Broke, USA

by Gary Rivlin

  Barnes probably compromised more than Fort would have had he been the chief negotiator. The biggest concession was giving up on judicial foreclosures. In many states, foreclosures are overseen by the courts but not in Georgia. There are strict rules governing the procedure, but a lender can auction off a property without ever going before a judge. The Barnes-Fort bill sought to change that but Barnes dropped that proposal to win the support of the Speaker of the House, a Democrat. But the bill passed mainly intact, including the provision that would allow a borrower to sue anyone who takes possession of his or her mortgage. “There’s a compassion issue here,” state senator Bill Stephens, a Republican, told the Atlanta Journal-Constitution, explaining why he and so many other members of the GOP voted for Barnes’s bill. “You can’t hear the stories without having it tug at your heart.”

  Barnes signed the bill into law in April 2002. He held a signing ceremony in Atlanta and similar events in Savannah, Augusta, and Macon. Before the week was out, he would hold no less than seven public ceremonies to sign a bill that advocates and critics alike were describing as the toughest anti–abusive lending law in the land.

  Barnes had generously singled out Bill Brennan and his staff during that first signing in Atlanta. This would never have happened, the governor said, without them. What passage of this bill meant to Brennan nearly a dozen years after he first came across that first flurry of Fleet cases became clear to Fort a few weeks later, at a celebration sponsored by Atlanta Legal Aid. No one expected them to win, Fort said from the podium. Not the good ol’ boys who were still stunned that they had lost—and not even those pushing for the bill. While he was speaking, Fort recalled, he spotted Brennan standing off to the side, overcome with emotion. “Bill doesn’t know that I noticed,” he said, “but I saw tears coming down his cheeks.”

  On election night, Roy Barnes saw the early returns from the rural white counties and knew he was in trouble. He might have won a John F. Kennedy Profile in Courage award for changing the Georgia state flag but apparently not everyone was so impressed with his convictions. In the end, the 2002 race wasn’t even close; GOP challenger Sonny Perdue beat Barnes by five percentage points and, for the first time in 130 years, a Republican was seated as the governor of Georgia. “Bill, you know it’s over,” Fort said when he called Bill Brennan the next day. And even Brennan, ever the optimist, had to confess that his friend was probably right.

  Lenders had threatened to stop making loans in North Carolina but studies showed that those were empty threats. A Morgan Stanley survey concluded that rather than reduce the availability of subprime loans there, the law had saved consumers in North Carolina at least $100 million in fees. But Georgia, of course, had implemented a more restrictive law. Countrywide and Option One announced they were greatly curtailing their activity in the state and Ameriquest announced it was pulling out of Georgia altogether. In time it would become clear that this should have been cause for celebration but at the time it had the intended effect of spooking more than a few legislators. Freddie Mac compounded the fear by announcing it would no longer buy any “high-cost” loans from Georgia lenders. One might have asked why a government-sponsored mortgage finance company like Freddie Mac was trafficking in these high-priced loans but the news further softened legislators to the industry’s argument that there were unintended consequences to the Barnes-Fort bill.

  Still, the original legislation might have survived largely intact if it were not for the unexpected intervention of the nation’s largest credit rating agencies. Less than two weeks after Sonny Perdue took over as governor, Standard & Poor’s announced that it would no longer rate the creditworthiness of any mortgage-backed security that included even a single loan out of Georgia—even conventional mortgages. Since any party purchasing a predatory loan was potentially subject to a lawsuit in Georgia, the New York–based rating agency reasoned, and since the Georgia law placed no cap on potential damages, the legal exposure was incalculable. Moody’s Investors Service and Fitch Ratings soon followed suit.

  If one were assembling a list of actors whose reputations were badly tarnished by the 2008 subprime meltdown, the big three credit rating agencies would likely be near the top. Far from being reliable third parties offering impartial financial judgments, together they were “a central culprit of the financial crisis,” Eric Dash of the New York Times would write in mid-2009. They stamped their highest ratings on junk. The problem was that the very people asking them to rate the integrity of these mortgage-backed securities were also the same people paying their fees. Dash likened the system to one in which Hollywood studios paid movie critics to judge their films. In 2003, however, the announcement caused panic inside the Georgia Capitol. The legislature was suddenly in a great rush to undo the damage.

