Research support for this article was provided by The Investigative Fund at The Nation Institute and by an Alfred Knobler Fellowship.

Sam Black woke up one morning not long after retiring to Charleston, South Carolina, with chest pains he didn’t realize would change his life. He took a shower and ate breakfast before his wife, Elsie, got him out the door to see his heart doctor. Within hours, the doctor cracked Sam’s chest open to do a triple bypass.

“They had the surgery early that morning,” Elsie recalls, piecing together the fragmented memory of someone who has survived a sudden trauma. Sam made it through the first operation all right, but later that night the hospital called Elsie. “We gonna have to take your husband back to surgery,” she says they told her. “Something went wrong.”

For the next seven weeks, Sam lay in a coma in the intensive care unit. Elsie says the doctor told her that when Sam comes to, “he might not know nobody. He ain’t gonna be able to drive.”

Today, roughly a decade later, Sam still labors over his words, speaking with a slow, gravelly slur. He sleeps with an oxygen mask and walks with more of a shuffle than a stride. But he walks and drives and lives independently. “They call him the walking miracle,” says Elsie. He also shells out more than $400 a month for prescriptions and owes his heart doctor what he estimates to be about $1,000 in co-pays. Elsie says she owes the same physician another $1,000. They’re both in the doctor’s office every few months for what feels like endless testing.

“See, our biggest thing is these co-payments,” Elsie fusses. “It’s like $35. And then when you go to these specialists, and you have tests done, the insurance pays a portion, and then they send you a portion—and you have all these bills coming in. You can’t really keep up with them.”

The Blacks are the first to admit they’ve never been good with money, but Sam’s heart attack began a remarkable financial tailspin that illustrates a deeper problem than their personal failings. They’ve been through a bankruptcy, gotten caught in a subprime refinance and narrowly avoided a foreclosure. But for years their most debilitating financial burden has been the weight of hundreds of small-dollar loans with triple-digit interest rates—short-term, wildly expensive credit that they took in order to keep the lights on and afford occasional luxuries like Christmas presents while paying those medical bills.

The Blacks are not unusual. Like millions of Americans with stagnant or shrinking incomes and considered too risky by mainstream banks, they have managed to pay for unexpected expenses by relying on an ever-changing catalog of expensive, shady consumer loans. This subprime lending industry exploded in the past decade and now stretches from Wall Street banks to strip-mall stores in working-class neighborhoods all over the country. It includes the infamous subprime mortgages sliced and diced into securities by the financial sector but also short-term loans against car titles, rent-to-own shops, personal finance companies, rapid-refund tax preparers and, perhaps most ubiquitous, payday lenders. These products are interdependent—often deliberately so—with one high-cost loan feeding into another, as struggling borrowers like the Blacks churn through fees and finance charges.

Payday lenders alone have turned millions of small loans, most for $500 or less, into a $30 billion-a-year industry, according to an analysis of SEC filings by consumer advocate National People’s Action. The payday industry’s lobby group, Community Financial Services Association (CFSA), boasts that its members lend to more than 19 million households. Researchers estimate that there are more than 22,300 payday lending shops nationwide, a scale that rivals the number of Starbucks and McDonald’s franchises. Stores are concentrated in the South, where consumer lending laws remain loose, but they crop up across the Midwest and West as well. It’s a sprawling industry that ranges from small mom-and-pop stores to a handful of national chains like Advance America, the nation’s largest payday lender; in 2010 it issued almost $4 billion in loans averaging less than $400.

Between 2000 and 2004, the payday industry more than doubled in size. Like the subprime mortgage bubble, which blew up during the same period, the payday lenders boom was enabled by two factors—deregulation and Wall Street money. For much of the twentieth century, most states imposed interest rate caps of 24–42 percent on consumer loans. But Reagan-era deregulation witnessed a steady erosion of state lending laws, opening the door for a range of nonbank lenders. In the late ’90s a handful of entrepreneurs stepped in to build national payday lending companies, exploiting the new ethos of deregulation to win exemptions from existing rate caps.

