Broke USA Part 11

Binzer asked his cla.s.s how many had received an offer from an auto dealer since initiating bankruptcy proceedings. "Almost always one hundred percent of the hands go up," he said. Often people emerge from a bankruptcy without a vehicle but a ready market of prospective customers needing transportation is only one reason the dealers are so eager for their business. There are solicitations from new car companies and solicitations from those selling used cars but invariably the come-ons are all the same. "They'll offer them a loan at eighteen to twenty-two to twenty-five percent but make it sound affordable by giving a person eight years to pay back the loan," he said. Interestingly, Binzer said, eight years is precisely the amount of time a person must wait before filing for another Chapter 7.

Late in the afternoon of my Dayton drive-along with Jim McCarthy, he asked if I would "indulge him" and visit a neighborhood not on our tour. I had asked him to show me the city's white working-cla.s.s neighborhood but he wanted me to see at least a small patch of the predominantly African-American west side. Later, Fesum Ogbazion, the CEO of Dayton's Instant Tax Service, would tell me that if it weren't for the instant-tax mills and the payday lenders, the check cashers, and the occasional p.a.w.nbroker, there would be no businesses operating in poor minority communities other than a few convenience stores and the ubiquitous hair and nail shops. His claim was an exaggeration but only a slight one. It was on the black side of town where all these low-rent credit shops had first taken root and it seemed every major payday chain had at least one outlet on the west side of the river, and most seemed to have two. Cashland operated no less than five payday stores in west Dayton. Even the Sunoco station we pa.s.sed shortly after crossing the river sported a sign advertising its check-cas.h.i.+ng services, allowing the proprietor to charge up to 3 percent of the face value of a check.

McCarthy drove slowly through a west side neighborhood called University Row (the streets have names like Harvard and Amherst). Many of the homes are magnificent, or at least they were not that long ago: wooden beauties with leaded gla.s.s and architectural touches like turrets and gables and wraparound porches. I had gasped earlier in the day when I saw three or four boarded-up houses clumped near one another and there were those few blocks in a row in Santa Clara where nearly half the homes had been foreclosed. Here, however, it seemed that half the homes on every every block had been abandoned. Paint was peeling, exteriors were crumbling, multiple windows were broken, lawns were overgrown, and the occasional roof had buckled in. This is a place, McCarthy said, that not so long ago he would have described as a stable, solidly working-cla.s.s community. No longer. "We're seeing the s.e.x trade here," McCarthy said as he drove. "There's drug stuff going on inside a lot of these boarded-up properties." block had been abandoned. Paint was peeling, exteriors were crumbling, multiple windows were broken, lawns were overgrown, and the occasional roof had buckled in. This is a place, McCarthy said, that not so long ago he would have described as a stable, solidly working-cla.s.s community. No longer. "We're seeing the s.e.x trade here," McCarthy said as he drove. "There's drug stuff going on inside a lot of these boarded-up properties."

And there are similar communities elsewhere in the country. One, South Ozone Park, a predominantly black neighborhood near New York's Kennedy Airport, is populated by postal workers, bus drivers, teachers, and clerks. These people were solidly middle cla.s.s and yet it was South Ozone Park and several other black enclaves in the southeast corner of Queens that the New York Daily News New York Daily News declared the "ground zero of New York's subprime mess." For decades the story of neighborhoods like these was their stability; houses weren't sold so much as pa.s.sed down from generation to generation. But that was before the mortgage brokers set up shop in the early 2000s. In South Ozone Park, the Neighborhood Housing Services of New York City, an organization that offers financial education and affordable lending products, started to see changes in South Ozone Park and several of the neighborhoods around it. Soon, Sarah Gerecke, the group's CEO, told me, where less than 5 percent of the homes in South Ozone Park would change hands in a given year, that number rose to 20 percent. By 2008, she said, the turnover rate on some blocks was approaching 50 percent. declared the "ground zero of New York's subprime mess." For decades the story of neighborhoods like these was their stability; houses weren't sold so much as pa.s.sed down from generation to generation. But that was before the mortgage brokers set up shop in the early 2000s. In South Ozone Park, the Neighborhood Housing Services of New York City, an organization that offers financial education and affordable lending products, started to see changes in South Ozone Park and several of the neighborhoods around it. Soon, Sarah Gerecke, the group's CEO, told me, where less than 5 percent of the homes in South Ozone Park would change hands in a given year, that number rose to 20 percent. By 2008, she said, the turnover rate on some blocks was approaching 50 percent.

