by Gary Rivlin
Schlein is a trim man, around fifty years old, with close-shorn gray hair. Those in the public relations trade tend toward the bubbly, or at least upbeat, but Schlein by disposition is far more dour, more life-weary and rough-hewn. He’s also more than a little obsessed with money. Over breakfast he told me about his grandfather, who had moved to this country from an Eastern European shtetl with next to nothing. He left a pair of successful jewelry stores to his heirs but Schlein wishes his grandfather had been a pawnbroker. “It was totally random, him getting into the jewelry business,” Schlein explained. And pawn sales, he went on to point out, are “going gangbusters right now.” At that same breakfast, he asked me to explain how a person could work as a business reporter at a place like the New York Times or Wall Street Journal. Some barely earn six-figure salaries. He can’t imagine working that hard, he told me, for so little money.
Schlein clearly is well paid. He wears expensive suits and a pair of fashionable rectangular steel glasses. Dezenhall’s offices are sleek, modern, prosperous looking. Yet one might ask Schlein why he does what he does for a living. His job hasn’t been much fun, he confessed, at least since taking over the payday account. He’ll work on a friendly reporter he knows, hoping to persuade him or her to see beyond the 391 percent APR, but then 60 Minutes Wednesday runs a segment on payday that begins, “It may sound like loan-sharking, but in most of America, it’s perfectly legal.” That particular story was set in North Carolina, of course. Look behind every effort to ban payday lending, Schlein said, and you’ll find “Martin Eakes and his little empire.”
It galls Schlein that people, especially reporters, hold up Eakes as some kind of white knight. To him, Eakes is a competitor who first opposed payday lending in North Carolina “because he runs a credit union and he had an economic stake in seeing us gone.” With no payday loans to help bail people out, the credit unions, like banks, earn a lot more in bounced-check fees and overdraft protection products. And once Eakes defeated them in North Carolina, he said, “he became enthralled with his power.”
“Just listen to the guy speak,” Schlein said. “He oozes elitism out of every pore. He’s the only one who knows what’s best for everyone else. He really thinks he’s the last honest man.”
Martin being Martin. That’s how Mark Pearce, the Self-Help executive Eakes chose to serve as the first president of the Center for Responsible Lending, described the decision to spend $23 million to buy the eleven-story office building that has pretty much destroyed Steven Schlein’s peace of mind. The building is located in Farragut Square, three blocks from the White House. “It was Martin’s way of saying we’re here and we’re not going anywhere,” Pearce said. It was also an aggressive business decision by an advocacy group that feels entirely at home playing the real estate game. The CRL, founded in 2002, occupies one floor and leases out the other ten, providing the organization with a steady income that more than covers the mortgage. Plus, Eakes said, the building is already worth more than $30 million.
Mike Calhoun admitted he was shocked to discover how rich and big the CRL was relative to other advocacy outfits. “We looked at groups like the Consumer Federation, PIRG, and the Consumer Law Center and we realized we were huge, relatively speaking, compared to these other groups,” said Calhoun, who took over as president of the CRL in 2006, when Pearce took a top regulatory posting with the state of North Carolina. “And these were organizations which had much wider mandates than us, with utilities and health care on top of consumer finance and mortgages.” To CRL’s great relief, these other groups were “gracious and welcoming,” Calhoun said, to this new giant in their midst (the group has a staff of sixty spread across three offices) and invited them to take the lead on predatory lending issues. The challenge, then, was figuring out what they would do in their newfound roles at the vanguard of the consumer rights movement.
The CRL would focus mainly on businesses that catered to the poor and working poor, but even then that left them with an impossibly broad terrain to cover. Subprime credit cards, rent-to-own, used car finance, refund anticipation loans, even the humble corner pawnbroker: There seemed no shortage of ways entrepreneurs had devised for getting rich working the easy-credit landscape. There was even a fledgling industry devoted to helping hospitals and doctors collect the money owed to them by the uninsured and underinsured. These companies, part of what BusinessWeek would dub the “medical debt revolution,” normally don’t charge the hospital or physician anything for its services but instead earn their profits from the fees and interest rates (typically between 14 and 25 percent) they tack onto the bills they have been assigned.
The CRL would naturally focus on exploitative subprime mortgages. The problem had grown only more acute since they had sided with Freddie Rogers in his fight with Associates and there was no doubting their authority in this realm. Kathleen Day remembered when she was covering the banking industry for the Washington Post and for the first time saw Eakes testify before Congress. Most striking, said Day, who now runs the CRL’s public information office, was how differently Eakes came across compared to the other consumer advocates speaking that day. “He starts off telling people he’s been in this business for twenty-five years,” Day remembered. “And he tells the committee, ‘You can’t tell me it can’t be done because I’m doing it, and I’m doing it right without screwing people.’” The banking lobbyists Day happened to share a cab with after the hearing were all in a huff about Eakes, she said. They didn’t say he was wrong: They didn’t say he didn’t know what he was talking about. “All they could say,” Day recalled, “is that they thought he was sanctimonious.”
