Broke, USA

by Gary Rivlin

  A California-based nonprofit called the Nehemiah Corporation of America was the key. Dominion would send a prospective buyer to Nehemiah, which would send Dominion borrowers the 3 percent down payment required to qualify for a loan through the Federal Housing Administration (FHA). Then, within a few days, Dominion would donate that amount of money to Nehemiah, plus a service fee. (For years HUD, which oversees the FHA, has tried to block this practice but the agency had never prevailed in the courts.)

  What was the harm if a sizable corporation wanted to devote a portion of its profits to helping people of modest means raise a down payment for a house? For one thing, it wasn’t a gift; Dominion officials admitted to Riepenhoff that they simply passed along the cost of the down payment to the buyer, just as it would the cost of a specially ordered stove. Moreover, there were risk-management studies that led the government to impose the 3 percent requirement in the first place. A 2002 HUD study of Nehemiah-assisted loans in four cities found default rates higher than 19 percent. At 11.5 percent, the Dominion default rate was much lower but it was still twice as high as the Ohio average and more than two and a half times the national average.

  The paper found that Ohio’s mortgage default rate had reached nearly 6 percent—tops in the country in 2005. The surge had started in 1999, shortly before Faith and the people in Dayton began clamoring for someone in power to act. That year there had been 31,000 new foreclosure filings in Ohio but by 2005 there would be more than twice that number: 64,000. The list of culprits the Dispatch series singled out was long and included mortgage brokers who put borrowers in loans they could not afford and unscrupulous appraisers inflating the worth of a property. The series also included a chart of Ohio’s ten largest subprime lenders, a roster that included Countrywide, H&R Block, Citigroup, and Wells Fargo. “I think a lot of Columbus was in shock while that series was running,” Ron Bridges said.

  People inside the Dispatch weren’t the only ones to notice this creeping menace, of course. Almost as soon as she took office in 2004, Joy Padgett, a state senator representing a predominantly rural district in central Ohio, began to hear from residents worried they were going to lose their home after refinancing with an unscrupulous lender. “At first, I thought they might just be isolated incidents,” Padgett said, but the consistency of the calls and the volume convinced her otherwise. Researching the law, she discovered the same loopholes that others had spotted years earlier. At the start of 2006, she introduced the Homebuyers Protection Act, which would broaden the state’s consumer protections laws so that they covered mortgage brokers, loan officers, and nonbank lending institutions. The bill also empowered the attorney general’s office to prosecute appraisal inflation and other practices that are often part of mortgage fraud. Padgett was a Republican representing a conservative district, but Faith, the left-leaning homeless advocate, finally had his champion. “She ended up becoming a good friend,” Faith said.

  As 2005 was turning into 2006, Bill Faith was missing a key component in the narrative he was trying to construct. Martin Eakes and his allies had Freddie Rogers, the widower and single parent who drove a bus for the Durham public schools. Bill Brennan and Howard Rothbloom put forward several older women whose plight came to serve as the public face of predatory lending in Atlanta at the start of the 1990s. Bill Faith had a raft of sobering statistics on his side and an ominous sense of a pending crisis, but it wasn’t until a lawyer named Rachel Robinson at the Equal Justice Foundation told him about Martha and Larry Clay that he found those Faith dubbed “predatory lending’s poster couple.”

  The Clays, who lived in a white working-class neighborhood in Columbus that locals call the Bottoms, were both blind. Their home had cost $15,000 when they purchased it in the mid-1980s. Larry Clay had worked as an X-ray technician at a nearby hospital for thirty-nine years but that facility closed its doors in 2002 when he was in his mid-sixties. After that the couple lived on a monthly $1,700 disability check. They attended services at a nearby church, where Larry Clay sang several times a week and volunteered at its soup kitchen. Martha Clay had recently survived ovarian cancer. By the time Bill Faith learned these and other facts about the Clays, they had been talked into so many refinancings that the couple owed $80,000 on a home the county assessor claimed was worth only $37,000, and they were facing eviction. The closing costs and broker’s fees on the last four refinancings alone added up to $20,000. As Martha Clay described it, they had been paying 7 percent interest on a $72,000 home loan but then the same mortgage broker who had put them in that loan only eight months earlier told them he could get them a better rate. But then the Clays ended up signing papers on an $80,000 loan carrying a 10 percent interest rate. So whereas the couple had been paying $480 a month on their home prior to that final refinancing, their new monthly bill was $702. For his troubles, the mortgage broker paid himself a $3,200 fee.

