Broke, USA

by Gary Rivlin

  “To the extent that ‘responsible subprime lenders,’ including Martin, gave credence to the notion that the best or only way to serve lower-income households is to charge them more, they have to take some of the blame for what happened,” Loftin said.

  Mortgage brokers need to make a living. All those former subprime salesmen need to put food on the table—and who better to help a distressed borrower negotiate a loan modification than those who proved so adept at negotiating the tricky shoals of this world in the first place? The New York Times’s Peter Goodman even found a group of mortgage brokers and lenders working in the very same offices on Wilshire Boulevard in Los Angeles where they made their fortunes during the boom. Now they were the Federal Loan Modification Law Center (FedMod for short) and selling their services to those who found themselves in arrears on subprime loans. “We just changed the script and changed the product we were selling,” one of the brokers told Goodman. They certainly had a compelling selling point. “We’re able to help you out because we understand your lender,” this broker told prospective clients.

  But whether those borrowers are any better off after paying a fee of up to $3,500 for help is another question. By mid-2009, the Better Business Bureau was receiving hundreds of complaints about FedMod and similar companies. FedMod’s managing partner confessed to Goodman that the business had largely been a bust as far as rescuing people but, he claimed, it wasn’t for a lack of trying. But there were reasons to doubt his sincerity, starting with the former FedMod salesman who told Goodman he wanted to talk with him because he felt so bad about the small part he had played in a business he considered unethical: “Our job was to get the money in and then we’re done. But I never saw one client come out of it with a successful loan modification.” In April 2009, the FTC sued FedMod, charging that they often did little or nothing to help their customers. The FTC sent warning letters to another seventy-one similar companies and ended up filing charges against at least seven of them.

  The problem with reporting on the poverty business is that it’s so broad and multifaceted. There are newfangled businesses like FedMod and old standbys experiencing a resurgence in hard economic times: debt collectors and those in the debt consolidation business (“Bill collectors got you down? Find yourself in debt? We can help.”) and their close cousins, companies promising people a higher FICO score—for a fee, of course. Boosting a credit score is not hard to do, at least temporarily. You challenge every ding on a person’s credit report; some are suspended while the dispute is investigated, and meanwhile a person’s credit score goes up. The problem is that it plummets back down a couple of months later when all the black marks are returned to a person’s credit record—but now they’re worse off because they just wasted $500 on a bit of financial cosmetic surgery.

  There are any number of strange but seemingly lucrative splinters that are part of the poverty industry. There are those in the business of buying large legal settlements from those who otherwise would be paid in monthly or annual payments (one, Peachtree Financial, tells potential customers that it “helps people who are holding structured settlements or annuity products enjoy the benefits of receiving their money faster”) and also the lucrative world of subprime student loans. As recently as ten years ago, most college kids received low-cost, federally guaranteed student loans with interest rates in the 6–8 percent range. But the private lenders moved in with products that included 10 percent origination fees and interest rates as high as 15 or 18 percent. A report put together by investigators for the Congressional Committee on Education and by Andrew Cuomo, New York’s attorney general, found “troubling, deceptive, and often illegal practices” among these lenders.

  The auto title loan is confined mainly to the South and is tiny compared to the payday sector. But it’s still a half-a-billion-dollar-a-year business and so controversial that even Allan Jones and Billy Webster question the morality of this product that lets people risk their car when they feel trapped and in desperate need of a short-term loan. Similarly, rent-to-own. “It’s an awful business,” Clay Taber, an Aaron’s franchisee from 2003 to 2008, told me. Taber, unlike most other entrepreneurs I would speak with, doesn’t pretend there was anything noble about this idea of renting people their televisions and dining room sets by the month. “I was looking at this as an annuitized income,” he confessed—a reliable source of easy money for him and a group of investors he had put together. But he ended up the slumlord who thought life would be as easy as cashing checks once a month—except he forgot to factor in that it might bother him seeing the way people lived.