  Those who had authored the law had not done themselves any favors: It turned out that the law needed fixing as soon it had been passed. Fort described it as a matter of a few minor “tweaks,” but that meant opening the bill to reconsideration during the next legislative session, which played into the hands of the opposition. Fort and his colleagues proposed a cap on the financial liability of any single investor, but the legislature was intent on going much further. The amendment that Sonny Perdue signed into law in early March 2003, just five months after the original law had taken effect, limited liability to the original issuer of a loan while watering down a number of provisions in the Barnes-Fort bill. “It’s as bad as not having a bill at all,” a dispirited Fort told the Associated Press.

  Not that their efforts were for naught. Like North Carolina, Georgia helped to inspire activists and legislators living in other locales. Soon after Georgia, New York State passed a tough anti–predatory lending law that also gave borrowers the right to sue whatever institution held their mortgage, even if it was owned by a third party. But that right was granted only if someone could prove that the third party had been complicit in committing fraud (or, in the event of foreclosure, a borrower could get out of his or her financial liabilities to a third party if the loan is deemed predatory under state law). The New York law went into effect in April 2003. Other states followed. Every state after Georgia was certain to put in place a cap on a mortgage holder’s potential liability. “That way the rating agencies like Standard & Poor’s could at least calculate the potential for damages,” said Patricia McCoy, a professor at the University of Connecticut School of Law, who has studied the issue.

  But victories in New York and elsewhere would do little to help those communities in Georgia devastated by the subprime meltdown. By 2006 the state would rank third in the nation in foreclosures.

  Predictably the problem was felt much more acutely in the state’s black precincts. Nearly half of all blacks buying a house in Atlanta in 2005 or 2006 ended up with a subprime mortgage, according to a 2007 analysis by the Atlanta Journal-Constitution, compared to 13 percent of white homebuyers. The difference was even more pronounced among those earning more than $100,000. Four in ten black homeowners earning in the six figures ended up in a high-interest subprime mortgage compared to less than one in ten whites in that income group. The rate of foreclosure among those blacks would be disproportionately high.

  Bill Brennan continued to do what he could, one client at a time. If there was an upside to the 2002 fight, it was that now Brennan had an ally in Fort who could frighten banks into doing the right thing. In recent years, Fort has phoned top bank executives ranging from Countrywide’s Angelo Mozilo to Bank of America’s Ken Lewis to scare them into fixing the most egregious of Brennan’s cases. Fort depicted for me what happens after he leaves a message with one of their assistants. “They’ll google my name, they’ll figure out who I am, and then my phone rings an hour later,” he says. “They figure it’s better to work things out than face a picket line.”

  “That’s how we settle a lot of cases nowadays,” Brennan told me. “Not all but well over half.”

  A man named John D. Hawke, Jr., played only a peripheral role in the
legislative fight over predatory lending in Georgia. As head of the U.S. Office of the Comptroller of the Currency (OCC), Hawke regulated the country’s national banks. He blanched every time a state encroached on his turf, and even before the Barnes-Fort bill took effect, he had already granted a blanket exemption to the banks under his supervision. That didn’t help giant mortgage lenders like Countrywide or Ameriquest but it provided relief to big banks like Wells Fargo and Washington Mutual. But it was another judgment Hawke made in 2003, one month after Sonny Perdue broke the hearts of Fort, Brennan, and others in Georgia, that stands out as the other great what-if of the early 2000s. Bill Clinton had nominated Hawke to a five-year term as OCC chairman that began in 1999 and from the start he seemed intent on standing in the way of those trying to crack down on predatory lending.

  It was more than just legislators in states like North Carolina, Georgia, and New York who were eager to do something about the more egregious forms of subprime mortgage lending. A number of state attorneys general were also intent on taking action, so much so that within their national association they had formed a predatory lending committee. Iowa Attorney General Tom Miller, whose investigation of Ameriquest led to that company paying a $325 million fine, served as co-chair of the committee. So too did North Carolina’s Roy Cooper, who had been displeased with Hawke ever since the latter exempted (as he would do in Georgia) national banks from the state law Cooper had championed while he was president of the North Carolina Senate. In April 2003, a small contingent of attorneys general converged on Washington hoping they could convince Hawke to work with them instead of against them.

