Broke, USA

by Gary Rivlin

  The next year brought another body blow to the industry. This time it wasn’t the CRL leading the charge (though Eakes’s group would provide critical behind-the-scenes lobbying help) but the commanding officers at military bases around the country, unhappy that the payday operators had opened so many shops outside their gates—“like bears on a trout stream,” a pair of academics concluded in a 2005 study of the geography of payday lending. Was it any wonder, given that the country’s military bases were thick with young, financially inexperienced people getting by on modest salaries? In the mid-2000s, the typical army private first class started at an annual salary of $17,000 a year and nearly three-quarters of active-duty military personnel never made more than $30,000 a year. There were reports of soldiers discharged because they defaulted on a loan and many others were stuck stateside because of a military rule that stated that anyone owing more than 30 percent of his or her salary could not be dispatched overseas. “I have guys guarding my gate here when they should be deployed in Iraq,” the commanding officer at a naval base in San Diego told the Associated Press. The CRL waded into the fight with a study concluding that one in five active-duty military personnel had taken out a payday loan in the previous year versus one in every sixteen adult Americans. At Fort Bragg, North Carolina, credit counselors said they were seeing an average of two to three soldiers a week who owed money to a payday lender, according to a report cited by Bloomberg Markets.

  To the extent that the payday industry has clout on Capitol Hill, it’s in the Senate Financial Services Committee, but this fight was waged instead in the Armed Services Committee. In the summer of 2006, Senator Jim Talent, a Missouri Republican, and Senator Bill Nelson, a Florida Democrat, added an amendment to the annual defense authorization bill that capped the rate military families would have to pay for a payday loan at 36 percent. It passed, and when the defense authorization bill became law that fall, payday lenders could charge active-duty personnel no more than $1.38 on every $100 they borrowed. With a stroke of the pen, the country’s payday lenders were essentially banned from doing business with the military. It didn’t elude the industry that it wouldn’t take much of a logical leap for a legislative body to conclude that if payday loans were so destructive to the emotional and financial well-being of America’s fighting men and women, they might also be harmful to some of their other constituents.

  At the start of 2006, people inside Self-Help and the CRL started to notice a spike in the number of subprime home loans. Even as late as 2003, subprime accounted for only 8 percent of the overall residential mortgage market, but by 2006, subprime loans accounted for more than one in every four home loans written—28.7 percent of the mortgage market, according to the Fed. Worried that this would spell doom for the home ownership dreams of a great many low- and moderate-income people, a research team was created inside the CRL to predict what might happen. Ellen Schloemer, the CRL’s research director, told me that their conclusion, that this trend would lead to 2 million subprime foreclosures, was so incredible that they rewrote a report they called “Losing Ground” six times before releasing it at the end of 2006. The Mortgage Bankers Association denounced the study as wildly pessimistic but in time it would become clear this was one of the few early warnings of the economic carnage to come. “That study really put us on the map in Washington,” Mike Calhoun said. At the start of 2008, the publication Politico declared that the CRL was “the main intellectual engine driving the Democratic response to the housing crisis” in no small part because “the Center has been more right than wrong.” That same year the Federal Reserve Board would single out the CRL for its research when appointing Mike Calhoun to a three-year term on its Consumer Advisory Council.

  Steven Schlein, though, has not been nearly as impressed with CRL’s research capabilities. “They do not do scholarship,” Schlein said. “It’s a joke what they call a study. They’re done by a bunch of twenty-four-year-old kids sitting in some office in North Carolina, plucking numbers from out of the air.”

  In fact, some of CRL’s payday reports have tended to overreach. Its first big industry study, for instance, released in 2006 and called “Financial Quicksand,” asserted that 90 percent of the revenues payday lenders collect in any given year are “stripped from trapped borrowers.” Under the CRL’s definition, though, a trapped borrower was anyone taking out as few as five payday loans a year. The study also alleged that the “typical” payday borrower ended up spending nearly $800 to repay a single $325 loan, or more than $450 of accumulated fees. That’s because the average payday customer, the CRL found after examining data from eight states, took out nine loans per year. Inside the CRL, they assumed that meant a person took out a single loan and then flipped it eight times before paying it back, but it seemed just as reasonable to conclude that the typical borrower took out a new loan every few months but needed an extra couple of payments to wipe out the debt.

