CITY OF DEBTORS Fleming_Final_pps.indd 1 8/22/17 1:30 PM Fleming_Final_pps.indd 2 8/22/17 1:30 PM City of Debtors A Century of fringe finAnCe Anne fleming Cambridge, Massachusetts London, England 2018 Fleming_Final_pps.indd 3 8/22/17 1:30 PM Copyright © 2018 by the President and Fellows of Harvard College All rights reserved Printed in the United States of America First printing Library of Congress Cataloging-in-Publication Data Names: Fleming, Anne, 1979– author. Title: City of debtors : a century of fringe finance / Anne Fleming. Description: Cambridge, Massachusetts : Harvard University Press, 2018. | Includes bibliographical references and index. Identifiers: LCCN 2017021520 | ISBN 9780674976238 (hc : alk. paper) Subjects: LCSH: Credit control—New York (State)—New York—History. | Credit control—Law and legislation—New York (State)—New York—History. | Predatory lending—New York (State)—New York—History. | Predatory lending—Law and legislation—New York (State)—New York—History. | Usury laws—New York (State)—New York. Classification: LCC HG3711.U6 F55 2018 | DDC 332.709747/1—dc23 LC record available at https://lccn.loc.gov/2017021520 Fleming_Final_pps.indd 4 8/22/17 1:30 PM For Paul Fleming_Final_pps.indd 5 8/22/17 1:30 PM Fleming_Final_pps.indd 6 8/22/17 1:30 PM Contents Introduction 1 1. Lending in the Shadow of the Law 12 2. From Loan Sharks to Licensed Lenders 47 3. New Threats to an Old Deal 78 4. Bringing Sales Finance under Law 107 5. The Problem of the Food Freezer Plan 139 6. Due Process in Debt Collection 176 7. Financial Federalism 213 Conclusion 246 Appendix: Annotated Timeline of Major Legislation and Rules 257 Abbreviations 265 Notes 267 Acknowledgments 351 Index 357 Fleming_Final_pps.indd 7 8/22/17 1:30 PM Fleming_Final_pps.indd 8 8/22/17 1:30 PM Introduction f all the evils to which modern society has given birth, there is “Oscarcely one more insidious, far reaching, and disastrous in its ef- fects than the institution of the money lender or ‘loan shark,’ as he is more unpopularly known,” a Chicago Tribune reporter proclaimed in 1908. The reporter lamented that high-rate moneylenders continued to plague the city and demand their “pound of flesh,” despite a recently enacted law designed to “deal a vital blow” to the “whole nefarious busi- ness.” With or without legal sanction from the state, so-called loan sharks found plenty of willing “victims” among the “great army of wage earners” in the Windy City, who were “forever pressed by the need of money.” Four years later, as the sharks continued to circle Chicago, an- other Tribune writer observed, “It is easy to condemn the loan shark evil but hard to correct it.” The root of the problem was simple: “Men, now and then, must have money.” The hard part was figuring out how to grant urban workers access to small amounts of credit at reasonable prices.1 Over a century later, much has changed. The laws governing small loans have developed over time, both reflecting and spurring the ascen- dance of new ideas about the proper regulation of the business. The American economy has also changed dramatically, with the growth of industrial, clerical, and service-sector work, along with the decline of Fleming_Final_pps.indd 1 8/22/17 1:30 PM 2 INTRODUCTION agricultural employment. Meanwhile, the advent of mass production brought down the price of consumer goods and has enabled mass con- sumption. The demographic characteristics of those struggling to make ends meet, “forever pressed by the need of money,” have varied over time as well. By some estimates, roughly 40 percent of the American population lived in or near poverty in the early twentieth century but, over the last three decades, the official poverty rate has never exceeded 20 percent. Moreover, rising standards of living have improved the lot of all Americans, including low-income households. Families struggling to get by in the modern era may own televisions and other consumer goods that did not exist a century ago. But thanks to the growth of the mass media, these households have also become more keenly aware of their relative hardship as compared to those higher up on the income distri- bution.2 Along the way, legal and economic change has helped kill off some forms of small-dollar credit and encouraged others to grow, eventually yielding our present-day “fringe lending” institutions, which include the payday lenders and rent-to-own stores that now cluster in low- income neighborhoods and operate storefronts in cyberspace. The small-sum lending business has grown exponentially over the course of the past hundred years, from a marginal enterprise into a big busi- ness that generates over ten billion dollars in revenue each year. At last count, there were over 15,000 payday lender storefronts in the United States, and over 9,000 rent-to-own stores in the United States, Can- ada, and