  “Both blind, from a poor white neighborhood in Columbus, scammed into mortgages six different times,” Faith said. “Good religious people. He sings in the choir. I mean, she’s got cancer and they’re doing this to her.” Faith couldn’t suppress the sly grin tugging at the corner of his lips. Despite the great sympathy he felt for the Clays, he’s a political pragmatist who recognizes an opportunity when it is presented to him. “A legislator can argue with me,” he said. “But what are they going to say to the Clays? ‘You should have known better?’ ‘You should’ve read the documents closer?’” The Dispatch told the Clays’ story in a page-one article that appeared on a Sunday in February 2005, and Faith arranged it so the couple testified in both the Ohio House and Senate when it came time for the appropriate committees to debate Joy Padgett’s bill.

  The Republican leadership proved critical to its passage. It helped that Faith had a good working relationship with both Bill Harris, the president of the senate, and his top lieutenant, Jeff Jacobson. Both Harris and Jacobson had sided with the industry in 2002 (the Ohio Association of Mortgage Bankers gave Harris its “Legislator of the Year” award that year) yet both joined the reform side in 2006. “I think they recognized that what they were hearing from all these mortgage guys was a bunch of crock,” Faith said. Perhaps, but Ron Bridges was inclined to give Faith some credit for helping to nudge them along. Bridges joined Faith when he visited Jacobson, who represented the Dayton suburbs, to talk about Padgett’s bill. “Do you want your mother, because she walks into the wrong door on High Street, you want her to lose her home?” Faith asked him. Not for a moment did Bridges think this powerful senator’s mom might find herself in that predicament, but it didn’t matter. “He got that this was about protecting people’s mothers from falling prey to these people,” he said of Jacobson. So strongly did Harris and Jacobson back Faith on this bill that when their Republican counterparts in the House tried to water it down, the pair bullied them into backing off.

  At Faith’s suggestion, the signing ceremony, held in June 2006, took place in the Clays’ backyard. “That was a great day in our lives,” Martha Clay said. For the occasion she wore a turquoise pantsuit with a green top and a gold heart necklace and Larry Clay donned a sport jacket and tie. Several of the Clay grandchildren also attended. During the signing itself, Governor Taft, as he had done in 2002, congratulated himself for a job well done. With Faith standing behind him, the governor said, “It shouldn’t take a miracle to allow our homeowners to stay in their homes and enjoy the American dream.”

  The bill, which took effect on January 1, 2007, would do some good as the problems in Ohio and elsewhere got worse. The law would give prosecutors additional tools to go after those who had abused borrowers. By the start of 2009, Faith said, the Ohio attorney general had filed multiple suits under the new law.

  Still, the victory felt hollow and it would come to feel more so in the coming months. “We knew at the time we were too late,” Faith said. No one on his side of things was particularly surprised, he said, when “six months later the wheels fell off” and Ohio’s problems transmogrified into a
worldwide calamity.

  Not long after the signing ceremony, Bill Faith made the three-hour drive to Youngstown to visit his mother. He hoped to do a little boasting, he admitted, or at least get some rest, but instead she started lobbying him. She told him about people she knew from church who had gotten themselves into a deep financial hole using the services of payday stores, and she mentioned people they both knew from the neighborhood who had gotten themselves in trouble the same way.

  “I have this big win and my own mother, she’s on me about dealing with this other thing,” Faith says. “I’m all excited, ‘We did it,’ and she’s like, ‘That’s nice but what about payday lending?’” he said. He hacked out a throaty smoker’s laugh, shot me a glance, and asked, “Ya know?” With time, the payday lenders would grow to despise Faith with nearly the same intensity they normally reserved for Martin Eakes.