"When you look at communities like South Ozone Park," Gerecke said, "you can't help but think that abusive lending was often more racial than economic." Gerecke's claim has been substantiated by any number of studies, including a May 2006 report by the Center for Responsible Lending that demonstrated a significant racial bias in subprime mortgage lending even taking into account income and credit score.

In the car with McCarthy, looking at all those once-beautiful homes now serving as nothing more than well-dressed drug houses, I couldn't help speculating about whether I was seeing a vision of the future. It was here, in communities like Dayton's west side, where the subprime mortgage disaster that would engulf the country first reared itself. It's here where the disaster has had the longest to play itself out-and it was clear as we wound up our tour that it's far from over.

Epilogue.

Borrowed Time NEW YORK, FALL 2009 2009.

Allan Jones had opened 1,300 payday stores yet through much of our two days together in Cleveland he bellyached how it could have been more. Several times he brought up Europe. Advance America operated stores in the United Kingdom; Check 'n Go bought a small chain in Scotland. The payday loan was becoming so popular in the UK that Kevin Brennan, its consumer minister, told the BBC he was "concerned that so many people are relying on these forms of high-cost lending." But Jones had never been to Europe, so in the summer of 2007 he and his family spent several weeks hopscotching their way across the continent, never staying in one place for more than two days. "I was trying to learn culture," he said. "Trying to get myself up to speed. So basically it was up and out with the tour guide at nine each morning and go through five." By the time the trip was over, everyone was happy to be home and Jones expressed no desire to ever return.

"I was all set to take the plunge but I was afraid of Europe," he said. Instead he opened some stores in Texas, a state he had always avoided because the rules required a payday lender to partner with a local bank. "I was ignorant of Europe," Jones said. "But Texas I understand, I told myself. Why go to Europe if you haven't been to Texas yet?" He found a partner bank and together they opened sixty stores.

"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 owners.h.i.+p 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 Hamps.h.i.+re. 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 s.e.x 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 Cheklist magazine. 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 compet.i.tion 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 compet.i.tion 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 cas.h.i.+ng at select stores, and by the time I visited him in February 2009, check cas.h.i.+ng 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 antic.i.p.ation loan at its stores years earlier then dropped the practice. But it too began offering check-cas.h.i.+ng and wire transfer services at select stores and announced in 2009 that it would offer car t.i.tle 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 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 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. 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 pus.h.i.+ng 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 a.r.s.enal 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 governors 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 pa.s.sage 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 circ.u.mstances. The market didn't self-correct, as he had a.s.sumed 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.

The payday lenders, the check cashers, and others catering to those on the economic fringes had been worried that somehow a crackdown on subprime mortgage lenders could threaten the way they conduct business. They were right to worry. The centerpiece of the Obama administration's financial reform package was an idea that Elizabeth Warren of Harvard first proposed in mid-2007: a Consumer Financial Protection Agency, or CFPA. The impetus behind this new regulatory body may have been the need to rein in abusive mortgage practices and complex products such as collateralized debt obligations that Warren Buffett had dubbed "financial weapons of ma.s.s destruction." But this proposed, new consumer protection agency for financial products would also have jurisdiction over payday loans, the p.a.w.n business, subprime credit card companies, and pretty much any Poverty, Inc. enterprise. The CFPA consolidated enforcement into a single, stand-alone agency that would have broad authority to investigate and react to abuses. The agency would also promote better financial education. Predictably, virtually every business in this sector lined up against the Obama proposal. How could they not in the face of a new federal agency that would suddenly be poking into their business? The CFPA was "redundant," a "waste of money" (actually, under Obama's plan, the businesses being regulated would be a.s.sessed a fee to pay for the agency), and an "extra layer of bureaucracy." Lynn DeVault, the Allan Jones lieutenant heading up the payday lender trade organization, told Cheklist Cheklist that her group had quadrupled its federal lobbying budget. that her group had quadrupled its federal lobbying budget.

The scope of this proposed new regulatory body was made plain by the breadth of interests aligned against it, a roster that included banks and payday lenders, of course, but also p.a.w.nbrokers, car dealers, real estate developers, the U.S. Chamber of Commerce, and even utility companies. By the time the debate over the agency began in mid-October, the financial services industry had already spent more than $220 million lobbying against Obama's proposed agency.

