Loan sharking: Wikis

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A loan shark is a person or body that offers unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence.[1]

Throughout history, usury laws made loan sharks commonplace. Many moneylenders skirted between legal and extra-legal activity. In the recent western world, loan sharks have been a feature of the criminal underworld, but are otherwise rare. Loan sharks are common in the UK and among the Italian Cosa Nostra and Triads in China.

Contents

History

The phrase "loan shark" came into usage in the United States late in the 19th century to describe a certain type of predatory lender. The lenders to whom these epithets were applied charged high rates of interest and designed their credit products in such a way as to make orderly retirement of the debt difficult. Borrowers became trapped by their loans and were unable to pay off the principal. The interest payments dragged on and many borrowers became virtual debt peons. As Cobleigh explains, "The real aim of loan sharks is to keep their customers eternally in debt so that interest (for the sharks) becomes almost an annuity."[2]

Today loansharking tends to be associated in the popular mind with organized crime. The stereotypical loan shark is often thought to be a gangster who extorts repayment of the debt with threats of physical brutality. Such loan sharks do exist, but the first loan sharks were not linked to crime families and they did not beat up delinquent debtors. The phrase was originally applied to salary and chattel mortgage lenders who operated at the turn of the twentieth century. These creditors dealt in small sums (most loans were less than $100) and they charged high rates of interest (between 10% and 20% a month, and sometimes more). Many of these cash advances were interest-only and required a lump-sum payment to retire the principal. As a result, loans that were supposed to be short term often dragged on for months and years. To pay one lender, the debtor often took out another loan in a process that was called "pyramiding." The loan sharks frequently colluded in encouraging this expanding chain of debt.[3]

To compel repayment, the first loan sharks secured their cash advances with chattel mortgages or wage assignments. A chattel mortgage entitled the lender to repossess household goods in case of default. A wage assignment gave the lender an enforceable claim on the debtor’s next wage payment. Because many employers at that time made it a policy to discharge employees against whom a wage assignment was filed, this instrument of security was especially effective in coercing debtors to keep making their payments.

Loan sharks tended to proliferate in big cities where there were large numbers of wage workers with regular paydays but modest salaries. These lenders operated out of cheap storefront offices and catered especially to government employees, factory hands, and office clerks. In the early decades of the twentieth century, it was estimated that one in five urban households in the United States borrowed from the loan sharks.[4]

Newspapers after the turn of the century were filled with stories about the plight of debtors who were being mauled by the loan sharks. Before the First World War, a progressive coalition emerged to fight on behalf of these consumers. This fight culminated in the drafting of the Uniform Small Loan Law, which brought into existence a new class of licensed lender. The model statute mandated consumer protections and capped the interest rate on loans of $300 or less at 3.5% a month or the equivalent of 42% a year. Its aim was to establish a reputable class of lenders that could satisfy the demand of loan shark victims at a substantially reduced rate. The law was enacted, first in several states in 1917, and was adopted by all but a handful of states by the middle of the twentieth century.[5]

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Mafia links

Although the reform law was intended to starve the loan sharks into extinction, this species of predatory lender survived and evolved. After high-rate salary lending was outlawed, some bootleg vendors recast the product as "salary buying." They claimed they were not making loans but were purchasing future wages at a discount. This form of loansharking proliferated through the 1920s and into the 1930s until a new draft of the Uniform Small Loan Law closed the loophole through which the salary buyers had slipped.[6] Salary-buying loan sharks continued to operate in some southern states after World War Two because the usury rate was set so low that licensed personal finance companies could not do business there.[7]

Organized crime began to enter the cash advance business in the 1930s, after high-rate lending was criminalized by the Uniform Small Loan Law. The first reports of mob loansharking surfaced in New York City in 1935, and for 15 years, underworld money lending was apparently restricted to that city.[8] There is no record of syndicate "juice" operations in Chicago, for instance until the 1950s. In the beginning, underworld loansharking was a small loan business, catering to the same populations served by the salary lenders and buyers. Those who turned to the bootleg lenders could not get credit at the licensed companies because their incomes were too low or they were deemed poor risks. The firms operating within the usury cap turned away roughly half of all applicants and tended to make larger loans to married men with steady jobs and decent incomes. Those who could not get a legal loan at 36% or 42% a year could secure a cash advance from a mobster at the going rate of 10% or 20% a week for small loans. Since the mob loans were not usually secured with legal instruments, debtors pledged their bodies as collateral.[9]

In its early phase, a large fraction of mob loansharking consisted of payday lending. Many of the customers were office clerks and factory hands. The loan fund for these operations came from the proceeds of the numbers racket and was distributed by the top bosses to the lower echelon loan sharks at the rate of 1% or 2% a week. The 1952 B-flick "Loan Shark," starring George Raft, offers a glimpse of mob payday lending. The waterfront in Brooklyn was another site of extensive underworld payday advance operations around mid-century.

