Twelve
Public Enemy Number One
DURHAM, NORTH CAROLINA, AND WASHINGTON, D.C.,
2002–2006
The first thing Steven Schlein wants you to know about the ongoing, epic struggle between his clients—the payday lenders—and their critics is that it’s not a fair fight. Payday’s foes, and especially Martin Eakes, have too much money and too much power. “They’ve got more lobbyists than we do,” he complained when we sat down together in mid-2008. “They have more money. We’re completely outgunned!” I raised a skeptical eyebrow and Schlein, payday’s main spokesman, slowly shook his head in disappointment. He has a strained, Brooklyn-tinged voice that he raises an octave. He sounded as if he were pleading rather than making a rhetorical point. “Go take a look at the $25 million monument Eakes bought for himself,” he said. He pointed his chin toward the window and the multistory building the Center for Responsible Lending (CRL) bought a few years earlier to serve as its Washington, D.C., office. “Go there right now and then tell me they’re just this scrappy, underfunded public interest group up against this big, bad industry.”
We’re sitting two blocks from the CRL building in the offices of Dezenhall Resources. That’s how bad it had gotten for Allan Jones, Billy Webster, the Davis brothers, and the others. In 2004, they started paying for the high-priced services of a crisis management firm that specializes in the representation of unpopular industries such as the chemical manufacturers, pharmaceutical companies, and Big Oil. The firm’s founder and chief executive, Eric Dezenhall, laid out his approach to helping beleaguered industries in his 1999 book, Nail ’Em! Confronting High-Profile Attacks on Celebrities and Businesses. “Damage control used to be about soft, fuzzy concepts like image,” Dezenhall wrote. “Now it’s about survival, and this had made the battle bloodier.” THE PIT BULL OF PUBLIC RELATIONS—that was the headline BusinessWeek used above a 2006 profile of Dezenhall. The actual job of defending the payday lenders, however, fell mainly on Schlein and a younger woman named Lyndsey Medsker.
“They have people in Washington,” Schlein says of Eakes and the Center for Responsible Lending. “They have people in North Carolina. They have an office in Oakland. Here it’s just me and Lyndsey.” Schlein complains about the disparity in the size of their respective ground forces when the payday lenders gather for meetings of their trade organization. The opposition, he’ll tell them, is meeting with newspaper editorial boards; they’re organizing in this state or that. But invariably his calls for more help go unanswered. Perhaps the pooh-bahs know that each big chain has its own team of government affairs people and its own public relations staff on the payroll.
Schlein wonders if it would even make a difference if he had more people. Dezenhall has represented the likes of Exxon Mobil and a former Enron executive but payday lending seems to occupy a category all its own. “I’ve been in this business twenty-five years,” he said, “and I’ve never seen such closed-mindedness about an issue.” He hears the same from the lobbyists they hire whenever the Center for Responsible Lending or some similar-minded group is pushing a bill that would shut down the industry in some far-flung state. “They’ll all say it,” Schlein said. “Working for the gun lobby, or working for tobacco, is like working for Goodwill compared to the hostility they face working for the payday lenders.” Schlein tells of the time he phoned the Washington Post about meeting the newspaper’s editorial board. The District of Columbia City Council was considering a bill that would cap the rate payday lenders could charge (the bill passed by an eight-to-one margin, with only Marion Barry voting against it) and he thought the paper might be curious about what the industry might have to say. “This woman I spoke with at the Post, she basically ranted at me, ‘I’m not giving you slime-balls a minute of my time,’” he said. He shook his head and looked momentarily hurt. “She used terms you wouldn’t believe.”
Schlein is a trim man, around fifty years old, with close-shorn gray hair. Those in the public relations trade tend toward the bubbly, or at least upbeat, but Schlein by disposition is far more dour, more life-weary and rough-hewn. He’s also more than a little obsessed with money. Over breakfast he told me about his grandfather, who had moved to this country from an Eastern European shtetl with next to nothing. He left a pair of successful jewelry stores to his heirs but Schlein wishes his grandfather had been a pawnbroker. “It was totally random, him getting into the jewelry business,” Schlein explained. And pawn sales, he went on to point out, are “going gangbusters right now.” At that same breakfast, he asked me to explain how a person could work as a business reporter at a place like the New York Times or Wall Street Journal. Some barely earn six-figure salaries. He can’t imagine working that hard, he told me, for so little money.
