Broke, USA

by Gary Rivlin

  Fort is on the short side, a portly man in oversized tortoiseshell glasses. He is bald and sports a graying beard. He can be an easy political foe to underestimate. The day we met he was wearing a white dress shirt marred by two large coffee splotches, a wide-lapel pinstripe suit he described as “very off the rack,” and Rockport-style walking shoes. Even the cultured, refined way he speaks is more professor or preacher than state senator. “I think it really bothered a lot of these good ol’ boys I was taking on that I wasn’t a real politician,” he said. “I didn’t go out of my way to be aggressive but at no time was I going to stoop or bow.”

  Those first months would be an education. Fort had assumed Bank of America’s decision to shut down branches around town was a cost-saving measure. Only once he dove headfirst into the anti–predatory lending fight and started hanging around with the likes of Bill Brennan (“he would become a good friend,” Fort said) did he learn that at the same time they were shutting down full-service branches, the big banks were purchasing subprime lenders. Bank of America, for instance, bought the subprime lender SP Financial Services during the 1990s. “It’s not like these brand-name banks really fled our neighborhoods like we originally thought. They just replaced their branches in working-class neighborhoods with these off-brands making subprime loans to people and making enormous amounts of money,” Fort said. “Citigroup, Bank of America, Wachovia, First Union—they all did it.” Was it any wonder, then, that the Federal Reserve showed that while the volume of conventional mortgages remained flat between 1993 and 2000, subprime loans grew sevenfold? Unsurprisingly, foreclosures spiked 68 percent through the second half of the decade despite a robust economy. In Atlanta, the numbers were even more shocking. The foreclosure rate between 1996 and 1999 fell by 7 percent for those holding a conventional home loan but it soared by 232 percent among those holding subprime loans.

  Fort introduced his bill at the start of the 2001 legislative session. He might have chided himself for telegraphing his intentions but it probably wouldn’t have made any difference. North Carolina had caught the industry by surprise but by 2001 the big banks and other lenders were ready. A few in the press had a good time with a Dallas-based conference that served as a kind of predator’s ball, where what the New York Times described as a “swat team” of lobbyists formed, ready to parachute into any state wherever they might be needed. To beef up its political connections, Household Finance hired Thomas McLarty, Clinton’s former chief of staff, and Connie Mack, the former Republican senator from Florida, to serve on a board of advisers and the big banks like Citigroup had their own teams of staff lobbyists at the ready.

  The industry didn’t try to beat back Fort’s legislation so much as they tried to co-opt it. The Georgia Senate’s Banking and Financial Institutions Committee passed a predatory lending bill carrying Fort’s name but by that time it had been so thoroughly eviscerated it bore no resemblance to the legislation he had written. The Georgia House never even bothered voting on the measure. It was time for a Plan B.

  By instinct, Fort was more community activist than politician. The day after the end of the 2001 legislative session, he headed to a CitiFinancial office in Clayton, one hundred miles away. There he stood next to an older black woman he said CitiFinancial “had put into one of the worst predatory loans I’ve ever seen.” That would be the start of an unusual media campaign designed to sway an audience of one: Governor Barnes. “I knew I didn’t stand a chance if I didn’t bring Roy Barnes on board,” Fort said. “I was doing anything I could think of to make sure he made this part of his legislative package in 2002.”

  The first thing he would stipulate for the record, Roy Barnes told me as I slipped into a booth across from him for our lunch interview, was that people with poor credit should pay more for a loan than people with good credit. “I’m a capitalist through and through,” he told me. He and his brother have started two banks together and they’ve bought a third. As governor he angered environmentalists by pursuing an aggressive growth agenda and he worked hard to abolish teacher tenure. He’s been a Democrat all his life, but he is not what anyone might call a classic liberal.