The relaxation of state laws made usurious lending legal, but easy credit from Wall Street’s more reputable players made it possible—and profitable. As Advance America’s co-founder, William Webster, recounts to journalist Gary Rivlin in Broke, USA, it was Webster’s Wall Street connections—he was in the Clinton administration, in the Education Department and then the White House—that allowed his company to quickly dominate the market, growing from 300 stores in 1997 to more than 2,300 today. In 2010 Advance America operated with $270 million in revolving credit—sort of the business equivalent of a credit card—primarily from Bank of America.

All told, banks offered more than $1.5 billion in credit to publicly traded payday lenders in 2010, according to National People’s Action. The group identified Wells Fargo as the largest payday lending financier; it backs five of the six largest firms. Consumer advocates also worry that mainstream banks are losing their skittishness about entering the market. At least three banks—Wells Fargo, US Bank and Fifth Third—have explored checking account products that operate much like payday loans.

In some ways, however, the industry is in retreat. Of all the types of subprime lenders, it has drawn the most scrutiny from lawmakers over the past decade. Congress outlawed payday loans for active-duty service members in 2006, and at least seventeen states have passed interest rate caps for cash advance loans.

But the industry is moving fast to adapt to the changing regulatory climate—and watchdogs warn that state lawmakers and regulators may be surprised to see the same payday products under different names. “Pretty much any state that tries to get at the bottom line of payday lenders, we see some attempt at subterfuge,” says Sara Weed, co-author of a Center for Responsible Lending report on how payday firms evade state regulations.

The problem is that most states narrowly regulate specific payday lending activities—say, on how many loans a borrower can take in a given time period—rather than putting broad boundaries on the range of high-cost lending that dominates poor neighborhoods. So lenders have skirted new regulations by making surface changes to their businesses that don’t alter their core products: high-cost, small-dollar loans for people who aren’t able to pay them back.

“Our approach is to continue to work with policymakers and grassroots organizations to provide a predictable and favorable legislative environment,” Advance America’s latest investor report explains. The industry’s growth era is over, the report predicts, so the company is focused on growing its market share in the thirty states where payday lenders operate freely or where there is “a regulatory framework that balances consumer interests while allowing profitable cash advance operations.”

South Carolina is among those thirty states. The Blacks didn’t know it then, but when they retired to South Carolina in 1999, they stepped into the middle of what is perhaps the most highly charged battleground in the war between regulators and payday lenders. As home to Advance America’s headquarters, the state has long been one of the industry’s most active markets. Payday lenders made more than 4.3 million loans in South Carolina between 2006 and 2007—the equivalent of nearly one loan per state resident. Had the Blacks stayed in New York, one of the states with interest rate caps for consumer loans, they might have avoided the predatory lending traps that have mired them in constant anxiety. But Charleston is where Sam and Elsie Black grew up, and in their later years the city beckoned them back.

Sam left home two days after high school graduation in search of the job opportunities black folks couldn’t get in the Jim Crow South. He and Elsie met and fell in love upstate, then moved to Queens and raised four sons on their own physical labor—Elsie walked nursing home floors for twenty-seven years while Sam hauled bags at Kennedy and Newark international airports.

But by the turn of the millennium, Sam’s battered body had reached its limit, and circulation problems in Elsie’s legs had almost forced an amputation. They both went on disability, but even bundling that income with Elsie’s union pension, they found that New York was too expensive a city for their retirement. So they sold their house and bought the two things they needed for their golden years in Charleston: a used Ford Windstar and a small ranch house north of the city.

Unfortunately, that meager wealth made the Blacks lucrative customers for the subprime lenders who have come to dominate their lives. It started with a small loan against the Ford in 2005. They’d gotten behind on the mortgage, which they’d already refinanced, and credit card statements were piling high alongside healthcare bills. So they pulled into one of the title loan shops that saturate South Carolina. “At that time the car was in halfway good shape, so we got $1,400,” says Sam. “Instead of that helping, it put us further back.” They’d have to pay roughly $250 a month for ten months, or $2,500 total.

Within a year, they were in foreclosure. Elsie says she realized it only when a cousin called to say she’d seen a listing for the Blacks’ house in the newspaper. That cousin directed them to a bankruptcy lawyer, who sent them to a credit counseling service and got them a $487-a-month bankruptcy plan. But mortgages are exempt from bankruptcy, and the judgment did nothing to alter the underlying problem: the Blacks’ basic expenses add up to more than their fixed income. They live permanently in the red.