The payday lending industry would be CRL’s second priority. Martin Eakes and Self-Help were too invested in that fight to consider dropping it, especially once they had the money to build a national organization. Their third and final priority would be the more predatory side of the credit card industry, including practices the consumer activists called “fee harvesting.” The insidious part of fee harvesting is that the consumer, her credit damaged and her funds tight, starts off feeling grateful that a lender is willing to trust her with a credit card. But then she receives the first bill. There are card activation fees and origination fees (commonly $100 or more) billed as a cash advance and also an “account maintenance fee” (maybe $10 a month). The fees eat up a goodly share of the available credit, typically between $300 and $500, and therein lies another huge moneymaking opportunity for the card issuer: the fine for going over your available limit. In time, the CRL would also add banks to their list of targets and specifically the overdraft fees they charged. “These fees are becoming the main profit center for these banks,” Eakes said, “which means they’re making the bulk of their profits off their poorest customers.” Still, the CRL would devote a lot more time to fighting the mortgage lenders and the payday advance industry than to battling the banks that were issuing subprime credit cards.
The payday lenders lost in North Carolina in 2001 and then again a few years later in Georgia and Arkansas. Even so, they were slow to recognize that they were in an existential fight for their livelihood. “These were three very different situations,” Billy Webster said. North Carolina was Martin Eakes, Georgia boiled down to the political clout of the industrial loan stores that Roy Barnes had battled, and Arkansas was a quirk: A legal battle they lost because Arkansas is the only state in the union with a usury cap (17 percent) written into the state constitution. Still, the same year that they lost in Georgia, the big chains hired Dezenhall. We need to be more aggressive, Webster explained in an American Banker article about the payday lenders “going on the offensive.” We need to explain to people that a payday advance is cheaper than missing a credit card payment or a series of bounced checks. Steven Schlein had just been hired but he was not wasting time. The Center for Responsible Lending might sound as if it has the best interest of consumers at heart, Schlein said, but he shared with American Banker a report he had put together dismissing the CRL as nothi
ng but a front group for a Durham-based credit union.
But payday hardly seemed an industry in need of outside help. As rapidly as payday had grown in its first seven years, it grew more rapidly still over the next few years; where there were 10,000 payday stores in 2000, that number exceeded 21,000 by 2004. Success inspired more success. As industry trailblazers such as Check Into Cash, Check ’n Go, and Advance America continued to thrive, large companies that had grown rich feasting in other corners of the poverty universe started offering payday loans. That included chains in the check cashing, pawn, and rent-to-own businesses. Regional powerhouses such as the MoneyTree in the Northwest helped to fuel the expansion, as did people like Mike Hodges. Hodges was twenty-four when he opened his first payday store in Nashville, in 1996. By 2008, Advance Financial was operating twenty stores within thirty miles of Tennessee’s state capital.
And there were those late to the poverty business who were no less eager to make their fortune. Just as Mike Hodges was poring over maps in search of gaps in the Nashville metro area, so too were people like Erich Simpson, a former DuPont factory worker who opened his first of three payday shops in a rural stretch of South Carolina in 2004. The industry would add two thousand more stores in 2005.
The big payday chains even started to spawn their own competition. Jones would grumble about the mid-level managers who gave notice “thinking that making it was as easy as figuring out what kind of plane they was gonna buy.” Billy Webster voiced the same complaint. Greg Fay served in the army for seven years right after high school, then went to work first in the rent-to-own business and then in payday finance. When Fay came into a little money, he opened his first payday store just outside Dayton in 2003 and was soon eyeing locales in and around Toledo, 150 miles up the highway. Ultimately he, his partner, and an outside pair of investors would open a half-dozen stores in western Ohio.
The issue of whether Wall Street could fully embrace payday lending was put to rest in 2004 when Advance America announced that it was going public and that Morgan Stanley, a top-tier investment bank, led the offering. The investment banking arms of Wells Fargo and Bank of America were among those lending their names and sales teams to the effort. If there was a taint to payday, the 23 percent profit margin Advance America was reporting in its prospectus made it all okay. Usually only the most successful technology companies consistently posted numbers that good.
The bankers had priced Advance America stock at between $13 and $15 a share. It opened at $15 and then soared above $21 before closing at $20.50—a 37 percent jump in one day of trading. Billy Webster had cashed out around $9 million worth of stock but still owned shares valued at more than $100 million. His partner and financier, George Johnson, cashed out $22 million in stock that day but still owned a $260 million stake in the company.
The numbers Advance America was posting naturally attracted even more wannabe moguls to the business. Every year at the annual meeting of the payday lenders, Steven Schlein rubs shoulders with some of the new arrivals, who give him hope for the industry. “You walk around and you think you’re seeing all of America in one room,” Schlein said. The crowd skews white, he acknowledged, but otherwise they strike him as a perfect cross-section of America, with people old and young and from all regions of the country. Schlein told me of a kid he had recently met who had gotten into payday lending while he was still in college but already owned five stores. “Think how rich he’s going to be when he already has five stores at twenty-two,” Schlein said.