  But one could also ask what difference it made. Maybe five loans a year didn’t call to mind a “trapped” borrower but it also didn’t conjure up the customer needing a bailout because (as Willie Green had told Scott Pelley) “God forbid, an emergency comes up where the refrigerator goes out or the child needs to go to the doctor.” And did it make much difference whether a person flipped a single loan eight consecutive times or took out multiple loans in a given year? The bottom line was the same: nearly $500 in payments to a payday lender rather than money that might otherwise go into a savings account.

  The industry would again find fault in some of the more sweeping assertions made within the CRL’s next big study, “Springing the Debt Trap,” released in 2007. But the power of that report wasn’t in its conclusions; it was in the data the CRL collected from states that tracked and published customer usage statistics. In Colorado, for instance, one in seven payday borrowers in 2005 remained in debt for at least six months before paying back a loan. Regulators there also found that customers taking out twelve or more loans in a year generated 65 percent of the industry’s revenues in the state. Other states reported similar findings when singling out those taking out twelve or more loans in a year: Oklahoma (64 percent of their revenues from this group), Florida (58 percent), Washington state (56 percent). At least one in five borrowers in each of those four states had taken out twenty-one or more loans in a year. In this regard, the APR no longer seemed an imprecise measurement of what was in fact a fee but a close approximation of the interest a good portion of the industry’s customer base was paying for its short-term cash needs.

  The number of loans the average payday consumer took out in a year was another point of contention. Industry sources tended to say seven or eight loans per year while payday’s critics claimed those numbers lowballed the problem. The Woodstock Institute, an advocacy group based in Chicago, concluded that the average payday user in Illinois took out thirteen loans in a year. Policy Matters, a liberal research group based in Cleveland, would reach the same conclusion about borrowers in Ohio. John Caskey, a sociology professor at Swarthmore College and the author of Fringe Banking, studied payday lending in Wisconsin in 2000. He found that 49 percent of the state’s payday borrowers had taken out eleven or more loans over a twelve-month period and that nearly one in five borrowers had taken out twenty or more loans during that time. There was no dispute over the size of the average payday loan, however: $325.

  The industry tended to cite one of two studies. One was by Donald Morgan, a researcher at the New York branch of the Federal Reserve who sought to test the thesis put forward by CRL and others that a payday advance was a “predatory debt trap.” According to his research, people in North Carolina and Georgia, two states that had recently banned payday loans, bounced more checks and filed for Chapter 7 bankruptcy at a higher rate than people in states where payday loans were available. Studies by researchers inside academia, though, have shown precisely the opposite, at least on the issue of bankruptcies; relying on payday loans, several studies have found, accelerates the chances that a
person will declare bankruptcy. The CRL also cast doubts on the bounced-check claim by noting that Morgan used data from large stretches of the South as a proxy for Georgia and North Carolina.

  The other study that advocates of payday lending quote was written by an economics professor at Indiana Wesleyan University named Thomas Lehman. “You cannot read Dr. Lehman’s work without walking away thinking payday lending is absolutely necessary and, if used responsibly, an absolute Godsend,” said Larry Meyers, a former screen-writer turned pro-payday blogger ever since he and a partner started investing in budding payday chains. Yet while journalists regularly quote the CRL in articles about payday, Meyers complained, they never quote Lehman. While testing that hypothesis I came across Lehman’s name in BusinessWeek. He wasn’t mentioned in an article about payday, however; it was about seemingly independent voices who are in fact “quietly financed by powerful interests.” Lehman served as BusinessWeek’s poster boy for the practice after he confessed to the magazine that in fact the industry had paid him to do his study.

