Broke, USA

by Gary Rivlin

  “I can tell a phony grin from a mile away,” Marcia said. “And this man was too smiley for me.” The phone rang and things went from bad to worse. It was a friend of the broker calling, apparently to work out the details of a trip to a nearby amusement park the next day. “This is a big deal to us,” Myers said, “but we’re sitting there for like twenty minutes—”

  Marcia: “At least twenty minutes.”

  “—at least twenty minutes while he’s talking about this trip and all the rides he’s looking forward to.”

  The man was all business once he was off the phone. It was Myers’s impression that he was in a rush to get home. Myers would kick himself in the coming months for acting so accommodating despite the stakes, but Saturday was a workday and there was Marcia to worry about. She didn’t feel anything close to 100 percent. Marcia had spoken up one final time. “I don’t want to do this whole thing,” she said, but then she abdicated to her husband. You’re the one who understands this stuff, she said. You’re the one who handles the money. “I don’t understand interest and that whole mess,” she remembers saying. “So if you think this is the right idea, then go for it.” Myers felt confident he was making the right decision. He thought he knew the questions he needed to ask. This particular broker might feel wrong to him but the deal felt right.

  Anyone who has been to a real estate closing knows that disorienting feeling that comes while staring at a thick stack of impenetrably complex documents, each reading as if written by the Committee for the Full Employment of Lawyers. Myers fixated on a single detail: the new interest rate. “I asked him point-blank, ‘So what I’m signing here, this means I’m paying 7.2 percent,’” he said. “And he looked me straight in the eye and said, ‘Just trust me. You make your payment every other week, that brings your interest rate down to 7.2.’ I didn’t think too much about it. I just thought, 7.2, good, that’s right.”

  The rest of their meeting was a blur. They signed and initialed until their hands cramped up. The Myerses had thought it was just the three of them in Household’s offices that night when a man appeared out of the gloaming when the time came to have the papers notarized. They were there less than an hour, including the time the broker was on the phone with a friend.

  “You make your payment every two weeks…” Those words gnawed at Myers’s subconscious all weekend but it wasn’t until Monday that he pulled out the papers and asked one of his daughters, who knew something about mortgages, to take a look. “She says to me, ‘Dad, you got took.’”

  Under Ohio law a borrower has three days to change his or her mind about a home loan. Myers didn’t contact Household until the next morning, four days after they had signed the papers, and the man he met with on Friday night refused his request to rescind the deal. “Partially it’s my fault for not saying I want to come back when we’re not all in this big rush,” Myers said. It was when he received the bill for his first mortgage payment that he began to appreciate the magnitude of his mistake. He knew his monthly payment would be higher than the $526 he had been paying but he was figuring on a bump of maybe $50. Instead it had nearly tripled to $1,400 per month.

  The main culprit was the interest rate. The annual percentage rate, or APR, on the loan Household sold the Myerses was 13.9 percent, not 7.2 percent. In time, it would be revealed that Household agents around the country were routinely claiming that customers would be paying lower interest rates than they were actually being charged. Each used the same sleight of hand: Because its customers were required to make biweekly payments, they were making the equivalent of thirteen monthly payments during the year rather than twelve. Financial planners recommend making thirteen payments each year because by doing so borrowers pay off a standard thirty-year fixed-rate mortgage in just over twenty-one years. The mortgage holder is paying the same interest rate on the money, of course, whether he or she is paying the standard twelve months a year or thirteen, but over the life of the loan they’ll pay significantly less interest because those extra payments are whittling away at the principal on the front end. Yet even this rhetorical trick practiced by Household agents doesn’t get a borrower from an interest rate of 13.9 percent to 7.2 percent.

