Broke, USA

by Gary Rivlin

  McCarthy didn’t hesitate when I asked him to name those he considered the worst subprime lenders operating in Dayton. “CitiFinancial has to be at or near the top of my list,” he blurted. In part that was due to the volume of loans CitiFinancial wrote and the terms of those deals. But McCarthy confessed he felt a special enmity for the New York–based giant in no small part because of the attitude of the Citi lawyers he mixed it up with while attending mediation sessions on behalf of people about to lose a home. “They were so damn arrogant and condescending,” McCarthy said. He and his allies were activists and couldn’t possibly understand how a business works. “And because we didn’t understand, that’s why we were asking for these ridiculous things like a reasonable interest rate that might actually let the people stay in their home and continue to pay on a mortgage.” Citi would send eight or nine people to every mediation session, McCarthy said, “and then they wouldn’t offer a thing.”

  By that point McCarthy was spending his days listening to old people frightened about losing homes they had owned for thirty years, angry at themselves for making the mistake of walking into the wrong office door. His pent-up frustration and anger boiled over during a meeting on behalf of several CitiFinancial customers. “I’m telling them, ‘I’ll get in front of the television cameras and just blast you for what you’re doing to these people. I’ll put them in front of the camera so they can tell everyone what you did to them. I’ll bully you in every way we can think of in front of the media.’” McCarthy had no idea whether he could back up any of these threats, but to his amazement, the gambit worked. Citi agreed to write off the loans, essentially letting the three borrowers off the hook. “These were the early days of all this stuff,” McCarthy said with a laugh, “so it was still possible to talk about hurting the reputation of one of these lenders.”

  Citi followed with other concessions aimed at appeasing its critics, including the announcement in June 2001, ten months after its purchase of Associates and six months after the FTC announced its suit, that it was phasing out its single-premium credit insurance product. It would continue to sell credit insurance, Citi said, but it would be sold separately from the mortgage and be paid for with regular premiums through the life of the policy. Perhaps Citigroup was motivated by a sense of moral responsibility but an alternative explanation was that the financial giant wanted to avoid additional criticism. The Democrats had recently taken control of the Senate, and Paul Sarbanes, the new chairman of the Finance Committee, had just announced that he would hold hearings to look deeper into predatory lending.

  Another year would pass before Citigroup agreed to pay $215 million to settle its suit with the FTC. At the time it stood as the largest consumer protection settlement in FTC history. Citigroup also agreed to pay up to $20 million to settle an investigation into Associates that Attorney General Roy Cooper of North Carolina initiated shortly after he took office.

  Citigroup would set another record in 2004, when the Federal Reserve hit the company with a $70 million penalty—the largest fine the Fed had ever imposed for a consumer lending violation. This wasn’t for misdeeds committed by Associates pre-Citigroup but for newer improprieties that dated back to 2001. CitiFinancial, the Fed claimed, was routinely converting personal loans into equity loans secured by a person’s home without regard to a borrower’s ability to pay. The Fed also charged CitiFinancial with trying to mislead regulators once they started to investigate.

  Eakes, meanwhile, had never stopped trying to convince Citigroup to change. In May 2005, five years after Citi announced it was acquiring Associates, Eakes stood at a podium and publicly praised Citigroup. The company had finally agreed to drop a clause from its subprime contracts requiring borrowers to agree to mandatory arbitration. The lender also greatly reduced the penalties it charged for early payment on a loan. “It only took them five years to do the right thing,” Eakes said. Goliath had not been killed, but he had also not emerged from the competition unscathed.

  Among those noticing Eakes as he fought with Citigroup while simultaneously doing battle against the payday lenders were Herbert and Marion Sandler, who ran the World Savings Bank, one of the country’s largest savings and loans. In 2002, Herb Sandler started phoning Eakes in the hopes that he could convince him to create a national organization to build on the work he had been doing fighting Citi in North Carolina.

