Part 4 (2/2)

It bothers Webster when people think there's a taint to the way he's made his money. People don't say anything directly to him, he told me when I visited with him in Spartanburg in early 2009; they are too polite for that. But he hears things secondhand and he always addresses it immediately when it comes up. He prefers to give someone a tour of an Advance America store but, if they're not willing to do that, all he asks for is a bit of their time. ”I have to say that virtually to a person, if I have thirty minutes to explain the business to them, they'll let me know that it makes perfect sense: 'I didn't understand that.'”

The hallways of the handsome postmodern brick building that Advance America has built as its headquarters in central Spartanburg are lined with posters that express good feelings in words and images. The self-affirming artwork justifying what everyone inside does for a living seems a staple of the big Poverty, Inc. chains. More typically they are more wholesome and upbeat, leftovers from old advertising campaigns that depict a veritable Rainbow Coalition of handsome, extraordinarily happy young people (”They showed me the money!” the young Latino man with the smoldering brown eyes and thousand-watt smile exclaimed in an ad for a company called Instant Tax Service) but at Advance America, at least in the winter of 2009, they were more playful and droll, a series of small testimonials to some of its archetypal customers. For the postal worker, the payday loan is for when ”the mail bag's heavy but your pockets are light.” The working mom needs Advance America for ”those times when your eyelids weigh a little more than your wallet.”

Webster is a slight man, with angular features and a tiny pug nose. Dressed in jeans and running shoes, he bobbed his foot incessantly through our few hours together. Webster had served as chief executive through Advance America's first nine years but several years ago, when he was in his late forties, he stepped down because his wife was sick and he wanted to take care of the couple's four children. He had recently returned, replacing George Johnson as board chairman, but he started by telling me that he had been reluctant to meet with me, despite being back at the helm. It was the APR. ”Most journalists stop at the 391 percent interest rate, and the only question is, 'How on earth can you charge so much?'” he said. He had his answers, just like the other payday lenders did when I visited them. But to him, it's a meaningless number-like saying salmon costs $15,980 per ton or advertising a hotel room as costing $36,500 per year. A flat fee is not an interest rate. Webster shakes his head. He had been the first to post the APR and had to confess, ”It has been a millstone around our neck ever since.”

Webster listed his decision to post the eye-popping, three-digit APRs as one of his ”two gross misjudgments.” The other was his failure to antic.i.p.ate the hailstorm of criticism that would rain down on the payday lenders. ”If there's an irony to all this, it's that we both should have been more politically aware that there was a political dimension to this business,” he said of himself and Johnson. ”It's hard to imagine but back then there was little controversy about payday lending.” Sure, there were companies overly aggressive in their collections and lax about posting their fees. But Advance America, Webster said, was trying to clean things up. They refused to criminally prosecute anyone who failed to pay them back and unilaterally announced that they would give people twenty-four hours to change their mind about a loan. Along with the other big chains, Advance America, in 1999, formed a trade a.s.sociation they called the Community Financial Services a.s.sociation, or CFSA, so they could offer a narrative that might serve as a counterforce to the shock of a three-digit APR. ”With a trade a.s.sociation in place,” Jared Davis said, ”we thought we could actually get back to doing what we do, which is create new jobs and give people access to credit when they need it.”

As the 1990s turned into the 2000s, worried payday lenders told themselves to relax. Theirs was a young industry experiencing a bit of turbulence but that was to be expected. The rent-to-own furniture stores had gone through a similar boom period in the late 1980s and early '90s; their brethren in the check-cas.h.i.+ng business had been fighting with regulators and their critics for more than a decade. Legislatures around the country had implemented caps on the fees check cashers could charge and regulators frustrated the more aggressive rent-to-own entrepreneurs by dictating new business practices that cut into their profits, but both industries adjusted and both were posting big profits.

For all the bad publicity the industry was receiving, the payday lenders were also thriving. The check cashers would hold workshops at their annual meeting about getting into the payday loan business and the session would be standing room only. For many it was a no-brainer given it required no special expertise. Small-time p.a.w.nbrokers might resent the intrusion of payday as an option for those with bad credit seeing quick cash, but the bigger p.a.w.n chains were now seeing only opportunity in these quick, unsecured, cash loans that earned triple-digit interest per year, and they jumped. ”It was an easy way to add rocket fuel to the bottom line,” said Jerry Robinson, the former Stephens, Inc. banker. The industry pa.s.sed the 10,000-store mark by 2001 and entrepreneurs with national ambitions were still lined up at the industry's door, hoping to get in.