  “You go hang flyers at public housing projects but these people have never been trained to pay bills,” Taber said. “You tell them, ‘You give me $100 and that TV will be in your house later today.’ That’s your hook.” But that $100 was still a big hurdle for some so he and his people did as the corporate office suggested, Taber said, and ran “99 cents” sales. “The basic idea is for only a dollar, you get the item in their house, and then you’d just hammer them with payments for twenty-four months,” he said. He would occasionally call the home office for advice. “Basically their attitude was ‘You do whatever you have to do to get your money.’” Taber described himself as so disgusted by his experience running three stores in Canada that he has sued the company. Maybe most frightening is that by all accounts, the rent-to-own business had already cleaned itself up by the time Taber became a franchisee.

  At around the same time the payday lenders hired Steven Schlein and his firm to try to dress up the image of the industry, Allan Jones decided it was time to hedge his bets. He knew nothing about selling cars but he certainly knew the poverty industry, and so in 2005 he took the plunge into the used car business by opening several lots in and around Cleveland. A year or so later, he opened the first of two pawnshops.

  Jones told me he hated the used car business. He did it in part to help the man who had married his daughter and it only brought headaches from day one. “It’s really the collections business,” Jones said. “A lot of these people have weekly payments so you need to be on them after every paycheck.” It’s even more labor intensive than payday, he said. “These people, they don’t send in their checks, they stop by the lot on their way someplace,” Jones said. “So you have to stop whatever you’re doing, call up the file, and mark their payments.” Under Tennessee law, he can charge an interest rate of 21 percent, but that’s too low, he complained, given the customers he deals with. He estimated that one in four loans were past due, and invariably a portion of those were going to be written off as losses.

  “I might give ’em to you for free if you’ll take ’em off my hands,” he told me in a woe-is-me voice that had become familiar. “They ain’t worth nothing.” Earlier in his career, Jerry Robinson had run Just Right Auto Sales, a ten-lot used auto business. Everyone needs a car, Robinson said when I visited him in Atlanta, and in hard economic times “this will be a fabulous business for the next five years.” When I mentioned this to Jones, he responded by calling Robinson “an idiot.”

  Pawnshops, though, had been a different story entirely. He had always looked at pawn, he said, as a “lower-class business,” but then Cash America, the pawn giant, made an offer for Check Into Cash and he opened his eyes. He ended up saying no to them but the experience taught him that he was missing a big opportunity to make a lot of money.

  “The rule of thumb with pawn is you pledge three times collateral,” he said. So if one of his clerks thinks they can sell a flat-screen TV for $300, they will loan that person $100. That borrower pays a little more than $20 a month in interest on that $100 (Tennessee allows pawnshops to charge a 256 percent APR); meanwhile, the pawned item remains in the shop’s back room as long as that customer keeps current with his or her loan. If that customer can’t repay the loan or decides not to, the shop puts the item up for sale. “I make money if they can pay off the loan,” Jones said. “I make money if they can’t pay off the loan.” At the start of 2009, h
e was operating two U.S. Pawn shops and was looking to open more. He only wished that it hadn’t taken him so long to recognize the potential of pawn. “If I have one regret, it was that I didn’t get into pawn earlier,” he said. Payday might be under siege but with more people out of work and in need of quick cash, the pawn business is booming.

  “I didn’t know I was in a fight for my life when I got in ’em,” he said of his two pawnshops, “but since I am, I’m glad I got ’em.” Check Into Cash started with one store and fifteen years later he was up to 1,300. Who’s to say he can’t do it again?

  Notes on Sources

  This book is based primarily on interviews—with the people I write about as well as with their confederates and their critics. But as the text melds journalism with history, I also build on the work of others who began investigating the subjects before I did. I mention some fellow writers and publications in the body of this work but largely I waited until this section of the book to make reference to my aids. I did this to help the flow of the narrative, just as I often wove statistics into the body of the book without full sourcing for the sake of readability. I offer credit and citations below.

