In much of history, usury laws made loan sharks commonplace. Many moneylenders skirted between legal and extra-legal activity. In the western world in recent years, loan sharks have been a feature of the criminal underworld, but otherwise rare. Loan sharks are common in the Italian Cosa Nostra and Triads in China.
There are many registered and legal lenders that lend to people who cannot get loans from the most mainstream lenders such as large banks. They often operate in cash, whereas mainstream lenders increasingly operate only electronically, which means that they will not deal with people who do not have a bank account. Terms such as subprime lending and "non-standard consumer credit" are used for this type of lender. Payday loans are one example of this type of consumer finance. The availability of these products has made true loan sharks rarer, though some legal lenders have been accused of behaving in an exploitative manner.
Payday loan operations have also come under fire for charging inflated "service charges" for the service 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.
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.
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 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 first enacted in several states in 1917 and was adopted by all but a handful by the middle of the twentieth century.
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 seems to have been restricted to that city. 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.
In its early phase a large fraction of mob loansharking was 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.
But 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.
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. But 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. Perhaps the sharks in this particular community were unusually placid, but it would not be surprising if the use of force was rare. It would not take many examples to teach the lesson to debtors, and excessive use of force would only scare off business. The economics of violence in the loan shark market ought to have diminished the resort to corporal or capital punishment.
The mob 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.
Many years ago, prior to the registration of mobile phone numbers in Malaysia, Ah Longs advertised their services merely by distributing their calling cards.
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