FEDERAL A AGENCY A N NEW T THREAT-that was the headline in the fall 2009 issue of Cheklist Cheklist. The author of the article checked in with the check cashers, a p.a.w.n chain, and a payday proprietor. There may have been a time when the poverty industry wasn't a single ent.i.ty so much as splintered, competing interests fighting over the same cl.u.s.ters of customers. But the p.a.w.nbrokers became check cashers and the check cashers ventured into payday, as did rent-to-own. And more recently the payday lenders started getting into check cas.h.i.+ng, money orders, refund antic.i.p.ation tax loans, and any other business that might bring in additional revenues. They all learned the same tricks for maximizing revenues from the same sources, each category of business grew plump with profits due to the same set of broader economic factors: stagnating wages while home and health prices soared, the loss of good-paying manufacturing jobs, the widening gap between the wealthy and those on the bottom half of the wage pyramid that economists have been observing for thirty years. If nothing else, the fight against a new consumer agency underscored the unified nature of the country's Poverty, Inc. sector-and its clout. JPMorgan Chase underwrites the loans for a large share of the instant tax market, the country's biggest banks funded the growth of the payday industry, and pretty much every large investment bank has had its hand in one of these businesses or another. And what are overdraft fees, which generated $24 billion for the banks in 2008 according to the CRL, but another way a business is feasting off those living on the financial margins?

"If it was just us, we'd get killed here," payday spokesman Steven Schlein said of Obama's proposal for a consumer agency. But the interests of his clients and the country's largest financial inst.i.tutions are aligned. "Our hope is that the banks will beat this bill back," Schlein said. As written, the Consumer Financial Protection Agency Act of 2009 didn't give this new agency the power to cap interest rates. But it was Schlein's great worry, and the worry of many within the Poverty, Inc. field, that an interest rate cap will be slipped in at the last minute or tacked on to a completely unrelated piece of legislation.

Obama said he wanted a financial reform package signed by the end of 2009 but that deadline came and went-and with it the Democrats' filibuster-proof majority in the Senate. The House had done its part, authorizing the CFPA in legislation it dubbed the Wall Street Reform and Consumer Protection Act. Barney Frank, the liberal congressman from Ma.s.sachusetts and chair of the House Financial Services Committee, had angered consumer activists by granting the federal government the power to preempt the states from regulating the national banks in some circ.u.mstances, but President Obama, anxious to see legislation pa.s.s by year's end, immediately issued a press statement lauding the committee for its swift action.

The House bill pa.s.sed without a single Republican vote. A rival proposal pa.s.sed out of the Senate Banking Committee, chaired by Connecticut's Christopher Dodd, but with health-care reform taking center stage and other issues crowding out the agenda, the full Senate failed to vote on the measure by year's end. Then, shortly into 2010, Dodd announced he would not be running for reelection, introducing another X factor into the debate. Early in 2009, the Los Angeles Times Los Angeles Times had reported that Dodd had raised more than $44,000 in campaign funds from high-interest lenders like payday and p.a.w.n, and later that spring there were news accounts of the senator eating dinner with members of the industry group representing the online payday lenders. Despite a reputation for being too cozy with the banks and other financial inst.i.tutions under his committee's jurisdiction, or perhaps because of it, Dodd announced his support for a consumer regulatory agency shortly thereafter. What the lame-duck senator might do now that he wasn't worried about raising more money or winning votes-and whether Obama's proposed new agency could survive a filibuster threat-was anyone's guess. had reported that Dodd had raised more than $44,000 in campaign funds from high-interest lenders like payday and p.a.w.n, and later that spring there were news accounts of the senator eating dinner with members of the industry group representing the online payday lenders. Despite a reputation for being too cozy with the banks and other financial inst.i.tutions under his committee's jurisdiction, or perhaps because of it, Dodd announced his support for a consumer regulatory agency shortly thereafter. What the lame-duck senator might do now that he wasn't worried about raising more money or winning votes-and whether Obama's proposed new agency could survive a filibuster threat-was anyone's guess.