  Prologue

  Caseload statistics for the Dayton area’s Predatory Lending Solutions Project were culled from the annual reports the Miami Valley Fair Housing Center assembled for county officials. For the cases that helped to spur Christine Gregoire, then Washington state’s attorney general, to action I relied on an article in the Seattle Times written by Peter Lewis. Data on Household Finance—its revenues, profits, and the number of people included in its $484 million settlement—were obtained from public filings and also news stories about the company.

  One

  My sketch of Jack Daugherty, the pawn pioneer, relied largely on a terrific profile of him written by Bill Minutaglio and published first in the Dallas Morning News and then, in 1996, in Mike Hudson’s anthology, Merchants of Misery. The National Pawnbrokers Association estimated that the average size of a pawn loan in 2009 was $90 and also helped me to estimate the size of the pawn industry; the early history of rent-to-own was courtesy of its trade association, the Association of Progressive Rental Organizations, which also placed the size of the rent-to-own industry at $7 billion. Every year the investment bank Stephens, Inc. publishes an annual report about the payday industry. That report and Stephens analyst David Burtzlaff served as my primary sources for data about the size of the U.S. payday market. FiSCA, the trade association for the country’s check cashers, provided data on its industry. To help me estimate the size of the various Poverty, Inc. industries, I spoke with several financial analysts who monitor what they tend to call the specialty finance sector, including Burtzlaff, Richard Shane of Jefferies & Co., and John Stilmar of SunTrust Robinson Humphrey.

  Edmund Andrews’s book is called Busted: Life Inside the Great Mortgage Meltdown.

  Two

  A quartet of reporters did stellar work investigating Fleet Finance: Mitchell Zuckoff and Peter S. Canellos at the Boston Globe, Jill Vejnoska at the Atlanta Journal-Constitution, and Mike Hudson, then a research fellow for the Alicia Patterson Foundation. The work of all four helped to inform my reporting on Fleet. Profiles of Bruce Marks that appeared in BusinessWeek (by Geoffrey Smith) and the Wall Street Journal (by Suzanne Alexander Ryan and John R. Wilke) shortly after the Fleet fight helped in my characterization of his role in that battle. An article by James Greiff in the Charlotte Observer at the start of 1993 provided me with a snapshot of Chrysler First at the time of the NationsBank purchase and alerted me to the two-hundred-plus lawsuits this subprime lender faced at the time.

  Three

  Allan Jones was my primary source for information about the early days of Check Into Cash but the “red herring”—the S-1 every company must file with the Securities and Exchange Commission when announcing its intentions of going public—it filed at the end of the 1990s also proved a rich source of information. It was while reading the company’s S-1 that I discovered that Jones paid himself $360,000 a month for use of his own jets (plus extra for flying time), for instance, and also found many details, financial and otherwise, of Check Into Cash through the 1990s. At Check ’n Go, Jared Davis would give me as much time as I wanted but David Davis, his brother, would not so much as say hello to me even when he walked into the room to ask Jared a question. Daniel Brook wrote a lively account of James Eaton and the earliest days of payday in Harper’s in an article titled “Usury County: Welcome to the Birthplace of Payday Lending.” Rodney Ho authored the early profile of the payday lending industry that appeared in the Wall Street Journal.

  Four

  The Marshall Eakes quote about his brother’s refusal to give up appears in a terrific profile of Eakes by Jim Nesbitt of the Raleigh News & Observer, published when the paper named him its 2005 “Tar Heel of the Year.” Eakes’s “we beg for it” quote appeared in the Durham Herald-Sun. Any number of publications, including the News & Observer, the Winston-Salem Journal, the Triad Business Weekly, and Southern Exposure, which all published early profiles of Self-Help that also proved helpful. Also notable was the column that Tony Snow wrote about his old friend in USA Today in 1996.