”It got unbelievably compet.i.tive,” Jared Davis said. ”It was literally a race from s.p.a.ce to s.p.a.ce.” It was, Davis said, like all those horses and wagons lined up on the Oklahoma border in 1889 for the great land rush. And, oddly, probably the most frantic opening of a new market took place in 2003-in Oklahoma. ”If I could do anything differently,” Billy Webster told me, ”it would be to spend more time telling our story to journalists, editorial boards, and opinion leaders.” But who had the time when there were still great stretches of the country to conquer?

Seven.

Subprime City DAYTON, OHIO, 19992000 Dean Lovelace first focused on all the payday lending shops sprouting up around Dayton. It was the second half of the 1990s and to Lovelace, who had served on the Dayton City Commission since 1993, it felt like his hometown was under attack. It was no wonder. By 1999, Allan Jones and Billy Webster had each opened seven stores in the greater Dayton area and Toby McKenzie had opened six. Jared and David Davis, the brother tandem behind Check 'n Go, had added another four. It was as if the demographics from this one unprepossessing blue-collar city in the heartland had been poured into a database and bells started clanging and lights started flas.h.i.+ng JACKPOT JACKPOT! on computer screens in the corporate development offices of payday chains across the country. Closer to home, there was Lee Schear, a local entrepreneur whom Lovelace was inclined to describe as a ”profiteer.” For years Schear had been making plenty off the working poor, cas.h.i.+ng checks (for a fee) and selling lottery tickets at the small chain of grungy grocery stores he ran in Dayton's poorer precincts. But with the legalization of payday, he was now operating two dozen of these storefronts in and around town. By the end of the 1990s, Dayton, a city of 150,000, and the surrounding suburbs were home to more than fifty payday shops.

Lovelace had grown up in Dayton, born to a single mother who raised three children largely on her own. It was only after his mother died during his senior year in high school that he learned that she never earned more than $200 a week. Looking through her papers he finally realized why they had moved every year he was in high school; his mother had fallen behind on the rent and each time they had been evicted. Lovelace would go on to earn an undergraduate degree in business from the University of Dayton and a master's in social economics at Wright State University. He then worked as a planner inside city hall until taking a job as the director of neighborhood development at the University of Dayton, a post he would hold for more than twenty-five years. He won a seat on the Dayton City Commission (its equivalent of the city council), a part-time position, on his third try. He lives in a nice-size, handsome house in a modest middle-cla.s.s community in Dayton but there could be no dismissing Lovelace as a silver-spooned elitist who has never been desperate for quick cash. He knew what it meant to be broke.

The payday lenders started showing up in 1996 shortly after the Ohio legislature, after intense lobbying from the industry, voted to exempt small, short-term loans from the state's 28 percent usury cap, thereby legalizing payday lending. As a commissioner, Lovelace had championed a living wage ordinance (but had to compromise on an $8.80 an hour minimum wage that applied only to those doing business with the city) and to him shutting down the payday lenders was the flip side of the same coin: Making sure people earned a better wage would mean little, he reasoned, if they only spent that extra money borrowing money at usurious rates from these new shops. The issue really hit home when his niece phoned him one day. ”They got me,” she told him. She barely made minimum wage but after frittering away hundreds of dollars in fees that she couldn't afford, she was now in a deeper mess. ”They're calling me at work,” she told Lovelace. She was scared she might lose her job.

Lovelace didn't know what a city commissioner could do about a statewide law that had only just pa.s.sed a few years earlier, but he felt compelled to do something. Using his limited clout, he held a series of community meetings around the city. ”I just figured at that point I needed to raise awareness,” Lovelace said. ”I at least wanted to start a dialogue.” He wanted to alert people to what he saw as a growing menace to the city's economic health.

