Star-Tribune Series Exposes Poverty Problems

By Vandana Sinha
September 28, 2004 10:18 AM

Business is an ingredient of every slice of life, that we know. But for low-income communities, some businesses have made extraordinary returns off of their poverty -- not so notorious a fact, but now a subject of discussion in Minneapolis, where a three-day series on the Business of Poverty ran recently in The Star Tribune. The story was conceived during a routine neighborhood drive by Ron Nixon, the computer-assisted reporting projects editor at the paper. It was sculpted in the next eight months by three reporters, 10 editors, a graphic artist and a photographer. They ended up with three stories and more than a dozen sidebars and graphics on how the explosive rise of payday lending, rapid-refund loans and subprime lending (definitions below) often dumped low-income residents into even deeper debt. BusinessJournalism.org Associate Editor Vandana Sinha spoke with Nixon on how the team steered the story from idea to its authoritative finale.

People normally don't think about these corporate forces behind poverty -- what turned you guys on to this story in the first place?

Nixon: The idea for the story began as I was driving down one of the main streets of Minneapolis. I noticed a larger number of businesses offering check cashing services and payday loans. I also noticed a larger number of people going in and out of these stores every day that I drove by. This made me curious about what kinds of businesses these stores were and who were their customers. I also noticed a larger number of tax preparers on the same streets offering "rapid refunds." Some of these tax preparers were in the same storefronts as the payday lenders and check cashing outlets.

Once you thought of it, what were the first things you did to pursue the story?

Nixon: The first thing we did was to gather articles, journals, books, studies, etc., on payday loans and other types of fringe financial institutions. The next thing we did was to read the state law governing these businesses to see what they were required to report, how their rates were set and what was required of them in getting their license. Finally, we made a request to view files at state agencies and collected data on loan disclosures from the Federal Deposit Insurance Corporation on the sub-prime loans.

At what point did you know you had a project in hand? Why?

Nixon: We knew we had a project when we looked at the annual number of loans made by these businesses and the tremendous amount of growth in just a few years. The numbers of loans had jumped from a few hundred to several thousand over a five-year period, and the amounts had jumped from a few hundred thousand to millions over the same time frame. We also knew we had the tax story when we examined their filings with the Securities and Exchange Commission and saw how much revenue was being made from these services. We knew we had the sub-prime story when we examined the number and amounts of sub-prime loans in Minnesota and the areas where these loans were being made. The totals of the sub-prime loans also jumped out at us -- over $3 billion in one year.

How did you keep such a broad topic so focused?

Nixon: Early on, we brainstormed and decided which areas we wanted to focus on. There's quite a bit, and we could have easily done a seven- or eight-part series, but decided to focus on payday loans, rapid tax refunds and sub-prime lenders because these were the ones with the biggest impact in Minnesota.

You attributed everything from university research to IRS statistics to a Wells Fargo proxy statement. Who were your best sources for the package, and how did you find them?

Nixon: We examined thousands of documents for these stories, including annual filings of payday lenders in the state of Minnesota, SEC filings for the tax preparers, proxy statements for the banks and shareholder suits. We also examined thousands of lawsuits concerning payday lenders, tax preparers, and sub-prime lending. We examined dozens of tax filings, payday loan applications and tax forms provided to us by people interviewed for the stories.

Several books were helpful in understanding the business, as were experts like John Caskey, author of "Fringe Banking;" Robert Manning, author of "Credit Card Nation;" Michael Stegman, a professor at University of North Carolina at Chapel Hill, who provided research on the business models of payday lenders; and Jeff Crump of the University of Minnesota, who provided us with his study of sub-prime lending in Minnesota. The state statutes were also helpful because they showed us what payday lenders had to file, how often and what the filings contained. Dozens of studies by consumer advocates and the industry proved useful in our work as well.

How did you find the dozens of "real people" who are the subjects of these stories?

Nixon: We found people for the stories by examining lawsuits, talking to attorneys and hanging outside payday lenders on cold Minnesota days, talking to people as they entered and left the stores. Consumer and community groups also helped point us to people, and debt counselors were also helpful.

How did you approach the payday loan places and tax preparers, which were clearly criticized by many in the story as being predatory? How did you get them to talk to you? And how did those companies then respond after the stories came out in print?

Nixon: We simply called them up and told them that we were working on stories concerning their industries. We raised all of the issues with them in interviews, and gave them a chance to respond and to provide any research or experts they had. They were cooperative. After the stories ran, a spokesman for the industry blasted the stories, saying they did not depict the industry in a positive light and all of the good work they were doing for people without access to credit. Another group described the stories as an example of a continuing public relations problem for the industries.

You guys did quite a bit of in-house computer-assisted reporting and research for the package, from former bank locations to payday lending interest rates. How did you decide what analysis you would conduct yourselves and how'd you go about doing them?

Nixon: We decided early on that we would need to do mostly original research because not a lot had been done in Minnesota, especially on payday loans and tax preparers. We knew we wanted to do the mapping analysis because of claims that these businesses are located in mostly poor neighborhoods, where banks have vanished. The analysis also allowed us to examine the demographics of the communities where these businesses are located. We did a statistical test to see what the likelihood was of living within a half-mile of one of these businesses given a median household income, and we examined millions of loans records to see where sub-prime loans were being made and who was getting them. We prepared a seven-page paper that explained our methodology. The analysis gave the stories more authority.

In doing a story like this, how do you balance between being the unbiased observer and a, kind of, community helper?

Nixon: In these stories, we were simply laying out what the analysis and our other research showed. Our task was to examine how these businesses operate and what impacts they were having on low-income communities. As happens with most news stories, we have no control over what people decide to do with this information concerning public policy. We hope that the information helped by educating people about the risk they faced in using these businesses, but we didn't say, "Don't use them."

A new census report recently placed 1.3 million more Americans in poverty in the last year. With that in mind, what are the "Business of Poverty" stories we should look out for in the future?

Nixon: I think the report shows that there will be an increase in the number of payday lenders and other fringe financial institutions as more and more people move into poverty. The industry, itself, predicts hundreds more stores. It bears watching how this plays out and what the response will be of mainstream financial institutions like banks, credit unions, etc.

 

Definitions:

Payday loan: A small, usually two-week loan that the borrower repays on his or her payday. Loans can be up to $350 and cost about $22.50 in fees plus interest. Borrower gives the storefront lender a postdated check that the lender deposits only on the designated pay date. Employment and income are verified before the loan is given.

Refund anticipation loan: A high-cost loan issued by tax preparers to customers who want their tax refund immediately. Loan fees and interest can cost $40 to $150 on top of normal tax-preparation fees. The tax preparer is repaid when the federal tax refund is received. RALs put cash in the hands of tax filers only one to two weeks sooner than if they had electronically filed their returns with the IRS.

Subprime loans: High-cost loans usually intended for borrowers with poor credit, heavy debt or both. Subprime loans often carry interest rates of 8 percent to 20 percent and fees of 4 percent to 10 percent of the total loan. The high rates and fees are designed to protect the lender in the event a borrower defaults on the loan.

 

Ron Nixon, computer-assisted reporting projects editor at the Star Tribune in Minneapolis, was previously training director for Investigative Reporters & Editors and the National Institute for Computer-Assisted Reporting. Formerly an investigative reporter with The Roanoke (Va.) Times, his work has documented the environmental effects of Appalachian coal mining and problems with the federal black lung program. At the Star Tribune, he recently co-wrote this poverty series, as well as a 9/11 anniversary series on how millions-dollar federal antiterrorism grants in Minnesota wouldn't likely prevent another Sept. 11-like terrorist attack there.

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