Over time, mob loan sharks moved away from such labor intensive rackets. By the 1960s, the preferred clientele was small and medium sized businesses. Business customers had the advantage of possessing assets that could be seized in case of default, or used to engage in fraud or to launder money. Gamblers were another lucrative market, as were other criminals who needed financing for their operations. By the 1970s, mob salary lending operations seem to have withered away in the United States.[10]

At its height in the 1960s, underworld loansharking was estimated to be the second most lucrative franchise of organized crime in the United States after illegal gambling. Newspapers in the 1960s were filled with sensational stories of debtors beaten, harassed, and sometimes murdered by mob loan sharks. Yet careful studies of the business have raised doubts about the frequency with which violence was employed in practice. Relations between creditor and debtor could be amicable, even when the "vig" or "juice" was exorbitant, because each needed the other. FBI agents in one city interviewed 115 customers of a mob loan business but turned up only one debtor who had been threatened. None had been beaten.[11]

Organized crime has never had a monopoly on black market lending. Plenty of vest-pocket lenders operated outside the jurisdiction of organized crime, charging usurious rates of interest for cash advances. These informal networks of credit rarely came to the attention of the authorities but flourished in populations not served by licensed lenders. Even today, after the rise of corporate payday lending in the United States, unlicensed loan sharks continue to operate in immigrant enclaves and low-income neighborhoods. They lend money to people who work in the informal sector or who are deemed to be too risky even by the check-cashing creditors. Some beat delinquents while others seize assets instead. Their rates run from 10%-20% a week, just like the mob loan sharks of yesteryear.[12]

UK loan sharks

The research by the government and other agencies estimates that 165,000 to 200,000 people are indebted to loan sharks in the United Kingdom. Loan sharking is treated as a high-level crime by law enforcement, due to its links to organized crime and the serious violence involved.[13]

Non-standard lenders in the United States

In the United States, there are lenders licensed to serve borrowers who cannot qualify for standard loans from mainstream sources. These smaller, non-standard lenders often operate in cash, whereas mainstream lenders increasingly operate only electronically and will not serve borrowers who do not have bank accounts. Terms such as sub-prime lending, "non-standard consumer credit", and Payday loans are often used in connection with this type of consumer finance. The availability of these products has made illegal, exploitative loan sharks rarer, but these legal lenders have also been accused of behaving in an exploitative manner. For example, payday loan operations have come under fire for charging inflated "service charges" for their services of cashing a "payday advance", effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the 'service' of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effectively bypassed.

Payday lending

Licensed payday advance businesses, which lend money at high rates of interest on the security of a postdated check, are often described as loan sharks by their critics due to high interest rates that trap debtors, stopping short of illegal lending and violent collection practices. Today’s payday loan is a close cousin of the early twentieth century salary loan, the product to which the "shark" epithet was originally applied, but they are now legalised in some states.

A 2001 comparison of short-term lending rates charged by the Chicago Outfit organized crime syndicate and payday lenders in California revealed that, depending on when a payday loan was paid back by a borrower (generally 1-14 days), the interest rate charged for a payday loan could be considerably higher than the interest rate of a similar loan made by the organized crime syndicate.[14]

Yamikinyu in Japan

The regulation of moneylenders is typically much looser than that of banks. In Japan, the Moneylending Control Law requires only registration in each prefecture. In Japan, as the decade-long depression lingers, banks are reluctant to spare money and regulation becomes tighter, illegal moneylending has become a social issue. Illegal moneylenders typically charge an interest of 30 or 50 % in 10 days (in Japanese, these are called "to-san" ('to' meaning ten and 'san' meaning three) or "to-go" ('to' meaning ten and 'go' meaning five)), which is about 1800 % per annum. This is against the law that sets the maximum interest rate at 29.2 %. They usually do business with those who cannot get more money from banks, legitimate consumer loans, or credit cards.

Ah Long in Malaysia and Singapore

Ah Long (derived from the Cantonese phrase '大耳窿' (Jyutping: daai6 ji5 lung1) is a term for illegal loan sharks in Malaysia and Singapore. They lend money to people who are unable to obtain loans from banks or other legal sources, mostly targeting habitual gamblers. They charge a very high interest rate (about 40% per month/fortnight which equals 1422%/33087% per annum due to the constantly compounding interest.)[citation needed] and frequently threaten violence (and administer it) towards those who fail to pay in time. [15][16]

Many years ago, prior to the registration of mobile phone numbers in Malaysia, Ah Longs advertised their services merely by distributing their calling cards.

Ah Long tactics

When a person fails to pay in time, the Ah Long will spray, splash, or write threats in red paint on the walls of the house or property of that person as a threat of violence and to shame the borrower into repaying the loan. A common use of painting includes the characters "O$ P$" meaning "Owe money, Pay money". According to local police authorities, there have been cases where borrowers were beaten or had their property damaged or destroyed, and some victims have committed suicide. [15]

Pig heads are sometimes hung outside the borrower's house, as a form of intimidation as well as a way of 'marking' the person as a loan 'defaulter'.

