Part 1 (1/2)

Broke, USA.

From p.a.w.nshops to Poverty, Inc.- How the Working Poor Became Big Business.

by Gary Rivlin.

Prologue.

Tommy's Angel.

DAYTON, OHIO, DECEMBER 2008 2008.

Seventy-three-year-old William T. Myers lives in a forlorn trailer park on the industrial outskirts of Dayton, Ohio. Pine View Estates, a tightly packed community of about 250 mobile homes, sits along a heavily trafficked commercial thoroughfare battered by a nonstop, noisy parade of dump trucks, cement mixers, and other heavy equipment. Despite its name, Pine View Estates has no pine trees-nor are there any views except those of the trailer park's closest neighbors: a metal salvage yard and a large asphalt plant. When giving directions to his home, Myers, who goes by the name Tommy, jokes about the railroad tracks a visitor must cross to reach the modest gray and white aluminum-sided trailer that he, his wife, a dog, and a cat have called home over the past few years. ”I suppose you can say I live on the wrong side of them tracks,” Myers said in a high, reedy voice. He punctuated his crack with a crazed, Walter Brennanlike cackle.

I met Tommy Myers and his wife, Marcia, in 2008, shortly before Christmas. I was still in my car when a small, wiry white man built like a bantamweight fighter bounded out of his trailer and made a beeline for my door. ”Ain't no way you want to park there,” he advised in a squeaky voice tinged with the Appalachian tw.a.n.g one hears a lot in southwestern Ohio. His next-door neighbor, he explained, stands at least six foot five inches tall and belongs to the Outlaws motorcycle club. Apparently I was taking the s.p.a.ce the man considered his personal parking spot. ”It might be best to just move your car,” he said. I did.

Inside, a spindly, spa.r.s.ely decorated Charlie Brown Christmas tree sat by the entranceway. There was a living room large enough to fit a couch, a couple of chairs, and a tiny dining room table.

”It's not too bad,” Myers said.

”Easier to clean than the house,” Marcia said.

”We make do.” A large wooden crucifix was nailed to one of the living room walls. A lot had happened in Myers's life over the past ten years but the cross reflected a recent change. A neighbor had invited the couple to a screening of The Pa.s.sion of the Christ The Pa.s.sion of the Christ and soon Marcia and Tommy were attending church for the first time since either was a teenager. ”She made me start going to church with her,” Myers said. ”It's been a blessing ever since.” and soon Marcia and Tommy were attending church for the first time since either was a teenager. ”She made me start going to church with her,” Myers said. ”It's been a blessing ever since.”

Tommy Myers has a pleated face and a broad, toothless smile. He had five kids from his first marriage, to a girl he had gotten pregnant shortly before graduating from high school in Dayton, and a sixth if you include the baby Marcia had given birth to less than two months before the couple met. He has worked as a delivery driver for most of his life. For years he drove a truck for Pepsi, then for a beer distributor. More recently he made deliveries for a restaurant supply company. Marcia, whom Myers sometimes calls ”Momma,” is a cafeteria worker at a local high school. ”My wife's tougher than a crocodile and alligator combined,” he said, causing Marcia to roll her eyes. She has a nice smile, a round face, and a curly mop of thick strawberry blonde hair that was somewhat wilted after a long day over the cafeteria's steam tables. ”She knows it's best sometimes just to ignore me,” Myers said with a shrug, flas.h.i.+ng his gums and emitting another whoop. Marcia, who was dressed in flannel sweatpants and a blue ”Life Is Good” T-s.h.i.+rt (a freebie from the school), drifted in and out of the room as we spoke. She hates to even think about the topic that had brought me to their trailer on the outskirts of Dayton that day.

The pair met in West Palm Beach, Florida, when Myers was thirty-five and Marcia was nineteen. Tommy had grown up in Dayton, but after his divorce he arranged a transfer through Pepsi. There he worked with Marcia's brother and played with him in a softball league, which is how Myers and Marcia came to meet shortly after she had given birth to a baby boy. Life was good in Florida, Myers said, but he missed Dayton, and eventually they moved north.

