
How private equity firms make money offering loans to cash-strapped Americans - uptown
https://www.washingtonpost.com/business/economy/a-way-of-monetizing-poor-people-how-private-equity-firms-make-money-offering-loans-to-cash-strapped-americans/2018/07/01/5f7e2670-5dee-11e8-9ee3-49d6d4814c4c_story.html
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avgDev
I have watched an interesting documentary on Scott Tucker that is currently
serving time in prison for collecting $1.3 billion in illegal interest
payments as some people paid a total of almost $1,000 to settle a $300 loan.
He was an owner of a quick loan company. The guy and his wife felt they were
wrongfully stripped of their wealth. They did not feel bad for people who
struggled to survive, and felt 0 remorse. I recommend reading about this or
finding the documentary as I can't recall the name at the moment.

These loans should be strictly regulated. They are preying on people who may
lack basic understanding of loans or a barely scraping by. These companies use
very aggressive tactics when trying to recover the money + interest.

These loans are a cancer to a society. As it pushes people very close to an
edge.

~~~
JumpCrisscross
> _These loans are a cancer to a society_

Subprime loans should be strictly regulated to (a) ensure the borrower
understands what they're getting into _ex ante_ and (b) minimize systemic
effects.

But they're also a symptom of American poverty. There are people who, strictly
speaking, are better off for having taken a subprime loan. (Classic example:
truck they need for work breaks down and they have no rainy day fund.) Banning
the loans won't fix the underlying problem.

~~~
frgtpsswrdlame
>minimize systemic effects

Those three words seem to be doing a lot of work. How would you minimize
systemic effects? What systemic effects even need to be minimized?

~~~
JumpCrisscross
> _How would you minimize systemic effects? What systemic effects even need to
> be minimized?_

Subprime loans have higher default rates than prime loans. You want to make
sure the lender can bear that risk. (Subprime mortgages getting into places
they shouldn't have been was a proximate cause of the financial crisis.)

------
1024core
> The company declined to say how many unsolicited checks it mails out

So they send out a check randomly: who is to verify that the recipient is the
one who encashed it?

I think there's a law in the US that any item sent unsolicited can be
considered a "gift" and you don't have to pay for it. Why doesn't that apply
here?

In general, stories like this make me very sad. Motherfuckers like Geithner
and Schwarzmann, etc. have all the money in the world they could ask for. Then
why prey on poor people? Just enjoy your fucking dollars and leave these
people alone!

~~~
icelancer
There are contracts attached to the check, written on the check, and
documentation sent in addition to it.

~~~
jschwartzi
Yeah, but literally anyone can sign the contract. If I move out tomorrow and
one of these checks lands in the new tenant's mailbox with my name on it
there's nothing stopping that tenant from cashing the check by attempting to
forge my signature. It's fraud, but now it's my problem because the idiots at
the company put my name on the check.

This kind of despicable practice should be illegal.

~~~
PurpleBoxDragon
The entire notion of identity theft should be inverted. It wasn't your
identity that was stolen, it was the money of which ever place didn't verify
the person taking the money. So it should be their problem, not your problem.

~~~
timerol
A comedic explanation is given by Mitchell & Webb:
[https://www.youtube.com/watch?v=CS9ptA3Ya9E](https://www.youtube.com/watch?v=CS9ptA3Ya9E)

"Some logged in on the bank website and committed identity theft
electronically." "I see, did they take anything else?" "Uh, no." "Oh, good, so
all the money's still there?" "What?" It's just my identity that's gone. None
of your money?"

------
mbesto
PE advisor guy here.

I'm not sure why the author acting as if the negative externalities of
subprime lending are all of the sudden new because PE firms are taking stakes
in them. Are they "supercharged" because of mega PE funds? Probably, but I
think the fact that these firms are so profitable (regardless of PE) is the
bigger topic at hand.

Problem here is two-fold:

1\. Why isn't the regulation that does exist working like it should?

2\. Assuming you think these loans should just not exist - think again. First,
it's obvious there is demand for this type of lending. Second, I would love
for someone to tell me how for-profit entities in this space would avoid using
dark patterns to get people to pay them back. There's usually a reason many
entrepreneurs stay away from these business models - they are notoriously
scummy for a reason.

This all reminds me of dark patterns technology managers implement to increase
conversions (which IMHO is no different than what subprime lenders do). So for
people who read this and think "oh this is so wrong"...is it ok for you to
maximize profits using dark patterns (and thus extracting value to the wealth
of your company) but not for a sub-prime lending?

For record - I'm not arguing one way or the other, just something for the HN
crowd to ponder. For more details on this topic, great documentary on netflix:
[https://www.imdb.com/title/tt7909178/](https://www.imdb.com/title/tt7909178/)