So even though they clawed out of foreclosure, it wasn’t long before they fell behind again on everything else. When a friend showed Sam and Elsie a local Check Into Cash store, they easily slid into the payday lending routine. They borrowed against their disability checks from a ballooning number of lenders every two weeks for the next two to three years, paying out thousands in finance charges for the privilege. They estimate they had at least five loans each at any given time.

The payday lending business model is straightforward. A customer signs over a personal check and in return collects a small loan, usually less than $500 (state laws vary on the maximum allowed). The loan is due when a borrower’s next paycheck comes. As Advance America’s website assures customers, the process takes just ten or fifteen minutes. Lenders charge varying fees for the loans, but when calculated as an annual percentage rate, as mandated by federal law, they are often as high as 400 percent. In South Carolina a $500 loan from Advance America costs $75.40, a 393 percent APR. Lenders prefer the term “fee” to “interest rate,” because the loan is for just two weeks.

But the vast majority of their business comes from loans that flip repeatedly, generating a new fee each time. The average payday borrower takes nine consecutive loans in a year, according to an analysis by the Center for Responsible Lending. In Michigan, state regulators found that 94 percent of payday transactions over a thirteen-month period involved borrowers who had taken five or more loans. In Florida borrowers with five or more loans a year accounted for 89 percent of the market.

“It used to burn me up,” Elsie says, describing the ritual of driving between payday shops to pay off one loan and take out another. “We’d pull up there to pay that money, and we know we gotta borrow it right back.”

The proximity of subprime lenders to one another—and to discount retailers like Wal-Mart—is part of the plan. Drive around Charleston or any urban area in South Carolina and you’ll eventually stumble into a payday valley. A title loan shop sits next door to a rapid tax refunder next to a payday lender and wire transfer station. A garish strip mall near the Blacks’ house is entirely dedicated to half a dozen variations on subprime consumer lending. Just in case customers miss the mall, a billboard in front screams, We’ll Pay Off Your Current Title Loan at a Lower Rate!

As a result of this agglomeration, payday lending saturates black and Latino neighborhoods. A recent National People’s Action report looked at payday lending in five large Midwestern cities. It found that neighborhoods with high concentrations of black and Latino residents had an average of twelve payday lenders inside a three-mile radius, compared with just 4.6 payday lenders for neighborhoods with low concentrations of blacks and Latinos.

As is typical for payday borrowers, at one point in 2008 the Blacks owed four payday shops more than $3,800 in two-week loans—that’s more than 130 percent of their monthly income. At the time, they had twelve simultaneous loans, including four from Advance America.

“Now what company in their right mind would lend that kind of money to someone in that situation?” asks Michaele Pena, the Blacks’ credit counselor. When she met them, Pena estimated their monthly expenses to be about $3,000. Their income, however, is fixed at $2,966. “The Blacks are like the poster child for what we see,” she complains.

Advance America in particular has worked hard to challenge the idea that payday loans take advantage of low-income customers who borrow beyond their means. “Our customers fill important roles in our communities, serving as teachers, bus drivers, nurses and first responders,” wrote now-outgoing CEO Ken Compton in the company’s triumphant 2009 annual report. “The reality is that we all experience financial ups and downs,” explained Compton, who collected a $1.1 million bonus this year, “and we are proud that we have helped so many people get the financial assistance they need.”

* * *

Republican John Hawkins represented Spartanburg, home to Advance America’s headquarters, in the state’s House and Senate for more than a decade before retiring in 2008. He is among the company’s most unforgiving critics. “What these vultures do is nothing but highway robbery,” he says bluntly. In 2007 Hawkins sponsored a bill to ban payday lending in the state, setting off a two-year pitched battle. He still reels from the lobbying blitz Advance America and the CFSA launched against his bill. “It was really taking on one of the most established interests in South Carolina,” he says.

Indeed, CFSA lobbyists have included former State Senator Tommy Moore, a 2006 Democratic gubernatorial candidate, who resigned his seat and became CFSA’s executive vice president in 2007; longtime Democratic operative and 2010 gubernatorial candidate Dwight Drake; and the law firm of former Democratic Governor Robert McNair. Steve Benjamin, Columbia’s first black mayor, once sat on Advance America’s board.