Only around thirty people showed up at that first meeting. A couple of consumer advocates were enlisted to explain why high-interest, short-term loans were very seldom an effective answer to a customer's cash flow crisis and a local legal aid lawyer told the group about the hundreds of payday-related default judgments clogging the local courts. A few payday customers stood to voice their displeasure over these new neighbors taking over empty storefronts in strip malls throughout town. You borrow to ”bridge a gap,” a woman named Pam Shackelford explained, ”except there's no way you're gonna bridge a gap if the gap keeps getting bigger.” But then a woman named Suriffa Rice, a home health-care worker, took her turn at the microphone. ”I can't go to my mama,” Rice said. ”I can't go to a bank. I can't go to my church. Where am I supposed to go if I don't have payday [loans] anymore?”

Dean Lovelace is a short and stocky black man with a mustache and silver-framed gla.s.ses that always seem to be sitting slightly askew on his face. When his turn to speak came, he had to confess to Rice that he didn't have much of an answer for her. A couple of credit unions around the state were experimenting with what they were calling ”stretch pay loans” but that was about it. An economist by training, Lovelace recognized that the real issue was better financial education and other reforms. Whether or not the payday lenders were greedy would be a moot point if banks actually offered products aimed at the working poor. In the end, his meetings generated a few articles but added up to little more than some high-profile hand-wringing.

Lovelace was hardly done, though. He has a mild-mannered and pleasant disposition yet by nature he is a battler and a crusader and not one who goes along just to get along. Early in his career, C. J. McLin, Jr., the G.o.dfather of black politics in Dayton, took him under his wing but Lovelace proved incapable of serving the gofer role he was expected to play. He ran the Dayton chapter of the Rainbow Coalition for Jesse Jackson's two presidential bids in the 1980s and led the local fight against police brutality. He had also spearheaded a coalition formed to pressure the city's big banks over their lack of lending in Dayton's low-and moderate-income communities. In fact, at around the same time he was organizing his hearings into payday lending, a local activist named Jim McCarthy, the executive director of the area's Fair Housing Center, invited him to join a committee they were putting together to figure out what was happening on the home owners.h.i.+p front. Businesses were starting to lend in the city's lower-income communities but it wasn't turning out to be a good thing.

Ever since its frontier days, Dayton had always been a place that devoted itself to making things: steam pumps and water wheels in its earliest history, stoves and solvents, tool-and-die machines, cardboard boxes, and a goodly portion of the country's cash registers well into the twentieth century. ”The city of a thousand factories”-that's what Dayton, once home to 260,000 people, dubbed itself.

But then a sizable portion of those thousand factories shuttered their doors, moving south or overseas, in search of lower taxes and weaker unions, or simply going out of business. The city lost more than one-fifth of its people through the 1970s and more kept leaving. By the time Forbes Forbes dubbed Dayton one of America's fastest-dying cities in 2008, it had lost 40 percent of its people. A few months later, the magazine singled out Dayton again, placing it in the top five of the country's ”emptiest cities.” dubbed Dayton one of America's fastest-dying cities in 2008, it had lost 40 percent of its people. A few months later, the magazine singled out Dayton again, placing it in the top five of the country's ”emptiest cities.” Forbes Forbes had a point. The city's rental vacancy rate stood at 22 percent, which was more than twice the national average and second highest in the country. Nearly 4 percent of the city's houses sat unoccupied. Was it any wonder that those in the poverty industry saw Dayton as a place rich with possibilities? had a point. The city's rental vacancy rate stood at 22 percent, which was more than twice the national average and second highest in the country. Nearly 4 percent of the city's houses sat unoccupied. Was it any wonder that those in the poverty industry saw Dayton as a place rich with possibilities?

Jim McCarthy can remember pretty much the exact moment when he realized Dayton was being aggressively targeted by a new kind of business. It was 1999, he was thirty-three or thirty-four years old, and, as the newly installed head of Fair Housing, he was a member of an advisory board the county had created to oversee an affordable housing fund. Fair Housing routinely heard from people claiming they had been denied a loan because of their race, but in recent weeks several people, all of them African-American, had contacted his organization making something like the opposite a.s.sertion: They were about to lose their home because of a refinancing. When he mentioned this during a meeting of the advisory board, someone offered that he too was noticing something strange. Over the years the federal government had set aside billions of dollars to make low- and no-interest home loans available to people living in areas that had designated community development zones, yet now people were coming to his office with large checks in hand to pay off these loans. ”These are the kinds of loans you basically don't pay off until you die,” McCarthy said. ”It made us all ask the question, 'What the h.e.l.l is going on?'”