Schlein clearly is well paid. He wears expensive suits and a pair of fashionable rectangular steel glasses. Dezenhall’s offices are sleek, modern, prosperous looking. Yet one might ask Schlein why he does what he does for a living. His job hasn’t been much fun, he confessed, at least since taking over the payday account. He’ll work on a friendly reporter he knows, hoping to persuade him or her to see beyond the 391 percent APR, but then 60 Minutes Wednesday runs a segment on payday that begins, “It may sound like loan-sharking, but in most of America, it’s perfectly legal.” That particular story was set in North Carolina, of course. Look behind every effort to ban payday lending, Schlein said, and you’ll find “Martin Eakes and his little empire.”
It galls Schlein that people, especially reporters, hold up Eakes as some kind of white knight. To him, Eakes is a competitor who first opposed payday lending in North Carolina “because he runs a credit union and he had an economic stake in seeing us gone.” With no payday loans to help bail people out, the credit unions, like banks, earn a lot more in bounced-check fees and overdraft protection products. And once Eakes defeated them in North Carolina, he said, “he became enthralled with his power.”
“Just listen to the guy speak,” Schlein said. “He oozes elitism out of every pore. He’s the only one who knows what’s best for everyone else. He really thinks he’s the last honest man.”
Martin being Martin. That’s how Mark Pearce, the Self-Help executive Eakes chose to serve as the first president of the Center for Responsible Lending, described the decision to spend $23 million to buy the eleven-story office building that has pretty much destroyed Steven Schlein’s peace of mind. The building is located in Farragut Square, three blocks from the White House. “It was Martin’s way of saying we’re here and we’re not going anywhere,” Pearce said. It was also an aggressive business decision by an advocacy group that feels entirely at home playing the real estate game. The CRL, founded in 2002, occupies one floor and leases out the other ten, providing the organization with a steady income that more than covers the mortgage. Plus, Eakes said, the building is already worth more than $30 million.
Mike Calhoun admitted he was shocked to discover how rich and big the CRL was relative to other advocacy outfits. “We looked at groups like the Consumer Federation, PIRG, and the Consumer Law Center and we realized we were huge, relatively speaking, compared to these other groups,” said Calhoun, who took over as president of the CRL in 2006, when Pearce took a top regulatory posting with the state of North Carolina. “And these were organizations which had much wider mandates than us, with utilities and health care on top of consumer finance and mortgages.” To CRL’s great relief, these other groups were “gracious and welcoming,” Calhoun said, to this new giant in their midst (the group has a staff of sixty spread across three offices) and invited them to take the lead on predatory lending issues. The challenge, then, was figuring out what they would do in their newfound roles at the vanguard of the consumer rights movement.
The CRL would focus mainly on businesses that catered to the poor and working poor, but even then that left them with an impossibly broad terrain to cover. Subprime credit cards, rent-to-own, used car finance, refund anticipation loans, even the humble corner pawnbroker: There seemed no shortage of ways entrepreneurs had devised for getting rich working the easy-credit landscape. There was even a fledgling industry devoted to helping hospitals and doctors collect the money owed to them by the uninsured and underinsured. These companies, part of what BusinessWeek would dub the “medical debt revolution,” normally don’t charge the hospital or physician anything for its services but instead earn their profits from the fees and interest rates (typically between 14 and 25 percent) they tack onto the bills they have been assigned.
The CRL would naturally focus on exploitative subprime mortgages. The problem had grown only more acute since they had sided with Freddie Rogers in his fight with Associates and there was no doubting their authority in this realm. Kathleen Day remembered when she was covering the banking industry for the Washington Post and for the first time saw Eakes testify before Congress. Most striking, said Day, who now runs the CRL’s public information office, was how differently Eakes came across compared to the other consumer advocates speaking that day. “He starts off telling people he’s been in this business for twenty-five years,” Day remembered. “And he tells the committee, ‘You can’t tell me it can’t be done because I’m doing it, and I’m doing it right without screwing people.’” The banking lobbyists Day happened to share a cab with after the hearing were all in a huff about Eakes, she said. They didn’t say he was wrong: They didn’t say he didn’t know what he was talking about. “All they could say,” Day recalled, “is that they thought he was sanctimonious.”