In fighting new regulations, the industry has tried to position itself as a champion of the working class and people of color in particular. It commissioned a study arguing that payday lending benefits both populations, which Representative Harold Mitchell, a black member who also represents Spartanburg, presented to the legislature. “Objective data that payday lenders’ practices ‘lure’ consumers into predatory debt cycles does not exist,” the Mitchell report declared, contradicting sources ranging from the Pentagon to the FDIC. “Isolated cases are often presented in the public media as evidence, but there has been no systematic examination of the extent to which these individual cases are representative.”

One State Senate staffer, speaking on background, talks about getting calls from consumers opposed to regulation who, when questioned, turned out to be in line at a payday shop waiting for a loan. They knew nothing about the legislation when asked.

Hawkins and consumer advocates countered with everything they could, including a class-action lawsuit arguing that Advance America had violated existing “unconscionable lending” laws by making loans it knew borrowers couldn’t repay. As of December 2010 Advance America was fighting or in the process of settling at least eleven suits, according to its SEC reports.

As Advance America brags to investors, industry lobbyists worked with South Carolina legislators to craft a set of reforms that fall shy of capping rates and ending the business entirely. The most stringent of these reforms, which has appeared in states around the country, is a rule declaring that a borrower may have only one payday loan at a time. To enforce the rule, the state created a database of borrowers that lenders must consult before making a new loan. In return, lawmakers raised the state’s ceiling for payday loans from $300 to $550, essentially doubling the amount borrowers may take in one loan.

“We’ve tried to put some speed bumps on it, but it’s an unruly problem,” says State Senator Robert Hayes Jr., a Republican who sits on the Senate Banking and Insurance Committee and who helped shepherd the reform law through. Hayes’s district borders North Carolina and is home to an infamous payday valley, which popped up after the district’s northern neighbor passed a rate cap.

As in other states, the loan-limit rule appears to be slowing the overall volume of loans made. Between February 2010, when the law fully took effect, and January 2011, the number of loans dropped to 1.1 million from about 4 million annually. Given that the ceiling for each loan nearly doubled, that means the loan volume was just about cut in half. It’s still unclear whether the law cut down on repeated flipping or just chased away more casual borrowers. But research from states that have tried loan-limit rules has shown they do not end flipping, and Advance America reports to investors that it doesn’t believe loan-limit rules will affect its profitability in the way that rate caps can.

These reforms came too late to prevent the Blacks from falling into a payday loan morass. But Michaele Pena’s savvy, patient counseling did help them get out. Pena doesn’t even bother negotiating with subprime consumer lenders; it never works. Instead, she makes a budget for her clients, figures out a reasonable repayment plan and starts sending payments until the original debts are cleared. That’s how she got the Blacks out of their payday debt trap.

With the cycle of fees broken, the Blacks were able to catch up on the actual loan principals, one loan at a time. In two and a half years, they paid off nearly $5,000 in debt, including the bankruptcy settlement. They negotiated away another $2,000, and as of September 2010 they were finally debt free.

Or, they would have been. The nearby garish strip mall has a more subdued but equally treacherous neighbor, anchored by a personal finance company called Regional Finance. Offering loans on slightly longer terms secured by household items rather than paychecks, personal finance companies are not subject to South Carolina’s new payday loan rules. In fact, the payday reforms appear to have spurred their growth. Advance America consolidated the state’s payday loan market in the wake of the new regulations, and industry watchdogs suspect that rivals, like Check ‘n Go, have relicensed themselves as personal finance companies.

Like its competitors, Regional sends mailers to area households with checks for pre-approved loans. In July 2010 Elsie accepted one for $446; she’ll pay $143 in finance charges over the life of the loan. Sam took one out too, in December 2009, to buy Christmas presents. Elsie can’t recall why she took hers, but when pressed both of them mumble about being too generous and fret that everything just seems more expensive these days. Both were shocked when told that they got the same deal from Regional that they did from the payday lenders they despise.

“They have gone through this cycle over and over again,” says a frustrated Pena. “I’ve tried to educate them, and they’re the sweetest people, but they just don’t get it. I don’t know what to do other than to be there to intercept their mail.”

In some ways, the finance companies are an improvement. The loans flip less often because they tend to be for three to eighteen months, not two weeks. But the idea remains the same: a loan for less than $1,000 with fees that translate into extremely high interest rates that can be flipped when it comes due. For Hawkins, these loans prove a simple point about subprime consumer lenders of all stripes. “There’s only one way to get rid of them,” he says. “And that’s to pull it out root and branch.”

