Two
The Birth of the Predatory Lender
ATLANTA, 1991–1993
If you think that if only there had been some warnings, the subprime lenders could have been stopped before they practically destroyed the world economy, then you should avoid the office of the Atlanta public interest lawyer Bill Brennan. It would be too upsetting.
Since that day in 1991 when eighty-year-old Annie Lou Collier sat across from his desk because a bank was threatening to take her home of thirty-eight years, William J. Brennan, Jr., has been talking about virtually nothing else but the need for people in power to impose some basic regulatory standards on the country’s lenders. A staff attorney for the Atlanta Legal Aid Society, Brennan has paid his own way to Washington, D.C., numerous times to testify before Congress and the Fed. He has spent more than he wants to admit doing reconnaissance work at industry-sponsored subprime lending conferences. Over the years he’s put so many flights and hotel stays and subscriptions and overnight deliveries on credit cards that for a time he put himself and his spouse, Lynn Simmons, a schoolteacher, in debt. “My wife wasn’t happy with me but we don’t need to get into that,” he says sheepishly. His collection of subprime-related material began small: some articles, a few key memos, a legal brief somebody had sent him. But when Brennan reached twenty or so cartons, Simmons put her foot down. She banished every last box from their home, so on top of everything else, Brennan now spends around a hundred and fifty dollars each month on a storage locker.
“Ninety-eight percent of everything good that’s happened in the fight against predatory lending is because of Bill,” his friend Howard Rothbloom told me. Back in the early 1990s, Rothbloom, then a young bankruptcy lawyer, called Brennan hoping to get up to speed on a new rash of predatory lending he was seeing in Atlanta. “Bill offers to send me a couple of articles he thought I’d find interesting,” Rothbloom said—and the next day a FedEx van was delivering a heavy box to his office. “Just quickly…,” Brennan will say when leaving a voice mail for his boss, Steve Gottlieb, the executive director of Atlanta Legal Aid. But it’s never quick. The Legal Aid voice mail system gives callers five minutes to leave a message but Brennan invariably needs to call again to finish a message and sometimes he needs to call a third time. Gottlieb asked Brennan to stand at his wedding but he has also banned his friend from using the office copier.
Brennan has no tolerance for halfway measures. He became a regular reader of the New York Times business section and he bought a subscription to the Wall Street Journal. And when he learned that the lenders he was following were reading something called Inside B&C Lending (its motto: “Everything you need to know about subprime mortgage lending—making loans with less than ‘A’ credit”), he decided he would read that as well, though an annual subscription cost $495. He has unusual dedication and focus. Brennan once spotted Steve Gottlieb walking down the street at seven or eight o’clock at night as Gottlieb and his wife were heading to a restaurant for dinner. “Steve! Steve!” Gottlieb heard—and he turned to see Brennan, tall and lanky, dashing toward him with a large packet of materials in his hand. He had stopped his car in the middle of the road and ran from it with the engine still running and a door wide open.
Brennan has a kind, open face and a gentle disposition. He’s bald, with a fringe of gray hair, a thin gray mustache, and gold-framed glasses. He has a courtly manner and dresses smartly at the office, preferring ties and blazers and trousers with sharp creases. He smiles a lot, but often it is the pained smile of someone who feels the world’s burdens more heavily than the average person does. He stoops slightly when standing, as if apologizing for his height. Jim McCarthy, a housing activist in Dayton, Ohio, was anxious the first time he called Brennan at the end of the 1990s when McCarthy was starting to get involved in the fight against predatory subprime lending. “Here I was, this nasal-voiced kid from Ohio who knew next to nothing,” McCarthy said, “and he gave me all the time in the world.” Of course, a FedEx box filled with follow-up materials arrived at McCarthy’s office the next day.
Bill Brennan wanted to be a Catholic priest, but after entering the seminary he found cloistered life too confining and so transferred to Emory University. His parents, who had grown up poor, pushed their son to attend law school but Brennan felt ambivalent about a legal career even after graduating from Emory Law School in 1967. He took a job teaching at a school for the mentally disabled in a poor black community in Atlanta and threw himself into the politics of the day. He marched on the Pentagon in 1968 to protest the Vietnam War, and got involved on the periphery of the civil rights struggle. He was driving his car when he heard a speech on the radio by the man then running Atlanta Legal Aid. Martin Luther King, Jr., had just been assassinated and this lawyer was talking about using the law to battle poverty, racism, and other social ills. Brennan went for an interview the next day and has toiled in the trenches of legal aid ever since.
