by Gary Rivlin
“I can’t tell you how many times I kicked myself for that decision,” Jones said with a deep sigh. Texas has been a consistent money loser and Europe makes him nostalgic for the United States in the mid-1990s, when most of the country was still virgin territory. “I could really use that money,” he said of the cash he’s not collecting because of his failure to open any stores overseas. His money is so tied up in planes and yachts and real estate and cars and horses, he moaned at one point, that there were still projects around his property he wanted to take care of, starting with the paving of the roadway leading up to his house, but he didn’t want to dip into his savings to do so.
“There’s this big misconception out there that payday is more lucrative than it is in reality,” he said. “People have this idea that I must be richer than I am.”
To make his point, Jones pulled out the small calculator he carries in a pocket. We were near the end of lunch on our first day together and he pushed aside the plate of food and started to punch in numbers. The average Check Into Cash store, he said, makes roughly $1,500 a month in profits. There are four and one-third weeks in the typical month, so he divided $1,500 by 4.3. He then divided that number by the 44 hours in a week that his stores are typically open. That worked out to $7.93 an hour.
“Does that sound excessive to you?” he asked, fixing me with a level gaze. “That’s practically minimum-wage rates.”
Rather than answer, I asked to borrow his calculator. He slid it across the table and I plugged in the $1,500 in profits he had just told me a store makes in a month. I multiplied that by 12 months. His average store generated $18,000 a year—after paying salaries and factoring in bad loans and even incidentals like his payments to Jones Airways for the use of his own jets. I multiplied that $18,000 times his 1,300 stores and held up the number for Jones to see: $23.4 million. He had given away a 2.5 percent ownership stake so I subtracted that amount. That left him with $22.8 million in after-tax profits.
I tried to engage Jones in a discussion of how much might be enough. Jones responded that he had the opposite worry: His empire was shrinking. The Ohio vote had taken place three months earlier but he was still angry about it as if it had taken place the day before. By that time he had already shut down forty of his ninety-four stores there—using his numbers, that represented roughly $720,000 in lost profits. And then there were the stores he had recently closed in Oregon and New Hampshire. When I mentioned that hard economic times would drive up demand at those stores that were still open, he frowned: A recession would probably mean a spike in defaults, he said sourly. He mentioned the millions he had spent buying a dude ranch in Jackson Hole he now wishes he hadn’t. I kept fiddling with his calculator to figure out his earnings if he punched the clock like so many of his customers do. Based on a 44-hour week, he made just a shade under $10,000 an hour in 2008. Around the country, headlines blared the news of rising unemployment rates and every day the papers were bringing more news of people losing homes through foreclosures. He had just had a strong January, Jones acknowledged, but even if things slowed down considerably over the rest of 2009, he seemed to be at least one American who could be able to survive a pay cut.
There was a time I was unsure what to think of the payday loan. Not everyone can tap a rich friend or family member for a few hundred dollars to hold them over until payday, and of course credit cards are their own quicksand. The interest rates on a payday loan were horrifically high but they seemed largely irrelevant on loans that lasted two weeks. Besides, what’s a single mom making $22,000 a year supposed to do when her car breaks down and she has no cash left in her bank account?
I can remember the exact moment when my view started to harden in opposition to the payday loan. I was on an airplane streaking west toward Dayton when I came across a report by the former Ohio attorney general (he would resign in May 2008 over a sex scandal) that included the testimonies of former payday employees like Chris Browning. As they told it, the payday loan wasn’t an every-once-in-a-while product that customers reserved for emergencies, as their bosses would have people believe, but rather a monthly reality for well over half their customers. In that scenario, an annual percentage rate of 391 percent wasn’t some theoretical number but a good gauge of the price too many people were paying for credit.
“I left the industry when I saw that the rollovers were as high as they were.” That’s what Jerry Robinson told me when I visited with him in Atlanta. Robinson had helped Toby McKenzie decide to get into the payday business, and as a banker for Stephens, Inc., he had been one of the industry’s early cheerleaders. But the industry had become a victim of its own success. “There’s just too many stores. That’s the bottom line,” Robinson said. “Customers have two loans, then three loans, then five.”