  Perhaps because at heart he was an old-style banker he took the changes he witnessed in the finance industry more personally than most. Interest rates nationally were strikingly low through the first half of the 2000s but people of modest means were paying more than ever for their money. “When I was a young prosecutor,” Barnes said, “we prosecuted people who charged more than twenty-five percent a year as loan sharks. Now Wall Street welcomes them as respectable businesses.” For years Barnes had fought what in Georgia they call the industrial lender—homegrown consumer finance shops that make small-denomination loans at annual interest rates of 60 percent. Now the payday lenders and title loan shops (called title pawn lenders in Georgia) charged closer to 400 percent.

  “Under normal circumstances, I’d say sixty percent is usurious,” Barnes said. “But compared to what the title pawn and payday lenders are charging, they’re low-cost.” When he was younger Barnes backed a law that would have capped the fees tax preparers could charge for an instant refund and he worked with the consumer groups to rein in rent-to-own. But now, Barnes said, “in the rank ordering of things, these things don’t seem so bad. We’ve become immune.” The biggest shock—and the most distressing to him personally—has been all those old-line institutions that succumbed to temptation. “Some of the most recognizable names are the biggest predatory lenders,” he said. He mentions Wells Fargo, a bank with roots dating back to 1852 and a bank he had long respected. “Wells Fargo! Wells Fargo funds these predatory lenders,” Barnes said. “Wells Fargo made all these predatory loans. Banks have a responsibility to serve the community. It’s outrageous.”

  Barnes is a bulky man with blue eyes, a thick mane of gray hair, and the breezy, aw-shucks style of a country lawyer. A successful legal practice and those banks he owns with his brother gave him a net worth estimated at more than $10 million but the day we met he dressed like an English Lit professor in a brown corduroy sport coat and seemed to greet every person we passed on the street with a “Hi, how y’all doin’?” He was twenty-six years old when he was first elected to the Georgia Senate and practically grew up there, cutting deals and learning the nuances of cloakroom politics. It was no wonder that Fort, the former black studies professor, saw Roy Barnes as the perfect partner. The case against Fleet Finance had been one of the biggest of Barnes’s legal career, and Barnes wasn’t just the sitting governor but also a master at twisting arms and counting noses.

  Another elected official would have sought a meeting with Barnes or at least one of his top people. Instead Fort took to the airways. If nothing else, Roy Barnes was a politician who read the polls, especially then as he geared up for a tough reelection. Getting Barnes to embrace predatory lending as a priority, Fort figured, required him to move the public opinion dial. And so Fort was all over the local media as 2001 turned into 2002, doing what he could to call attention to the problem of predatory lending in Atlanta.

  Mainly that meant borrowing from the Bill Brennan playbook and offering the media the stories of elderly Georgians facing the street because of a deal they had done with a subprime lender—people like Ralph and Ethel Ivey. They had been making do since Ralph, eighty, a retired construction worker, had been incapacitated by a series of strokes, but then they needed a few thousand dollars’ worth of home repairs on the small turquoise-colored bungalow they had paid off years earlier. So they turned to Household Finance for help. “Atlanta is under siege by predatory lenders,” a consumer reporter told listeners on the town’s ABC affiliate. “These lenders were your friend so long as you owned equity in your home,” said Fort in an interview with Creative Loafing, the local alternative weekly. “They’d get as much out of you as they could and then…they took your house.” Where once the polls had shown only nominal interest in the problem of abusive mortgage lending, by 2002 between 70 and 80 percent of the electorate
was in favor of predatory lending legislation.

  “I’d hear the stories and get mad,” Barnes said. “They were loaning money to people who couldn’t afford it. They were churning people through loans to collect more fees. They were not using any underwriting criteria because they were just going to sell the thing on Wall Street through securitization. So I had my administration take over Senator Fort’s bill.”