The payday lending industry would be CRL’s second priority. Martin Eakes and Self-Help were too invested in that fight to consider dropping it, especially once they had the money to build a national organization. Their third and final priority would be the more predatory side of the credit card industry, including practices the consumer activists called “fee harvesting.” The insidious part of fee harvesting is that the consumer, her credit damaged and her funds tight, starts off feeling grateful that a lender is willing to trust her with a credit card. But then she receives the first bill. There are card activation fees and origination fees (commonly $100 or more) billed as a cash advance and also an “account maintenance fee” (maybe $10 a month). The fees eat up a goodly share of the available credit, typically between $300 and $500, and therein lies another huge moneymaking opportunity for the card issuer: the fine for going over your available limit. In time, the CRL would also add banks to their list of targets and specifically the overdraft fees they charged. “These fees are becoming the main profit center for these banks,” Eakes said, “which means they’re making the bulk of their profits off their poorest customers.” Still, the CRL would devote a lot more time to fighting the mortgage lenders and the payday advance industry than to battling the banks that were issuing subprime credit cards.
The payday lenders lost in North Carolina in 2001 and then again a few years later in Georgia and Arkansas. Even so, they were slow to recognize that they were in an existential fight for their livelihood. “These were three very different situations,” Billy Webster said. North Carolina was Martin Eakes, Georgia boiled down to the political clout of the industrial loan stores that Roy Barnes had battled, and Arkansas was a quirk: A legal battle they lost because Arkansas is the only state in the union with a usury cap (17 percent) written into the state constitution. Still, the same year that they lost in Georgia, the big chains hired Dezenhall. We need to be more aggressive, Webster explained in an American Banker article about the payday lenders “going on the offensive.” We need to explain to people that a payday advance is cheaper than missing a credit card payment or a series of bounced checks. Steven Schlein had just been hired but he was not wasting time. The Center for Responsible Lending might sound as if it has the best interest of consumers at heart, Schlein said, but he shared with American Banker a report he had put together dismissing the CRL as nothing but a front group for a Durham-based credit union.
But payday hardly seemed an industry in need of outside help. As rapidly as payday had grown in its first seven years, it grew more rapidly still over the next few years; where there were 10,000 payday stores in 2000, that number exceeded 21,000 by 2004. Success inspired more success. As industry trailblazers such as Check Into Cash, Check ’n Go, and Advance America continued to thrive, large companies that had grown rich feasting in other corners of the poverty universe started offering payday loans. That included chains in the check cashing, pawn, and rent-to-own businesses. Regional powerhouses such as the MoneyTree in the Northwest helped to fuel the expansion, as did people like Mike Hodges. Hodges was twenty-four when he opened his first payday store in Nashville, in 1996. By 2008, Advance Financial was operating twenty stores within thirty miles of Tennessee’s state capital.
And there were those late to the poverty business who were no less eager to make their fortune. Just as Mike Hodges was poring over maps in search of gaps in the Nashville metro area, so too were people like Erich Simpson, a former DuPont factory worker who opened his first of three payday shops in a rural stretch of South Carolina in 2004. The industry would add two thousand more stores in 2005.
The big payday chains even started to spawn their own competition. Jones would grumble about the mid-level managers who gave notice “thinking that making it was as easy as figuring out what kind of plane they was gonna buy.” Billy Webster voiced the same complaint. Greg Fay served in the army for seven years right after high school, then went to work first in the rent-to-own business and then in payday finance. When Fay came into a little money, he opened his first payday store just outside Dayton in 2003 and was soon eyeing locales in and around Toledo, 150 miles up the highway. Ultimately he, his partner, and an outside pair of investors would open a half-dozen stores in western Ohio.
The issue of whether Wall Street could fully embrace payday lending was put to rest in 2004 when Advance America announced that it was going public and that Morgan Stanley, a top-tier investment bank, led the offering. The investment banking arms of Wells Fargo and Bank of America were among those lending their names and sales teams to the effort. If there was a taint to payday, the 23 percent profit margin Advance America was reporting in its prospectus made it all okay. Usually only the most successful technology companies consistently posted numbers that good.
The bankers had priced Advance America stock at between $13 and $15 a share. It opened at $15 and then soared above $21 before closing at $20.50—a 37 percent jump in one day of trading. Billy Webster had cashed out around $9 million worth of stock but still owned shares valued at more than $100 million. His partner and financier, George Johnson, cashed out $22 million in stock that day but still owned a $260 million stake in the company.
The numbers Advance America was posting naturally attracted even more wannabe moguls to the business. Every year at the annual meeting of the payday lenders, Steven Schlein rubs shoulders with some of the new arrivals, who give him hope for the industry. “You walk around and you think you’re seeing all of America in one room,” Schlein said. The crowd skews white, he acknowledged, but otherwise they strike him as a perfect cross-section of America, with people old and young and from all regions of the country. Schlein told me of a kid he had recently met who had gotten into payday lending while he was still in college but already owned five stores. “Think how rich he’s going to be when he already has five stores at twenty-two,” Schlein said.
