Broke, USA

by Gary Rivlin

“The first time the issue of subprime had gotten anywhere near the kind of attention it deserved was with Fleet,” she said. “Until Fleet, we had never gotten any traction with our issues.”

  Keest remembers riding the train with Bruce Marks and arguing over his use of the phrase “predatory lender.” She was worried that it was too inflammatory, that such a loaded term might turn people off to their cause. She also wondered about the focus on Fleet when she knew they were no worse than the others, only larger and more successful. Years later, she laughed at how little she understood the workings of the media then. It had to be Fleet, precisely because it was so big. While its size gave it strength, it also made it vulnerable to public pressure and outrage.

  In the months following the CBS broadcast, both the U.S. House and Senate held committee hearings to probe Fleet Finance’s lending practices. Bruce Marks did his part to ensure that the Senate Banking Committee hearing was especially memorable. “Ride an all-expense paid chartered bus to Washington,” read the flyers Marks’s group passed around poor neighborhoods in Boston, Atlanta, and Augusta, Georgia, in the days leading up to the hearing. Roy Barnes picked up most of the tab for those willing to travel north from Atlanta (meals included) and Marks’s organization footed the rest of the bill. So many people took them up on their offer—press accounts put their numbers at between three hundred and four hundred while Marks claimed a crowd in excess of five hundred—that the hearings had to be moved to a larger room. The demonstrators, dressed in their bright yellow “loan shark” T-shirts, broke into chants and song. “It was like a gospel revival meeting,” Marks said in interviews afterward. Defending his bank before the committee, Fleet president John Hamill said that the average annual interest rate on a Fleet Finance loan was 15.9 percent and not 20 percent or more as some were claiming. “I’ve got to tell you,” committee chairman Donald Riegle, Jr., told Hamill, “that 15.9 percent…bothers me and it ought to bother you…. It’s very troubling to me and frankly I think it’s hurting the country.”

  The fight lasted several more months. Fleet thought it might out-smart Marks by having a lawyer issue a subpoena requiring him to testify in Boston on the day of its next annual shareholders’ meeting in Providence. They wanted it to be a celebratory day as the bank was about to announce a 113 percent jump in its first-quarter profits in 1993. “We just assumed even an ego that size couldn’t be in two places at one time,” a bank spokesman told the Globe. Marks simply ignored the subpoena and marched along with the two dozen people who showed up to picket its annual meeting.

  The final straw came in the fall of 1993, when Marks learned that Fleet’s Terrence Murray had been invited to speak at a breakfast for business leaders sponsored by the Harvard Business School. Marks had about thirty-five people planted around the room that morning. “We got the names of Harvard Business alum and started registering in their names,” he said. “We just took their names. We didn’t ask permission.” Marks sidled up to Murray as people were gathering and told him matter-of-factly that they would make sure he wouldn’t be speaking that morning. Murray was a working-class kid from Providence who had attended Harvard on scholarship. “In front of everyone, Murray got up there and said he was going to resolve the troubles he was having with Fleet Finance,” Marks said. A few days later, the two sat down for the first of a trio of long talks, each lasting three or four hours. “I get a call from Bruce saying he’s meeting with Murray, what would it take to settle my suit,” Brennan said. When Marks phoned him back a few hours later to tell him that Fleet had capitulated and it was a done deal, Brennan wished he had asked for a larger number.

  Fleet paid $6 million to settle the separate class-action suit that Howard Rothbloom and Roy Barnes had filed on behalf of Lillie Mae Starr and twenty thousand other Georgians who had received home loans through Fleet Finance. That was very good news for Starr and the other named plaintiffs and also Rothbloom and Barnes, who (along with two other lawyers) split $2 million in fees and another $150,000 in expenses for their efforts. Jack Long in Augusta fared even better, negotiating a $16 million settlement for himself and his clients. Fleet pledged another $115 million to settle claims filed by the attorney general, a portion of which would provide refunds and other relief to those who had done business with Fleet Finance in Georgia. Fleet set aside $800 million for programs aimed at helping low-income borrowers, $140 million of which would be distributed by Marks’s organization. “I want to be the banks’ worst nightmare,” Marks told BusinessWeek in 1993—until they turned into his best friend with a big donation to his group. “What they have put together,” Marks said of Fleet in an interview with the Wall Street Journal, “is a shining example for the entire industry.”