Brennan seemed to have a nose for crusades that pit him against people seeking to get rich off the poor. In his first year on the job he exposed a pair of city inspectors who bought apartment buildings on the cheap after citing the original owners for code violations and then jacked up the rent without making repairs. Several years later he took on a former top housing official under Atlanta mayor Andrew Young for demanding under-the-table payments from the Section 8 tenants (those receiving rent subsidies from the federal government) living in properties he owned. The man was sentenced to five years in prison. In 1989, Bill Dedman of the Atlanta Journal-Constitution won the Pulitzer Prize for an astonishing series that could be summed up in a pair of nearly identical maps, one showing the city’s predominantly black neighborhoods, the other identifying those communities where banks almost never made a loan. Brennan was a key member of the housing group that had first gone to the newspaper with the original idea of an investigative piece exposing the redlining policies of the city’s largest banks.
Brennan picked up his first mortgage fraud case at around the same time the Journal-Constitution was running its series. And then his second, third, and fourth. Each of his clients told Brennan more or less the same story. All had fallen behind on their mortgages and they heard from a local business, Brown Realty Associates, offering to help. The name of that business rolls easily off Brennan’s tongue twenty years after the fact, as if he’s been talking about them regularly ever since: the Browns of Brown Realty Associates, a husband-wife team and their adult son. One of the Browns would tell the beleaguered homeowners that clearing everything up was as easy as signing a few papers to make payments to Brown Realty until they were all caught up. “What these folks didn’t realize is they had signed a legal document called a ‘quitclaim,’ transferring ownership of the home to the Browns,” Brennan said. “As soon as they missed a payment, the Browns would file to take possession.” The Browns had gotten their hands on dozens of homes before he and others with Legal Aid figured out what was going on. Joining forces with a pair of local private attorneys, Brennan and his cohorts won millions in damages against the Browns and forced them out of business.
Perhaps most disturbing to Brennan was the fact that a major downtown bank had granted Brown Realty a $1.5 million line of credit. Without it, he figured, the company could not have accumulated that many homes in so short a period of time. Brennan didn’t care how much the bank knew about what the Browns were doing with the money. They were financing scam artists who were “targeting black neighborhoods to steal people’s houses,” Brennan said, at the same time they were refusing to make legitimate loans to qualified would-be homeowners in those same communities. In 1988, with additional funding from the county, he convinced his bosses to create a Home Defense Program, the first of its kind in the country. Brennan has served as its executive director ever since.
Brennan learned from the Brown case that established financial institutions were no longer ignoring the black community entirely. What he discovered working the next set of cases the Home Defense Program took on was that the challenge was larger than a few rogue lenders working the area’s working-class and poor communities. In these same neighborhoods, larger financial concerns were now aggressively peddling loans that were so destructive that they left borrowers in a far more precarious financial position than when they started. “It was incredible,” said Brennan. “These banks went from making no loans in all these black neighborhoods to making loans that were totally abusive.” Jack Long, one member of the group that Brennan assembled to fight back, gave the phenomenon a name: “reverse redlining.”
The first firms to recognize the profits to be made from the neighborhoods that the banks had historically ignored were nonbank lenders such as Champion Mortgage. A Legal Aid attorney named Ira Rheingold watched in wonder as Champion used redlining as its main selling point. Its advertising campaign featured the slogan “When your bank says no, Champion says yes.” It was, Rheingold had to confess, devilishly brilliant—and also underscored the shortsightedness of the established banks.
“I don’t know if it was because of their own prejudices or because of the limits of the system they built, but traditional banks failed to recognize that there was plenty of need and desire in low-income and minority communities that was going untapped,” said Rheingold, who worked as a legal aid attorney in both suburban Washington, D.C., and Chicago before becoming the executive director of the National Association of Consumer Advocates. “So companies like Champion moved in and figured out that not only could they make money lending to these people, they could make a lot more money than a bank. These were unsophisticated consumers who didn’t know how banks worked, so the Champions of the world came in and said, ‘We’re going to go in as your best friend and act as your trusted adviser.’” The typical customer, Rheingold said, didn’t feel ripped off paying interest rates of 20 percent or more but instead felt grateful that, finally, someone was saying yes.
“It took them time,” Rheingold said, “but eventually the banks figured it out.”