But if Schlein was brightened by the native entrepreneurialism of a can-do country, Billy Webster was worried that he was witnessing his own doom. “One of the things I never dreamed would happen is we would have so many people in this business,” he told me when I visited him in Spartanburg. As a reference point, he harked back to his decade in the fried chicken business. “You’d never have seen a Popeyes and a KFC on the same corner as a Bojangles,” he said, “but that’s what you have now [with payday lending stores]. So you end up not just with saturation problems from a business perspective but also multiple loan problems.”
Inside the CRL they dubbed themselves the “road warriors.” These were the staffers so committed to defeating the payday lenders or their counterparts in the mortgage industry that they proved willing to turn their lives upside down and live in another state for weeks, if not months at a time. Martin Eakes described one of the warriors, Uriah King, as a “human vacuum cleaner sucking up everything he could about payday.” King, who read Clausewitz on war to gird himself for battle, could drive him batty, Eakes said, but what King lacked in experience he more than made up for in energy, enthusiasm, and native savvy. It fell to people like King and his colleague, Susan Lupton, to help fill in the narrative and demonstrate that the payday advance was, to borrow a vivid metaphor from Robert H. Frank, an economics professor at Cornell University, like “handing a suicidal person a noose.”
It helped that Advance America and a second payday company, QC Holdings, a chain of three hundred stores based in Kansas City, went public in 2004. The documents both companies are required by law to regularly file with the Securities and Exchange Commission have provided a treasure trove of information. So too have the quarterly conference calls that most publicly traded companies routinely record and post on the Internet as well as the detailed reports written by financial analysts who earn money selling stock advice to wealthy clients.
From the start, the payday lenders have said theirs is an occasional emergency product used by the rational consumer facing the prospect of a bounced check. Yet those in the business of following the industry seemed to come to precisely the opposite conclusion. “A note about rollovers,” an analyst named Elizabeth Pierce with Roth Capital Partners wrote in a research report about First Cash, a pawnshop chain that had gotten into payday. “We are convinced the business just doesn’t work without them.” That view was echoed by the accounting firm Ernst & Young: “The survival of payday loan operators depends on establishing and maintaining a substantial repeat customer business because that’s really where the profitability is.” Even Dan Feehan, the chief executive of Cash America, the country’s largest pawnshop chain and another major player in the payday industry, said much the same when explaining the business to potential shareholders at an investor’s conference. “The theory in the business,” Feehan said, “is you’ve got to get that customer, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.”
The CRL was convinced the payday cash advance was an inherently defective product, trapping people as if by design. The single mother with two kids might be avoiding a costly bounced-check fee that first time she borrows $400 but how is she ever going to cover that $460 check two weeks later when she brings home $1,100 a month? “They sucker you in with that first loan,” Eakes said, “and then they gotcha.” It became essential, then, to collect the tales of customers like Sandra Harris, an accounting technician in Wilmington, North Carolina, who borrowed $200 from a payday lender to pay her car insurance after her husband lost his job as a cook. Eight thousand dollars in fees later, the couple ended up losing the car and avoided eviction only because of a sympathetic landlord. John Kucan, a former Connecticut state trooper, had a less tragic story but one offering no less flattering a view of payday. He retired to North Carolina after being shot in the line of duty but then needed to borrow $850 from a payday lender because the state had overpaid some benefits and wanted its money back. Living on a fixed income, however, Kucan would need to renew the loan fifteen times, racking up $2,000 in fees before he was able to pay it off. When you’re desperate for quick cash, he told one interviewer, “what’s flashing in front of you is the dollars you’re looking for. The percentage rate isn’t something you’re even considering.”
The CRL’s first big media triumph came in the spring of 2005, when CBS correspondent Scott Pelley traveled to North Carolina to report on the state’s efforts to evict the payday lenders from within its borders. Sandra Harris told her story, as did John Kucan. Listeners also heard from a woman named Ginny McCauley, who ran an Advance America store in Illinois for six years. McCauley estimated that 60 to 70 percent of her customers were rollovers during that time. Pelley asked Jim Blaine, the CEO of the State Employees’ Credit Union of North Carolina, what he would tell someone who was planning on taking out a payday loan. “I’d say go get a loan shark,” Blaine said. “They’re cheaper.” A typical loan shark, he explained, only charges an APR of around 150 percent.