Home in Florida had been a trailer, but once in Dayton the couple decided to buy a home they found in a white working-cla.s.s neighborhood. The house cost only $60,000, but for Myers, who was about to turn sixty, and Marcia, in her forties, it felt like a small palace. There was an upstairs and a downstairs and a finished bas.e.m.e.nt with a washer-dryer. The place had three bedrooms, or four if you included the utility room that seemed a wild extravagance after so many years fitting their lives into a cramped double-wide. They had a decent-sized backyard, where Marcia liked to tend to her plants. The monthly payment was $526 including property taxes and insurance. They painted their new home white and, because Marcia loved her home team, trimmed it in Miami Dolphins teal.

Myers started thinking about retirement. He would turn sixty-five in 2000 and it would be nice to slow down. But then Marcia got sick and he thought about all the calls he had been getting from a man he's now inclined to refer to, sarcastically, as his guardian angel. He was a salesman for the consumer finance giant Household Finance Corporation, phoning one name on a long list of prospects. By 2001, when the Myerses borrowed $95,000 from Household, this venerable U.S. corporation would rank as the country's top subprime lender.

Household Finance was established in 1878 by a Minneapolis jeweler named Frank J. Mackey, who sensed the money to be made through loans to people of modest means. Through the late nineteenth century and into the twentieth, banks were conservative inst.i.tutions that loaned money to affluent citizens at a slightly higher interest rate than they paid those same citizens for their deposits. In the name of reducing risk, they categorically excluded potential customers who had jobs but did not look, act like, or even speak the language of their prosperous, mostly property-owning clientele. So Mackey started loaning money to those heretofore excluded people out of the back of his jewelry store at an interest rate high enough to protect against the increased risk but low enough to remain affordable.

Business was good for both Mackey and his credit-starved customers. The working people who borrowed money from Mackey-the working poor, if we were talking about them today-proved themselves to be a diligent and largely dependable lot. Mackey created a system by which people made regular partial payments on what they owed him. That enabled families living paycheck to paycheck to purchase big-ticket items such as furniture and iceboxes and handle emergencies too great for their weekly paychecks to accommodate. Mackey might have seen himself as doing nothing more ambitious than providing credit to people at the bottom of the economic ladder but essentially he invented the unsecured installment loan. He moved his company to Chicago and, in the 1920s, HFC went public.

It was an enormously profitable business that for decades could be sustained simply by opening offices in new locales, but in the 1960s the company grew restless. Flush with cash, HFC acquired an airline, a car-rental company, and a supermarket chain, among other properties. None proved anywhere near as lucrative as the personal loan business, however, and in the second half of the 1970s management decided that it would follow in the footsteps of giants such as Citibank and American Express and transform itself into a one-stop financial supermarket. It sold off most of its recent purchases, bought an insurance company, and moved into branch banking and even private wealth management. When this new strategy produced the same disappointing results as the previous one, the company decided to look for a new chief executive outside its senior ranks.

Their savior was a Brooklyn-born dockworker's son named William Aldinger, who had been working as a top executive at Wells Fargo. Aldinger sold off the insurance company. He gave walking papers to those who had been hired to beef up its private banking business and fired the company's art curator. The people generating the real profits, he understood, weren't those in s.h.i.+ny shoes and sober dark suits looking to woo the business of the very wealthy. It was all those sales people in their off-the-rack JCPenney specials manning the company's mini-empire of strip mall storefronts. Under Aldinger, the company's consumer finance division would no longer need to compete for the bra.s.s's attention.