  Hawke agreed to a meeting but then asked himself why he had even bothered. He was annoyed with the lot of them even before they showed up at his offices. The day before they were scheduled to arrive, Eliot Spitzer, then the New York attorney general, had held a press conference blasting Hawke as a pinheaded bureaucrat for standing in the way of his efforts to crack down on unfair lending practices, especially in black and Latino neighborhoods. Spitzer wasn’t at the meeting with Hawke but his presence was felt just the same. “Are we here for a press event,” Hawke began when he took his seat, “or do you want to talk issues?” The attorneys general were no happier with their publicity-hungry colleague from New York but there was also nothing they could do. “We couldn’t control Spitzer but that didn’t change the fundamental issue that we were there to talk about,” Cooper said.

  Their meeting lasted only an hour. It was decorous despite its contentious start but hardly satisfying for either side. The attorneys general asked for more latitude in cracking down on predatory lending; Hawke held forth on the doctrine of preemption and why it was critical that the federal government not relinquish any regulatory power. We’re not trying to intrude on the business of ensuring the safety and soundness of the nation’s banks, the attorneys general countered, but we have the right to protect our citizenry from the oppressive loans that some lenders under your charge are making. States have also always had the right to regulate real estate transactions within their borders, Cooper argued when it was his turn to speak, and they have the power to enforce consumer rights laws even if that abuse is at the hands of a nationally chartered bank (or a bank’s subprime subsidiary, for that matter). There were more practical considerations as well: The states were closer to the problem and could react more quickly than the federal government. Hawke, however, would not budge.

  “He took fifty sheriffs off the job when the lending industry was becoming the Wild West,” Cooper, who was still angry with Hawke when I visited him in North Carolina, told me at the end of 2008. “What was going on was unrestrained and uncontrolled. You had these no-doc [no documentation] loans. You had lenders that weren’t even looking at the borrower’s ability to pay because they knew they would just be selling these loans on the secondary market.” If the federal government had chosen to remain neutral, Cooper said, “I believe the fight against these lenders would have spread like wildfire across the country because of just the basic unfairness.” Instead, Hawke and the OCC threatened lawsuits at every turn.

  “I blame him for the meltdown,” Bill Brennan said of Hawke. “He knew exactly what was going on and didn’t do a thing about it.”

  Hawke was fed up with that kind of statement by the time I reached him at the end of 2008. “Everyone’s looking around for a scapegoat,” he said. “So people point a finger at me.” It’s not as if he did nothing, he said. He asked the attorneys general to give his staff any evidence they had of reckless lending “but they just completely dropped the ball on that.” He suspected that’s because their main interest was in generating headlines. He pointed out that shortly after meeting with Cooper and his colleagues, he sent out rules clarifying the OCC’s position: Loans should be based not solely on the worth of a borrower’s collateral but also on his or her ability to pay. To him, if people are looking for someone to blame, look at the investment banks and their “unquenchable thirst” for more subprime loans they could package and sell.

  Hawke is a heavyset man with thinning gray hair and dressed in suspenders and a bright blue-and-white striped dress shirt. After his term expired in 2004, he returned to Arnold & Porter, the Washington, D.C., powerhouse law firm where he had worked prior to his appointment. There he represents some of the same banks he had supervised as the chairman of the OCC, but to his mind there is no conflict of interest because his fight with the states had been over jurisdiction and never the behavior of the banks under his domain. “One of the benefits of being a national bank is you can operate under a single set of rules,” Hawke said. As he had done in his meeting with the attorneys general, Hawke gave me a short lecture about the Constitution and the primacy of delegated federal authority over states’ rights. “Preemption is not something for us to give up on because it might be convenient,” he said.