  There’s something monomaniacal about Bill Faith. He burrows so deeply into an issue or a project that it’s as if the rest of the world ceases to exist. His wife of more than twenty years, Barb Poppe, describes it as “the zone.” It doesn’t make a difference if her husband is working at the computer or deep into a document or just playing cards. “When he gets in the zone, that’s what he totally focuses on,” Poppe said. But that also means Faith can miss a lot while he’s concentrating on something else. For the longest time this advocate for the poor was oblivious to all the payday stores opening in and around Columbus. To the extent he even understood what a payday loan was, he figured it was something people took out once in a blue moon. “I’m embarrassed to say that the cycle of debt and people getting sucked in was something that never even occurred to me,” Faith said.

  Before his mother brought up the problem, Dan McCarthy, his lobbyist friend, and Tom Allio, a political ally running the social action arm of the Catholic Diocese of Cleveland, did. McCarthy had never taken out a payday loan, but he knew his sister had because she put him down as a reference and lenders started calling him at work whenever she was late on a payment. It got so bad, McCarthy told Faith, that he had written a big check just to make the phone calls stop. McCarthy, who had worked with Faith on the predatory lending bill, had even half joked with his friend on the night they finally won, “Now we go after the payday lenders.”

  For Allio, payday had become his issue a couple of years earlier when he first learned about a woman named Peggy Daugherty. Daugherty, traveling back and forth from central Ohio to Cleveland to get medical attention for her daughter, had borrowed $300 to pay for work on her car. By the time a friend intervened, Daugherty, a middle-aged woman living on a monthly disability check of about $900 a month, owed money to five different stores and had already spent more than $1,000 in fees. To Allio, payday was nothing but an extension of the predatory subprime mortgage lending problem, and in fact he had irritated Faith no end by suggesting they add a payday rate cap to the predatory lending bill.

  “We already were up against the entire mortgage industry,” Faith said. “At that point we didn’t need a whole new set of enemies lining up against us.”

  Faith had promised Allio he would turn his attention to payday finance as soon as the mortgage fight was over, but months passed without Faith making any commitments. “I was still dragging my feet,” Faith said. “So now Tom is getting even more pissed.” It was no longer a question of what he thought of payday loans. A woman on his staff was getting calls at work because of a sibling who was past due on some loans and he heard from another friend whose sister had also gotten herself into a deep hole using them. “Once you start looking into this thing, you see it’s a really ugly world,” Faith said. But Faith, ever the pragmatist, wanted to see if they stood a chance before jumping into the fight. He checked in with a few friendly legislators and he set up a meeting with the governor-elect, a Democrat named Ted Strickland. Strickland, who would take office at the start of 2007, asked him to wait, but he also made it clear he would sign something if it reached his desk. Faith had similarly encouraging signs from the others, so he informed Allio he was on board.

  The group called themselves the Ohio Coalition for Responsible Lending—a self-conscious nod to the Center for Responsible Lending. Jim McCarthy and Dean Lovelace were members, as were a long list of labor leaders, housing activists, community organizers, legal aid attorneys, and those representing faith-based organizations around the state. “To many of us this wasn’t just an economic issue but a moral one,” Allio said. “The high interest rates they charge is a modern-day form of usury. I don’t care what the text, whether it be Jewish or Catholic or mainline Protestant, there’s clear statements in each against usury and the need to offer fair interest rates.” The group decided that its aim would be to cap the interest rates that payday lenders could charge and limit the number of loans a person could take in a given year. “We had people calling the office every day who are like, ‘I’ve got five, six, ten payday loans, I’m trapped,’” said Nick DiNardo, a legal aid attorney in Cincinnati. “And there was nothing we could really do short of helping them if the collections got too aggressive.” It fell to Faith to find a lead sponsor for their bill.