Ameriquest would be the first big subprime lender to flop. Its ign.o.ble end in mid-2007 came when the company posted a curt message on its website informing people it would be taking no new applications for loans. Its a.s.sets would be sold, fittingly, to Citigroup. JPMorgan sold off much of its subprime mortgage holdings at the start of 2007 and, not long afterward, H&R Block and General Electric put its subprime mortgage units up for sale. But, finding no buyers, the two companies shut them down and absorbed the losses. Wells Fargo made a similar announcement, and New Century, which made $37 billion in loans in 2006, declared bankruptcy the next year. In 2008, Bank of America purchased Countrywide and JPMorgan Chase bought Was.h.i.+ngton Mutual. What was left of the subprime lenders boiled down to billions of dollars in debts and a raft of legal cases, including the lawsuit the city of Baltimore filed against Wells Fargo accusing the bank of steering black customers into subprime loans even when they qualified for lower-rate mortgages and home equity lines of credit. (A federal judge dismissed the charges against Wells at the start of 2010.) Perhaps the most shocking news of all came when HSBC announced, in March 2009, that it was shutting down Household Finance, despite the $14 billion it had paid for the company just a half-dozen years earlier.

Yet no bank seemed to take it on the chin as hard as Citigroup. Citi would remain on government life support longer than most of its compet.i.tors, and the stock price of this once-mighty global inst.i.tution that as recently as May 2007 traded for more than $50 a share dropped to $1.02 a share-a 98 percent plunge. Citigroup's primary problem was that it had full exposure on both sides of the subprime debacle: Through CitiFinancial, it was one of the country's leading subprime mortgage originators and on the investment banking side its people had aggressively pursued a derivative product called a collateralized debt obligation that was based on underlying portfolios of mortgages. Citigroup wrote off tens of billions of dollars in bad mortgages and a new CEO split the company in two: those units they would keep and those they would sell once there was money back in the system. This second category included any number of divisions (insurance, the brokerage business) that Sandy Weill had brought to Citigroup. Citi would cut 110,000 jobs (around one-third of its workforce) and sell off $350 billion in a.s.sets by the start of 2010.

Yet there was little joy inside the Center for Responsible Lending over the demise of the predatory subprime lender. The value of real estate in the United States had shrunk by $1 trillion in a matter of months, and there was more bad news coming as the rates would reset on all those explodable ARMs written in 2006 and early 2007. There was another new foreclosure every thirteen seconds through the early months of 2009, the Mortgage Bankers a.s.sociation reported, and while the Obama administration promised help, it was slow in coming. Under its $75 billion Home Affordable Modification Program, created in March 2009, the government announced that it would pay mortgage companies $1,000 for each loan they modified and then another $1,000 a year for up to three years. But as 2009 was coming to a close, the inst.i.tutions controlling these loans had renegotiated the home loans for only a tiny fraction of the 4 million eligible homeowners-66,000 in ten months. The CRL estimated that homeowners in neighborhoods with a high ratio of subprime loans saw the collective worth of their homes drop $500 billion in value because of nearby foreclosures.

"In the last twenty-five years, the United States made tremendous progress integrating poor families into the middle cla.s.s, largely through home owners.h.i.+p," Martin Eakes told me. "But now we'll lose about half of that progress because of subprime abuses that were permitted to continue despite the best efforts of a lot of people. The subprime lenders have basically destroyed the communities that we were targeting. It's a tragedy." Compounding that tragedy, Eakes said, were the likes of Rush Limbaugh, d.i.c.k Cheney, and editorial writers for the Wall Street Journal Wall Street Journal repeatedly blaming the Community Reinvestment Act, or CRA, which required banks to make loans in any neighborhood where they had branches, as the cause of the crisis. It was absurd to blame a law that was written more than thirty years ago and didn't apply to many of the biggest subprime lenders, including Ameriquest, Countrywide, and Household Finance. Yet Neil Cavuto declared on the Fox Business Network in the middle of the subprime meltdown in the second half of 2008, "Loaning to minorities and risky folks is a disaster." repeatedly blaming the Community Reinvestment Act, or CRA, which required banks to make loans in any neighborhood where they had branches, as the cause of the crisis. It was absurd to blame a law that was written more than thirty years ago and didn't apply to many of the biggest subprime lenders, including Ameriquest, Countrywide, and Household Finance. Yet Neil Cavuto declared on the Fox Business Network in the middle of the subprime meltdown in the second half of 2008, "Loaning to minorities and risky folks is a disaster."

"If the extremists succeed in putting forward this view, then we'll lose all hope for the next generation," Eakes said. Equally disconcerting were those blaming the poor for the financial woes facing both Fannie Mae and Freddie Mac. Fannie and Freddie both played a big role in helping to cause the Great Recession of 2008. In September of that year, the federal government felt obliged to announce a $200 billion rescue of the two government-sponsored mortgage finance companies. But its true motivation for buying up all those home mortgages and either holding them in a portfolio or reselling them to Wall Street investors seemed less about helping those of modest means purchase a home-a large portion of those subprime loans, after all, involved middle-cla.s.s and upper-middle-cla.s.s borrowers-and more about profits and remaining relevant. Both Fannie and Freddie had gone public in 1989 and the seemingly unquenchable appet.i.te for subprime loans in the 2000s seemed primarily about justifying the hefty salaries and even bigger bonuses the executives paid themselves.