  Martin Eakes figured he must be doing something right. He had enough critics throwing mud at him to convince him the CRL was having an impact. One of the sillier attacks came from a group that called themselves the Consumers Rights League, a name chosen presumably so they could appropriate the CRL acronym. They dubbed the original CRL a “predatory charity” that contributed to the world’s economic woes in 2008 by promoting “public panic” about the subprime meltdown.

  One of the nastier assaults has come at the hands of a group called the Capital Research Center, a D.C.-based think tank that keeps tabs on liberal advocacy groups. Eakes’s longtime friend Tony Snow, a conservative stalwart, compared his old running buddy to Jack Kemp, an active combatant in the war on poverty while serving as a Republican representing the Buffalo area in Congress. Eakes even uses the same term to describe his politics—he calls himself a “bleeding-heart conservative”—as did Kemp, a former vice presidential candidate and the director of HUD under the first President Bush. Yet Eakes was more liberal and therefore a foe. “A Leftist Crusader Wants to Dictate Financial Options to Consumers” was the headline over the first of several unflattering pieces about Eakes that the Capital Research Center published. Among Eakes’s various crimes: He uses Self-Help to “form political coalitions with radical left-wing groups whose purpose is to bully banks into changing their lending practices” despite Self-Help’s stated mission of helping the disadvantaged, it has loaned millions to its own executives and officers over the years; and its borrowers have delinquency rates seven to ten times higher than their credit union peers. A second article made fewer personal charges but instead criticized Eakes, among others, for “demonizing” the practices of some of the country’s leading subprime lenders. In that article, Capital Research lauded Countrywide, New Century, and other subprime lenders for increasing “home ownership opportunities for minorities and low-income borrowers” while ripping “left-wing advocacy groups” like Self-Help that “oppose consumer choice.”

  In Durham, people didn’t know whether to laugh or cry. Capital Research was accusing Eakes of enriching himself at the hands of the poor yet Self-Help’s salary cap meant their boss and the other top staff were getting paid no more than $69,000 a year. Still, they earned too much to join the credit union they ran and therefore were ineligible for loans. For his part, Eakes was relieved that the Raleigh News & Observer had recently named him its 2005 “Tar Heel of the Year.” To ensure they hadn’t chosen wrong, the paper had a reporter check Capital Research’s charges. “It was bad luck for them that the News & Observer had already picked me for this thing,” Eakes said. “They had to get to the bottom of this and investigate.” Making insider loans and reckless lending “would be worrisome,” the News & Observer wrote in an editorial appearing shortly after Capital Research’s first attack, “if there was a word of truth to them.”

  At least one of Capital Research’s charges was true: More of Self-Help’s borrowers were thirty or sixty days late in their mortgage payments when compared to the typical credit union. But that was to be expected given Self-Help’s role as a self-styled bank of last resort. “Our customers don’t have the same cushion that middle-class borrowers have,” Eakes said. “So if they lose a job or someone gets sick, they’re more likely to fall behind a month or two. But then they catch up because keeping a home means that much.” Through the economic turmoil of 2008, Self-Help, despite its low-income clientele, had consistently maintained a loan default rate of less than 1 percent.

  Bonnie Wright, Eakes’s wife, believes the attacks on her husband help to sustain him. Longtime Self-Help colleagues say the same, but on some level the assault on his character seems to bother Eakes. He cracked jokes about some of the more personal charges foes have leveled at him but back at his office, he wanted to read me a quote from Eric Dezenhall, Steven Schlein’s boss. It took him less than thirty seconds to find it: “Modern communication isn’t about truth, it’s about a resonant narrative. The myth about PR is that you will educate and inform people. No. The public wants to be told in a story who to like and who to hate.”

  “They don’t understand idealism,” Eakes said of the payday lenders and other businesses aligned against him. “They can’t believe idealism exists. So they think, ‘You have to be doing this because you want our business.’ They have the most cynical motives so they conclude everyone else has cynical motives.”