  The hearings Congress held to look into Fleet’s lending practices led to the passage of the Home Ownership and Equity Protection Act, or HOEPA, which Bill Clinton signed into law in the fall of 1994. The law laid out a series of additional protections for anyone taking out a “high-cost loan,” defined by the new law as any mortgage carrying an annual interest rate more than ten percentage points higher than the yield on a U.S. Treasury bill (the trigger point in 1994 would have been around 17.5 percent) or points and fees adding up to more than 8 percent of the loan amount. Among other things, the law banned prepayment penalties on high-cost loans as well as balloon payments lasting less than five years and mortgages that allowed the principal owed to grow rather than shrink. The law also granted new authority to Chairman Alan Greenspan and the rest of the Federal Reserve, deputizing them to serve as the regulatory authority charged with monitoring the practices of the subprime lenders.

  Bill Brennan felt ecstatic after their victory over Fleet. He thought the HOEPA triggers should have been much lower but he felt that a very strong message had been sent by both the federal government and the media. “I really thought after 60 Minutes no bank would dare to target black communities like Fleet did; that no bank would ever do these horrible things,” Brennan said. The lending practices of its consumer finance subsidiary had cost Fleet nearly $150 million in fines, wiping out two or three years’ worth of profits. The price tag had been almost $1 billion if the bank’s other fair-lending commitments were factored in. The bank had taken a huge public relations hit in the view of a banking analyst quoted in an article Brennan faxed to practically everyone he knew. Given the potential for negative publicity and expensive lawsuits, this analyst said, he imagined that other banks would be reluctant to move into subprime. He was wrong.

  NationsBank had already plunged into the subprime pool when it spent more than $2 billion in the fall of 1992 to buy Chrysler First, a consumer finance and mortgage company, from the Chrysler Corporation. At the time, NationsBank, based in Charlotte, North Carolina, was the country’s fourth-largest bank but its people didn’t seem spooked by the potential pitfalls of subprime lending. The potential for controversy might be great—Chrysler First had two hundred consumer lawsuits pending when it was sold—but apparently so too were the profits, because several years later the Charlotte-based giant also bought EquiCredit, then the country’s tenth-largest subprime lender. First Union, Bank of America, HSBC, and Citibank: These were among the name-brand banks that would buy a consumer finance company to cash in on subprime mortgage lending in those first few years after the passage of HOEPA.

  The HOEPA legislation wasn’t without its influence. Kathleen Keest uses its passage to mark the start of subprime’s second wave, or what she calls the “HOEPA evasion model.” In Boston, Keest shook her head as she watched the big lenders react to HOEPA. If a high-cost loan was one carrying an interest rate of 17.5 percent, they would loan money at a rate of 17.2 percent and charge 7.9 percent in up-front costs to avoid the 8 percent trigger. To the extent even these small concessions ate into profits, the lenders more than made up the difference pushing overpriced products such as credit life insurance, which pays off a loan in the event of a death.

  Fleet exited the subprime mortgage business in Georgia, but the compa
ny sold its portfolio to a rival named Associates, so Brennan found himself doing combat with a giant based in Dallas and owned primarily by the Ford Motor Company rather than one based in Providence. If anything, Brennan and Keest said, Associates was more insidious than Fleet. “They just packed loans with credit insurance and other junk, and then flipped people over and over and over,” Keest said. Brennan saw the same thing. Whenever he met a new client coming to him because of Associates, they were invariably on their third or fourth refinancing.

  In 1998, Brennan would travel to Washington, D.C., to testify about predatory lending at the Senate’s Special Committee on Aging. He would fly to the nation’s capital again two years later to talk about the same issue, though this time the invitation came from the House. In April 2000, when Andrew Cuomo, then the HUD secretary, was holding hearings to investigate subprime lending, Atlanta was the first stop on his five-city tour and Brennan was one of the featured speakers. “Finally, it’s our day in the sun,” he told a reporter for the Atlanta Journal-Constitution.