But if Schlein was brightened by the native entrepreneurialism of a can-do country, Billy Webster was worried that he was witnessing his own doom. “One of the things I never dreamed would happen is we would have so many people in this business,” he told me when I visited him in Spartanburg. As a reference point, he harked back to his decade in the fried chicken business. “You’d never have seen a Popeyes and a KFC on the same corner as a Bojangles,” he said, “but that’s what you have now [with payday lending stores]. So you end up not just with saturation problems from a business perspective but also multiple loan problems.”
Inside the CRL they dubbed themselves the “road warriors.” These were the staffers so committed to defeating the payday lenders or their counterparts in the mortgage industry that they proved willing to turn their lives upside down and live in another state for weeks, if not months at a time. Martin Eakes described one of the warriors, Uriah King, as a “human vacuum cleaner sucking up everything he could about payday.” King, who read Clausewitz on war to gird himself for battle, could drive him batty, Eakes said, but what King lacked in experience he more than made up for in energy, enthusiasm, and native savvy. It fell to people like King and his colleague, Susan Lupton, to help fill in the narrative and demonstrate that the payday advance was, to borrow a vivid metaphor from Robert H. Frank, an economics professor at Cornell University, like “handing a suicidal person a noose.”
It helped that Advance America and a second payday company, QC Holdings, a chain of three hundred stores based in Kansas City, went public in 2004. The documents both companies are required by law to regularly file with the Securities and Exchange Commission have provided a treasure trove of information. So too have the quarterly conference calls that most publicly traded companies routinely record and post on the Internet as well as the detailed reports written by financial analysts who earn money selling stock advice to wealthy clients.
From the start, the payday lenders have said theirs is an occasional emergency product used by the rational consumer facing the prospect of a bounced check. Yet those in the business of following the industry seemed to come to precisely the opposite conclusion. “A note about rollovers,” an analyst named Elizabeth Pierce with Roth Capital Partners wrote in a research report about First Cash, a pawnshop chain that had gotten into payday. “We are convinced the business just doesn’t work without them.” That view was echoed by the accounting firm Ernst & Young: “The survival of payday loan operators depends on establishing and maintaining a substantial repeat customer business because that’s really where the profitability is.” Even Dan Feehan, the chief executive of Cash America, the country’s largest pawnshop chain and another major player in the payday industry, said much the same when explaining the business to potential shareholders at an investor’s conference. “The theory in the business,” Feehan said, “is you’ve got to get that customer, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.”
The CRL was convinced the payday cash advance was an inherently defective product, trapping people as if by design. The single mother with two kids might be avoiding a costly bounced-check fee that first time she borrows $400 but how is she ever going to cover that $460 check two weeks later when she brings home $1,100 a month? “They sucker you in with that first loan,” Eakes said, “and then they gotcha.” It became essential, then, to collect the tales of customers like Sandra Harris, an accounting technician in Wilmington, North Carolina, who borrowed $200 from a payday lender to pay her car insurance after her husband lost his job as a cook. Eight thousand dollars in fees later, the couple ended up losing the car and avoided eviction only because of a sympathetic landlord. John Kucan, a former Connecticut state trooper, had a less tragic story but one offering no less flattering a view of payday. He retired to North Carolina after being shot in the line of duty but then needed to borrow $850 from a payday lender because the state had overpaid some benefits and wanted its money back. Living on a fixed income, however, Kucan would need to renew the loan fifteen times, racking up $2,000 in fees before he was able to pay it off. When you’re desperate for quick cash, he told one interviewer, “what’s flashing in front of you is the dollars you’re looking for. The percentage rate isn’t something you’re even considering.”
The CRL’s first big media triumph came in the spring of 2005, when CBS correspondent Scott Pelley traveled to North Carolina to report on the state’s efforts to evict the payd
ay lenders from within its borders. Sandra Harris told her story, as did John Kucan. Listeners also heard from a woman named Ginny McCauley, who ran an Advance America store in Illinois for six years. McCauley estimated that 60 to 70 percent of her customers were rollovers during that time. Pelley asked Jim Blaine, the CEO of the State Employees’ Credit Union of North Carolina, what he would tell someone who was planning on taking out a payday loan. “I’d say go get a loan shark,” Blaine said. “They’re cheaper.” A typical loan shark, he explained, only charges an APR of around 150 percent.
The only payday lender willing to talk on camera was Willie Green, a former NFL wide receiver who opened his first payday store as his playing days were ending in the mid-1990s; he ultimately opened ten stores. Pelley asked Green, who was from a poor background, what he would say to a Sandra Harris, who had lost a car and almost a home. “How about, ‘Thank You, Mr. Green or Mr. Check Casher or Mr. Payday Advance Store for helping me out when I was in a time of need?’” Later in the segment, when Pelley brought up the prospect of Green’s wife taking out a payday advance, he essentially confessed that she was too smart for that. “She has a master’s degree in accounting,” he said.