Broke, USA

by Gary Rivlin

  Bill Brennan remembered the early 1990s when he was fighting NationsBank’s purchase of Chrysler First. “[If] there [have] been problems with prior business practices, this acquisition may well be the most effective way to fix them,” a spokesman for NationsBank told the Charlotte Observer. In Brennan’s view, the opposite happened. NationsBank was a scrappy regional player striving to show Wall Street what it could do, and as a consequence, complaints against NationsCredit, Brennan said, had skyrocketed. Over the years he kept hearing the same story. A bank would say it was bringing integrity to the subprime enterprise it had just purchased, but invariably the opposite happened. “The problems always got worse,” Brennan said flatly. Citigroup’s purchase of Associates seemed destined to turn out the same way. Citigroup was a company carrying too much debt and run by a CEO anxious to demonstrate for the Street that his company, despite its size, was still a top-pick growth stock—a company, in other words, always on the lookout for ways to jack revenues.

  Hoping to avoid a generic we’ll-bring-them-up-to-our-standards kind of statement, in advance of the Durham meeting the Coalition for Responsible Lending had worked up a list of specific business practices they wanted changed. The boilerplate language of an Associates contract included a prepayment penalty and a provision that waived a person’s right to sue in case of a dispute. The activists called on Citigroup to drop the prepayment penalty and the mandatory arbitration clause. They also wanted Citi to cap up-front fees at 3 percent of a loan and to stop the noxious practice of charging borrowers the full price of a credit insurance policy and then financing it as part of the loan. They also said there should be some limit on the interest rates CitiFinancial could charge. Lenders deserved a healthy return on their investment, Eakes and his cohorts acknowledged, but a signature of the subprime market was the unmooring of interest rates from any calculation of risk. “Risk-based pricing,” it seemed, had become an excuse for whatever a lender could get away with—demonstrated by the sky-high profits the subprime industry was producing.

  But Citigroup had no intention of agreeing to a sweeping set of concessions certain to dampen profits. Instead the company, in a letter addressed to regulators, made some vague promises about better training and an improvement in their compliance review procedures. They promised, too, to review CitiFinancial and Associates loans that had ended in foreclosure during the prior twelve months to see if any should be reversed. They would also disappoint activists on the issue of credit insurance. A study released by HUD and the Treasury Department in the final months of the Clinton administration concluded that the consumer finance companies often employed “unfair, abusive and deceptive” techniques to sell lump-sum credit insurance products that were, more often than not, “unnecessary.” Citigroup said it would offer people the option of making monthly payments rather than financing the entire sum at once but it would continue to sell the lump-sum product. Citigroup agreed to cap its up-front fees at 8 percent (the HOEPA trigger) and not 3 percent, as activists wanted, and while it wouldn’t drop prepayment penalties altogether, they shortened the penalty period from five years to three years. The company also promised not to target borrowers with a no-interest or low-interest loan written by a government entity or a nonprofit such as Habitat for Humanity, and to at least experiment with the idea of treating people more fairly. One might have thought it was already Citi policy to give a customer the best rate possible given a person’s credit history but Citigroup announced it was testing a pilot program called “referring up,” whereby CitiFinancial employees would let those with good credit know they could get a conventional loan at a significantly lower interest rate with Citibank.

  “Their proposed changes are generally consistent with the stringent policies and procedures that have long been in place at Household,” Household Finance said in a statement expressing its support for the Citigroup plan. This was near the end of 2000, just about one year before Tommy and Marcia Myers would step into a Household office just outside Dayton and two years before the company was forced to pay a $484 million fine for its bad loan practices.

  Martin Eakes dismissed Citigroup’s concessions as “baby steps” on the path to reform and then, in a Q&A in the New York Times’s Sunday business section, seemed to be talking directly to the people inside Citigroup’s executive offices. “I have been in meetings where black ministers made the statement that this will become the civil rights movement of this decade, the confronting of the systematic destruction of wealth by abusive lenders,” Eakes said, turning up the heat considerably. “Will it take street demonstrations? Boycotts? I hope not. But many of us are prepared if necessary to spend the next 15 years battling Citibank.”

  Eakes might have known how to push all the right buttons inside Citigroup, but in that same article he proved himself an awful prognosticator. Subprime, he said, seemed a “fad” unlikely to gain momentum. “Is it a trend that will be picked up across the banking industry?” Eakes asked himself. “I rather doubt it. I think that Citigroup will find itself somewhat isolated.”

  Weill, for his part, chose to ignore the activists. He and his staff had met with any number of community groups, Weill wrote in a letter to regulators. They had spoken with elected officials and their representatives. They had listened to everyone’s concerns. And he felt satisfied that the company had reached a good balance between its responsibilities to its investors and the communities it served.

  More than seventy community lenders and advocates had signed a letter addressed to the FDIC and Office of the Comptroller of the Currency asking the two agencies to hold hearings into the Citigroup-Associates deal. Regulators were limited in the conditions they could impose on a company but by holding hearings and threatening to withhold their approval they can often extract reforms. That’s what the Clinton-era Office of the Comptroller did when First Union bought the Money Store. It approved the deal only after First Union pledged that its new subsidiary would not sell subprime loans to borrowers who qualified for conventional financing. In this case, though, representatives from both the FDIC and Office of the Comptroller complimented Citigroup for voluntarily agreeing to change select policies inside Associates. Both agencies declined to hold hearings.