  It wasn’t to be. Instead the dawning of the twenty-first century marked the start of Keest’s third wave. By this time, a wide cast of players had joined the consumer finance companies, including a new crop of nonbank lenders such as Ameriquest and New Century. Increasingly, mainstream banks were revving up profits by purchasing or starting a subprime subsidiary. Unlike during waves one or two, the lenders were offering first mortgages as well as refinancings. Rather than holding the loans they wrote, they began selling off the mortgages to third parties that would in turn bundle and sell them on Wall Street. They were still frequently selling people loans more expensive than their incomes could handle, but they gambled that home prices would continue to rise at a brisk rate. The homeowner wanting a new mortgage could easily refinance as the home appreciated in worth and, in the event of a foreclosure, the bank would have repossessed a property that had grown in value. Of course, the gamble would prove disastrous if housing values were to fall. Brennan’s message remained consistent throughout: The Fed must aggressively crack down on lending that bears no relation to a borrower’s ability to repay. In particular it galled him that Fannie Mae and Freddie Mac, both created by the government explicitly to foster home ownership by buying and selling home mortgages, acted as a guarantor of some of these alternative subprime products. These twin giants of the mortgage world lent credibility to the subprime field and could cost the government untold billions if everything came crashing down. “Fannie and Freddie, as government-sponsored entities, might very well turn to Congress for a financial bailout similar to the bailout of the savings and loan industry in the 1980s,” Brennan warned when he testified before Congress in 2000. His words were prophetic but seemed to fall on deaf ears.

  Brennan works out of a satellite bureau that Atlanta Legal Aid maintains in Decatur, just east of Atlanta. The bookshelves in his office are crammed with books on race, and the pictures on the wall include shots of John F. Kennedy and King. Most striking, though, are the souvenirs of his fights, including the many awards he has collected over the years. He has been honored by his fellow legal aid attorneys, the state bar of Georgia, and various national consumer groups. Black groups have honored him for his work, as have religious groups, women’s groups, and groups representing the elderly. He has so many plaques and awards that he has room only for a small portion in his modest-sized office. The rest sit in a pile in one corner of the room.

  In the fall of 2008, the board of Atlanta Legal Aid honored Brennan with a resolution acknowledging his forty years of service to the poor and working poor. He felt pride that day, but the moment mainly made him feel glum. “I find all the awards discouraging,” he said. For Brennan they served as periodic reminders of how hard they had all worked and how little things had changed. “You work on something for twenty years,” he said, shaking his head, “and it’s been worse than it’s ever been.”

  Three

  Going Big

  CLEVELAND, TENNESSEE, IN THE 1990s

  Allan Jones wasn’t seeking to launch an industry in the spring of 1993 as he sat in the cockpit of his single-engine Piper Saratoga on his way to Johnson City, Tennessee. He only wanted to convince a man to come to work for him.

  Jones was still in his early twenties when he took over his father’s small collection agency and built it into a multi-city behemoth—“the largest in Tennessee,” he’ll tell you—but it gnawed at him that he had no presence in the northeast corner of the state. “My final plug on the map,” Jones recalled in a marbly Tennessee drawl. So when he heard that an old friend of his father’s who lived up that way had been let go after years in the business, Jones jumped on the opportunity. He lives in Cleveland, Tennessee, a rural outpost thirty miles north of Chattanooga. He told Steve Hixson, a childhood friend whom he calls “Doughball,” to meet him at the small airport where he kept his plane. “We’re gonna see ol’ James Eaton and see if we can’t get him to come work for us,” he told Hixson.

  Hixson and Jones told me the story after work one day. We were at the bar of the Bald Headed Bistro, a restaurant that Jones opened a one-minute walk from his office. Jones, who has made a couple hundred million from the payday business, was sipping what he calls a “Scotch slushie”—the single malt he drinks over crushed ice in a red plastic cup his bartender stocks especially for the boss—and Hixson was on his feet next to Jones, the better to narrate the story. A small crew of regulars, Jones underlings who seem only too happy to drink his alcohol, laugh at his jokes, and listen attentively as the boss runs through a familiar repertoire of old tales, had joined us. The James Eaton story is apparently a favorite for no other reason than that it offers a chance to showcase the imitations of Eaton that Jones and Hixson have lovingly honed over the years. One or the other will raise his voice one or two octaves and then, adopting a kind of mezzo-soprano hillbilly twang, proceed to make the other laugh.