  Eakes, Ralph Nader–like in his asceticism, hardly offered a fat target for those looking to tarnish the CRL. The same could not be said of all of its donors, though, starting with its top two funders, Marion and Herb Sandler, former owners of the World Savings Bank in Oakland, California. It was Herb Sandler who had first approached Eakes about starting a group like the Center for Responsible Lending, and the Sandlers proved generous benefactors. Mike Calhoun told me the couple had given the CRL roughly $20 million in its first half dozen years but Herb Sandler said the actual dollar figure was “well over” that amount.

  Eakes had never heard of World Savings or the Sandlers when Herb Sandler first phoned him proposing a meeting, but he asked around and liked what he had heard about the couple and their bank. They were stand-up lenders, he was told, who concentrated on writing mortgages for middle-class borrowers. They had testified before Congress about sound lending practices and feature articles generally heralded them as humane and socially conscious—old-fashioned bankers succeeding in a modern world. World Savings held on to its loans rather than selling them off on Wall Street. The Sandlers gave generously to the American Civil Liberties Union and Human Rights Watch.

  The Sandlers still enjoyed a solid reputation when Wachovia bought Golden West Financial, the parent company of World Savings, for $26 billion in 2006. Their share of the purchase price was a reported $2.3 billion. But then the housing bubble began to deflate and with it the Sandlers’ reputation. Wachovia’s stock plummeted by nearly 80 percent as reports spread of heavy losses in its mortgage holdings. Wachovia had made its share of irresponsible loans long before merging with World Savings but it was the World Savings portfolio that was blamed, at least initially, for the implosion of this bank that had been founded in 1879. At the peak of the credit crisis, in the fall of 2008, federal regulators pressed Wachovia to sell itself to a more secure partner. Wells Fargo bought Wachovia in October of that year, for $15 billion.

  World Savings had specialized in a product called an option ARM. These were adjustable rate mortgages—loans that would see interest rates fluctuate over time—that allowed borrowers to choose how much they would pay each month. The Sandlers dubbed World’s product Pick-A-Pay: A customer could make a full monthly payment or they could pay an amount that wouldn’t even cover the interest for that month. To the Sandlers, theirs was a more humane product that insulated borrowers from payment shock should there be a spike in interest rates and also gave them the flexibility to ride out financial bumps in the road, whether a lost job, a divorce, or a health-c
are crisis. The problem with the loan was what bankers call negative amortization: Choose to pay the lower rate and the amount of money you owe rises over time rather than shrinks. Critics dubbed the option ARM and Pick-A-Pay in particular a fundamentally dishonest loan product—essentially an expensive way for people of modest means to rent a home because those always choosing the lesser payment were unlikely to ever have the money to buy the property. The product might make sense when housing prices were soaring—it’s a very good deal if you can sell for $400,000 the home you bought for $250,000, even if you paid down little if any of the principal—but a lousy deal when prices fell. Then it only seemed a way of lending to people with little or no regard for their ability to pay. Inside the CRL, they don’t seem to have anything good to say about the option ARM. But that wasn’t something people internally would talk about on the record. “Our stance,” Kathleen Day, CRL’s main spokeswoman told me, “is that the Sandlers are perfectly capable of defending themselves.” She then added, “We are grateful they have been so generous in their funding of our efforts,” and noted that their contributions have never come with any strings attached.

  By the time I caught up with Herb Sandler to hear his side of things, he was so fed up with the media that he sputtered more than explained. Time magazine put the Sandlers on its list of “25 People to Blame for the Financial Crisis.” The New York Times named them in a front-page article as two of the chief villains behind the economy’s collapse. CBS’s 60 Minutes devoted an entire segment to a former World Savings employee who claimed he had repeatedly tried to warn higher-ups about the destructive nature of the loans they were peddling. The Sandlers were even parodied in a mock C-SPAN press conference aired by Saturday Night Live. When their turn came to stand at the podium, they were identified on screen as “Herb and Marion Sandler: People who should be shot.”