Nelson, the Bankruptcy Court is suing some of the investors, trying to “claw back” any assets to spread around evenly among those who lost money.
Which is awfully tough for these investors. Some of them lost retirement and college savings. Some took out second mortgages to invest in the payday loan business, for which they were promised returns of 40 percent to 60 percent. Ponzi schemes, remember, are illegal and immoral. They always collapse, leaving the last investors holding the bag. In this case, of the 650 or so people who contributed $135 million to the Shoppe, about half didn’t recover their initial investment, the SEC says. Fifty got nothing at all. Most of these people were members of the same church.
A bad deal, all around. But there was something rotten at the Little Loan Shoppe long before now. Something rotten inside the whole mechanism meant to bring these investors their riches.
Something completely rotten and completely legal.
Here’s a quote from the Little Loan Shoppe’s website, aimed at potential borrowers, that captures it pretty well: “The cost of your credit as a yearly rate: 782.14%”
The Little Loan Shoppe charged poor, gullible people outrageous, usurious interest for small loans. At least it did before it closed down in 2009. The business model is the same one used by other payday lenders, as well as Tony Soprano: Loan money to those who can’t borrow legitimately, and exploit them with extravagant interest and fees. Loan sharks call that the vigorish. Eventually, borrowers are borrowing to repay their borrowing. You own them.
Back in the day, someone who borrowed $100 from the Little Loan Shoppe and paid it back over 20 installments eventually forked over $700 for that C-note. Imagine the person who takes that deal. Imagine their financial life, if you’ve never been there yourself. Imagine recognizing that person’s desperation or lack of savvy, and deciding to charge them $600 interest.
Then imagine getting all your church friends together to take advantage of this business opportunity.
Completely legal. The SEC won’t sue you or anything. No court in the land will claw back a penny for you.
The Little Loan Shoppe operated in seven locations, in Spokane and Canada, before it went Internet-only in 2006. It charged rates that would no longer be possible under a series of reforms passed by the Washington Legislature and implemented in 2010. These changes limited fees that payday lenders could charge, capped the duration of loans and took other steps meant to prevent the wholesale fleecing of borrowers. In this new environment – only moderate fleecing allowed – payday lenders have closed up, the number of loans has plummeted, and the size of the payday loan game in Washington has shrunk considerably.
Which means that, in 2010, it was merely a $434 million industry. More than half of all loans went to borrowers who took out between five and eight such loans during the year, according to the Washington Department of Financial Institutions. These days, someone who borrows $500 for two weeks pays $75 – an annual percentage rate approaching 400 percent. All at a time when the average credit-card rate for people with lousy credit is 25 percent.
This is post-reform, remember. An interest rate of merely 16 times a lousy credit-card deal.
And there are plenty of places – business-friendly Idaho among them – where there is no upper limit of any kind on how much a lender can charge a borrower. That market is free.
Meanwhile, the legal and non-Ponzi payday lending rolls on. The industry argues that it is providing a service to people who can’t otherwise get short-term credit. It says that this population’s essential unreliability is the reason that it must charge such high fees, to cover defaults. But if that’s true, it’s hard to understand why this service being so generously offered to the downtrodden is priced at such radically different rates: 391 percent APR in Washington; 651 percent in Idaho; 460 percent in Hawaii, 201 percent in Colorado.
Those are the various rates charged by a single scavenger, according to its website.
This was the entirely legal, above-board enterprise the Little Loan Shoppe was engaged in, and for which it attracted millions and millions in investments. This was the wholly proper enterprise that didn’t work out the way these people had hoped. I don’t mean to diminish their suffering or deny the scope of their betrayal.
But they’re not the only victims.