  People with tarnished credit, naturally, can expect to pay a higher interest rate than those with good credit. They present a greater risk of default and lenders need to charge a higher rate to cover any additional losses. But Tommy and Marcia Myers had excellent credit. The generally accepted definition of a “subprime” borrower is a person with a credit score of below 620 on a scale between 300 and 850, though some institutions use a cutoff of 640 or higher. But the Myerses weren’t even close to the margins. Myers contends that the couple had a FICO score (FICO is named for the Fair Isaac Corporation, which created the credit rating system) in the mid-700s. If so, that meant that had Myers gone to a traditional bank rather than Household, he would have secured the loan he had been seeking.

  A credible lender might charge its subprime customer an interest rate one or two percentage points more than what its customers with good credit receive. But in his interview with the Journal’s Jeff Bailey, Household’s William Aldinger dismissed this idea of competing on price. They would compete instead using aggressive marketing and sales techniques. The Myerses thought they were borrowing $80,000 at an interest rate of 7.2 percent. That would have meant a monthly house payment of $543. Instead they were charged an APR roughly seven percentage points higher than the rate a prime borrower could have secured in the fall of 2001. That translated to a monthly payment of $942.

  But the interest rate proved only one factor in the near tripling of the monthly payment. The Myerses ended up borrowing $95,000, not $80,000, because of a pair of extra charges Tommy learned about only after the fact. Everyone carps about closing costs, the fees that lenders invariably tack onto a mortgage: escrow fees, loan origination fees, attorney’s charges, and the like. Commonly those add a percentage point or two to the cost of a loan. Fannie Mae, the quasi-government mortgage finance company that sets the standards for the industry, won’t approve a loan if the fees and points exceed 5 percent of the total cost of the loan. In the case of the Myerses, though, Household hit the couple with slightly over 8 percent in points and fees. That bumped the amount the couple needed to borrow by $7,700.

  Myers admits he didn’t even notice that number on that Friday night they were in Household’s offices signing papers. “My mind was on two things,” he said. One was that 7.2 percent interest rate; the other was his wife’s health. “She was fixing to have her operation and I wanted to get these obligations out of the way so I could pay attention to her,” he said.

  The other nasty surprise was an insurance policy he had unknowingly purchased. Myers acknowledges that the broker had brought up the issue of insurance during the closing, but he figured it was part of the deal, like a warranty automatically included as part of the purchase. He certainly didn’t mention its cost, Myers said.

  “He tells us, ‘I had a couple of people, had the loans for two or three months when they got injured; we paid the loans off and everything.’ He’s telling me how this is this great thing, part of the loan we’re getting. Well, I got to reading the fine print: $7,600 for insurance.” Without quite realizing it, Myers had fallen into another costly and controversial financial trap, the so-called “single-premium credit insurance policy.” For years single-premium policies were a staple of subprime loans. Those selling the policies argued that they protected borrowers in case of death or an accident, but banks and other lenders rarely even bothered to pitch the same product to those in the market for a conventional loan. That’s because a middle-class borrower is more likely to buy a standard life insurance or disability policy to protect against disaster.

  People typically make monthly or annual payments when buying an insurance policy. Single-premium policies, however, are paid off in one lump sum at the start of the contract. If that contract is financed, as it invariably is, that means interest accrues on the
entire cost of the policy. That’s what happened to the Myerses. The policy, as written, expired after five years, but Tommy and Marcia would be paying off its costs over the entire life of the mortgage. At 13.9 percent interest, that meant the actual cost of the policy would work out to around $32,000, not $7,557.

  Myers received the final shock a few weeks after signing the deal when the couple received a second bill from Household. At roughly $325 per month, this one was much smaller than the first bill but it enraged Myers more than any other aspect of the loan. While working their way through a stack of papers at the closing, they had unknowingly signed the paperwork for two loans: the original home refinance and also a home equity loan. This was becoming a common tactic inside Household: Agents would lend money through a home equity loan at the same time they were writing a refinance, even though that often meant (as in the case of the Myerses) that customers were left owing more than the actual value of their homes. Household charged the Myerses an interest rate of 19.9 percent on this second loan.