Mexico.3 Yet, the problem of high-rate, small-sum lending continues to trou- ble both policymakers and ordinary people. Americans remain divided over how to police the industry. Most acknowledge that working-class households “now and then, must have money,” as the Chicago Tribune reporter observed over a century ago. Nonetheless, many worry about the high cost of small loans and fear that lenders are taking advantage of the most vulnerable households. Policymakers and everyday Americans are perpetually torn between dueling desires, wanting to protect working- class debtors while also allowing them easy access to credit and control over their own financial lives. Both favorable and critical views of the business persist, in the celebration of microfinance as an engine of social mobility and the vilification of payday lending as a modern form of debt peonage.4 Fleming_Final_pps.indd 2 8/22/17 1:30 PM INTRODUCTION 3 For decades, little loans have troubled many Americans because they raise a big, vexing policy question: what is the meaning of justice within capitalism? Since the rise of the small-sum cash lending business in the 1890s, those on the lowest rungs of the economic ladder have been asked to pay the greatest cost for credit. Time and time again, Americans have puzzled over why the smallest loans to the most fragile borrowers seem to come with the biggest price tags. Each generation has won- dered: Is there a way to grant low-wage workers small amounts of credit at lower cost, without restricting access for the riskiest borrowers? Can law make small loans safer and, if so, where should we draw the line between necessary protection and overreaching paternalism? City of Debtors chronicles the decades-long struggle to answer these questions, seeking to understand why regulating small loans has proved so challenging over the past century. It is a history of the small-sum lending business and its regulation, told from the perspective of the peo- ple who navigated the market for small loans and shaped its develop- ment. More broadly, it is about how each generation of Americans has redefined the meaning of justice within capitalism for those on the eco- nomic margins. The players in this drama were politicians and judges, reformers and scofflaws, creditors and debtors. They include low-wage workers, such as John Doherty, a twenty-three-year-old railroad clerk who walked into a loan broker’s office in 1910 in search of a little quick cash, as well as businessmen, such as Clarence Hodson and Frank R. Hubachek, who aspired to put the small-sum lending industry under regulation in the 1910s and 20s and thereby legitimize the enterprise. The story also involves lawyers, such as Irwin Slater, who brought an innovative class action lawsuit in the 1940s on behalf of a group of poor debtors, and Philip Schrag, a young antipoverty litigator who made small loans into a big issue through his work with the NAACP in the 1960s. Several generations of consumer advocates and reformers like- wise contributed their efforts and ideas to the struggle. Some worked within government, such as Persia Campbell, New York State’s first con- sumer counsel and chief promoter of a pioneering sales finance law in the late 1950s. Others represented national or local nonprofit groups, such as Leon Henderson, who headed the Russell Sage Foundation’s consumer credit division in the 1920s and 30s, and Mrs. Walton Pryor, who led the grassroots, Harlem-based Consumers’ Protective Committee in the 1940s and 50s. Together, within the confines of the legal, political, Fleming_Final_pps.indd 3 8/22/17 1:30 PM 4 INTRODUCTION and economic structures surrounding them, these players directed the course of small-sum lending and its regulation. In the process, they also defined the options available to working-class households in need of small amounts of quick cash or credit to purchase goods. The long struggle to regulate fringe finance began over a hundred years ago, at the dawn of the twentieth century, when lending to urban, working-class households first grabbed newspaper headlines and the at- tention of progressive reformers. Although pawnshops or “hock shops” had existed for centuries, other forms of small-sum lending grew rapidly only after the Civil War, when an increasing number of households be- came dependent on wage labor for their support. For wage workers, small loans offered a means of scraping by when they suffered inevitable bouts of unemployment or were otherwise in need of cash. Borrowers could assure lenders that their debts would be repaid from their future wages. By 1900, “chattel loans,” cash advances secured by a lien on the borrower’s personal property, and “salary loans,” secured by an assign- ment of the borrower’s future wages, had become a common source of credit for urban, working-class laborers.