Giving Us the Business

How hidden fees bleed the middle class dry.

In 2010, Consumer Reports polled its readers on “what bugs America most.” The winner: “unexpected [or] hidden fees.” The good readers of Consumer Reports were not outliers. Fees reliably incite mass indignation. More and more of our dealings—not just financial transactions, but also reserving hotel rooms or booking flights, for example—come festooned with them. Many bear cryptic names (such as a “recasting fee,” to pick just one from a list included with my 2017 mortgage interest statement) and are accompanied by reams of impenetrable legal boilerplate (in 1980, most credit cards came with a single-page contract; little more than twenty years later, this had spiraled to thirty-plus pages of obfuscatory verbiage). Tinging our affront is a sense of impotence at the impunity with which they’re levied. If we even know we’re paying them, that is—often they go undisclosed, lumped into an item’s overall price.

Land of the Fee: Hidden Costs and the Decline of the American Middle Class
by Devin Fergus
Oxford University Press, 264 pp.

But fees are not merely irksome, contends Devin Fergus, a professor of history and black studies at the University of Missouri and the author of Land of the Fee. Fergus argues that the explosion of fees has become a lien on social mobility—inflicting death by a thousand cuts on the American dream.

Despite the book’s title, Fergus’s target isn’t solely fees; he takes aim at a set of fee-laden financial products that exact a regressive tax on many Americans as they navigate life—attending college, buying a house, commuting to and from work, and making ends meet: student loans, subprime mortgages, urban car insurance, and payday loans. Collectively, he writes, they constitute a toll on the primary means by which most of us acquire what wealth we’ll get to call our own.

Fergus imparts some fast facts: the proportion of household debt accounted for by student loans increased from 28 to 58 percent between 1983 and 2001; by 2005, subprime mortgages were siphoning $9.1 billion a year from borrowers in interest, penalty payments, and other fees; and in 60 percent of payday loans, fees eclipse the sum borrowed. The impacts reverberate. Student loan debt, for instance, delays home ownership and affects the terms of mortgages and other loans borrowers qualify for. In aggregate, these costs exert a crushing burden on working- and middle-class Americans, relieving them annually of at least $1.46 trillion—an amount that exceeds the yearly revenue and spending forecasts for Britain or France. Average repayments on student and payday loans, plus auto insurance premiums and the interest alone on a subprime mortgage, would have consumed more than half the median 2015 U.S. pre-tax income.

Overall, the creep of these and other fees (plus the corresponding advance of a largely parasitic financial services sector—by the 2000s, it claimed 40 percent of profits while supplying just 5 percent of jobs) marks the retreat of consumer protections inaugurated by the New Deal and exemplified in later legislation like the 1946 Employment Act, which, Fergus writes, “looked to guarantee the rights of particular organized actors, oversee pluralistic competition in the national marketplace, and protect or advance the greater social good.” This “broker state” was highly imperfect, he concedes. Nonetheless, it set a default understanding that government looked out for the people’s interests.

How did we get from there to a situation in which, for example, the government permits payday loans to be trip-wired with fees that can total 300 to 900 percent of the principal? Fergus weaves a braided narrative beginning with the passage of the Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and Community Reinvestment Act in the mid-1970s. This legislative wave sought to extend access to credit to previously excluded groups. It also carried the hopes of vendors prospecting for new markets. “This deregulated space fostered the rise of a new fringe financial sector,” writes Fergus, “one auguring a shift away from denying credit and services to extending it on high-cost terms.”

Another landmark statute from the era enlisted market forces for macroeconomic purposes. The Depository Institutions Deregulation and Monetary Control Act, enacted in 1980 by the Carter administration and considered the foundation stone of subprime lending, removed checks on interest rates in the service of stimulating savings.

But Fergus discounts any notion that this road to hell was paved with good intentions; closer to the mark is implacable commercial opportunism, idées fixes about small government and the higher wisdom of the market, and outright mendacity. These impulses interact and overlap in Fergus’s vignettes of the wanton delinquencies that greased the ascent of “the fee economy.”

