Book Review: Broke U.S.A.

Gary Rivlin’s new book Broke U.S.A. does a rather thorough job of chronicling the rise of the subprime lending industry in this country. The positive attributes of his tome include excellent detail and insight into how subprime lending operates in this country, very concise and descriptive prose, and some intriguing profiles of the lenders and activists involved. To the book’s credit, Mr. Rivlin describes blatantly deceptive and corrupt lending practices in the early days of consumer finance. He rightly singles out both employees and management of Household Finance and Fleet Financial for such behavior, as well as Associates Bank and NationsBank.

On the down side, however, Mr. Rivlin’s bias against subprime lenders is apparent. His profiles of activists are more comprehensive than the lenders, and they are portrayed as crusaders against an industry designed to “make money off the poor”. He fails to mention the more unflattering angles on certain activists. Further, while his research delves deeper than just about any other media story, he either deliberately omits damaging truths about the activist community, or failed to research thoroughly enough. Nor does he ever once mention the litany of non-industry-funded studies that support the cash advance industry.

There are several glaring omissions or distortions in Mr. Rivlin’s book that speak to his unfortunate bias. The first, and most significant, is lionizing the founder of the Center for Responsible Lending, Martin Eakes. Mr. Rivlin came up short in his research about Mr. Eakes. In addition, he largely gives Mr. Eakes a pass for his role in the subprime mortgage meltdown. Mr. Eakes pioneered the product and created a secondary market for these mortgages. There’s no getting around that, try as Mr. Rivlin will.

Second, Mr. Rivlin gives borrowers a complete pass on their responsibility in every transaction. While some of the people who were cheated admit to their own mistakes, nowhere in the book does Mr. Rivlin ever lay out a very simple argument: that borrowers constitute half the transaction, and are therefore half of any problems that exist within the industry. To that end, Mr. Rivlin plays the typical card of a mainstream media journalist — harping on the sob stories of subprime borrowers, but not providing any compelling stories of how borrowers were helped by subprime lenders. Anyone reading his book would come away believing that every lender mentioned was only out to cheat customers.

Third, while Mr. Rivlin goes a long way in accurately and fairly describing what can happen to regular people who are victimized by unscrupulous lenders, he fails to point out that practices of other retail services which are equally devastating, if not more so. I realize the book’s focus is on lending, but context is important. Where is the criticism of indifferent liquor stores and the fast food industry, both of which create far more devastation in lower-income communities than a cash advance default?

Indeed, context is an issue the book frequently overlooks. In chapter one, Mr. Rivlin compares the amount of revenue the subprime industry takes in compared to liquor stores and the movie business, yet neither are comparable. Yet, he leaves out the tens of billions in revenue generated by banking overdraft fees that far exceed the average cost of a cash advance. The same goes for Advance America’s 8% profit margin as exceeding that of 60% of the Fortune 500’s margins…without specifically mentioning other financial service company margins. This lack of context does not serve Mr. Rivlin well.

He certainly undoes any semblance of fairness by speaking of money paid to cash advance lenders as a “poverty tax”. A tax is money forcibly extracted from a citizen to pay for government services they may or may not receive, whereas a borrower receives credit in exchange for a fee. This style of presentation recurs frequently in the book, subtly expressing Mr. Rivlin’s bias, which he finally cops to in the Epilogue.

I wish Mr. Rivlin had spent more time on the moral issues involved. He touches on morality in the Epilogue, but it would have been wiser to place it up front, allowing readers to constantly frame the issues in a moral context. How should the pricing and terms of credit be handled for those who rightly belong in the subprime category? How much regulation is too much? At what point do we offer as much disclosure as possible and then let the customer make their own decision? What constitutes high-pressure sales tactics? What responsibilities — legal or otherwise — do vendors of any product have to undereducated consumers?

Mr. Rivlin struggles to find solutions, but he runs into the same problems many others have before him. He ultimately lacks the economic knowledge to make a persuasive argument against the fees charged by cash advance stores. He says that McDonald’s offers more than just hamburgers, so why must a cash advance store only offer one product? More products might mean lower cash advance fees. The answers are simple: Not every customer seeks a broad range of financial products when they enter a cash advance store. Adding products people don’t need does not equate to additional revenue. McDonald’s customers are there for multiple offerings. Furthermore, you would not see a price differential in McDonald’s menu if they cut back their menu to the basics. Go to In-and-Out Burger and you’ll see what I mean.

Mr. Rivlin cites the State Employees’ Credit Union of North Carolina as being able to offer cash advances at 12% APR and its CEO claims it is “the most profitable product we make”. Mr. Rivlin forgets that the credit union model and the cash advance model are totally different.

Utlimately, Broke U.S.A. is an interesting read. The issues are extremely divisive, particularly when it comes to cash advances. Mr. Rivlin got that part correct. Ultimately, however, I was disappointed that Mr. Rivlin let his bias leak into the text. It’s unnecessary. People can make their own decisions about the industry, just as I believe they can make their own decisions about credit. There are explosive allegations and questionable connections among many of these consumer activists, and I hope Mr. Rivlin will seek these out should the book have a second edition.