Annie Lou Collier had been living in the same home since 1953 when a man who could have stepped out of the movie Tin Men knocked on her door in 1990. He was a home-improvement salesman who wanted to talk about a new roof. Collier had paid off the house years earlier but she was eighty years old and scraping by on a modest fixed income. She told him she couldn’t afford a new roof but the man advised her that given the worth of her home, she could simply borrow the money. He even offered to drive her to a lender who would lend her $6,900 that very day. “She was this wonderful lady,” Brennan recalled, “but they gave her this crazy loan she could never afford.”
Predictably, Collier quickly fell behind in her payments and by 1991, one year after signing the deal, she was already in arrears on a loan that included 22 percent in points and fees and carried an annual 25.3 percent interest rate. Brennan contacted the lender, who told him that they had Collier’s signature on the loan papers and that’s all the proof they needed that she understood the terms of her loan. It did not seem to matter to the person on the other end of the phone that Collier had a second-grade education and could not read or that, given her income, she couldn’t possibly afford the monthly payments. It didn’t matter, either, that the contractor had not completed the job that she had paid for. When the Home Defense Program heard from several more elderly people living in southwest Atlanta who found themselves in a similar predicament to Collier’s through strikingly similar circumstances, Brennan figured that they again would be combating a small-time local firm like Brown Realty. The loan terms were “so terribly abusive,” he reasoned, there couldn’t possibly be a legitimate company behind them. The going rate for a conventional mortgage at the time was around 9 percent, but he had one client who was being charged 29 percent on a home loan. Consequently, he suspected the lender was more interested in seizing homes through judgments of default than in accruing steady profits through regular monthly payments. Brennan would be shocked when he learned that the institution holding paper on all these loans was Fleet Bank, a large, publicly traded firm from Providence, Rhode Island.
For years activists had been lobbying the likes of Fleet to make more loans in the country’s less affluent communities. But this was not what they had in mind. These were not loans to first-time homebuyers; they were mortgage refinancings and home equity loans. They were also not conventional loans made through bank branches; they were deals arranged by a subsidiary called Fleet Finance.
While the morality of what Fleet was doing might be questionable, there was no doubting its profitability. Through much of the 1980s, the Economist reported in March 1990, banks across the country were posting big losses. One exception was Fleet, which was posting a return on equity (a “spanking 17 percent,” the magazine wrote) that made it the envy of the industry. Its “prize performer,” the Economist wrote—“the jewel in Fleet’s crown”—was its “hugely profitable” consumer finance subsidiary. Fleet Finance, with 150 offices in twenty-seven states, produced $43 million in after-tax profits in 1989. Its portfolio would generate another $55 million in profits in 1990. By 1991, Fleet had surpassed the venerable Bank of Boston to reign as New England’s largest bank. The financial press hailed Terrence Murray, the company’s chief executive and chairman, for transforming a small Rhode Island bank into a regional powerhouse.
Every year, Atlanta Legal Aid gets summer law interns whom the staff is never quite sure what to do with. Brennan sent several to the county deed room in search of any loan involving Fleet Finance. They found more than sixty and then contacted the borrowers in search of people who might talk. Brennan was not drumming up business so much as looking for a discernable pattern of abuse. All the borrowers contacted by the interns were black and they tended to live in the same few neighborhoods. Their homes had been paid off or they had lived in them so long that they had built up considerable equity. Most were older than sixty-five and had little in the way of available cash; almost all had ended up signing a loan with Fleet because they had been enticed by a seemingly helpful contractor offering its services to fix a porch or a roof or some other part of the house in visible disrepair. Fleet never made the loans themselves but used what Brennan called “pass-through companies”: local mortgage lenders that would sell the loans to Fleet, often on the same day the loan papers were signed. Typically the repair work would be left unfinished, leaving borrowers with the same problem propelling them to sign the loan—though of course they now had a steep new monthly bill that put further repairs beyond their financial reach.
Brennan knew it would be futile to sue the home-improvement contractors. Annie Lou Collier’s roof job might have been only half completed but these were fly-by-night operators who would disappear before he could serve them with papers. Even if he gained a judgment against them, he could be reasonably certain their bank accounts would be empty. He would name two of the intermediary mortgage companies in the suit he filed but he saw them as virtual “shell companies” that were hardly the main culprits. With his boss’s blessing, Brennan filed a class action against Fleet itself, charging the bank under the country’s racketeering laws. He called a press conference to announce his suit, his first in more than twenty years as a legal services attorney. Then the calls started coming.
