This investigative piece was published in The Boston Globe April 30, 2007:
For the last seven years, Massachusetts banking officials have made fitful efforts to stop some of the state's poorest cities from letting pawnshops charge usurious interest rates for loans to the down-and-out.
Yet nothing has changed. Tens of thousands of the state's poorest people continue to pay municipally sanctioned pawnshop interest rates of 7 to 10 percent per month -- 84 to 120 percent a year -- despite a state rule limiting the annual rate to 36 percent.
In one case, it took the state Division of Banks 18 months to hold a hearing on the 10 percent monthly rate approved by Fall River officials.
State and local oversight is so scant that an investigation by the Globe and Fox 25 News found that some pawnshops do as they please:
In Brockton, for example, pawnbroker Philip S. Cohen opened Ideal Pawn in 1992 and has been charging a largely poor clientele 10 percent monthly interest since -- without city approval. Cohen acknowledged his business has been very profitable; so much so that he paid nearly $1.6 million in 2005 for a 5,000-square-foot home on six acres in Dover.
READ THE FOX 25 NEWS REPORT: Taking advantage of the poor
And in Worcester, city and state officials authorized pawnshops to charge 2 percent a week on small loans, but 3 percent a month -- 36 percent a year -- on loans above $100. Two weeks ago, police officials started a crackdown after reporters discovered that Worcester pawnshops were charging 2 percent a week -- 104 percent a year -- on all loans.
"Absolutely outrageous what they are charging," state Representative John F. Quinn , a Democrat from Dartmouth, said in an interview. "There should not be excessive profits in this industry -- particularly on the backs of the poor."
The 10 percent monthly rate charged in some communities is, in practice, often much higher than that-- higher even than what loan sharks charge. That's because the full monthly rate applies to any part of a month. For example, at Fall River Pawnbrokers, a Globe reporter left a wedding ring as collateral for a $40 loan. Six weeks later, it cost $53 to retrieve the item -- $40 to repay the loan, $8 for two months' interest and a $5 "transaction fee." The cost for the six-week loan was 32 percent.
Since 2003, Quinn has filed legislation three times to place a statewide cap of 36 percent per year on pawnshop interest. If Quinn's legislation became law, it would replace a century-old statute that has caused more squabbling between state and municipal officials than oversight of the industry. The law gives cities and towns the power to set rates, but includes a section that says state banking regulators have to approve the rates.
Finally, Quinn's lonely crusade is drawing attention. On Beacon Hill, where executive power changed hands this year, Daniel Crane, the top consumer official under Governor Deval Patrick, and newly elected Attorney General Martha Coakley expressed anger and chagrin when the Globe and Fox 25 News raised questions about the exorbitant interest rates, and the state's hapless efforts to rein them in.
Crane said any pawnshop that is charging more than the 36 percent annual rate the Division of Banks has set as the highest rate it will approve is violating the law.
In an interview, Crane said it appears the issue has fallen through the cracks, partly because banking regulators have no clear power to enforce the interest rate limits under the law. He said he has asked Coakley's office to investigate. Coakley said she would step in, but said new legislation may be needed to clarify the law. Coakley called some of the interest rates "outrageously high" and said they should be outlawed.
In Boston, where the police commissioner holds the rate-setting authority, pawnshops operate under the 36 percent annual limit. But 120 percent annual rates are being charged in Fall River, Lynn, Taunton, Haverhill, Malden, Hudson and -- without municipal approval -- Brockton. Annual rates ranging from 84 to 104 percent are being levied in Chelsea, New Bedford, Springfield, Lawrence, Chicopee and -- until last week -- Worcester.
Typically, pawnshops buy or make loans on items -- most commonly jewelry -- that people leave as collateral in return for quick cash. Pawnshop customers are typically poor and working-class consumers in financial straits and without access to conventional credit. Among the other pawnshop regulars are drug addicts desperate for cash .