Indeed, states that have tried to regulate high-cost consumer lending have found it a full-time job. In state after state, payday lenders who faced new rules simply tweaked their businesses without changing the core model. Since 2005, for instance, Advance America and others have recast themselves as credit repair organizations in states that maintained interest rate caps on nonbank lending. Notably, this began after the FDIC barred payday lenders from partnering with out-of-state banks to evade rate caps. They charge a borrower a standard payday lending fee, then connect the borrower with a third-party lender who finances the small-dollar loan at a legal rate. According to Weed, this is legal in twenty-six states.

Variations on this theme are myriad. When Ohio capped interest rates in 2008, Advance America began offering cash advances under a mortgage lender license. When Virginia tightened payday lending rules in 2009, the company started offering loans as open-ended lines of credit, until the state regulator stepped in. In New Mexico, after the state passed a seemingly strict set of regulations, lenders created longer-term installment loans similar to those of South Carolina’s finance companies and, according to a study by University of New Mexico legal scholar Nathalie Martin, transferred customers directly into the new regulation-free loans without informing them. Others offered payday loans without taking a check as security, a modification that put them outside regulatory bounds.

Lenders have also simply ignored the law. After North Carolina passed its 36 percent interest rate cap in 2003, a consumer group filed a class-action lawsuit, based on an investigation by the attorney general’s office, charging that Advance America went right on lending at triple-digit rates. In September 2010 Advance America settled the suit for $18.75 million, the largest payday settlement in history.

Advance America also assures its Wall Street investors that it’s keeping up with the changing regulatory climate by exploring new products. It began offering prepaid debit cards, and by 2009 it had more than 167,000 cards loaded with $374 million. In 2007 it partnered with MoneyGram to offer wire transfers in its stores. In late 2008 it launched a web-based payday application that logged 95,000 new loans in its first year.

Consumer advocates say all this suggests one solution: a federal cap on nonbank consumer lending like the one that went into effect for service members in 2007. President Obama promised to do so during his 2008 campaign, and Senator Dick Durbin introduced bills in 2008 and 2009 that would have created a 36 percent cap, a return to earlier usury laws. Advance America is blunt about how that would affect its business. “A federal law that imposes a national cap on our fees and interest would likely eliminate our ability to continue our current operations,” declares its 2010 annual report.

The Congressional rate cap discussion was displaced, however, by the heated debate over the 2010 financial reform law, which dealt with the question by creating a new consumer-protection watchdog. Congress granted the new Consumer Financial Protection Bureau (CFPB) oversight of the previously unregulated nonbank lenders, including payday lenders. But that was largely directed at the mortgage brokers that had pushed subprime home refinances, and the bureau is primarily embroiled in a debate over how much authority it will have over Wall Street banks. With every financial industry player lobbying hard to limit the bureau’s authority, CFPB will be able to police only so many products, and early reports suggest it will concentrate on mortgages. When it comes to payday lenders, the bureau is expected to focus on consumer education and enforcing disclosure rules. In state efforts, neither has proven an effective counterweight to the industry’s saturation of working-class neighborhoods with predatory products.

Disclosing payday lenders’ APR has done little to help borrowers like the Blacks because, says Pena, the math of their financial lives doesn’t add up. “When people are desperate to pay someone else, and these people are calling me and harassing me and they want $300 today and, whoops, look what I got in the mail today…” She throws up her hands at what happens next.

For the Blacks, Pena has a sinking feeling about what’s next. Neither of them is healthy, and Sam worries what will happen if one of them ends up in a nursing home, or worse. He’s asked Pena to look into a reverse mortgage for their house, which would ensure they can stay in it until they both die. Pena’s not optimistic that it will work out, given how little equity they have. They are one health crisis away from homelessness.

“I’m winding down my career,” Pena says. “And I thought when I got into this industry twenty-something years ago that things would be better by now. But they are in fact worse, because of the different products that have come out.” It used to just be credit cards, which was something she understood. Now, she says, she barely recognizes the personal finance world. “I don’t know—the financial world just got greedy and went cuckoo.”

Also in this issue, Adam Doster reports on a new alternative to payday loans that is being tried in Baltimore.