Some were from people who believed that they too had been victimized by a Fleet-financed home-repair scam. Several were advocates wanting to join the fight. That’s how bankruptcy attorney Howard Rothbloom came to contact Brennan. He had been working late at his office when a woman named Lillie Mae Starr phoned looking for help. Starr was a retired factory worker who had left school after the eighth grade. Now in her sixties, she owned a small home in Vinings, a predominantly black community just west and north of Atlanta. Her financial woes began years earlier when she borrowed $5,000 to fix her windows. She fell behind in her payments and, after two refinancings, she owed Fleet $63,000. Facing foreclosure, she had phoned Rothbloom thinking that bankruptcy might be the solution.
Rothbloom was skeptical as he listened to her story. She claimed to be paying 23.3 percent interest but that seemed too high for a home loan. She brought in her loan documents, which he showed to Roy Barnes, a more senior lawyer working in the same small office building on the edge of the Atlanta metropolitan area. Barnes, who owned an interest in a trio of local banks, was equally incredulous.
But there had been no mistake. That first $5,000 loan had cost Starr more than $9,000, including points and fees. She had paid Fleet more than $19,000 over nine years yet somehow she still owed the bank three times that amount. “She was this real quiet lady who was embarrassed that this was happening to her,” Rothbloom said. “I was the one who had to tell her how badly she had been taken.” Over the coming months, Rothbloom would meet dozens of Fleet customers. Most were older African-American women living on their own and with a Bible by their bed or the couch. “These were people that trusted other people,” Rothbloom said. All seemed more angry at themselves than at Fleet. It struck Rothbloom that just as he had been oblivious to abuses routinely occurring on the squalid edges of the financial system, the victims of this system had little idea of what is fair and what is not in the larger financial world.
Starr had only asked Rothbloom to help her figure out whether or not it made sense for her to declare bankruptcy, but Rothbloom decided to enlist the help of Barnes, who after serving fifteen years in the state senate had recently lost his bid to be the Democrat nominee for governor. “They’d do deed record searches looking for people with high equity,” Barnes told me when I asked him why he took on the case. “They had their bird dogs walk a block, writing down those homes in need of repair. These were bad people.” Together the two filed a class-action suit against Fleet claiming the bank was conspiring with a cabal of loan originators to defraud customers. Like Brennan, the two lawyers also accused Fleet of violating the country’s racketeering laws.
Jack Long, an attorney in Augusta, also sued Fleet. Long was the odd man out in this group, a lifelong Republican who had spent a good deal of his legal career representing corporate clients. “I’m a fairly conservative guy,” Long told me, “but I got tired of being the guy who had to go out and screw somebody.” Of Fleet he would say, “What those bastards were doing was abuse, plain and simple. They had to be stopped.” Long sued Fleet, charging the bank with race discrimination. Another pair of lawyers in Augusta were also suing Fleet, charging that it was in violation of Georgia’s usury laws. The group stayed in touch through Brennan and a second Legal Aid lawyer, Karen Brown, a staff attorney with the agency’s Senior Citizens Law Project. They spent hours over the phone, sharing scraps of intelligence and batting around strategy. When the group met face-to-face for the first time, Howard Rothbloom was shocked that Brennan was as old as he was. He had pegged Brennan, a legal aid attorney with an excitable voice and a boyish enthusiasm, as a few years younger than he was rather than twenty years his senior.
Yet perhaps the most valuable member of their team was the only nonlawyer among them: Bruce Marks, an activist who was fighting Fleet in Boston. “I’m a real hardball player and no attorney in Boston will work with me,” Marks had warned Brennan the first time they spoke over the phone. Atlanta Legal Aid, however, had limited resources and Fleet was the fourteenth largest bank holding company in the country, a publicly traded adversary with deep pockets. “I was happy to get any help I could get,” Brennan said. Among other contributions, several people involved in the Fleet fight say, Marks popularized the term “predatory lender.” (Marks himself takes credit for the coinage and there is something to his claim. Except for a single use of “predatory lender” in an article in the Washington Post in 1983, every other early mention of that phrase, or its close cousin, “predatory lending,” appeared in either the Boston Globe or Atlanta Journal-Constitution at the start of the 1990s in articles quoting Marks fulminating about Fleet’s lending practices.)