  The new governor was a Democrat but the Republicans still controlled both the Ohio House and Senate. So instead of starting with a good liberal, Faith surprised his allies by first approaching a conservative legislator named Bill Batchelder. With Leonid Brezhnev eyebrows, oversized Mars Blackmon glasses, and a tendency to quote Adam Smith, Batchelder hardly seemed to fit the bill of consumer champion. But if they could first muster Republican support, Faith reasoned, some of the bipartisanship good feeling they had nourished during the mortgage fight might carry over to payday. Besides, the two got along famously. Unlike most every other lobbyist traipsing through his office, Batchelder told me, he always found Faith a man of conviction “who was actually looking to engage you in a serious policy debate.” If some of Faith’s allies were inclined to describe Batchelder as one of the legislature’s “cavemen conservatives,” that was all right with Batchelder, who reacted to the characterization with a burst of delighted laughter.

  Batchelder and Faith might disagree about most everything but he was an easy sell on payday lending. Batchelder told him he was happy to sponsor the Coalition for Responsible Lending’s bill, not despite Adam Smith, the first apostle of laissez-faire, but because of him. “The rates lenders charged were a moral question for Smith,” Batchelder said. “Smith pointed out that if you charge too much, you damage a society. And he’s right. You can’t charge people these kinds of interest rates without hurting their situation and society.” In October 2007, Batchelder and Robert Hagan, a liberal Democrat from Youngstown, introduced a bill that would impose a 36 percent rate cap on the interest rates payday lenders could charge.

  In Washington, D.C., Steven Schlein reacted to the news with an indifferent shrug. After four years with the payday lenders, he had learned not to get too worked up over every dispatch from the hinterlands. “Every year a bunch of states put payday into play,” Schlein said. “But then in the end you have few actual fights.” They had lost legislative battles in Oregon and New Hampshire over the previous few years but mainly they ended up with a compromise that the big chains could live with. “Ohio didn’t seem one of the places we should worry about it,” Schlein said.

  In Spartanburg, Billy Webster was similarly unconcerned. The market was too important and the industry too strong in Ohio to lose. Check ’n Go was based in Cincinnati and the Davis brothers several years earlier had had the foresight to spend the money necessary to lure away a top Ohio Senate staffer to run its governmental affairs office. There was also CheckSmart, based in Columbus, a chain of 175 payday and check-cashing stores that had just been sold to a large New York–based private equity fund for $268 million. After writing a check that big and with half of its stores in-state, CheckSmart’s investors weren’t going to sit idly by. “We were told time and time again,” Webster said. “With Check ’n Go and CheckSmart there, there was no wa
y Ohio would be in play.”

  The Coalition for Responsible Lending held forums across the state and organized small delegations to meet with individual legislators and with the editorial boards of all the big daily newspapers. A local research group, Policy Matters Ohio, released a report demonstrating that payday had become widespread even in the state’s suburban and rural areas. When, in the autumn of 2007, Marc Dann, the state’s Democratic attorney general, announced he would be holding hearings investigating the lending practices of the state’s 1,600 payday stores, the search was on for customers and employees, or at least former employees, willing to talk about their experiences.

  The first of three hearings was held in a large Baptist church on Cleveland’s east side. The industry might have been confident about a victory but they were hardly complacent. Its supporters showed up in full force, wearing yellow “I Support Payday Lending” buttons and made sure their perspective was voiced. They pointed to the list of “best practices” their trade association had developed, including a twenty-four-hour rescission policy and a once-a-year extended payment plan for customers who get themselves into financial trouble with a payday loan. Payday’s critics, many of whom sported buttons showing a shark’s snout biting into a large stash of cash, dismissed these voluntary policies as not worth the paper they were printed on. One of the more moving speakers in Cleveland was a man named Charles Mormino, who told the crowd about a family member with psychiatric problems (he was no more specific than that) who had gotten into trouble with a trio of payday stores. He settled up her debts at all three and then sent a certified letter to each alerting them to the family member’s problem. But all three—Advance America, CheckSmart, and ACE Cash Express—continued to do business with her.