The only payday lender willing to talk on camera was Willie Green, a former NFL wide receiver who opened his first payday store as his playing days were ending in the mid-1990s; he ultimately opened ten stores. Pelley asked Green, who was from a poor background, what he would say to a Sandra Harris, who had lost a car and almost a home. “How about, ‘Thank You, Mr. Green or Mr. Check Casher or Mr. Payday Advance Store for helping me out when I was in a time of need?’” Later in the segment, when Pelley brought up the prospect of Green’s wife taking out a payday advance, he essentially confessed that she was too smart for that. “She has a master’s degree in accounting,” he said.
The next year brought another body blow to the industry. This time it wasn’t the CRL leading the charge (though Eakes’s group would provide critical behind-the-scenes lobbying help) but the commanding officers at military bases around the country, unhappy that the payday operators had opened so many shops outside their gates—“like bears on a trout stream,” a pair of academics concluded in a 2005 study of the geography of payday lending. Was it any wonder, given that the country’s military bases were thick with young, financially inexperienced people getting by on modest salaries? In the mid-2000s, the typical army private first class started at an annual salary of $17,000 a year and nearly three-quarters of active-duty military personnel never made more than $30,000 a year. There were reports of soldiers discharged because they defaulted on a loan and many others were stuck stateside because of a military rule that stated that anyone owing more than 30 percent of his or her salary could not be dispatched overseas. “I have guys guarding my gate here when they should be deployed in Iraq,” the commanding officer at a naval base in San Diego told the Associated Press. The CRL waded into the fight with a study concluding that one in five active-duty military personnel had taken out a payday loan in the previous year versus one in every sixteen adult Americans. At Fort Bragg, North Carolina, credit counselors said they were seeing an average of two to three soldiers a week who owed money to a payday lender, according to a report cited by Bloomberg Markets.
To the extent that the payday industry has clout on Capitol Hill, it’s in the Senate Financial Services Committee, but this fight was waged instead in the Armed Services Committee. In the summer of 2006, Senator Jim Talent, a Missouri Republican, and Senator Bill Nelson, a Florida Democrat, added an amendment to the annual defense authorization bill that capped the rate military families would have to pay for a payday loan at 36 percent. It passed, and when the defense authorization bill became law that fall, payday lenders could charge active-duty personnel no more than $1.38 on every $100 they borrowed. With a stroke of the pen, the country’s payday lenders were essentially banned from doing business with the military. It didn’t elude the industry that it wouldn’t take much of a logical leap for a legislative body to conclude that if payday loans were so destructive to the emotional and financial well-being of America’s fighting men and women, they might also be harmful to some of their other constituents.
At the start of 2006, people inside Self-Help and the CRL started to notice a spike in the number of subprime home loans. Even as late as 2003, subprime accounted for only 8 percent of the overall residential mortgage market, but by 2006, subprime loans accounted for more than one in every four home loans written—28.7 percent of the mortgage market, according to the Fed. Worried that this would spell doom for the home ownership dreams of a great many low- and moderate-income people, a research team was created inside the CRL to predict what might happen. Ellen Schloemer, the CRL’s research director, told me that their conclusion, that this trend would lead to 2 million subprime foreclosures, was so incredible that they rewrote a report they called “Losing Ground” six times before releasing it at the end of 2006. The Mortgage Bankers Association denounced the study as wildly pessimistic but in time it would become clear this was one of the few early warnings of the economic carnage to come. “That study really put us on the map in Washington,” Mike Calhoun said. At the start of 2008, the publication Politico declared that the CRL was “the main intellectual engine driving the Democratic response to the housing crisis” in no small part because “the Center has been more right than wrong.” That same year the Federal Reserve Board would single out the CRL for its research when appointing Mike Calhoun to a three-year term on its Consumer Advisory Council.
Steven Schlein, though, has not been nearly as impressed with CRL’s research capabilities. “They do not do scholarship,” Schlein said. “It’s a joke what they call a study. They’re done by a bunch of twenty-four-year-old kids sitting in some office in North Carolina, plucking numbers from out of the air.”
In fact, some of CRL’s payday reports have tended to overreach. Its first big industry study, for instance, released in 2006 and called “Financial Quicksand,” asserted that 90 percent of the revenues payday lenders collect in any given year are “stripped from trapped borrowers.” Under the CRL’s definition, though, a trapped borrower was anyone taking out as few as five payday loans a year. The study also alleged that the “typical” payday borrower ended up spending nearly $800 to repay a single $325 loan, or more than $450 of accumulated fees. That’s because the average payday customer, the CRL found after examining data from eight states, took out nine loans per year. Inside the CRL, they assumed that meant a person took out a single loan and then flipped it eight times before paying it back, but it seemed just as reasonable to conclude that the typical borrower took out a new loan every few months but needed an extra couple of payments to wipe out the debt.