There was at least one subprime lender still in business: Self-Help. Its own loan portfolio was performing blessedly well despite the global financial meltdown. By September 2009, roughly 4 percent of the country's prime borrowers were delinquent on their mortgage payments compared to 20 percent of subprime borrowers. At Self-Help, that figure was 8 percent. The mortgages Self-Help bought on the secondary market it created in the mid-1990s were also faring much better than the typical subprime loan, in no small part because of the standards the organization used when evaluating a portfolio. Self-Help, Eakes said, would only buy portfolios where the points and fees were in line with conventional loans and would avoid writing mortgages that included onerous terms, such as a prepayment penalty. "We've always been about creating sustainable loans," Eakes said.

There are still people, and not just Allan Jones, who blame Eakes and Self-Help at least in part for the subprime meltdown. Self-Help, after all, created the first subprime market and it was Self-Help who pushed Wachovia so hard to enter subprime lending (the bank ultimately hit bottom because of subprime). One problem with that argument is that Self-Help ended up being dwarfed by the larger subprime market. Over fifteen years, Self-Help bought $6 billion worth of subprime loans on the open market-or what Ameriquest, Countrywide, or Household Finance wrote individually in two months in 2005. "We were just a flea on this giant elephant," Eakes said. Self-Help's David Beck also disputed the notion that Self-Help's secondary market served as a kind of gateway drug, giving established banks a taste for subprime. "The dirty little secret about subprime was already out there," Beck said. "We didn't have to give banks any idea of the obscene profits they could be making because they already knew."

Despite its successes, Self-Help's allies weren't universal in their praise of the group. "They told me when we were fighting to save the Georgia Fair Lending Act, 'We'll negotiate to one iota of something just to be able to say we have a victory,'" Bill Brennan said of the role the CRL played in Georgia after the defeat of Roy Barnes. "We ended up dropping out of negotiations way before them. To be honest about it, we were appalled they were continuing to negotiate long after the bill had been gutted beyond recognition."

Vincent Fort was even harsher in his a.s.sessment of CRL. "I'm down here dealing with people every day talking about foreclosures and predatory lending," Fort said, "but here this group flies in here, they've received tens of millions of dollars from some predatory lenders, and they're working on a bill with Republicans that's a total piece of s.h.i.+t because they want to go back and say 'We've accomplished this.' I wasn't very happy with the CRL."

Then there's the perspective of those who are part of a group that Newsweek Newsweek dubbed the "ethical subprime lenders": community development financial inst.i.tutions and other nonprofits mainly. These lenders expose as overly simplistic the claim that the CRA was to blame for the global financial meltdown of 2008 or Neil Cavuto's line that lending to minorities or those with blemished credit is a "disaster." "Even amid the worst housing crisis since the 1930s," dubbed the "ethical subprime lenders": community development financial inst.i.tutions and other nonprofits mainly. These lenders expose as overly simplistic the claim that the CRA was to blame for the global financial meltdown of 2008 or Neil Cavuto's line that lending to minorities or those with blemished credit is a "disaster." "Even amid the worst housing crisis since the 1930s," Newsweek Newsweek's Daniel Gross wrote near the end of 2008, "many of these inst.i.tutions sport healthy payback rates. They haven't bankrupted their customers or their shareholders. Nor have they rushed to Was.h.i.+ngton begging for bailouts." One person quoted in the article, Cliff Rosenthal, the head of an organization representing more than two hundred credit unions that lend primarily in low-income communities, said that delinquent loans were about 3.1 percent of a.s.sets in the middle of 2008 compared to a national delinquency rate at the time of 18.7 percent among subprime loans. The article also quoted Mike Loftin, the head of Homewise, a Santa Fe, New Mexicobased nonprofit that lends exclusively to first-time, working-cla.s.s homebuyers. Of the five hundred loans on Homewise's books in the fall of 2008, only 0.6 percent were ninety days late, Loftin said, compared with 2.4 percent of all prime mortgages nationwide.

