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“Legalized loan-sharking”: How much is too much?

I appreciate the comment by “M,” providing information about how the banks’ Congressional representatives voted on interest rate caps as provision of proposed C.A.R.D. Act legislation, which has now passed.   I was going to say “our” representatives, but judging by voting results, Congress doesn’t really seem genuinely interested in protecting the average American citizen from legalized loan-sharking.

I set out this morning trying to research “Mafia loan-sharking rates,” but my inquiry was frustrated a bit when I entered that term in search engines.  Many of the hits that were returned pertained to credit card companies and their rates, which clearly, people associate with Mafia rates.  But I wanted to know specifically about the Mafia rates.  Since I am not a criminal, I really wasn’t certain.

Among my findings, I came across a Google books preview of The Complete Idiot’s Guide to the Mafia.  In a section entitled, “Bringing in the Loan Sharks,” I found the following information:

“Mafia guys love loan sharking….Loan sharks make tremendous amounts of money….Most loan sharks charge customers anywhere from two to five points a week in interest on the unpaid balance of the loan.  For example, if a customer borrowed $1,000 on a Friday at five points a week, the following Friday a would pay a $50 ‘vig’ to keep the cash another week or pay it off with a $1050 payment….Small loans, say $100, are usually six payment affairs in which a customer makes weekly payments of $20 to satisfy a $100 loan.  Some loan sharks take $4 at the front end….His average rates are about 150 percent a year.”  (p. 138).

With regard to the “$4 at the front end” in passage above, that’s an interesting coincidence as it relates to balance transfer fees.  Most of the promotional balance transfer offers I see are typically three percent, no maximum; however, Bank of America’s are now four percent of the amount borrowed.  You will note that $4 on a $100 loan is four percent, so it appears that Bank of America’s up-front fee is possibly modeled after that of some loan sharks.

I also found another site, which provided a transcript of testimony from Michael DiLeonardo in the case, United States of America v. John A. Gotti, Jr., defendant (scroll down to the section, “Earning Money With the Mob”):

“Q. Why were you stronger with the Gambino family behind you?

A. I had a whole enterprise behind me, a whole army. It’s like having a license.

Q. What kind of money did you start to earn on the street?

A. I got $10,000 from Paulie Zac to go out and start shylocking, which I did.

Q. What do you mean by shylocking?

A. Well, I was able to go out and lend money out at an interest rate, a weekly interest rate.

Q. What kind of interest rate?

A. I charged up to 5 percent, from 3 to 5 percent at that time.

Q. And that’s 5 percent a week?

A. 5 percent weekly, yes.

Q. If someone pays that weekly percentage, does it do anything to affect the principal?

A. No, never.”

The aforementioned site also has a fabulous bibliography (developed over a long period of time by Thomas P. Hunt, who is evidently an excellent researcher and subject matter expert on Mafia activities).

As I discussed when I was in Washington, a question exists, at what point do we consider interest rates to be too high?

Even though I have to acknowledge that banks are not actually charging as much as the Mafia (with the exception of some up-front balance transfer fees, like those of B of A), thirty percent or more is certainly prohibitive to the average consumer: students, middle class Americans, people in your neighborhood (would you like your home’s value to drop even more, because a neighbor is in financial distress for any reason, not just a mortgage?).

Thirty percent is also high enough to destroy all hope of repayment on the part of most borrowers, so they default and pass on their debt to those of us who are still paying (I know, some holier than thou individuals exist, and will be simpletons in their “solution”: just “pay cash”).  If we want an economic recovery, these rates must come down so that entrepreneurs can get back to work, too (and part of their work is creating jobs).

Meanwhile, thirty percent is certainly a slap in the face of taxpayers, who have bailed out the banks (especially given a FED funds rate of one quarter of a percent; “The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight”).

Now, with Chase, it “offered” some customers an “alternative“: If customers couldn’t stomach the increase in payments, then they could alleviate the pain of higher payments simply by switching to a rate that was (typically) double the previously promised promotional rate.  For example, a customer (aren’t they considered victims by the Mafia?) could agree to go from 3.99 percent to 7.99 percent (and the 7.99 percent was for a limited duration).

Of course, exactly what rate constitutes “loan-sharking” is a subject that deserves more discussion.  However, it’s not strictly about the interest rate.  Rather, we’re back to the notion of good faith versus bad faith, and intent.  Is it a loan, or is it a purposely set trap, designed to ensure a victim’s exploitation until death?  To my last point, I think that the Mafia and credit card companies use tactics that are exactly alike: “We’re gonna hurt you or your loved ones, and we’re gonna enjoy it.”

In keeping with the above, I’ve come up with a new slogan when you communicate with banks’ Congressional representatives:

CAP INTEREST RATES, NOT OUR KNEES

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