But one could also ask what difference it made. Maybe five loans a year didn’t call to mind a “trapped” borrower but it also didn’t conjure up the customer needing a bailout because (as Willie Green had told Scott Pelley) “God forbid, an emergency comes up where the refrigerator goes out or the child needs to go to the doctor.” And did it make much difference whether a person flipped a single loan eight consecutive times or took out multiple loans in a given year? The bottom line was the same: nearly $500 in payments to a payday lender rather than money that might otherwise go into a savings account.
The industry would again find fault in some of the more sweeping assertions made within the CRL’s next big study, “Springing the Debt Trap,” released in 2007. But the power of that report wasn’t in its conclusions; it was in the data the CRL collected from states that tracked and published customer usage statistics. In Colorado, for instance, one in seven payday borrowers in 2005 remained in debt for at least six months before paying back a loan. Regulators there also found that customers taking out twelve or more loans in a year generated 65 percent of the industry’s revenues in the state. Other states reported similar findings when singling out those taking out twelve or more loans in a year: Oklahoma (64 percent of their revenues from this group), Florida (58 percent), Washington state (56 percent). At least one in five borrowers in each of those four states had taken out twenty-one or more loans in a year. In this regard, the APR no longer seemed an imprecise measurement of what was in fact a fee but a close approximation of the interest a good portion of the industry’s customer base was paying for its short-term cash needs.
The number of loans the average payday consumer took out in a year was another point of contention. Industry sources tended to say seven or eight loans per year while payday’s critics claimed those numbers lowballed the problem. The Woodstock Institute, an advocacy group based in Chicago, concluded that the average payday user in Illinois took out thirteen loans in a year. Policy Matters, a liberal research group based in Cleveland, would reach the same conclusion about borrowers in Ohio. John Caskey, a sociology professor at Swarthmore College and the author of Fringe Banking, studied payday lending in Wisconsin in 2000. He found that 49 percent of the state’s payday borrowers had taken out eleven or more loans over a twelve-month period and that nearly one in five borrowers had taken out twenty or more loans during that time. There was no dispute over the size of the average payday loan, however: $325.
The industry tended to cite one of two studies. One was by Donald Morgan, a researcher at the New York branch of the Federal Reserve who sought to test the thesis put forward by CRL and others that a payday advance was a “predatory debt trap.” According to his research, people in North Carolina and Georgia, two states that had recently banned payday loans, bounced more checks and filed for Chapter 7 bankruptcy at a higher rate than people in states where payday loans were available. Studies by researchers inside academia, though, have shown precisely the opposite, at least on the issue of bankruptcies; relying on payday loans, several studies have found, accelerates the chances that a person will declare bankruptcy. The CRL also cast doubts on the bounced-check claim by noting that Morgan used data from large stretches of the South as a proxy for Georgia and North Carolina.
The other study that advocates of payday lending quote was written by an economics professor at Indiana Wesleyan University named Thomas Lehman. “You cannot read Dr. Lehman’s work without walking away thinking payday lending is absolutely necessary and, if used responsibly, an absolute Godsend,” said Larry Meyers, a former screen-writer turned pro-payday blogger ever since he and a partner started investing in budding payday chains. Yet while journalists regularly quote the CRL in articles about payday, Meyers complained, they never quote Lehman. While testing that hypothesis I came across Lehman’s name in BusinessWeek. He wasn’t mentioned in an article about payday, however; it was about seemingly independent voices who are in fact “quietly financed by powerful interests.” Lehman served as BusinessWeek’s poster boy for the practice after he confessed to the magazine that in fact the industry had paid him to do his study.
Martin Eakes figured he must be doing something right. He had enough critics throwing mud at him to convince him the CRL was having an impact. One of the sillier attacks came from a group that called themselves the Consumers Rights League, a name chosen presumably so they could appropriate the CRL acronym. They dubbed the original CRL a “predatory charity” that contributed to the world’s economic woes in 2008 by promoting “public panic” about the subprime meltdown.