The advisory board decided to form a group to look into the matter. Dean Lovelace joined them and so did Beth Deutscher at Consumer Credit Counseling Services. Like Lovelace, Deutscher didn't need any convincing. She oversaw a Consumer Credit project created to help first-time homebuyers but in recent months she seemed to be spending as much time aiding existing homeowners who had fallen into trouble. Where her organization had typically heard from maybe one or two people a week seeking mortgage default counseling, the call volume had jumped to four or five per day. She grew more alarmed, she said, once the agency's counselors started meeting with people. ”These were loans designed to bring maximum profit to the lender and minimum benefit to the borrower,” Deutscher said. Rounding out the group were executives with KeyBank and Fifth Third, two of the bigger banks in town, along with representatives from the local board of Realtors and the home builders' a.s.sociation.

The industry representatives were initially defensive. You beat us up for failing to make loans to these customers and now do you see what happens? ”There was a real 'I told you so' att.i.tude around the table,” McCarthy said. But they dug deeper and even the bankers had to concede the point: The problem wasn't the people but the product they were being sold. The staff in the county clerk's office told of brokers and lenders rummaging through residential tax records, looking to see who had fallen behind in their property tax payments. They were poking around the owners.h.i.+p records as well to determine how long people had owned their homes. ”It was like they were focusing on elderly African-American ladies, mostly widows, who all lived within a few miles of each other in west Dayton,” said Stan Hirtle, a legal aid lawyer in Dayton.

Dora Byrd was ninety years old, a widow for the previous thirty-five years, when a man knocked on her door to talk about some home repairs. ”'He was a nice, clean-cut young man'-she kept saying that to me over and over,” McCarthy said. ”'He was so nice he'd even read my mail for me.'” Byrd, who had owned her home outright for twenty-seven years, had made a modest living running a small beauty salon out of her home. She had been enough of a businesswoman to recognize it would be unwise to let her home fall into disrepair, and this nice young man talked her into financing several home-improvement projects, all in the name of maintaining a property that ended up in foreclosure. Byrd died before the issue would be settled in her favor.

”She was this little bitty, tiny, frail woman who sat on her front stoop with her head in her hands and just cried,” McCarthy said. ”She said she was so embarra.s.sed this had happened to her.” Others would feel equally foolish-people like Gloria Thorpe, who was living on a monthly Social Security check of $354 when a lender sold her a $5,000 home equity loan. With fees, the deal ended up costing Thorpe $12,000 and so, at the age of seventy-two, she found herself working once again, a security guard on the second s.h.i.+ft at a local factory. ”They're sitting there talking to you and making it sound so good,” Thorpe told the Dayton Daily News Dayton Daily News in 2000. ”And me, my stupid self, I signed. But it was too much paper to read.” One study showed that in a three-year period, from 1997 to 1999, subprime home equity loans had quadrupled in the Dayton area. Another found that at least one in three refinancings had been initiated by the lender, not the borrower. in 2000. ”And me, my stupid self, I signed. But it was too much paper to read.” One study showed that in a three-year period, from 1997 to 1999, subprime home equity loans had quadrupled in the Dayton area. Another found that at least one in three refinancings had been initiated by the lender, not the borrower.

Even those in McCarthy's working group were stunned when, at the start of 2000, the county government agreed to fund what they called the Predatory Lending Solutions Project. They had asked for $350,000-but county officials gave them that much plus another $600,000 to educate the public about these loans based on the worth of someone's home rather than a person's ability to pay. ”It really worked in our favor that most of these people were senior citizens,” McCarthy said.