  The governor’s people fiddled with the language but otherwise left the key provisions in place. As in previous legislative efforts, the bill created a special category for “high cost” loans. The bill defined that as any home loan carrying fees exceeding 5 percent of the loan amount (versus 8 percent under the federal HOEPA law) or an annual interest rate more than eight percentage points higher than the corresponding Treasury bill (Fort had initially proposed six percentage points). The proposed law would ban balloon payments and prepayment penalties on any high-cost loan and required a borrower to receive counseling from a nonprofit organization before a deal could be consummated. The bill also capped the financial reward a lender could give a mortgage broker for putting a borrower into a more expensive loan (in the trade, a “yield spread premium”) and stipulated that there must be a clear tangible financial benefit to a refinancing on a loan less than five years old. And, as Fort’s original bill had done, the proposed legislation also gave any borrower burdened by a high-cost home loan the right to sue not only the original lender but anyone taking possession of that loan.

  “I saw that as the key,” Barnes said. “Wall Street had legitimized subprime lending and predatory lending by allowing for the securitizing of mortgages. We had to get at that if we were gonna get a handle on all the abuses.”

  The bills might have been virtually the same but the result wasn’t. Again the legislation came before the Senate Banking and Financial Institutions Committee but this time it passed unanimously and cleared the full Senate by a vote of 52–2. It was in the Georgia House that the lenders would make their stand.

  Wright Andrews, Jr., ran the National Home Equity Mortgage Association out of his offices in Washington, D.C. From those same offices he ran a group he called the Coalition for Fair and Affordable Lending and also a third that went by the name of the Responsible Mortgage Lending Coalition. Andrews was a top lobbyist for the subprime mortgage industry so Bill Brennan was understandably surprised to hear Andrews inviting him to a conference in Palm Beach, Florida. They were having a panel discussion on regulation and would Brennan participate? Seeing this as a perfect chance for some choice reconnaissance work, Brennan readily said yes.

  The trip wouldn’t disappoint, but only because Brennan, being Brennan, stayed through to the end for some final remarks from Andrews. “He tells everyone that the next battlefield is Georgia,” Brennan recalled. “He tells the group, ‘We’re going to Georgia to stop Roy Barnes from passing this anti-lending ordinance.’”

  Barnes took to calling his bill the Lobbyist Relief Act of 2002. Between the mortgage brokers, the local banks, the out-of-state banks, and nonbank lenders such as Countrywide and Ameriquest, Barnes said, “they hired every lobbyist in town.” And then there were troops who had been flown in from out of the state. Fort remembers in particular a pair of female lobbyists for Ameriquest ubiquitous in those weeks when the two sides were vying for support in the House. “One was black and one was white and they’re both in their mid-twenties,” Fort said. “And I’ll tell you what, they were both really attractive.” In a series of articles that ran at the end of 2007, once the subprime market was already showing deep cracks, the Wall Street Journal reported that one of Wright Andrews’s groups, the Coalition for Fair and Affordable Lending, spent $6.3 million to blunt state laws like Georgia’s, and that Ameriquest, then the country’s seventh-largest subprime lender, by itself made more than $20 million in political contributions.

  Andrews offered something of a mea culpa in the Journal series: “I certainly was not aware of the degree to which many in the industry clearly failed to follow proper underwriting standards—the standards which they represented they were following to us who were lobbying.” But in 2002 Andrews was describing the proposed Georgia law as “so bad” it might even prove a good thing. Georgia should “wake up and truly unite” the mortgage industry, Andrews told American Banker, to the need for federal legislation that would “pre-empt” those state and municipal governments trying to impose limits on subprime lenders and in the process creating a balkanized and confusing regulatory system.

  The other side, of course, was offering much the same complaint: A fractured system meant fighting the same battle in town after town and in state after state. At the end of 2001, the Federal Reserve, which Congress had deputized to monitor the field, modified its definition of a “high cost” loan to include any loan carrying an interest rate eight percentage points higher than a Treasury bill, putting it in line with the North Carolina law and Georgia’s proposal, and declared that any lender making a “high cost” loan needed to take into account a borrower’s ability to repay the loan. Yet both sides had their powerful stalwarts in Congress, and neither could muster enough support to change the system. So despite the wishes of either side, the fight played out in states and cities around the country, creating a complex and multilevel battlefield (if not also a lucrative one) for Andrews and other lobbyists.