One of the nastier assaults has come at the hands of a group called the Capital Research Center, a D.C.-based think tank that keeps tabs on liberal advocacy groups. Eakes’s longtime friend Tony Snow, a conservative stalwart, compared his old running buddy to Jack Kemp, an active combatant in the war on poverty while serving as a Republican representing the Buffalo area in Congress. Eakes even uses the same term to describe his politics—he calls himself a “bleeding-heart conservative”—as did Kemp, a former vice presidential candidate and the director of HUD under the first President Bush. Yet Eakes was more liberal and therefore a foe. “A Leftist Crusader Wants to Dictate Financial Options to Consumers” was the headline over the first of several unflattering pieces about Eakes that the Capital Research Center published. Among Eakes’s various crimes: He uses Self-Help to “form political coalitions with radical left-wing groups whose purpose is to bully banks into changing their lending practices” despite Self-Help’s stated mission of helping the disadvantaged, it has loaned millions to its own executives and officers over the years; and its borrowers have delinquency rates seven to ten times higher than their credit union peers. A second article made fewer personal charges but instead criticized Eakes, among others, for “demonizing” the practices of some of the country’s leading subprime lenders. In that article, Capital Research lauded Countrywide, New Century, and other subprime lenders for increasing “home ownership opportunities for minorities and low-income borrowers” while ripping “left-wing advocacy groups” like Self-Help that “oppose consumer choice.”
In Durham, people didn’t know whether to laugh or cry. Capital Research was accusing Eakes of enriching himself at the hands of the poor yet Self-Help’s salary cap meant their boss and the other top staff were getting paid no more than $69,000 a year. Still, they earned too much to join the credit union they ran and therefore were ineligible for loans. For his part, Eakes was relieved that the Raleigh News & Observer had recently named him its 2005 “Tar Heel of the Year.” To ensure they hadn’t chosen wrong, the paper had a reporter check Capital Research’s charges. “It was bad luck for them that the News & Observer had already picked me for this thing,” Eakes said. “They had to get to the bottom of this and investigate.” Making insider loans and reckless lending “would be worrisome,” the News & Observer wrote in an editorial appearing shortly after Capital Research’s first attack, “if there was a word of truth to them.”
At least one of Capital Research’s charges was true: More of Self-Help’s borrowers were thirty or sixty days late in their mortgage payments when compared to the typical credit union. But that was to be expected given Self-Help’s role as a self-styled bank of last resort. “Our customers don’t have the same cushion that middle-class borrowers have,” Eakes said. “So if they lose a job or someone gets sick, they’re more likely to fall behind a month or two. But then they catch up because keeping a home means that much.” Through the economic turmoil of 2008, Self-Help, despite its low-income clientele, had consistently maintained a loan default rate of less than 1 percent.
Bonnie Wright, Eakes’s wife, believes the attacks on her husband help to sustain him. Longtime Self-Help colleagues say the same, but on some level the assault on his character seems to bother Eakes. He cracked jokes about some of the more personal charges foes have leveled at him but back at his office, he wanted to read me a quote from Eric Dezenhall, Steven Schlein’s boss. It took him less than thirty seconds to find it: “Modern communication isn’t about truth, it’s about a resonant narrative. The myth about PR is that you will educate and inform people. No. The public wants to be told in a story who to like and who to hate.”
“They don’t understand idealism,” Eakes said of the payday lenders and other businesses aligned against him. “They can’t believe idealism exists. So they think, ‘You have to be doing this because you want our business.’ They have the most cynical motives so they conclude everyone else has cynical motives.”
Eakes, Ralph Nader–like in his asceticism, hardly offered a fat target for those looking to tarnish the CRL. The same could not be said of all of its donors, though, starting with its top two funders, Marion and Herb Sandler, former owners of the World Savings Bank in Oakland, California. It was Herb Sandler who had first approached Eakes about starting a group like the Center for Responsible Lending, and the Sandlers proved generous benefactors. Mike Calhoun told me the couple had given the CRL roughly $20 million in its first half dozen years but Herb Sandler said the actual dollar figure was “well over” that amount.
Eakes had never heard of World Savings or the Sandlers when Herb Sandler first phoned him proposing a meeting, but he asked around and liked what he had heard about the couple and their bank. They were stand-up lenders, he was told, who concentrated on writing mortgages for middle-class borrowers. They had testified before Congress about sound lending practices and feature articles generally heralded them as humane and socially conscious—old-fashioned bankers succeeding in a modern world. World Savings held on to its loans rather than selling them off on Wall Street. The Sandlers gave generously to the American Civil Liberties Union and Human Rights Watch.