Billy Webster tended to agree: Too many entrepreneurs had gotten into the business and, as a result, it was too easy for borrowers to end up owing money to several stores at once. The shame of it, Webster said, was that the industry might have avoided some of these problems if it had been more open to reforms like the one he helped to negotiate in Florida. The state government there maintains a database to ensure that no borrower has more than one payday loan out at a time (and caps rates at $10 per $100) and yet entrepreneurs like the MacKechnies of Amscot Financial, with all its stores in central Florida, are thriving. But people inside the industry such as Allan Jones (and also Jerry Robinson) slammed Webster for caving in to payday’s critics. “The industry’s worst instinct has been to confuse reform with prohibition,” Webster said. By the middle of 2009, Advance America had counted fifteen pending bills in Congress and another 173 around the country that would have an impact on its business—and the man now sitting in the Oval Office had, as a candidate for president, promised to “empower more Americans in the fight against predatory lending” by capping “outlandish interest rates.” Advance America had earned $30 million in profits in the second half of 2008, and then booked another $26 million in profits in the first quarter of 2009, yet its stock was down by more than 75 percent from its high because of uncertainty about the payday loan.
“It’s hard to invest in the future earnings of a company if you don’t know if it’s going to have a future,” Webster said. To guard against further erosion of its market, the payday lenders collectively have forty company-paid lobbyists on staff and contract with another seventy-five lobbyists working in thirty-four states, the head of its trade organization told Cheklist magazine.
Inside the payday industry, they see a business less profitable than it had once been and conclude they can’t be ripping people off. With more competition and a lowering of the rates so that $15 per $100 is pretty much the standard in most states (exceptions include Montana, where lenders tend to charge $20 for every $100 borrowed, and Missouri, where they tend to charge $25 per $100), the days of 20 percent or more profit margins are over. Yet payday is still plenty profitable. Advance America, for instance, reported a profit margin of 8 percent in 2008. That meant the company had a higher profit margin than Hewlett-Packard, Target, Office Depot, or even Morgan Stanley. In fact, despite the increased competition and greater regulatory prescriptions, Advance America’s profit margin would place it ahead of more than 60 percent of the companies in the Fortune 500.
Still, the lenders are right when they argue that the economics of the stand-alone payday shop don’t work with a 36 percent rate cap. That works out to a fee of $1.12 per $100 borrowed rather than $15, which wouldn’t even begin to cover fixed costs such as salaries and store leases. But then why is there something sacrosanct about the free-standing payday store? McDonald’s would no doubt be a money loser if its franchises carried nothing except hamburgers, but they also sell fries and shakes and desserts and other concoctions to help pay for the cost of the restaurant and the salaries of the people who work there. The State Employees’ Credit Union of North Carolina, one of the country’s largest (the state’s teachers are eligible), has been making payday loans since 2001.
They charge a fee that works out to an annual percentage rate of 12 percent and yet the credit union’s CEO, Jim Blaine, describes the product as “the single most profitable loan we make.” But of course their tellers do more than just write payday loans, and their branches are supported by revenues from a wide range of services, from car and home loans to more routine banking functions.
The payday lenders would diversify their offerings—eventually. In April 2008, Allan Jones first started experimenting with check cashing at select stores, and by the time I visited him in February 2009, check cashing was available at around half his stores, along with wire transfers through Western Union. Advance America announced in 2008 that it had cut a similar deal with MoneyGram; at the same time, the company began selling prepaid debit cards and Visa gift cards at all of its stores. Check ’n Go had experimented with the tax refund anticipation loan at its stores years earlier then dropped the practice. But it too began offering check-cashing and wire transfer services at select stores and announced in 2009 that it would offer car title loans in states where they were permitted to do so by law. “Before we were just focused on taking care of our customer,” Allan Jones said. “Now we’re trying to survive.”
