Criminals have a knack for seizing upon opportunities to get money, especially when the government unintentionally clears the way.
When small businesses need a loan for payroll or repairs and they cannot obtain capital from traditional financial institutions, they may turn to alternative sources such as merchant loans or cash advances.
However, when there are fewer of these legitimate sources, because of government-imposed restrictions, small business owners may turn to illegitimate and dangerous alternatives.
That was the case in New York. Jonathan Braun, a marijuana smuggler, recently received a commutation on his 10-year prison sentence for leading a large-scale drug ring.
Braun still faces investigations for his other lucrative enterprise of charging ridiculous interest rates on illegal loans to small business owners. He reportedly collected $77 million on illegal loans and sometimes charged over 1,000% interest. He enforced his loans with threats of physical harm, kidnapping, and murder.
The tales are harrowing according to court proceedings. He threatened to beat a rabbi who borrowed money to renovate a preschool at his synagogue: “I am going to make you bleed. I will make you suffer for every penny.”
He told another borrower: “I know where you live. I know where [your] mother lives. I will take your daughters from you… You have no idea what I’m going to do.”
Braun is a horrible character who likely would have taken advantage of any money-making enterprise. What makes this case so concerning is that his black-market enterprise emerged because small business owners needed a source of cash in a pinch and they could not secure that cash through other means.
In the state of New York, the maximum rate of interest on a loan is 16 percent per year. Charging more than that may be deemed usury and trigger penalties.
While lawmakers may have thought that arbitrary interest-rate caps would protect individuals from being preyed upon by payday lenders and cash advance companies, instead they drove customers to criminals like Braun.
As we have explained before, there are reasons that legitimate lenders charge high-interest rates and fees on small-dollar short-term loans. They incur high fixed costs associated with running a business such as rent, payroll, and capital. They also have to absorb the costs of bad debts. The risks of lending money to a defaulting customer—who doesn’t have assets, savings, or bank accounts—are high.
State and federal lawmakers regularly propose lower rate caps or implementing new regulations on this industry. Those policies will have the unintended consequence of driving lenders out of business and reducing the access customers have to credit when they need it.
Sadly, the most vulnerable in our society become victims when they feel forced to turn to unscrupulous criminals like Mr. Braun.
Perhaps the way to combat illegal loan-making is to expand the legal options that customers have access to.
This is a cautionary tale for policymakers though: good intentions can lead to bad outcomes.