The Sandlers still enjoyed a solid reputation when Wachovia bought Golden West Financial, the parent company of World Savings, for $26 billion in 2006. Their share of the purchase price was a reported $2.3 billion. But then the housing bubble began to deflate and with it the Sandlers’ reputation. Wachovia’s stock plummeted by nearly 80 percent as reports spread of heavy losses in its mortgage holdings. Wachovia had made its share of irresponsible loans long before merging with World Savings but it was the World Savings portfolio that was blamed, at least initially, for the implosion of this bank that had been founded in 1879. At the peak of the credit crisis, in the fall of 2008, federal regulators pressed Wachovia to sell itself to a more secure partner. Wells Fargo bought Wachovia in October of that year, for $15 billion.
World Savings had specialized in a product called an option ARM. These were adjustable rate mortgages—loans that would see interest rates fluctuate over time—that allowed borrowers to choose how much they would pay each month. The Sandlers dubbed World’s product Pick-A-Pay: A customer could make a full monthly payment or they could pay an amount that wouldn’t even cover the interest for that month. To the Sandlers, theirs was a more humane product that insulated borrowers from payment shock should there be a spike in interest rates and also gave them the flexibility to ride out financial bumps in the road, whether a lost job, a divorce, or a health-care crisis. The problem with the loan was what bankers call negative amortization: Choose to pay the lower rate and the amount of money you owe rises over time rather than shrinks. Critics dubbed the option ARM and Pick-A-Pay in particular a fundamentally dishonest loan product—essentially an expensive way for people of modest means to rent a home because those always choosing the lesser payment were unlikely to ever have the money to buy the property. The product might make sense when housing prices were soaring—it’s a very good deal if you can sell for $400,000 the home you bought for $250,000, even if you paid down little if any of the principal—but a lousy deal when prices fell. Then it only seemed a way of lending to people with little or no regard for their ability to pay. Inside the CRL, they don’t seem to have anything good to say about the option ARM. But that wasn’t something people internally would talk about on the record. “Our stance,” Kathleen Day, CRL’s main spokeswoman told me, “is that the Sandlers are perfectly capable of defending themselves.” She then added, “We are grateful they have been so generous in their funding of our efforts,” and noted that their contributions have never come with any strings attached.
By the time I caught up with Herb Sandler to hear his side of things, he was so fed up with the media that he sputtered more than explained. Time magazine put the Sandlers on its list of “25 People to Blame for the Financial Crisis.” The New York Times named them in a front-page article as two of the chief villains behind the economy’s collapse. CBS’s 60 Minutes devoted an entire segment to a former World Savings employee who claimed he had repeatedly tried to warn higher-ups about the destructive nature of the loans they were peddling. The Sandlers were even parodied in a mock C-SPAN press conference aired by Saturday Night Live. When their turn came to stand at the podium, they were identified on screen as “Herb and Marion Sandler: People who should be shot.”
Herb Sandler seemed most angry about the article in the New York Times, which ran on Christmas Day 2008. It wasn’t hard to see why. World Savings was an odd choice for anyone looking to single out some of the worst villains of the subprime meltdown. It had not gotten caught up in the securitization frenzy at the heart of the credit collapse. Loans made through World Savings were held on to rather than sold on Wall Street. The Sandlers were pushing adjustable rate mortgages, sure, and they would play a role in the great global recession, but they were not ensnaring people with teaser rates as low as 1 percent annually and then hitting borrowers, two years later, with rates that reset at 6 or 7 or 8 percent. They didn’t target minorities or the working poor like many other lenders. World Savings stood as a perfect laboratory for examining how the housing frenzy overtook even seemingly well-meaning businesspeople but instead World—and the Sandlers in particular—was lumped in to listings of the country’s more reckless, covetous lenders. Among those delighting in the misfortune of the Sandlers was Steven Schlein, who never seemed to tire of pointing out that the “founders of the Center for Responsible Lending” had been exposed as the “toxic mortgage king and queen.”
As if all the negative reports about the Sandlers weren’t bad enough for the CRL, another major donor, John Paulson, wore a similarly large target on his back. Paulson was a hedge fund manager who so firmly believed that loose lending standards would cause deep troubles in the broader economy that he bet against the real estate market. Paulson & Co. made $15 billion in profits in 2007, $3.7 billion of which Paulson himself pocketed. That is believed to be the largest one-year payday in Wall Street history. In 2008, his firm collected another $5 billion in profits. In different circumstances, Allan Jones might have been impressed, but Paulson had donated millions to the CRL, so Jones was disgusted.
“It was un-American what he did,” Jones said. “He made his money betting against our country. This is who’s funding the CRL.” Jones then brought up the Sandlers, who he claimed “started the credit meltdown” when they sold Golden West to Wachovia. “You look at how dirty the CRL is,” he said. “And after knowing that, you’d even listen to a word they have to say about us?”