  The Sandlers were hardly the first to broach the idea, but Eakes always offered the same stock answer when anyone proposed this idea of broadening Self-Help’s scope beyond the state’s borders. “We’ll look at other places,” he would say, “when the job has been completed in North Carolina.”

  Yet the Citigroup fight had forced Eakes onto the national stage, and Self-Help’s fight against first the predatory subprime mortgage lenders in North Carolina, and then the payday lenders, had raised its profile to the point where people were expecting them to act like a national advocacy organization. “Basically, we realized we [at Self-Help] were spending all this time on these requests anyway, so why not get some help?” Mark Pearce said. One key turning point, Mike Calhoun said, occurred while he was reading through a predatory lending bill that activists were championing in Alabama. “It copied verbatim our bill, down to the references to North Carolina statutes,” Calhoun said.

  Still, Herb Sandler needed to phone several times before Eakes finally decided to get serious about launching a national organization. “He’s been calling and calling,” Calhoun said, “until finally he has to say to Martin, ‘I really mean it, I’ll provide you some money. So would you goddamn send us a proposal?’” Sandler had looked at others but, to him, “Martin was the only one up to the enormity of the challenge,” he said. “He was the only one with the capability and the passion and the strategic ability and the leadership quality to get his arms around a challenge of this size.”

  Inside Self-Help, they huddled to figure out how much money they might need to start such a group. It was Eakes, Pearce said, who suggested asking for a number large enough to provide an endowment sufficient to remain independent and not constantly fret over raising money and uncertainty about next year. “Are you fucking crazy?” Sandler cried out over the phone, or something to that effect, when Eakes told him of the tens of millions of dollars he thought he needed to start a national Center for Responsible Lending. Sandler remembered Eakes telling him he wanted an endowment big enough to generate $8 or $9 million per year: a sum well over $100 million. In time, however, it would become clear that money would not be a problem for Herb and Marion Sandler.

  Nine

  “No Experience Necessary”

  DAYTON, 1993–2008

  Allan Jones had inherited his father’s debt collection business; Jared and David Davis had a wealthy father who served as the chief executive and president of Cincinnati’s second-largest bank, a publicly traded corporation. And there were all those executives from Citigroup, First Union, and other financial behemoths who had stooped down to see the riches that could be made operating on the fringes of the economy. They had near-limitless access to whatever capital they might need to move aggressively into a new business.

  By contrast, Fesum Ogbazion, who would also find his fortune in the poverty industry, began with nothing. His parents had been born in a tiny farming village in Eritrea, a small country on the northeast tip of Africa sandwiched between the Sudan and Ethiopia. His father had been taught to read and write by Christian missionaries who opened a school in his town in the 1950s. His mother attended school there as well. Back then, Eritrea was under the rule of Ethiopia, a communist-ruled country that didn’t have much tolerance for people preaching the gospel. His parents were jailed several times, Ogbazion said, and nearly killed “for being Protestant, for speaking out, for not being happy with Ethiopian rule.” Ogbazion was nine years old when the family moved to Florida to join their father, who had gone ahead to study at Hobe Sound Bible College, and then to Ohio, where the senior Ogbazion earned a master’s degree at Cincinnati
Christian College. His father found work as a pastor at an area church while his mother settled into the role of pastor’s wife. They no doubt had a great deal to contribute to their eldest son’s moral and spiritual development but they could offer little in the way of working capital.

  Allan Jones describes himself as a born entrepreneur. So eager was he to learn the collections business while he was still a teenager that, after his freshman year, he secured a summer job at another collection agency—and sat in his car for three hours on his first day of work, waiting for the office to open. Jones, however, had nothing on Ogbazion, who held two or three jobs through high school. He hawked snacks as a vendor at Riverfront Stadium, where the Reds and Bengals played, and at different times worked the mailroom at two of Cincinnati’s larger corporations, CIGNA Insurance and Procter & Gamble. When he was nineteen and still a freshman in college, he wrote in his diary that he felt depressed because he still hadn’t started his own business.