The turnaround reigns as one of the financial world's cla.s.sic feel-good tales, and it fell on a Wall Street Journal Wall Street Journal reporter named Jeff Bailey to tell Household's story in 1996, two years after Aldinger's arrival. During that time, Household's share price had more than doubled. ”At Household, formerly a sprawling and ill-focused conglomerate,” Bailey wrote, ”a single-minded devotion to consumer loans is leading a significant turnaround.” Aldinger had refocused Household on what Bailey dubbed ”lunchpail lending.” Loaning money to the little guy, whether via a credit card, a used car loan, a home equity line, or a furniture store, was proving far more profitable than nearly any alternative banking activity-and Wall Street was beginning to notice. reporter named Jeff Bailey to tell Household's story in 1996, two years after Aldinger's arrival. During that time, Household's share price had more than doubled. ”At Household, formerly a sprawling and ill-focused conglomerate,” Bailey wrote, ”a single-minded devotion to consumer loans is leading a significant turnaround.” Aldinger had refocused Household on what Bailey dubbed ”lunchpail lending.” Loaning money to the little guy, whether via a credit card, a used car loan, a home equity line, or a furniture store, was proving far more profitable than nearly any alternative banking activity-and Wall Street was beginning to notice.

On one level, Aldinger, a man with humble beginnings, was returning Household Finance to its original roots. Yet it seemed the new Household and the company Frank Mackey had started more than a century earlier shared nothing aside from the same core customer base. Before Aldinger, Household had competed for consumers by offering lower interest rates. Under Aldinger, the company raised its rates but also intensified its marketing efforts. The gambit worked. Loan volume went up, not down, and profits soared. The company would deluge working-cla.s.s neighborhoods with mailers-and then follow up these come-ons with repeated phone calls. ”n.o.body applies for a loan,” a Household executive told Bailey. ”It's all push.”

To make its point, the company invited Bailey to play a fly on the wall at a branch the company operated on the suburban fringes of Chicago. There, in an office next to a Jenny Craig weight-loss center, he sat watching as local branch manager Bob Blazek and his staff trolled an internal database in search of customers deep in credit card debt who also owned a home. ”I love to see five to ten” credit cards, Blazek explained. ”We target them first.” When Blazek reached a couple who owed $28,000 on eight cards, he treated them like prime prospects rather than dangerous credit risks. He sold them a high-rate home equity loan sized to pay off their credit cards and upped their credit by another $20,000, ”just in case the spending bug bites again.” Later, Blazek confessed to Bailey that had a second customer, a retiree, gone to a conventional bank instead of talking with him, he almost certainly could have gotten much more favorable terms than the 15.25 percent annual interest rate he would be paying to Household.

The company made little effort to collect from borrowers who were falling behind on payments. Those customers, executives explained to Bailey, were instead treated as top prospects for a new loan-at a higher rate, of course, and with a new set of up-front fees tacked on. Many sales people chose to leave the company, and Household fired another three hundred during Aldinger's first two years for failing to meet company quotas. The company, Bailey found, experienced a 60 to 70 percent annual turnover rate among its sales people. Those who could stand the pressure, though, were paid far more than they were likely to earn elsewhere. Branch managers were paid a salary of $40,000 a year plus performance-based bonuses that let top managers such as Blazek make as much as $100,000 a year.

In 1998, a few years before Tommy Myers would become a Household customer, Aldinger made his boldest move yet. Household bought its best-known compet.i.tor, Beneficial Finance. So where once HFC could claim roughly 1,000 storefronts in working-cla.s.s neighborhoods across the country, the company now operated nearly 2,000. The deal increased Household's debt, placing even more pressure on the sales staff to make loans. The Beneficial employees, who had been working on a straight salary, saw their wages slashed and replaced by the possibility of the rich commissions and sales bonuses they might earn peddling Household's high-priced products.

Not everyone was as impressed as Wall Street by the creative means that businesses like HFC were devising to earn fat profits off those with thin wallets. ”They're sucker pricing,” one critic, Kathleen Keest, a deputy in the Iowa attorney general's office, told Bailey. Keest's quote high up in the Journal Journal's story-and the presence of the phrase ”sucker pricing” in the article's headline-showed that even the paper sometimes called Wall Street's daily bible was queasy about the changing nature of lunchpail lending.

Unfortunately, Tommy Myers didn't read the Wall Street Journal Wall Street Journal.