Those behind this new project tried everything they could think of to spread the word. They leased billboard s.p.a.ce along busy thoroughfares warning people about predatory loans; they took out ads in the Dayton Daily News Dayton Daily News that employed arrows and circles to teach people to decipher the gibberish of the HUD-1 disclosure form that by law is part of every home loan. They ran ads on the sides of buses and ads inside those same buses. An advertising agency was hired to develop a series of radio and TV ads warning people against signing deals that sound too good to be true (”If you're not careful,” a baritone-voiced narrator intoned, ”you can end up with huge payments, even lose your house”). Glossy brochures were handed out to real estate agents (”Help your clients avoid predatory loans”), and another set explained terms like ”origination fee,” ”balloon payment,” and ”prepayment penalty” for potential borrowers. They established a hotline and stamped its phone number on everything from refrigerator magnets to plastic water bottles to lawn signs. They used yellow and black for everything because the agency had taught them that these colors suggested caution and hazards ahead, like police tape and road signs. that employed arrows and circles to teach people to decipher the gibberish of the HUD-1 disclosure form that by law is part of every home loan. They ran ads on the sides of buses and ads inside those same buses. An advertising agency was hired to develop a series of radio and TV ads warning people against signing deals that sound too good to be true (”If you're not careful,” a baritone-voiced narrator intoned, ”you can end up with huge payments, even lose your house”). Glossy brochures were handed out to real estate agents (”Help your clients avoid predatory loans”), and another set explained terms like ”origination fee,” ”balloon payment,” and ”prepayment penalty” for potential borrowers. They established a hotline and stamped its phone number on everything from refrigerator magnets to plastic water bottles to lawn signs. They used yellow and black for everything because the agency had taught them that these colors suggested caution and hazards ahead, like police tape and road signs.

The Miami River cleaves Dayton in two, and the vast majority of the city's black citizenry lives to the west of it. The Predatory Lending Project focused mainly on the city's west side because that's where the lenders were focusing their efforts. Its people, mostly volunteers, set up a booth at the Dayton Black Cultural Festival and did Sat.u.r.day blitzes in west side neighborhoods, borrowing a replica trolley from the regional transit authority and showing up eight, ten, or twelve strong, dressed in yellow-and-black T-s.h.i.+rts that read DON'T BORROW TROUBLE DON'T BORROW TROUBLE: ANTIPREDATORY LENDING SOLUTIONS ANTIPREDATORY LENDING SOLUTIONS. They distributed door hangers and brochures and trinkets stamped with their hotline number and spoke with thousands-8,578 residents in their first full year, according to the report they submitted to the county. Yet while they were busy spreading the word in one part of town, lenders were working the other side of the river.

”Apparently they started to reach a saturation point in the inner city so they moved into the rest of the city,” McCarthy said. So in 2001, its second year of operation, the Predatory Lending Project added the Appalachian Mountain Days festival to its list and dispatched the trolley and its teams of volunteers into white working-cla.s.s neighborhoods.

But they remained perpetually one or two steps behind the lenders. In 2001, Richard Stock, the director of the Center for Business and Economic Research at the University of Dayton, released a study offering the first snapshot of subprime lending in Dayton. The first surprise in his study was the steep rise in foreclosures. There had been barely 1,000 foreclosures in 1994 but the county registered nearly 2,500 in 2000. The city's deteriorating manufacturing base could explain some of the rise but Stock's numbers also revealed an eightfold spike in foreclosures involving subprime home loans.

The second surprise involved the names of the most active subprime lenders. Those behind the Predatory Lending Project were pleased that the county had been so generous in providing them funding yet it turned out they were fighting large corporations with millions to spend on marketing and millions more to invest in sales teams. They included H&R Block, which was one of the area's most aggressive subprime lenders through a subsidiary called Option One, and a list of large banks as impressive as it was disturbing. Bank of America, Bank One, First Union, and Was.h.i.+ngton Mutual ranked among the top subprime lenders in the Dayton area, but topping Stock's list were Household Finance and Citigroup, the New Yorkbased giant that promoted itself as the world's leading bank.

The final surprise-and perhaps the biggest-was how widespread the problem had become in so relatively short a period. Stock and his team of researchers found that a large portion of those default judgments involving subprime loans weren't occurring on the west side or even in the white working-cla.s.s enclaves on the city's east side but instead in first-ring suburbs that had fallen on hard times. Zip code and the color of a borrower's skin, it turned out, wouldn't make a difference to subprime lenders seeing nothing but opportunity in Dayton's economic decline. They were, McCarthy concluded, ”equal opportunity predators.”