  “I didn’t drink a single beer in college,” Ogbazion told me when we met in Dayton. “I was that focused.”

  I met Ogbazion, whom everyone calls Fez, shortly after the check cashers’ convention in Las Vegas. The roster of attendees at the convention—we all received copies in our goodie bags—included a woman representing a Dayton-based company called Instant Tax Service. That sounded promising. H&R Block, Jackson Hewitt, and Liberty Tax Service were the Big Three in next-day tax refunds, a product that generates more than $1 billion in annual revenues, but I thought it might be interesting to talk with a smaller player seeking to strike it rich in this corner of the poverty economy. I wrote her a note proposing that we meet the next time I was in Dayton and she suggested I talk with Ogbazion, whom she described as the company’s founder and chief executive. Their offices, she said, were downtown, at the corner of Third and Main.

  That made sense. Third and Main is a major transfer point on the Dayton city bus system—an ideal locale for a business catering to the working poor. Spotting the Instant Tax Service sign, I peeked inside. It was a run-down storefront with walls pleading for a new coat of paint. Founder and CEO—the dual titles seemed a bit much. I imagined myself sitting in a banged-up folding chair while Ogbazion sat behind a battered metal desk like one you might find in a county welfare department or a homicide detectives bullpen while outside a large plate-glass window half of Dayton milled about waiting for the 41 crosstown bus.

  I began to suspect I was wrong when I found a human-interest article in the Dayton Daily News about this émigré from East Africa who had founded one of the city’s more successful new businesses. By the time the article appeared in 2004, Ogbazion was running more than one hundred Instant Tax Service storefronts in ten states and crowing about opening a thousand more. The woman from my initial email exchange hadn’t flown to Las Vegas to learn more about the business. She was there to woo potential partners interested in opening a franchise. Their come-on seemed particularly effective: “Work just seventeen weeks a year! No prior tax experience necessary! Low start-up costs! Franchise fee deferment!”

  It wasn’t until the day I was scheduled to meet with Ogbazion, though, that I looked more closely at the address. It was located across the street from the Instant Tax Service storefront I had perused a few days earlier, in one of the town’s marquee buildings, a brown granite structure grandly dubbed One Dayton Centre. I took an elevator to the fourteenth floor. The waiting room was richly appointed, with blond wood paneling and handsome wingback chairs. When I was ushered in to see Ogbazion, he gave me a choice between a leather couch or the seat opposite him at the handsome wood desk where he worked.

  Instant Tax Service’s archetypal customer, Ogbazion said, is the assistant manager at a McDonald’s earning $19,000 a year. Yet clearly business was booming. There are well-regarded law firms in town that can’t afford the rents at One Dayton Centre but Ogbazion leased the entire fourteenth floor and much of the fifteenth. At thirty-five, he was running a business with 1,200 stores and kiosks scattered across thirty-nine states, ranking it just behind the Big Three in a listing of the largest tax preparation firms in the country. It was an enterprise he built using another element of the fringe economy: the subprime credit card.

  In Silicon Valley, young upstarts generally innovate and the big boys play catch-up. The same can’t be said of Ogbazion’s business: H&R Block first started offering its customers the “refund anticipation loan” (RAL), more commonly (and not quite accurately) known as the “instant tax refund.”

  A taxpayer opting for an instant tax refund is not receiving his or her refund any faster than anyone else. What they’re receiving is actually a loan arranged by a tax preparer. The collateral is the refund that the IRS typically mails out in two or three weeks after an electronic return is filed. That loan generally comes at a stiff price. Unlike a payday advance, there’s little risk that the IRS won’t pay a tax refund. Yet, like the payday lenders, the rates vendors charge for RALs, when expressed as an annual percentage rate, are typically in the triple digits, commonly in the 100 to 200 percent range.