Ah Longs sometimes break into victim's houses and steal items of the loans value. This method is commonly used to save time and also effort.[citation needed]

Recent cases shows that Ah Longs also displays the borrower's identity card on a huge banner and post it on fences. Since Ah Longs need only an identity card from borrowers, this tactic is becoming common because it shames the borrower publicly into paying up.

Pacific loan sharking in New Zealand

In New Zealand, there is a vibrant industry in loan sharking in communities with large numbers of poor Pacific Island migrants (Mostly Samoan, Tongan, and Niuean migrants). Most of the migrants are likely to be unemployed or work menial jobs. Loan sharks have legitimate shops in commercial centres of poorer parts of Auckland and Wellington. These shops are often run by other Islanders or other immigrants (Indian and Chinese). Many people of other ethnicities use these shops too (usually poorer and more disadvantaged people) and the shops charge exorbitant amounts of interest (usually 30-200% a year and charge last documentation fees; registration fees; and, in one extreme case, $30 for a phone call. These sharks have been condemned for years but people use them as they are totally legal. They will get prosecuted only over producing badly worded contracts. Often borrowers can not speak English well, have no bank account, and can not understand the terms of their loan contract. Often, excessive penalties are charged even for slight defaults on payment. The result is people spend years and thousands of dollars paying off a loan that initially cost a few hundred dollars. The companies can be family run, and one Tongan company even shows photos of defaulters in the Tongan Newspaper as part of naming and shaming that is part of that culture. Huge church and social financial commitments (Such as loans for funerals) can make the moneylender a part of life. The New Zealand government is trying to pass legislation to make these companies not loan money to people who cannot pay it back. These companies also advertise extensively, and, in the worst case in 2007, people from a well known finance company went around from door to door in the poor suburb of Otara offering high interest cash loans.

Another component is offering security. Often family heirlooms like shields, kava bowls and fine mats are security for small amounts, but larger loans can incur cars and even houses. The most extreme case being an Indian loan shark taking a house over for a default on a $900 loan.

Poor suburbs are littered with advertising and even well-known sub-bank companies use Pacific motifs in their advertising, offer easy terms, use poor spelling, and even jive talk.

References

  1. ^ [1] - A Detailed Look at Loan Shark History - "Loan sharking is the practice of lending money to desperate people at extremely high and illegal rates of interest... ...Loan sharks ensured payment with threats of violence. They require no collateral other than the borrower and his family's well being.
  2. ^ Ira Cobleigh, How and Where to Borrow Money (New York: Avon Books, 1964), p. 109.
  3. ^ See Clarence Wassam, The Salary Lending Business in New York City (New York: Charities Publication Committee, 1908) and Louis Robinson and Rolf Nugent, Regulation of the Small Loan Business (New York: Russell Sage Foundation, 1935).
  4. ^ Lendall Calder, Financing the American Dream: A Cultural History of Consumer Credit (Princeton: Princeton University Press, 1999), p. 118.
  5. ^ David Gallert, Walter Hilborn and Geoffrey May, Small Loan Legislation: A History of the Regulation of Lending Small Sums (New York: Russell Sage Foundation, 1932).
  6. ^ George Gisler and Joe Birkhead, Salary Buying in Kansas City, Missouri (Kansas City: Conference on Personal Finance Law, 1938).
  7. ^ Victor Meador, Loan Sharks in Georgia (Washington, DC: American Bar Association, 1949).
  8. ^ "27 Arrested as Usurers in Sudden Move by Dewey to Break Up Vast Racket," New York Times (October 29, 1935), p. 1.
  9. ^ John Seidl, “Upon the Hip”—A Study of the Criminal Loan-Shark Industry, unpublished Ph.D. dissertation (Cambridge, MA: Harvard University, 1968).
  10. ^ Peter Reuter, The Organization of Illegal Markets: An Economic Analysis (Washington, DC: U.S. Department of Justice,1985).
  11. ^ Annelise Anderson, The Business of Organized Crime (Stanford: Hoover Institution Press, 1979), p.66.
  12. ^ Sudhir Venkatesh, Off the Books: The Underground Economy of the Urban Poor (Cambridge, MA: Harvard University Press, 2006), pp.140-141, 399-400.
  13. ^ http://www.timesonline.co.uk/tol/news/uk/crime/article6742115.ece
  14. ^ James, Stephen (19 July 2001). “The ancient evil of usury”. Sacramento News & Review (Sacramento, CA). Retrieved 6 March 2010.
  15. ^ a b Don’t borrow from loan sharks
  16. ^ Factory emptied, so loan sharks beat up owner

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