In 1998, Senator Charles Gra.s.sley of Iowa, the Republican chairman of the Senate Special Committee on Aging, held a one-day hearing into subprime mortgage lending. The t.i.tle he chose for the event left no doubt about his sympathies: ”Equity Predators: Stripping, Flipping, and Packing Their Way to Profits.” Among those testifying on Capitol Hill were Ormond and Rosie Jackson, an elderly Brooklyn, New York, couple living on Social Security, whose loan had been ”flipped” so many times that, six years after a salesman knocked on their door promising that new windows could be theirs for just $43 a month for fifteen years, they owed $88,000 and were facing foreclosure-the ”stripping” of their equity. Helen Ferguson, a seventy-six-year-old widow from Was.h.i.+ngton, D.C., living on a monthly $504 Social Security check, told a similar story, except that in her case it wasn't a knock on the door but an ad she saw on television pitching low-interest home-improvement loans. Prior to that, her mortgage payment had been $229 a month, but-in part because her loan had been ”packed” with an expensive credit insurance policy that a woman living alone did not need-five years later she had a house payment of $810 per month. ”My perfect customer,” a former salesman for several subprime lenders told the senators, ”would be an uneducated woman who is living on a fixed income-hopefully from her deceased husband's pension and Social Security-who has her house paid off, is living off credit cards and having a difficult time keeping up with her payments.”

People in Dayton reached out to their congressional delegation hoping for help in Was.h.i.+ngton. They did their homework, and Jim McCarthy made contact with Martin Eakes and Bill Brennan. They were fighting national banks and other publicly traded companies with a broad geographical reach. This was a problem best fought in Was.h.i.+ngton, D.C., not Dayton city hall.

Those hoping to warn the rest of the country about the threat posed by the subprime lenders had their successes. Andrew Cuomo, in his final days as HUD secretary under Bill Clinton, spoke out publicly against the problem and Cuomo, along with Larry Summers, the Treasury secretary, created a short-lived task force in April 2000 to examine predatory lending in the United States. That same year Congress would again turn its attention to the subprime lending industry when Congressman Jim Leach, a Republican from Iowa and the chairman of the House Committee on Banking and Financial Services, held a hearing to look at the situation. But it was the misfortune of those advocating reform that in the 1950s, a woman named Florence Gramm managed to buy a small bungalow home in Columbus, Georgia, despite the risks inherent in extending her credit.

There's no doubting Florence Gramm's grit and fort.i.tude. Her husband, Kenneth, suffered a stroke shortly after she gave birth to their son Phil. That left him partially paralyzed and unable to work. But Florence Gramm, a nurse, convinced a finance company to loan them the money they needed to buy a home, even though that meant she would need to work double s.h.i.+fts. Throughout his political career, which included three terms as a U.S. senator, Phil Gramm spoke frequently about the subprime loan that enabled his mother to become the first person in her family to own a home.

Gramm wasn't just any senator; he was determined to serve as his party's resident expert on the financial industry-once he settled on a political party. He held a Ph.D. in economics and had taught at Texas A&M, while running an economic consulting firm on the side, before deciding to get into politics in the 1970s. The surest route to victory in Texas back then was to run as a Democrat, and that was what Gramm did when he was first elected to Congress, but he had switched to the Republican Party by the time of his election to the Senate in 1984. He is probably best known for his co-authors.h.i.+p of the landmark Gramm-Rudman-Hollings Act, which in the 1980s established deficit reduction targets for the federal budget. More recently, he was the primary sponsor of the Gramm-Leach-Bliley Act, the bill that undid the post-1929 crash reform mandating that banking, brokerage, and insurance businesses remain separate. There was no denying his power through the 1990s and into the 2000s. Any federal legislation curbing the behavior of the country's subprime lenders would need to first pa.s.s muster with the powerful chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Senator Phil Gramm of Texas was not about to meddle with this corner of the free enterprise system that had played so exalted a role in his family's history.

”Some people look at subprime lending and see evil,” he said on the Senate floor during debate over a bill to clamp down on subprime lenders in 2001. ”I look at subprime lending and I see the American dream in action. My mother lived it as a result of a finance company making a mortgage loan that a bank would not make.” And if nostalgia were not enough to ensure his gung-ho support, then there was also the generosity of these lenders who helped to keep him in office year after year. Between 1989 and 2002, commercial banks were more generous with Gramm tha

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