  The roots of the refund anticipation loan can be traced to the Nixon administration and a welfare reform measure called the earned income tax credit. The idea as conceived was a sound one. Rather than give cash payments to a mother with two children, provide her with a tax credit. It’s simpler and cheaper to administer and the incentive is tied to the amount of income that a low-wage parent is able to generate. In 2009, a mother with two children receives a cash refund equal to 40 percent of the first $12,000 or so she earns each year (that figure is closer to $14,000 for a couple); the credits start declining once she starts earning more than $16,420 in a year. A home-care nurse with two kids making $15,000 a year would receive an earned income credit of more than $5,000. An LPN with those same two kids and earning $22,000 would receive a refund closer to $3,000. This provision of the tax code put an additional $43 billion in the pockets of the poor and working poor in 2008, according to federal data.

  “There would be a depression in this country every year if the earned income tax credit wasn’t there,” Ogbazion said. “It means billions of dollars each year that goes to buy cars, to pay the landlord, to pay the Christmas bills, to buy furniture.” And of course that same $42 billion has served as the honey pot allowing Ogbazion and a host of others to grow very wealthy despite the most modest clientele.

  “It’s a beautiful, beautiful thing that Richard Nixon gave the country,” he said.

  “We focused on the low-hanging fruit.” That’s how John Hewitt, one of the early champions of the refund anticipation loan, explained the idea in a newspaper interview. They targeted, he said, “the less affluent people who wanted their money quick.” Hewitt, who founded Jackson Hewitt and Liberty, two of the Big Three, recognized a simple truth: People who earn $15,000 or $20,000 a year live in a perpetual state of financial turmoil. They’re constantly behind in their bills, put off all but the most essential of purchases, learn to do without. And then once a year they receive a check from the IRS that can be equal to several months’ pay. Are they willing to pay one hundred dollars or more on top of tax preparation fees to receive the money tomorrow rather than anxiously watching the mail for two or three weeks? Financial planners might scoff but instant gratification is one of our defining national traits.

  Beneficial Finance, one of the giant consumer finance companies, invented the concept of these specialized, tax-time, short-term loans but H&R Block jumped when Beneficial pitched the idea. Starting in the late 1980s, the tax giant became the first tax preparer to offer its customers a “rapid refund” arranged by Beneficial. By 1993, when Ogbazion entered the business, Bank One, based in Chicago and then the country’s sixth-largest bank, was also offering these instant gratification loans. It was Bank One, in fact, that agreed to partner with a twenty-year-old sophomore at the University of Cincinnati who wanted into the business.

  The entrepreneurial bug bit when Ogbazion was around sixteen years old and wo
rking in the Procter & Gamble mailroom. His inspiration was the articles he was reading in Fortune and Forbes profiling the young titans of technology making mountains of money at an improbably young age. He read about Michael Dell, who had started his computer company in his dorm room, and Bill Gates, who was still at Harvard when he founded Microsoft. “I became obsessed with this idea that I needed to start my business by nineteen or it’d be too late,” he said. He was the president of his class in high school and graduated as valedictorian. But unlike Dell or Gates, Ogbazion didn’t have a passion for computers or for anything really beyond a desire to become rich. “I knew I wanted to start a business,” he said. “I just didn’t know what kind of business.”

  Ogbazion was a senior in high school when he received a letter from H&R Block inviting him to have his taxes done at no charge. He drove to an office in a strip mall near his parents’ home, where he was shocked to discover he needed to wait to see a tax preparer. He was still thinking about the packed waiting area days later when a friend mentioned that he too had gone to Block, where he used a nifty new product called the rapid refund. “He tells me, ‘You pay a couple of hundred bucks but you get your money in a few days,’” Ogbazion said. “That’s when the lightbulb went on. I understood why H&R Block was so packed.” H&R Block’s offer of free tax services, he realized, was nothing but a clever marketing ploy to sell RALs to people his age. Thinking back, he realized that the woman who had prepared his taxes had tried to sell him one but Ogbazion was that rare high-schooler who actually owed money to the U.S. Treasury. That fall he would enter the freshman class at the University of Cincinnati, living at home and commuting to school each day. He decided to also find an office in a central location large enough to house a tax preparation business.