By Mike La Sorte, Professor Emeritus
Loansharking is usury, the lending of money at exorbitant or illegal rates of interest. Crime Commissions over the years have asserted that loansharking was the second most important activity of organized crime. Predatory in their intent, loansharks are said to employ unscrupulous tactics to strip borrowers of their assets and to acquire ownership of businesses. (The research on loansharking is sparse and the findings not always consistent; generalizations on the topic are not easily substantiated.)
Whether loansharking is indeed an organized-crime monopoly is open to question. Many lenders are not mobbed-up. Nor do lenders have the ultimate goal of exploiting those in need of ready cash; the more rational motive would be to keep the borrower as a steady customer to insure a regular flow of income.
The often overreaction to the evils of loansharking (not to mention other mob activities) can have the aim of keeping the populace alarmed by menacing it with an endless series of hobgoblins, many imaginary.
The loansharking parameters are structured by the parties involved. These include: rate of interest; payment schedule; penalties for non- or delayed payments; call for full payment; renegotiation of terms. Loaning to a stranger or a previous delinquent borrower can be risky and would call for higher rates, shorter terms, harsher penalties.
Legitimate persons—lawyers, entrepreneurs, retailers—are loaners and borrowers. So are friends, relatives, and business partners, as well as negotiations among and between members of organized-crime groups. (Immigrant groups in America have long relied on interpersonal borrowing and loans from unregulated ethnic "banks.") Organized-crime shylocking constitutes the major issue. By putting dollars "on the street" mob shylocks can generate substantial profits to be used to fund even more profitable criminal ventures.
Illegal lending as a business has been around for some time. There were the so-called "salary lenders." These organizations (which continue to exist in low-income districts) lent money against future salary payments, often creating documents that disguised the true reason for the loan. There is an early history of racketeer loansharking, which first appeared in New York City in the 1920s. Such lending was coupled with strong-arming as a standard collection procedure. Racketeer lending to both legal and illegal businessmen was well-established in New York by the 1930s. (Loansharking became a felony in New York in 1965.) Many of the borrowers were unsuccessful gamblers. There was at least one mob in New York that specialized in loansharking, according to A.F.J. Ianni (A Family Business, 1972).
The 'knockdown" loan is the dominant form. It involves a fixed schedule of payment, both interest and principle. Vigorish, or the vig, loans are those where the borrower pays on the interest, with the principle payments left unspecified. Non-payment results in penalties. If the borrower misses a payment, the penalty is added to the regular payment. The lender has the right of recall, which means he can ask for full payment at a specified date.
Interest rates have great variance. The borrower's history of loans is a factor and the size of the loan; the larger the loan the lower the rate. A three percent weekly rate would be an annual rate of 152 percent. Very small loans bear the highest rates: a "6 for 5" loan (a $50 loan to be repaid at $60 one week later) is equal to a yearly rate of 1,040 percent. Larger loans are usually vig loans, with weekly rates as low as two to three percent or less, the so-called prime rate. Collateral for loans is often required as well as a loan guarantor; these protections serve as incentives to meet the repayment schedule.
The functions of mob-associated predatory lenders to businesses can be many. The business can be bled for its assets. It can become a front for laundering dirty money or it can remain a legitimate business under mob influence. Such schemes are sufficiently complex to be left to specialists in organized-crime groups. By comparison, for the authorities to seek to suppress street or opportunistic lending has little urgency. The profits from racketeer-related lending, however, have consequences: it can give mobsters increased leverage in the illicit market.
The prevailing research on the topic suggests that intimidation and violence as tools of compliance are seldom utilized. Reports of such violence are more likely to become public thereby giving the false impression that beatings, or worse, for late payment are an everyday affair. The system works best for both parties when there is little recourse to strong-arming. Nor need there be: the capacity to instill fear is a consequence of reputation. The mob's long standing reputation for violence can alone give any potentially deviant borrower pause. Despite the seemingly seedy nature of an illegal loansharking market, it has its functions for certain segments of the population.
There are no timeless truths. Such a criminal phenomenon as loansharking undergoes change with changing times, not that its general characteristics remain static and easily amenable to facile generalization. Classic street lending has declined as the result of the increased reliance on credit card debt, which is, one might argue, a regulated form of shylocking.
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