The calls started shortly after the Myerses moved into their home in 1995. ”Every month we were getting another letter from Household,” Myers said. After a time, the phone started ringing as well. ”h.e.l.lo, Mr. Myers, how are you today?” It was the same man who was signing the letters from Household. ”I was never so popular,” Myers said, ”as when I owned that house.”

Myers doesn't consider himself a sucker. The mortgage on his home was a standard A-grade loan obtained through a mainstream lender. He's never resorted to borrowing money from a p.a.w.nshop and he never wasted a 2 or 3 or 4 percent share of his paycheck relying on a check casher. He can't imagine himself ever going to one of those rent-to-own stores that long ago figured out how to sell $500 television sets for $1,200. I asked if he'd ever gone to one of the thousands of shops around the country offering ”rapid refunds” to people so desperate for quick cash that they'll give over a portion of their tax refund to save waiting a couple of weeks and Myers looked at me as if I'd insulted him. ”Never, never, never,” he said. ”I would never pay a third of my money for that.”

His reaction to a question about payday loans was even stronger. Stores offering a cash advance against a person's next paycheck were sprouting up all around Dayton starting in 1997 yet he had never been tempted to stop at one. The rates they charged, he said, $15 on every $100 borrowed, were too high. ”I may just have me a kindergarten education,” Myers said, ”but they ain't never getting me with one of them things.”

At first the salesman from Household was as easy to ignore as the rest of these peddlers of high-priced credit. He'd employ any number of gambits, Myers recalled, to convince him to start using his home as a kind of ATM machine. You're building up equity in your home, he would counsel; make that equity work for you. Fix up your home. Consolidate your bills. Take that pretty wife of yours on a trip, he'd cajole. Myers would always politely decline.

But then in 2001 Marcia started to have trouble breathing. Walking up a flight of stairs left her feeling as if she had just run a marathon. She couldn't go to work and then the news got worse when the doctors discovered a congenital heart problem and told her she needed surgery. The long recovery meant the pair would be without her paycheck for the better part of a year.

Myers puzzled over what to do about their new, more perilous financial situation. They were suddenly carrying more than $10,000 in credit card debt. They were paying a relatively low 7 percent on their mortgage but getting hit by interest rates as high as 10 percent on their three credit cards. ”My thinking there was 'Let's refinance the house, put everything in one bill, it'd be easier to handle,'” he said. Now it was Myers who was calling Household.

It turns out that the salesman who had been calling was also a Household broker who could write loans. ”He tells me, 'How about me taking your house, your credit card bills, everything, and we'll combine it into a single loan at 7.2 percent?'” He would end up owing more in princ.i.p.al and pay a slightly higher interest rate than they were paying on the mortgage but one that was significantly less than the interest on their credit card debt. That sounded great to Myers, who told the man to draw up the papers. ”We want to get this all taken care of and get you back on your feet,” Myers remembers him saying.

The nearest Household Finance office was just off the interstate in a first-ring Dayton suburb called Huber Heights. There on a Friday evening in the fall of 2001, out by the big air force base, in a shopping center populated by an Applebee's and an Uno pizza parlor, they met with the salesman who had been calling them. He greeted the couple with a toothy Dentyne smile-and right away Marcia was mistrustful. ”She flat tells him,” Myers said of his crocodile wife, ”'Anytime I talk to somebody and all I see is teeth and eyeb.a.l.l.s, I don't trust 'em.'”

”I can tell a phony grin from a mile away,” Marcia said. ”And this man was too smiley for me.” The phone rang and things went from bad to worse. It was a friend of the broker calling, apparently to work out the details of a trip to a nearby amus.e.m.e.nt park the next day. ”This is a big deal to us,” Myers said, ”but we're sitting there for like twenty minutes-”

Marcia: ”At least twenty minutes.” twenty minutes.”

”-at least twenty minutes while he's talking about this trip and all the rides he's looking forward to.”