  “We knew nothing about a second bill coming in,” Myers said. “A home equity loan? First we hear a thing about it is when this bill here comes in the mail.” (Myers would claim that later when he had a chance to examine all the loan documents, he noticed initials that looked nothing like his or Marcia’s.) He rushed to the Household office the first time he had a free moment to confront his broker. “You must think I’m awfully fucking dumb,” he began. He laid out his case in one big emotional gush but he casts the man as smug rather than defensive. “You can’t sue me, there’s nothing you can do, you signed the papers,” he remembers being told.

  “I said to him, ‘You snookered me on that 7.2 percent interest. But you ain’t snookering me on this line of credit at 19.9 percent.’” Myers was resigned to paying the monthly amount on the new mortgage; he felt he had no one to blame but himself for agreeing to a lousy deal. But he wouldn’t pay a dime on the home equity loan. “He tells me, ‘You have to pay.’ And so I says, ‘We’ll see about that.’”

  Myers phoned his state senator, where an aide informed him that a lender can charge basically whatever he wants so long as the terms are spelled out in the contract. He heard pretty much the same from an aide inside the governor’s office, who told him that even if everything he said was true, it wasn’t against the law. Myers phoned the White House. He tried reaching the secretary of the U.S. Department of Housing and Urban Development (HUD) and the U.S. attorney general. He ranted at random Beltway bureaucrats who seemed indifferent to what had happened to him. But mainly he pestered the people at Household.

  Myers could have paid his bill by mail, but then he would have denied himself the pleasure of stopping by the Household office before work every other week. “I enjoyed seeing ’im,” Myers said of his broker. “I enjoyed sticking it to him for the screwing they took me for.” He’d park right out front and wait for them to open and invariably be the first person in the door. “I’d basically raise hell every time I’d go in there,” he said. “I’d razz him for being a crook; I’d talk about what a job they did on me. I didn’t care who was in there. I’d just give him what for.

  “I’ll be honest with you,” Myers said. “I’m very, very stubborn. I try and be fair about things. But don’t tick me off. Just don’t tick me off.”

  Among those Myers called to complain about Household was a local advocacy group called the Miami Valley Fair Housing Center (Dayton is located on the Great Miami River). Myers is white and the Fair Housing Center was a group known for fighting the racial discrimination that denied homes to qualified black buyers in the Miami Valley, but he figured someone there would know something about abusive lending practices.

  Actually, the mission of the Fair Housing Center was already starting to change by the time of Myers’s call. Just as strong currents of change were beginning to flow through a newly deregulated financial world, the strategies of housing activists were shifting with them. It was no longer a matter of lenders refusing to make loans in certain neighborhoods; rather, it was now something like its opposite: Lenders were now targeting those same neighborhoods and aggressively peddling mortgages and home equity loans on terms that left borrowers worse off than if they had been denied a loan in the first place. This new scourge had first shown itself in the city’s black precincts but quickly spread to its white working-class neighborhoods and to the crumbling first-ring suburbs. Myers didn’t realize it at the time but his hometown had become a hotbed in the fight against predatory lending, and Fair Housing’s executive director, Jim McCarthy, was one of the people pushing hardest for a confrontation with these lenders. The county had recently given McCarthy and his allies $600,000 to fund a public awareness campaign to warn people about these abusive loans and to create a group they were calling the Predatory Lending Solutions Project to help people untangle themselves from situations like the one that had ensnared Tommy and Marcia Myers.