  In the end, only the New York State Banking Department held a hearing to review the proposed merger. Dozens of critics spoke against the deal, including Sarah Ludwig, executive director of the New York City–based Neighborhood Economic Development Advocacy Project. For years she had joined others in criticizing Citibank for its lack of branches in low-income and minority neighborhoods. If you allow Citi to buy this high-priced and unscrupulous lender, Ludwig argued, “you’re giving Citibank a perverse incentive” to stay away from the communities most in need of traditional banking services. Citigroup claimed that it had significantly increased lending to blacks and Latinos since 1997 but the activists countered with studies of their own, including one that showed that more than 80 percent of the loans Citi had made in the greater New York City area over the prior year had been small, unsecured, high-interest loans of $1,000 or less. Regulators in New York state managed to wrangle from Citigroup several written concessions, including a promise that it would at least temporarily stop selling single-premium credit insurance—but only inside New York’s borders.

  Activists were disappointed, but Eakes and others told reporters they were not about to quit. With its acquisition of Associates, Citigroup ranked as the country’s largest subprime lender. “Look, if Citigroup thinks we’re going to go away, they’re in for a big surprise,” Eakes told the Raleigh News & Observer. “We’re just getting warmed up.” Among other tactics, Eakes and his allies took to inundating Weill with thousands of emails each week and ultimately would try confronting Weill more directly in New York.

  Martin Eakes worried that he was spreading himself and his organization too thin. But he also saw himself as having no choice, given the nature of the Citigroup fight, just as he felt he didn’t have the option to say no when people as
ked him and Self-Help to join in the pending battle over the future of the payday advance business in North Carolina.

  The Tar Heel State had opened the door to the payday lenders in 1997. “They had a compelling story,” said Wib Gulley, Eakes’s old law partner, who voted in favor of the original bill authorizing payday lending in North Carolina. “Times were tough here back then. People needed access to credit and payday seemed a reasonable way of offering poor people quick emergency loans.” But to make sure they weren’t institutionalizing something they didn’t fully understand, Gulley and his allies included a sunset provision in the bill. If new enabling legislation were not passed by July 31, 2001, then payday lending would no longer be legal in the state. “Within two or three years,” Gulley said, “it was clear we were not getting what we thought we were getting.”

  Gulley helped enlist Eakes in the anti-payday cause, as did Eakes’s old ally from the predator mortgage fight, Peter Skillern. Skillern and his staff had even written a small book about the payday loan industry in North Carolina called Too Much Month at the End of the Paycheck. At that point, North Carolina was home to more than one thousand payday stores and, if nothing else, Skillern thought lawmakers should at least have a better understanding of what was going on. The book included interviews with store owners and industry representatives but its emotional heft was in the stories of North Carolinians who went to a payday lender for help but ended up feeling trapped. One woman had borrowed $300 after falling behind in her car payments. She ended up paying $2,000 in fees over a two-year period before she finally caught up. A second borrower said he was paying rates so high it’s “pretty much impossible not to get in a cycle there” and a third was quoted as saying, “It’s worse than crack.” The book wasn’t written specifically to engage Martin Eakes in the fight against payday lending but it might as well have been.

  “The time wasn’t right for us,” Eakes said. “But we knew if we didn’t take it now, we might never have another chance again.” There are a thousand ways to kill a bill, he reasoned, and passing one is always difficult. It was the spring of 2001 and he was barely six months into Associates’ fight but Self-Help would add its considerable muscle to prevent the payday lenders from obtaining a majority for the legislation they would need to continue operating legally in the state.

  Allan Jones and Billy Webster said they felt blindsided by the North Carolina fight. Maybe so, but then they had only themselves (or at least their government affairs people) to blame and it didn’t seem to take them long to recover. There were so many lobbyists running around the state on behalf of the payday lenders, Wib Gulley said, that it was as if each legislator who hadn’t yet committed to the payday side had his or her own personal lobbyist—if not more than one. When the first two lobbyists sent to talk with Gulley couldn’t convince him to support the payday lenders, they sent a young and attractive woman to see if she could be more persuasive. “I could almost hear them saying, ‘Well, we tried the policy approach with Gulley; let’s go this other route,’” he said. Gulley described the ensuing political fight as probably the hardest-fought donnybrook he had witnessed in his twelve years serving in the state senate.

  Defeating a bill may be easier than passing one, but the payday lenders had collected more than $80 million in fees in North Carolina during the previous year. It wasn’t until July 31 came and went without a new bill that the foes of payday could be confident they had won. “We thought we were having a debate over what changes might have to be made in the law,” Billy Webster said. Would the legislature give borrowers the right to rescind a loan within twenty-four hours? Would they put restrictions on the steps lenders could take to collect on a bad debt? “But all of a sudden, it was over and we were out,” he said. At the time Webster thought the defeat, while significant, was a mere “speed bump,” but Allan Jones worried it might be a portent for the future. During the North Carolina battle, Jones said, he first heard the name Martin Eakes. “I learned about who he was and I got nervous,” Jones said. “I realized we were up against a zealot.”