  Five

  Freddie Rogers’s case was featured in articles appearing in both the Durham Herald-Sun and the Raleigh News & Observer, written respectively by Christopher Kirkpatrick and Carol Frey. Jeff Bailey wrote the 1997 Wall Street Journal article about Bennie Roberts, the retired quarry worker who ended up owing $45,000 on a $1,250 loan. An in-depth account of the fight Peter Skillern and his allies waged against NationsBank appeared in 1998 in the Independent Weekly, based in Durham. That piece was written by Barry Yeoman and proved helpful in my depiction of Skillern, as did a profile of him written by Frank Norton that appeared in the News & Observer in 2006. The tidbit about Eakes handing out seven thousand copies of Associates videotape appeared in an entertaining and informative profile of Eakes written by Chris Serres for the News & Observer in 2000.

  Six

  As was the case with Allan Jones’s Check Into Cash, Advance America’s S-1 offered up a trove of information about the company’s early growth and its financials. Also helpful were Susan Orr’s lengthy profile of Billy Webster that appeared in the Spartanburg Herald-Journal in 2005, and C. Grant Jackson’s profile of George Johnson in the State, Columbia’s primary daily newspaper. “Strife inside the family”: Eventually the tensions between the Davis brothers and their father prompted Allen Davis, in February 2005, to sue his sons for control of the company. “Passed the 10,000-store mark by 2001”—that is according to a study of the payday industry conducted by the Federal Reserve Bank of Philadelphia. Mark Anderson was the Sacramento Business Journal reporter who noticed all these cash advance stores in his midst in 1998.

  Seven

  The Dayton Daily News proved an excellent resource in the re-creation of the fight over subprime lending in its city. At the end of the 1990s, reporter Marcus Franklin wrote an excellent piece on the impact of the payday loan business on Dayton. Franklin also reported on the hearing where Pam Shackelford and Suriffa Rice both spoke. Jim Bebbington’s in-depth profile of Dean Lovelace in the Daily News helped me round out my profile of Lovelace, and Bebbington, among others at the Daily News, did a commendable job covering the debate over Lovelace’s proposal to curb high-cost home loans inside the city limits. That list also includes Eddie Roth, who, in the late 1990s and early 2000s, wrote a series of editorials for the Daily News decrying subprime abuses and calling on elected officials at all levels of government to do something about this festering problem, and Ken McCall, who wrote about the Gloria Thorpe case.

  The University of Dayton’s Center for Business and Economic Research conducted the study that found that at least 30 percent (and as many as 40 percent) of all refinancings had been initiated by the lender and also provided the data showing that subprime home equity loans had quadrupled in the Dayton area between 1997 and 1999. Lee Schear declined several requests
for an interview, though in 2002 he sat down with Caleb Stephens of the Dayton Business Journal for a profile under the headline “Classic Entrepreneur.”

  The best account I found of Senator Grassley’s hearing into predatory lending was written by the New York Times’s Richard W. Stevenson, which is where I first learned about Ormond and Rosie Jackson of Brooklyn and Helen Ferguson of Washington, D.C. Critical to my portrait of Phil Gramm was the terrific piece Eric Lipton and Stephen Labaton wrote for the Times in 2008 as part of “The Reckoning” series the paper ran that year. The Times article was my source for the revelation that the country’s banks gave Gramm more in campaign contributions than any other senator and it was through this impressive in-depth piece that I first learned about Florence Gramm.

  Eight

  Richard A. Oppel, Jr., wrote that great piece investigating Associates for the Dallas Morning News—and then, after moving to the New York Times, he did an admirable job (along with fellow reporter Patrick McGeehan) covering the ongoing battle over Citigroup’s decision to purchase this controversial subprime lender. Julie Flaherty was the reporter who interviewed Eakes for the Times’s Sunday business section and Robert Julavits was the author of the American Banker article that accurately predicted that Citigroup was going to have an enormous fight on its hands with its proposed purchase. Also useful were reports by Kathleen Day in the Washington Post and Paul Beckett in the Wall Street Journal. At the website of the Inner City Press, run by activist-lawyer Matthew Lee, I first learned about a pair of former CitiFinancial employees named Michele Handzel and Gail Kubiniec and also about Kelly Raleigh, who went to work for Commercial Credit in 1990.