Or trying to thwart the will of the people. Despite the express wishes of the Ohio state legislature and more than 60 percent of the electorate, all the big payday lenders were still making short-term cash loans in Ohio. Incredibly, some were charging rates that worked out to more than 391 percent annually. “Like mosquitoes adapting to a new bug spray,” wrote Thomas Suddes, a columnist for the Cleveland Plain Dealer.
The lenders had found any number of clever ways to do so. Most had applied for licenses either under the state’s Small Loan Act or the Mortgage Loan Act. A business couldn’t charge more than 28 percent interest under either of these acts but there was no preventing a lender from charging a loan origination fee or making a borrower pay a fee for a credit check. The more aggressive companies went one step further, issuing the advances in the form of a check and then charging a steep fee to cash it. Under this new system, the APR depended on the amount of the loan and the audacity of the lender but one local business figured out that it could charge as much as 423 percent under the Small Loan Act on a $100 loan and 680 percent under the mortgage loan law. Bill Batchelder and others were working on legislation that would eliminate what Bill Faith and others dubbed “loopholes” in the law but they could be certain that the payday lenders would not be leaving Ohio anytime soon. It had taken North Carolina five years to finally drive them out of the state.
If it was in an airplane somewhere over Pennsylvania where I started thinking differently about the payday loan, then it was in a meeting room in the bowels of the Mandalay Bay resort during the annual meeting of the check cashers in 2008 that I began to liken the entire Poverty, Inc. industry to those energy companies whose strip-mining destroyed vast tracts of wilderness areas until the practice was made illegal in the 1980s. There, Jim Higgins, the Vincent Gardenia look-alike, was teaching the smaller operators the tricks of the trade, from raffled-off iPods to the payment of kickbacks to local business people who send them business.
“A dentist sends you a reminder card.” That’s what Check ’n Go’s Jeff Kursman said when we talked about his company’s practice of phoning people who haven’t been to one of their stores in the previous sixty days. “Some haircut places do it also.” In Ohio, I would come across a company, Heartland Cash Advance, that has its managers start phoning customers who haven’t been into the store for thirty days. And why not, asked Larry Hauser, the owner of Heartland. “I call my customers every week for the same reason a car-servicing company sends you a message when it’s time to get your oil changed,” he said.
I was reminded, and not for the first time, of an interview I had done a couple of years earlier with Gary Loveman, the CEO of Harrah’s, when I was a staff reporter at the New York Times writing frequently about the gambling industry. Loveman, who has a Ph.D. from MIT and for years had taught at the Harvard Business School, had moved over to Harrah’s in 1998 as kind of a real-life experiment: After years of studying how some of the country’s more successful companies used marketing and new technologies to grow their businesses, could he apply that book knowledge to a once-profitable casino chain that had grown fat and moribund? Among the innovations Loveman introduced to the casino industry was the use of sophisticated data mining tools to better understand the gambling habits of individual customers and market to them accordingly, and the introduction of a rewards program so effective that in time every other big casino chain would appropriate the idea. When we spoke, Loveman seemed particularly impressed by the marketing genius of the credit card companies and he told me they frequently served as a model as he strove to turn the gambler who visited a Harrah’s property three or five times a year into one who visited eight, ten, or twelve times the next year and gambled more with each successive stay. By the time we sat down over breakfast at one of his properties on the Las Vegas Strip, Loveman was widely hailed as the man who brought the casino into the twenty-first century. Yet as I listened to him, I grew horrified by the cold efficiency with which Harrah’s systematically harvested ever more money from its most loyal customers.