Loftin is a good friend and I've been hearing about his group since the early 1990s, when he took over as its executive director. Technically, Homewise is not a subprime lender. His group focuses on potential homeowners with blemished credit scores but rather than put them in loans with a higher interest rate, Homewise provides prospective homebuyers financial counseling and also helps them get into the habit of setting aside some savings each month. (The Home Owners.h.i.+p Center of Greater Dayton, Beth Deutscher's group, has the same approach as Homewise.) Typically it takes six months to a year for the serious homebuyer to boost his or her credit score and also sc.r.a.pe together the 2 percent down payment his organization wants to see before making a loan. "If customers build a savings habit to save that money on a modest income," Loftin told Newsweek Newsweek, "it says a lot about them and their financial discipline."

Loftin thinks the world of Martin Eakes. I've heard him describe Eakes as having a rare moral clarity in a jaded world and he expresses great admiration for Eakes's effectiveness, his creativity, and his integrity. He'll hear Eakes speak and he'll feel invigorated. "He has this ability to remind us why we do what we do," he said. The two have often been featured speakers at the same conferences and usually find themselves on the same side of an issue. The exception is the use of subprime loans. Through the subprime boom, Loftin watched as more than a few nonprofits embraced such loans. Colleagues confessed to him that they were moving into subprime because that's where the action was and boasted about the fees they were earning writing those loans. He saw groups he had respected profoundly lose their way as they accepted money from Ameriquest, Citigroup, and other large lenders. Eakes never did so but it was Eakes who had been an inspiration for many and Eakes who served as the pied piper for responsible subprime lending. "Martin has to take some of the blame for giving credence to this notion that the best or only way to serve lower-income households is to charge them more," Loftin said. From his perspective, the real shame of it was that all the energies of a group as talented and creative as Self-Help went into the development and growth of the subprime home loan.

Loftin trained as community organizer, and seems to have a preternatural ability to pose the kind of fundamental questions that get you thinking differently about an issue that had been settled in your mind. "Risk-based pricing" is supposed to be one of the great innovations in finance. Where in the old days, only those with good credit could secure a loan, risk-based pricing meant the extension of credit to everyone-so long as you're willing to pay more to cover the greater risk in lending money to you. "The underlying logic of subprime mortgages and payday loans is the same: that the only way to expand credit to minorities and lower-income people is to dumb-down credit standards and charge them more for the added risk," Loftin said. "But there are other tools in the box"-including financial literacy. "No one is born with poor credit," he continued, "and teaching people how to manage their finances is a tool that has proven itself to work and to work over the long haul." But it's easier and quicker to charge people more than to go through the hard work of teaching people good habits.

"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 New York Times's Peter Goodman even found a group of mortgage brokers and lenders working in the very same offices on Wils.h.i.+re 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 68 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 t.i.tle 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 n.o.ble 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 cas.h.i.+ng 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 att.i.tude 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 p.a.w.nshops.

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."

p.a.w.nshops, though, had been a different story entirely. He had always looked at p.a.w.n, he said, as a "lower-cla.s.s business," but then Cash America, the p.a.w.n 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 p.a.w.n 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 p.a.w.nshops to charge a 256 percent APR); meanwhile, the p.a.w.ned 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, he was operating two U.S. p.a.w.n shops and was looking to open more. He only wished that it hadn't taken him so long to recognize the potential of p.a.w.n. "If I have one regret, it was that I didn't get into p.a.w.n earlier," he said. Payday might be under siege but with more people out of work and in need of quick cash, the p.a.w.n 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 p.a.w.nshops, "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 a.s.sembled for county officials. For the cases that helped to spur Christine Gregoire, then Was.h.i.+ngton state's attorney general, to action I relied on an article in the Seattle Times 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. 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 p.a.w.n pioneer, relied largely on a terrific profile of him written by Bill Minutaglio and published first in the Dallas Morning News Dallas Morning News and then, in 1996, in Mike Hudson's anthology, and then, in 1996, in Mike Hudson's anthology, Merchants of Misery Merchants of Misery. The National p.a.w.nbrokers a.s.sociation estimated that the average size of a p.a.w.n loan in 2009 was $90 and also helped me to estimate the size of the p.a.w.n industry; the early history of rent-to-own was courtesy of its trade a.s.sociation, the a.s.sociation 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 a.n.a.lyst David Burtzlaff served as my primary sources for data about the size of the U.S. payday market. FiSCA, the trade a.s.sociation 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 a.n.a.lysts 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 Busted: Life Inside the Great Mortgage Meltdown.