  “To think that a bunch of people who don’t know the first thing about business or how we operate just ups one day and says they’ve changed their minds, ‘We’re not going to let you do business here anymore, we’re going to put all these people out of work,’” Jones said. Was it any wonder, then, that Jones, Webster, the Davis brothers, and several others kept operating in North Carolina even after the enabling legislation expired?

  The payday lenders would lose that battle as well—eventually. They tried to talk to the new attorney general, Roy Cooper, but it was their bad luck that he was the former Senate majority leader who had proven so critical to passage of the predatory mortgage bill back in 1999. “He did everything he could,” Jones said of Cooper, “to make sure no matter what we tried, we couldn’t make a go of it as a business there.” Cooper’s office sued, as did the state’s Division of Banking. Advance America operated for another four years before they were finally ousted from the state, and Check Into Cash, Check ’n Go, and a third company called First American Cash Advance lasted for nearly five years. That trio would pay a collective $700,000 in fines but only after collecting multiple millions in fees in the intervening years.

  Defeat in North Carolina had been a bitter pill for the payday lenders to swallow, but practically speaking it had not proven much of a setback. North Carolina had been a good market, not a great one, and there was still plenty of room for growth. At that point there were perhaps ten thousand paycheck advance stores in the country and analysts were saying the country could handle more than twice that many. “We probably should have taken [Eakes] more seriously earlier on,” Webster said, “but we also were growing our businesses and looking for better ways to compete.”

  Federal bureaucrats had refused to intervene to stop Citigroup’s acquisition of Associates but the lender did not fall off the regulatory radar screens entirely. Eighteen months after Citi was permitted to acquire Associates, the FTC took action. Citigroup might have hoped they could acknowledge Associates’ past abuses and quietly pay a modest fine, but the FTC was seeking a settlement in the hundreds of millions of dollars. Citi balked at the cost, negotiations stalled, and the agency filed suit, naming not only Associates in its complaint but also Citigroup and CitiFinancial.

  The lawsuit was probably an FTC negotiating tactic. If so, it was a particularly effective one. The Wall Street Journal reported the news deep inside its second section but the Times reported it on page one, under the headline U.S. SUIT CITES CITIGROUP UNIT ON LOAN DECEIT. It was not the kind of publicity a big bank wanted on the front page of its hometown newspaper. Loan officers for Associates, the FTC charged, routinely employed trickery to lure customers into costly loan refinances, often promising people they would save money by refinancing when the opposite was true. They regularly sold overpriced credit insurance policies, generating an extra $100 million in profits over five years. Customers who objected to an insurance policy, the agency charged, were told that removing it would mean delaying the closing and therefore waiting longer for the check they were typically anxious to receive. The suit also accused Associates of training employees to rush people through a loan closing to minimize questions, and alleged that the company engaged in abusive methods when pursuing delinquent accounts.

  “What had made the alleged practices more egregious is that they primarily victimized consumers who were the most vulnerable—hard working homeowners who had to borrow to meet emergency needs and often had no other access to capital,” Jodie Bernstein, the director of the FTC’s consumer protection bureau, told the Times. The agency’s five commissioners—three Democrats and two Republicans—had voted unanimously to file the twenty-six-page complaint, which accused Associates of violating four federal laws.

  Citigroup held its annual shareholders meeting one month later. At his behest, a group that owned large positions in Citigroup, including Warren Buffett and Bill Gates, Sr., invited Eakes to present a resol
ution on their behalf that, if passed, would link Weill’s compensation to Citi’s record on social responsibility. Eakes flew to New York to confront the CEO directly and see if he might be able to increase the pressure on Citigroup at a time when it might already be reeling from negative press.

  The meeting was held in Carnegie Hall. Eakes’s first shock was the stagecraft of the day. “Little plebeians like me,” Eakes said, lined up in the hall’s center aisle, awaiting their turn at the microphone. The theater was dark so that each presenter was a disembodied voice over a PA system. Weill, meanwhile, stood center stage, a spotlight trained on him, “as if he were God himself,” Eakes recalled. Eakes refused to be intimidated. Citigroup, he said when his turn came, had “steadfastly refused” to adopt standards of responsible lending. The company had “aggressively opposed” legislative efforts to rein in predatory lenders. And then he turned up the heat on Weill himself. “Any CEO who will cheat his customers,” Eakes boomed, “will eventually cheat and lie to his shareholders.” Eakes claimed that his remarks won him an ovation from the crowd, but if so, that was about all he got. The resolution was soundly defeated.

  It may have been easy to dismiss Eakes or any dissident shareholder. No one usually pays much attention to what goes on at a company’s annual meeting, especially back then. But Citigroup was a large consumer company whose caretakers were skittish about more negative press, a fact driven home for Jim McCarthy in Dayton when he lost his temper with a roomful of Citi lawyers while trying to negotiate on behalf of a client he believed had been trapped in a predatory loan.