I had a similar feeling sitting through Higgins’s ninety-minute presentation on tips for turning the $1,000 customer into one who spends $3,000. We spoke after his talk and Higgins, like Loveman, was anything but defensive. These were legitimate businesses, he said, run by legitimate people, doing what any other business would do to increase its profits. Maybe. But his talk and others like it left me thinking that it wasn’t a fair fight being waged on the rougher fringes of the financial universe. On one side, you had the policy wonks, consumer advocates, and the other well-intentioned reformers pushing their pilot programs for the unbanked and advocating for better financial literacy education. On the other side, there were the pseudo-bankers in their strip mall storefronts wielding a powerful arsenal of weapons they learned from the likes of Jim Higgins. Short of government intervention, the consumer advocacy side didn’t stand a chance.
Ben Bernanke took over as chairman of the Federal Reserve in February 2006. A Republican who had served as chairman of President Bush’s Council of Economic Advisers just prior to his promotion to the top spot at the Fed, Bernanke was no one’s idea of a consumer champion. Yet he was a vast improvement over Alan Greenspan, at least in the fight against predatory lending. His campaign against what he ultimately called “unfair and deceptive” loans began with a series of public hearings into mortgage lending the Fed held in the summer of 2006. At the end of 2007, the Fed issued a new set of rules governing any mortgage carrying an interest rate just 1.5 percent higher than the average rate paid by prime borrowers—its new definition of a “higher-priced” loan. Under the new rules, lenders can no longer make a higher-priced mortgage without regard for a borrower’s ability to pay. The Fed restricted the use of prepayment penalties in higher-priced mortgages and banned the use of “stated income” loans—the so-called liar loans that required no proof of income. The Fed also prohibited lenders and mortgage brokers from advertising only the lower teaser rates on an adjustable rate mortgage.
The Center for Responsible Lending and other consumer groups praised the Fed for what the CRL dubbed a return to “common-sense business practices” in subprime lending—and then castigated the Fed board of governors for not going far enough. Mike Calhoun, CRL’s president, criticized the Fed for failing to rein in option ARMs—the very product that had made Herb and Marion Sandler billionaires—and called on the Fed governors to do something about yield spread premiums. It was hard to justify these payments that were nothing but kickbacks lenders paid mortgage brokers to put borrowers in costlier loans. North Carolina had banned yield spread premiums. It was time for the Fed to do the same, Calhoun said.
In time, the Fed would propose such a ban (the comments period ended on New Year’s Eve 2009, clearing the way for action). Its gov
ernors would announce new rules for the overdraft fees banks charge (in particular the overdraft protection plans in which banks automatically enroll people) and also the credit cards they issue. Again, the CRL would criticize the Fed for not going far enough on these last two issues. The failures of the Fed on credit card reform would be moot as Congress would take on the issue with passage of a credit cardholders’ “bill of rights” in 2008. The new law, which went into effect in early 2010, protects cardholders from capricious interest rate increases and clamps down on the fees card issuers can charge. “The Fed’s overdraft rules were a small step but at least a bank now has to ask if someone wants this expensive small-loan product,” the CRL’s Kathleen Day said.
Even Alan Greenspan would provide a bit of pleasure to people inside the CRL when he appeared before Congress to talk about the subprime meltdown. As far back as 2000, Greenspan showed he recognized that there was something amiss in the mortgage business. “Of concern,” he said in a speech he gave in March of that year in front of the National Community Reinvestment Coalition, “are abusive lending practices that target specific neighborhoods or vulnerable segments of the population and can result in unaffordable payments, equity stripping, and foreclosures.” Yet as a young man, Greenspan had sharpened his political philosophy in the living room of Ayn Rand, and he believed deeply in a hands-off approach to the market. “I have found a flaw” in my thinking, Greenspan confessed when appearing in front of the House Committee on Oversight and Government Reform. His free-market ideology, he acknowledged, ended up being the wrong one for the circumstances. The market didn’t self-correct, as he had assumed it would, a humbled Greenspan said in his testimony. “I was shocked,” he admitted. Kathleen Keest had been so ecstatic to see the former Fed chairman, once hailed as the world’s greatest central banker, taken down a peg or two that she had taped to her office door news articles reporting on Greenspan’s testimony.