  “Ale-ann. Ale-ann, I shore do i-pree-shy-ate y’all comin’ on up he-ya.”

  Jones had always admired James Eaton. He was a “real stately” fellow, he said, a bespectacled man who smoked a pipe. “He looked to me kind of like Sherlock Holmes,” Jones said. That made it all the sadder when they found Eaton working in a shack so shabby the paint was peeling off the walls. It was the office of a dilapidated gas station where Eaton had set up a business he called Check Cashing, Inc. “I guess I’ve found myself my man in northeast Tennessee,” Jones told himself.

  Jones was not deep into his pitch that day when Eaton excused himself to deal with a customer. A baffled Jones asked Eaton what he was up to and he explained. “Ale-ann, Ale-ann, I’ll tell you what.” It turned out he was loaning cash to people who needed a bridge loan until the next payday. The school janitor who needed $100 today would pay him back $120 when he received his next paycheck.

  At that point Jones was a successful businessman with around 250 employees. He was wealthy enough to own his own plane but he was also in the debt collection business, which meant he spent his days dealing with unhappy people. The people behind the businesses who paid his bills were constantly bellyaching that his collection agents weren’t aggressive enough and he was forever hearing complaints from the debtors that they were too gung-ho. After an hour or so of watching Eaton deal with his customers, he was struck by how friendly it all was. “People would thank him,” Jones recalled. “They would thank him and thank him and thank him.” The other thing that stuck in his mind was that these were working folk, not poor people. They drove decent cars. They dressed in good clothes.

  Jones wondered about the fee Eaton was charging. Wasn’t 20 percent too steep for a short-term loan of maybe a week or two? “Ale-ann. Ale-ann,” Eaton drawled, and then pointed out that his customers’ banks would charge them at least that much on a bounced check.

  “That’s when the lightbulb went off in my head,” Jones said.

  Eaton, of course, said no to Jones’s job offer. “I sure do appreciate you coming on up here,” Eaton told h
im, “but this is the happiest business I’ve ever been in. I’m happy, my clients are happy. They just love me.”

  On the plane ride home, Hixson recalled, Jones was there but not there. “I couldn’t hardly say a word to him,” Hixson said.

  They’re happy, I’m happy.

  Collections is a tough business. All those hospitals and department stores and credit card companies always on your back.

  They just love me.

  All those deadbeats demanding to talk with him because his people were rough with them over the phone.

  Cheaper than a bounced check.

  Jones thought of the grateful look on people’s faces when Eaton handed over the money. And Eaton? How could he help feeling anything but ecstatic making 20 percent on his money? He kept thinking about that steep fee and how his customers saw it as a bargain. Jones sat on the board of a local bank; he saw the money they were making on bounced checks. Collections is a low-overhead business but Eaton was essentially running his operation out of a shack.

  Jones was pushing forty at the time. He would be getting in on the ground floor of a potential new business. He would be siphoning off money from the banks and make a tidy profit in the process. What was there not to like?

  He went over the numbers in his mind. Ten grand, he concluded. He would set aside $10,000 and give it a shot.

  The early evening gathering at the Bald Headed Bistro was actually the second time I heard the story of Jones’s trip to Johnson City. The first was the day before, when Jones and I were barreling down the interstate in the cab of his shiny new white Ford 4x4 with gleaming mag wheels, heading to Chattanooga for a wrestling match he wanted to see. “I think about that day and all I’ve accomplished,” he said somberly, shaking his head. This version Jones delivered in almost hushed tones, as if sharing something precious, and it ended up making him feel nostalgic and sad. “You work so hard to build something from out of nothing and then watch a bunch of people who don’t know anything about business try and take it apart,” he said. Payday may have rendered him a very wealthy man but it has also made Jones, the industry’s most prominent pioneer and its most outspoken defender, a favorite punching bag of consumer advocates around the United States. “Sixteen years—and all of a sudden what I do has become evil,” he says. “I don’t know what’s changed that suddenly I’m evil.” And not for the first time, and also not for the last, he launched into a small tirade about a man named Martin Eakes, the founder of the Center for Responsible Lending.