The man was all business once he was off the phone. It was Myers's impression that he was in a rush to get home. Myers would kick himself in the coming months for acting so accommodating despite the stakes, but Sat.u.r.day was a workday and there was Marcia to worry about. She didn't feel anything close to 100 percent. Marcia had spoken up one final time. ”I don't want to do this whole thing,” she said, but then she abdicated to her husband. You're the one who understands this stuff, she said. You're the one who handles the money. ”I don't understand interest and that whole mess,” she remembers saying. ”So if you think this is the right idea, then go for it.” Myers felt confident he was making the right decision. He thought he knew the questions he needed to ask. This particular broker might feel wrong to him but the deal felt right.

Anyone who has been to a real estate closing knows that disorienting feeling that comes while staring at a thick stack of impenetrably complex doc.u.ments, each reading as if written by the Committee for the Full Employment of Lawyers. Myers fixated on a single detail: the new interest rate. ”I asked him point-blank, 'So what I'm signing here, this means I'm paying 7.2 percent,'” he said. ”And he looked me straight in the eye and said, 'Just trust me. You make your payment every other week, that brings your interest rate down to 7.2.' I didn't think too much about it. I just thought, 7.2, good, that's right.”

The rest of their meeting was a blur. They signed and initialed until their hands cramped up. The Myerses had thought it was just the three of them in Household's offices that night when a man appeared out of the gloaming when the time came to have the papers notarized. They were there less than an hour, including the time the broker was on the phone with a friend.

”You make your payment every two weeks...” Those words gnawed at Myers's subconscious all weekend but it wasn't until Monday that he pulled out the papers and asked one of his daughters, who knew something about mortgages, to take a look. ”She says to me, 'Dad, you got took.'” Those words gnawed at Myers's subconscious all weekend but it wasn't until Monday that he pulled out the papers and asked one of his daughters, who knew something about mortgages, to take a look. ”She says to me, 'Dad, you got took.'”

Under Ohio law a borrower has three days to change his or her mind about a home loan. Myers didn't contact Household until the next morning, four days after they had signed the papers, and the man he met with on Friday night refused his request to rescind the deal. ”Partially it's my fault for not saying I want to come back when we're not all in this big rush,” Myers said. It was when he received the bill for his first mortgage payment that he began to appreciate the magnitude of his mistake. He knew his monthly payment would be higher than the $526 he had been paying but he was figuring on a b.u.mp of maybe $50. Instead it had nearly tripled to $1,400 per month.

The main culprit was the interest rate. The annual percentage rate, or APR, on the loan Household sold the Myerses was 13.9 percent, not 7.2 percent. In time, it would be revealed that Household agents around the country were routinely claiming that customers would be paying lower interest rates than they were actually being charged. Each used the same sleight of hand: Because its customers were required to make biweekly payments, they were making the equivalent of thirteen monthly payments during the year rather than twelve. Financial planners recommend making thirteen payments each year because by doing so borrowers pay off a standard thirty-year fixed-rate mortgage in just over twenty-one years. The mortgage holder is paying the same interest rate on the money, of course, whether he or she is paying the standard twelve months a year or thirteen, but over the life of the loan they'll pay significantly less interest because those extra payments are whittling away at the princ.i.p.al on the front end. Yet even this rhetorical trick practiced by Household agents doesn't get a borrower from an interest rate of 13.9 percent to 7.2 percent.

People with tarnished credit, naturally, can expect to pay a higher interest rate than those with good credit. They present a greater risk of default and lenders need to charge a higher rate to cover any additional losses. But Tommy and Marcia Myers had excellent credit. The generally accepted definition of a ”subprime” borrower is a person with a credit score of below 620 on a scale between 300 and 850, though some inst.i.tutions use a cutoff of 640 or higher. But the Myerses weren't even close to the margins. Myers contends that the couple had a FICO score (FICO is named for the Fair Isaac Corporation, which created the credit rating system) in the mid-700s. If so, that meant that had Myers gone to a traditional bank rather than Household, he would have secured the loan he had been seeking.