  Fair Housing opened more than 650 case files in 2001 and nearly 900 more the next year. McCarthy invited me to go through the center’s files, where I found the names of more than seventy-five people who had contacted their organization about a Household loan. Not every person who showed up in their offices was a victim, McCarthy said, but many shared tales not all that different from the one that Tommy Myers told. He remembered Myers—remembers liking him and feeling great sympathy for what had happened to him—but called up his file to refresh his memory. He filled me in on details that Myers had left out, such as the stiff prepayment penalty Household had written into his loan terms—another staple of abusive mortgages. Just as it had cost Myers dearly for the privilege of taking out a Household loan, it would cost him plenty to get out of the loan inside of five years. Myers also didn’t mention that Household had paid a subsidiary of itself to do the appraisal on his home and then stuck it on his tab. Technically that’s not illegal but it’s certainly not the accepted practice, either. Phone logs for the organization showed that Myers had initially contacted the Fair Housing Center to ask whether it was true that there were no predatory lending laws in Ohio. He was told that there weren’t.

  McCarthy could sympathize. Since the late 1990s, he and his allies had been trying to alert people in the state capital, Columbus, about the destructive practices of seemingly legitimate subprime lenders like Household Finance. “We were met by this very arrogant ‘Who are you, you’re just a bunch of community organizers, we know and you don’t’ attitude,” McCarthy said. For the time being at least, there would be no help from the state or, for that matter, the federal government.

  In the meantime, Fair Housing beat the hustings in search of local lawyers willing to take on the cases of those believing themselves to be victims of predatory loans. Among the few who answered the call was Matthew Brownfield, an attorney who lived in Cincinnati, one hour to the south. Brownfield filed a class-action suit against Household in November 2001, listing the Myerses among a small group of named plaintiffs. The basis of the lawsuit was the charge that the company had violated federal mortgage disclosure laws and therefore the loans should be rescinded. The suit claimed more than one thousand potential plaintiffs. Gary Klein, who as a staffer for the National Consumer Law Center in Boston had helped write the materials that lawyers across the country use when litigating these types of cases, helped Brownfield. That gave Myers a tickle: A big-time lawyer from Boston was helping him go after Household.

  Brownfield encouraged the Myerses to remain in the house. Household—perhaps because the Myerses had sought legal protection—had yet to take action against them over their failure to pay on the home equity loan. Don’t worry about the main loan, either, he advised the couple. Pay a set amount each month into an escrow account I’ll help you set up. That way you can demonstrate good faith to a judge.

  Myers, however, was thinking about the aggravation this whole mess was causing Marcia, who was still recovering from open-heart surgery. So at the end of 2001, six years after they had bought their first home but not f
ive months after they walked into that Household Finance office in Huber Heights, the Myerses walked away from their house and mortgage and moved into a trailer park in a suburb south of Dayton. The place wasn’t too bad, they said. Space was tight but they had access to a community swimming pool. There were trees, the grounds were well maintained, the neighbors were nice. All in all, it didn’t seem too terrible a place to recover while waiting for the courts to rule on their claim.

  The Myerses wouldn’t need to wait terribly long; the company’s aggressive new lending policies were sparking lawsuits all across the country. Household Finance was facing legal action for its alleged deceptive practices in Illinois, California, Oregon, New York, and Minnesota. The community organization ACORN had filed a national class-action suit against the company, charging it with widespread consumer fraud, and AARP joined a similar class-action suit filed against the company in New York.

  The company was also attracting the attention of regulators around the United States, starting with Christine Gregoire, then the attorney general of Washington state. One case that spurred Gregoire into action was that of a seventy-year-old Bellingham man who had been talked into buying a credit insurance policy limited to those sixty-five or younger. There was also the family of five in Auburn, paying $900 more a month than they had been paying before they turned to a Household salesman for a refinance. A group of attorneys general began meeting with company officials in the summer of 2002 and a joint settlement was announced that fall. Household agreed to $484 million in fines—the largest consumer fraud settlement in U.S. history—and assented to a series of reforms, including a 5 percent cap on up-front fees and utilizing “secret shoppers” whom the company would hire to police its own sales people. William Aldinger even claimed he was sorry after a fashion. In a written statement, he apologized to the company’s customers for “not always living up to their expectations” but did not admit to any specific wrongdoing.