The disgusting business of milking the working poor

The working poor make great victims. They are often trusting and financially unsophisticated, and with wages stagnant, they're desperate for cash. These folks hold jobs, so they have a money stream and possibly equity in their homes — all ripe for plunder.

Corporate America has decided there's gold in draining the low-income masses of what little they have. Loan sharks and con artists once dominated this territory, but big businesses have moved in and are proving to be far smoother than the mugs who break legs. Their legal fine print can trap the uneducated in outrageous debt contracts without rousing the authorities.

You've all heard of J.D. Byrider, the used-car chain with the jaunty jingle. In 2005, Roxanne Tsosie, a home health-care aide in Albuquerque, N.M., went there and bought a Saturn with 103,000 miles for $7,922. She borrowed the entire amount at an interest rate of nearly 25 percent.

The Navajo mother of four thought that her $150 installments were to be made on the usual monthly basis, but actually the contract demanded payments every two weeks. After three months, she gave up.

No problem for Byrider. It took the car back to sell to the next chump and kept Tsosie's $900.

This story comes from BusinessWeek's splendid report, "The Poverty Business." Byrider doesn't post prices on the windshields. Instead, the salespeople figure out the maximum they can squeeze from the working-class buyer, then charge it — financing courtesy of Bank of America. The practice is called "opportunity pricing."

As BusinessWeek notes, the thing being sold doesn't matter. It's just the "bait" to saddle someone with punishing loan terms. Companies can now assess the financial wherewithal of potential victims with special software called Automated Risk Evaluator.

Payday lenders offer workers cash advances on their next paycheck. Wells Fargo and U.S. Bancorp have entered this booming business, charging annual interest rates of 120 percent. Five payday-lending chains are trading on the New York Stock Exchange and NASDAQ.

Jackson Hewitt is a tax-prep service that gloms onto low-income neighborhoods. Its specialty is lending money to low-income workers in anticipation of their IRS refund — while siphoning off more than 10 percent of it. The refunds usually involve the Earned-Income Tax Credit (aimed at the working poor), prompting some to dub Jackson Hewitt and its ilk "the new welfare office."

Milking America's poor is now a global opportunity. Subprime mortgages, which charge high rates and fat fees to people of modest means, are packaged into securities. Investors currently hold more than $1 billion in subprime loans from 22 ZIP codes in Detroit alone, according to The Wall Street Journal.

Some readers may say: "Tough. If they're too lazy to study the terms, they deserve to get soaked." So here's a question for you: What is Libor?

Libor stands for the London interbank offered rate (recently 5.42 percent). It is the short-term rate on top of which subprime lenders in Detroit were adding another 9.125 percentage points. True, the borrowers weren't careful, but how many people have ever heard of Libor?

Already deep in debt, Luisa and Rose Ajuria were surprised and pleased to be offered a Tribute Mastercard, the Chicago sisters told BusinessWeek. The card charged a 28 percent interest rate, $150 annual fee and a separate $6 monthly fee. Its pusher is CompuCredit, a giant Atlanta corporation that specializes in poor credit risks. The Ajurias may soon lose their home.

Dump a few of these loans on the working poor and see them spiral downward. Preying on vulnerable people is a disgusting business model. Does anyone in Washington have a conscience?

Providence Journal columnist Froma Harrop's column appears regularly on editorial pages of The Times. Her e-mail address is fharrop@projo.com