Consider the Federal Deposit Insurance Corporation, “regulator of choice for the payday loan industry” during the 2000s because it was considered a pushover. Congress invited “lax enforcement,” Fergus writes, by partially basing the FDIC’s remuneration on the number of companies placing themselves under its ambit.

Then there’s the fate of “direct lending,” the Clinton administration’s attempt to disintermediate student loans. The initiative won glowing reviews from institutions and students and was projected to save $4.3 billion per year once fully operational. Instead, it was hobbled by Republicans, who forbade its marketing and pushed, in its place, government-guaranteed loans from private lenders who plied college officials with largesse to win their business. This led to the ignominious spectacle in 2003 of private lenders ousting direct lending at Michigan State University at a cost to taxpayers of $23.5 million, including $2 million pledged to the institution “from a special federal subsidy guarantee the federal government gave to lenders.” As always, ideological zeal and graft mingle murkily; from 1997 to 2003, “mega-lender” Sallie Mae ranked third among credit industry lobbyists on Capitol Hill. Meanwhile, President George W. Bush appointed former loan industry executives to the Education Department. Direct lending was reprised by the Obama administration, but only after a generation of students had been steered toward costlier loans.

Looking askance at the reversal of Obama-era reforms by the Trump administration, Fergus draws the obvious conclusion that, as with so many problems, relief will only come through the sustained ascendency of the Democratic Party.

As far as it goes, Land of the Fee offers a cogent, historically grounded account of how certain fees have emerged as stealth agents of our gaping wealth disparity. But it’s not quite the wider reckoning with fees promised by its own billing and warranted by the importance of the subject.

Fergus starts off down this road, delving into the genesis of fees per se half a century ago as an outlet for both government and business to raise revenue without raising taxes or sticker prices, respectively. They proved a boon for local, state, and federal government; 92 percent of agencies’ increase in income from 1970 to 2013 came from “non-tax sources.” Ironically, impetus for the adoption of fees by banks, in particular, stemmed from an attempt to promote financial transparency. The 1968 Truth in Lending Act obliged them to disclose the cost of repaying a loan as an annual percentage rate. Fretting about crimped profitability, they turned to fees. What had been used strictly to defray “administrative costs or risk” blossomed into a profit center. In 1984, banks raked in $200 million from overdraft fees; by 2009, this had spiked to $38.5 billion.

But while Fergus provides some useful context on the explosion of fees, his analysis is muddied by a definition of fees that feels fudged at times. One of the financial burdens he spotlights, auto insurance, ostensibly contains no fees, according to lay understanding of the term as an auxiliary charge. But Fergus includes it as a government-mandated charge bearing “a hidden cost” in the form of higher premiums that urban motorists are forced to pay. More generally, he’s concerned with all of these sorts of charges, not just fees. This supports a more tractable analysis of the pain points for many Americans, but results in a frame that, as far as fees are concerned, is circumscribed yet amorphous.

Moreover, there’s a retrospective cast to much of the data Land of the Fee cites. We learn that in 2008, payday lending outlets outnumbered McDonalds and Starbucks locations—but what about now, a full decade later?

This is a dynamic arena, so while we’re at it, what about the fee-based predations of private equity, with its appetite for delivering high (and consistent) returns to investors, as it branches into public services like utilities? Abetted by regulatory rollback from Trump appointees to the Federal Communications Commission, private equity–owned firms have resumed their long-standing practice of gouging prisoners and their families on phone calls. Now, they’re aggressively exporting the same exorbitant fee-based model to prison tablets. And Trump has talked about tapping private equity to rebuild our infrastructure; how much wealth would those companies leech from us in fees? Another question: What’s the scope for fee-based abuse amid the growth of subscription-based business models for online content, and how might this exacerbate the digital divide? While Land of the Fee provides a detailed historical capsule of how some fees have been allowed to imperil social mobility, readers will need to look elsewhere for a sense of where we’re going next.

Stephen Phillips

Stephen Phillips has written for the Economist, Wall Street Journal, Atlantic, Smithsonian Magazine, Los Angeles Times, San Francisco Chronicle, and NPR, among other outlets.