~~~
nimish
1\. Because the industry lobbied heavily for the CFPB and others to be
neutered 2\. There is demand for short term cash. But not for usurious loan
sharking that has deep social consequences.

Many of the "services" provided here are predatory rather than rehabilitative
and it's entirely possible to have the latter without the former, ideally via
something like a post office bank.

That the firms are profitable is secondary to whether it's a useful social
good.

~~~
whatok
What's the right price for short-term cash not secured by any assets for a
customer who does not have any record of displaying creditworthiness?

~~~
frgtpsswrdlame
In a competitive market the right price would be one which generates a
positive but very tiny profit. These big payday lenders make money hand over
fist though.

~~~
vageli
> In a competitive market the right price would be one which generates a
> positive but very tiny profit. These big payday lenders make money hand over
> fist though.

Is this not an inversion of the risk associated with these loans? It was my
understanding that riskier loans are assessed at higher rates of interest
_because of_ the likelihood of default. Thus, extract as much as quickly as
possible before the default.

How would companies profit if the successfully serviced loans did not offset
the defaults, given these loans are not secured with another asset?

------
menacingly
So, this guy received a loan check in the mail with an outrageous interest
rate, and cashed it when his truck broke down.

Is the preference here that the guy didn't have the option of fixing his
truck?

~~~
moonka
>Is the preference here that the guy didn't have the option of fixing his
truck?

It would be nice if people weren't running so close to the edge that an
emergency can ruin them. I don't know the particulars of this guy's story,
there must be many people who are in this situation since this is such a
profitable industry. Maybe that speaks to a larger issue of inequality in our
society. I'm not sure that relying on predatory loans to be a safety net are
the only or best option for society.

~~~
menacingly
Those are great points, they're just further up the chain than where we are
when we're trying to execute our day to day. It was an option on the table he
didn't have to take. He's a grown man, and he made a call. It may have even
been the right one.

I come from a "payday-loan poor" family, and spent a good chunk of my adult
life there myself. It's hard, but people with comfy salaries paternalistically
taking options away because they know better really agitates me.

~~~
moonka
>It may have even been the right one.

Absolutely, I just think it's a shame that there aren't alternatives
available. Normally I'd assume that interest rates are that high because
that's what is required to remain profitable while lending to the market, but
I can't help wonder if consolidation and wall street ownership means there's a
large profit margin and some gouging happening.

~~~
menacingly
Well, then we're on the same page.

I don't want him to need the loan, but I respect him enough to trust him with
the option. I'd prefer a competitive marketplace for his loans to shaming the
concept of an alternative financial system, and I absolutely would not put it
past capital to collude to keep the interest rates high.

I don't know that, though, since these are risky loans. Case in point, this
very dude didn't pay it back.

------
cwal37
Something that stands out to me is the extent to which PE is in all kinds of
different agencies through various sector-specific funds. I recognized several
of the firms mentioned from the power sector, where they have a habit of
acquiring somewhat distressed assets that still have some value in one of the
market structures (e.g., selling capacity) even if they don't really expect
the plant to run very much at all.

In one sense it's good that someone has the flexibility to maintain an asset
that still has real value but a different use case than its original
intention, but on the other side that money could be propping up something
that doesn't really have long-term value; distorting the market by delaying
entries by newer or more efficient technologies.

I remember seeing a comment the other day about how the next recession could
probably/easily not be housing (the last one) or tech (the one before that),
but the next big chunk of the economy that's under-studied and not well known.
Maybe it's these pools of cash at the top extracting more $ from everyone
below them on the global financial stage. Not sure what the failure point or
mechanism would be though.

------
apazzolini
It's very expensive to be poor in America.