  Martin Eakes had proven that a lender could make loans to subprime borrowers at rates around one percentage point above the going rate for prime borrowers and at least break even. Self-Help was a nonprofit, but even if charging only two or three percentage points above the conventional rate, a lender could still make double-digit profits. Georgia’s proposed law only applied to mortgages that charged rates eight percentage points above conventional rates, yet Andrews and his colleagues deemed the proposed new rules unduly excessive. It will hurt first-time homebuyers. It will chase away the legitimate lenders, not just the crooked ones. “I had one bank CEO in my office telling me that Georgia is going to become an island; no one is going to make a loan here,” Barnes scoffed. “We were the third or fourth fastest-growing state in the nation, at least at the time. I just couldn’t believe no one was going to loan us money when we were growing that fast.” In one meeting, a contingent of out-of-town lenders argued that if Georgia insisted on imposing its own rules on mortgages, then it would be difficult to sell them in the secondary market. Mortgages are the latest commodity sold on the global market, they explained, but Barnes was thinking these guys weren’t thinking beyond next quarter’s bonuses.

  “I’m telling ’em, ‘You’re in for a crash here, this isn’t going to end well,’” Barnes said. “But they’re looking at me like I’m the one who doesn’t understand.”

  Barnes was confident he could outmaneuver the out-of-town lenders. He knew he could best the mortgage brokers, but the state’s biggest banks, even those not making high-cost loans, were also aligned against him and that had him worried. So he called them into his office to threaten them en masse. “I have this vacancy on the banking commission,” Barnes recalled telling them, “and if y’all don’t back off this bill, I’m going to do a nationwide search to find me the most sandal-wearing, long-haired, liberal consumer activist I can find to regulate every last one of you.’” Whether that was a bluff was not something they were willing to find out. “I finally backed them off,” Barnes said.

  Even many of his fellow Democrats were opposing him. “You’d’ve thought I was proposing the repeal of the Plan of Salvation, that’s how much they were fightin’ me on this,” Barnes said. Some told him that they were worried his measure would make them appear antibusiness. “This ain’t about business,” he’d tell them, “this is about taking advantage of folks.” And when reason wouldn’t work, he reminded them that he was governor and could make life miserable for them if he set his mind to it. “They were mostly mad because they were enjoying those thick steaks and the cold liquor they were getting from the lobbyists,” he said.

  F
ort confessed to experiencing a few pinch-me moments during those weeks of arm-twisting and uncertainty. He would be sitting in a hearing room overstuffed with lobbyists and activists and feel something like shock. “The whole focus nationally was on stopping us in Georgia so it wouldn’t spread to other places,” he said. “It was almost surreal to think what we had started in 2000 had gotten to this level.” Fort had staked out the conference room next to his legislative office, where every Friday a small coterie of strategists would gather. He had Bill Brennan on hand to help him monitor small changes in the bill, along with Self-Help’s Mike Calhoun, who had helped Fort write the original bill. Another regular, Kathy Floyd, a lobbyist for AARP, arranged for tens of thousands of its members to phone legislators in support of the Barnes-Fort bill.

  “As this process moved along, my job was to make a lot of noise,” Fort said. “It was to our benefit for them to think I was militant or racial or whatever. The crazier they saw me, the more dealing with Roy didn’t seem so bad.”

  Despite everything they were doing, Fort thought they were a goner when Fannie Mae waded into their fight. In a letter addressed to Barnes, the government-backed mortgage giant warned that the measure “could unintentionally shrink the availability of responsible credit for the most vulnerable consumers.” Fannie Mae asked to be exempted from the bill. But rather than respond directly to Fannie Mae, one of the governor’s people enlisted Fort. “So I blast Fannie Mae and hint at the crowds we’ll mobilize to protest their actions,” Fort said. And the next thing he knew, Fannie Mae had rescinded its statement and issued one in support of the bill. The agency blamed the whole thing on a low-ranking staffer.