Ordinarily, a pawnbroker will loan a fraction of the value of an item -- $100, say, on a $200 necklace. Under the law, the borrower has four months to claim the item and pay off the loan -- $100 plus $40 in interest and handling fees if the monthly rate is 10 percent. If the item is not reclaimed, the pawnbroker takes ownership and can sell it for its full value, recouping his loan and the interest. In theory, borrowers are entitled to any surplus amount from the sale, but they must claim it.
To put the numbers in context, if the 10 percent monthly rate were applied to home loans, a homeowner with a $200,000 mortgage would pay $240,000 a year in interest alone.
Crane expressed concern that poor people who patronize pawnshops have little understanding of the interest rates they are being asked to pay.
To document the interest rates, Globe and Fox 25 reporters asked municipal officials to verify that they had approved the rates local pawnshops are charging. City officials in Brockton, however, could find no evidence of any approval for Ideal Pawn, which opened in 1992.
Last week, a Globe reporter talked to "Phil," who identified himself as Ideal Pawn's manager. Phil said he did not know when the rate had been approved because he had worked there for only a few years. He said the owner would know, but was on vacation and had left instructions that he not be disturbed.
A check of Massachusetts corporate records, however, showed that "Phil" -- Philip S. Cohen -- is the company's founder, owner, and president. In a subsequent conversation, Cohen admitted he had misrepresented himself. Asked when the city approved his 10 percent rate, he replied, "To my knowledge, they never have." Cohen said he had had no idea pawnbrokers needed such approval, at least not until 2003 when he read about the requirement in a newspaper article.
Even then, Cohen said he did nothing to rectify the error. "I don't think the onus was on me to contact the city. The onus would be on the city to contact me," Cohen said. But after hearing from the Globe, Cohen said he would approach city officials. He expressed confidence they would sign off on his 10 percent monthly rate.
In Worcester, where police officials have jurisdiction over pawnshops, the city set the rates in 1997 -- capping interest on any loan of more than $100 at 36 percent a year. Sergeant Kerry Hazelhurst said he believed pawnbrokers were abiding by the rates, until a reporter told him the city's five pawnshops were charging 104 percent annual interest on all loans. Police then visited pawnshops to demand they comply with the 1997 rates.
Richard Rizzo , who owns the Money Stop, a pawnbroker shop in Worcester, denied that he had ignored the interest rate limits in hopes that no one would notice. "No. Not really. That's not what I was doing at all," he said.
Rizzo said he doesn't believe the city ever set a 36 percent rate limit in 1997, but then conceded that he isn't sure. "That's not true. Well, I shouldn't say that's not true. They might have had them. We were never informed of that."
In Lynn, a reporter received an $80 loan on an 18-carat gold chain at a pawnshop, Sherman Loan and Jewelry, at a monthly interest rate of 10 percent. The City of Lynn approved that rate in 2003, but banking regulators in 2005 rejected the rate, in part because neither the city nor local pawnbrokers could provide any evidence to justify it. James Lamanna , the city attorney, told a reporter that the City Council is on the verge of lowering the rate.
Kenneth Stauffer , the owner of Sherman Loan, declined to be interviewed.
Crane, who is director of the Office of Consumer Affairs and Business Regulation, which oversees the Division of Banks, said he believes pawnbrokers can do just fine charging 36 percent annual interest.
Edward D. Bean , the owner of Suffolk Jewelers on Washington Street in Roxbury, Boston's largest pawnshop, said 10 percent monthly rates are uncalled for. But Bean said that pawnshops cannot be profitable if they're restricted to 3 percent monthly interest -- the rate in Boston -- unless they do business with an enormous volume.
The volume statewide worries Crane and Coakley, both of whom noted that drug addicts frequently visit pawnshops to pawn stolen items. "You have to assume that a certain percentage of the goods that come in may be fenced, may be stolen," said Coakley, who was Middlesex district attorney for eight years.
This article was reported for a seminar in Investigative Reporting at Northeastern University by two graduate students, Donna Roberson and Mike Beaudet. Beaudet is also the investigative reporter for Fox 25 News. Their work was overseen and this article was edited by Northeastern journalism professor Walter V. Robinson, former editor of the Globe Spotlight Team.