  If ever he doubted himself, Hawke had the courts to provide him solace. The OCC filed suit against Spitzer after he opened an investigation of possible discrimination by banks under his charge. The federal district court ruled in favor of Hawke’s agency and the U.S. Court of Appeals upheld the lower court’s decision. “He challenged us,” Hawke said of Spitzer, “and we beat ’im every time.” Six months after my visit, though, Hawke was no doubt feeling less smug. The U.S. Supreme Court concluded that the OCC had been wrong and had had no right to block a state trying to enforce its own law. An unusual coalition had formed behind this ruling, with Antonin Scalia writing for the majority in an opinion that also had the consent of the Court’s four more liberal justices.

  The alarms, meanwhile, continued to ring, even as most people in power chose to ignore them.

  Twelve

  Public Enemy Number One

  DURHAM, NORTH CAROLINA, AND WASHINGTON, D.C.,

  2002–2006

  The first thing Steven Schlein wants you to know about the ongoing, epic struggle between his clients—the payday lenders—and their critics is that it’s not a fair fight. Payday’s foes, and especially Martin Eakes, have too much money and too much power. “They’ve got more lobbyists than we do,” he complained when we sat down together in mid-2008. “They have more money. We’re completely outgunned!” I raised a skeptical eyebrow and Schlein, payday’s main spokesman, slowly shook his head in disappointment. He has a strained, Brooklyn-tinged voice that he raises an octave. He sounded as if he were pleading rather than making a rhetorical point. “Go take a look at the $25 million monument Eakes bought for himself,” he said. He pointed his chin toward the window and the multistory building the Center for Responsible Lending (CRL) bought a few years earlier to serve as its Washington, D.C., office. “Go there right now and then tell me they’re just this scrappy, underfunded public interest group up against this big, bad industry.”

  We’re sitting two blocks from the CRL building in the offices of Dezenhall Resources. That’s how bad it had gotten for Allan Jones, Billy Webster, the Davis brothers, and the others. In 2004, they started payi
ng for the high-priced services of a crisis management firm that specializes in the representation of unpopular industries such as the chemical manufacturers, pharmaceutical companies, and Big Oil. The firm’s founder and chief executive, Eric Dezenhall, laid out his approach to helping beleaguered industries in his 1999 book, Nail ’Em! Confronting High-Profile Attacks on Celebrities and Businesses. “Damage control used to be about soft, fuzzy concepts like image,” Dezenhall wrote. “Now it’s about survival, and this had made the battle bloodier.” THE PIT BULL OF PUBLIC RELATIONS—that was the headline BusinessWeek used above a 2006 profile of Dezenhall. The actual job of defending the payday lenders, however, fell mainly on Schlein and a younger woman named Lyndsey Medsker.

  “They have people in Washington,” Schlein says of Eakes and the Center for Responsible Lending. “They have people in North Carolina. They have an office in Oakland. Here it’s just me and Lyndsey.” Schlein complains about the disparity in the size of their respective ground forces when the payday lenders gather for meetings of their trade organization. The opposition, he’ll tell them, is meeting with newspaper editorial boards; they’re organizing in this state or that. But invariably his calls for more help go unanswered. Perhaps the pooh-bahs know that each big chain has its own team of government affairs people and its own public relations staff on the payroll.

  Schlein wonders if it would even make a difference if he had more people. Dezenhall has represented the likes of Exxon Mobil and a former Enron executive but payday lending seems to occupy a category all its own. “I’ve been in this business twenty-five years,” he said, “and I’ve never seen such closed-mindedness about an issue.” He hears the same from the lobbyists they hire whenever the Center for Responsible Lending or some similar-minded group is pushing a bill that would shut down the industry in some far-flung state. “They’ll all say it,” Schlein said. “Working for the gun lobby, or working for tobacco, is like working for Goodwill compared to the hostility they face working for the payday lenders.” Schlein tells of the time he phoned the Washington Post about meeting the newspaper’s editorial board. The District of Columbia City Council was considering a bill that would cap the rate payday lenders could charge (the bill passed by an eight-to-one margin, with only Marion Barry voting against it) and he thought the paper might be curious about what the industry might have to say. “This woman I spoke with at the Post, she basically ranted at me, ‘I’m not giving you slime-balls a minute of my time,’” he said. He shook his head and looked momentarily hurt. “She used terms you wouldn’t believe.”