“The problem we all faced is that much of the abuse we were seeing wasn’t illegal, it was just immoral,” Rothbloom said. It was seven local mortgage companies—Brennan took to calling them the “seven dwarfs”—that actually wrote these loans and worked in tandem with the door-to-door contractors. To make their case against Fleet, each set of lawyers would need to demonstrate that the seven companies were in effect acting as emissaries for Fleet. “We knew that a rich corporation like Fleet could afford to litigate this forever in a court of law, which is why we focused a lot of our attention on public opinion,” Rothbloom said. “In the court of public opinion, morality is more important than legality.” Brennan would describe it as a “multi-faced approach to advocacy.” Spokes people for Fleet would dub it a “media mugging.”
The way you get their attention,” Marks once explained in a newsletter for housing activists, “is to be in their face all the time.” Fleet would unwittingly offer Marks, executive director of the Union Neighborhood Assistance Corporation, a fat opportunity to put this philosophy into action when it announced it was buying the Bank of New England. Marks was a rich kid from Scarsdale, New York, with an MBA who in his previous career had worked for the Federal Reserve. Big mergers meant hearings and press attention and an opportunity to apply pressure on Fleet. “Up until now,” he reportedly said at a meeting with Fleet executives arranged by the Fed, “you have dealt with community activists. We are bank terrorists.” Data he had assembled showed that for years Fleet had made almost no home loans in Roxbury, Dorchester, and other predominantly black neighborhoods of Boston. At the same time, Fleet was bankrolling smaller lenders hawking high-rate home loans in those same communities. To make his point, he picketed Fleet press conferences and disrupted public speeches by Fleet executives. He infiltrated the company’s annual meetings and did what he could to “educate” those in attendance. Protesters dressed in bright yellow shark T-shirts that read “Stop the Loan Sharks” on front and “Sink the FLEET” on back. Between 1991 and 1993, Marks was quoted more than fifty times in the Boston Globe, including a lengthy feature article profiling this housing activist with a “beseeching tone in his voice,” “flailing mannerisms,” and a “red-eyed stare.”
Yet there was no denying his effectiveness. Fleet severed its relationship with some of the more unsavory lenders making loans in Boston’s black neighborhoods and launched a local marketing campaign to defend itself against Marks’s attacks. When that didn’t work, Fleet capitulated. It created an $11 million pool to help minority homeowners in Boston receiving what Fleet acknowledged were “burdensome mortgage loans” and then, after more pressure, upped that figure to $23 million.
Atlanta’s turn to witness the Bruce Marks Show came when his organization set up a satellite office there in September 1992. “It was Bruce who really stirred things up down here,” Rothbloom said, “and it was Bruce who kept things boiling.” He dispatched protesters to demonstrate outside the offices of King & Spalding when the news leaked out that this venerable local law firm, whose roster of partners included a former U.S. attorney general and former U.S. senators, was representing Fleet. He set up a phone bank to make sure there would be a good crowd each time they had an appearance in court. One of Rothbloom’s more vivid memories from those years was the day at the end of 1992 when a judge agreed to certify Lillie Mae Starr’s case as a class-action suit. A packed courtroom responded to the news with a loud burst of applause, and a fervent cry of “Thank you, Jesus!” rang out. If ever he needed a reminder that he wasn’t working on just any case, Rothbloom said, that was it.
The battle was fought largely by pulling the public’s heartstrings. Annie Lou Collier was granted her fifteen minutes of media fame, as were a number of Brennan’s clients, including Frank Bennett, a retiree living on Social Security, and his wife Annie Ruth, who worked as a cafeteria worker for Delta Air Lines. The Bennetts ended up owing Fleet $28,000 after paying a contractor $9,900 for a job that an inspector hired by Legal Aid said was worth barely half that amount. Christine and Robert Hill lost their home after falling behind on a Fleet home equity loan carrying a 23.4 percent interest rate (“I figured if it was God’s will, I would get something else,” Christine Hill told the Associated Press). James Hogan, a soft-spoken janitor, was $84,000 in debt to Fleet and facing foreclosure in what started out as a $6,200 loan to repair a roof that still leaked. “When my father passed, he didn’t have anything to give me,” Hogan, the father of five, told a reporter for the Newhouse News Service. “I wanted to give this house to my children.”
Fleet’s defense was that these stories, while tragic, had nothing to do with them. Fleet had not made the loans; it had merely purchased them from third parties. Holding the company responsible for the business practices of these independent agents, a Fleet lawyer argued, would be like saying Fleet was accountable for the business practices of anyone with whom they worked, including the printer that supplied them with loan documents. “These people may be poor and illiterate, but no one puts a gun to their head and tells them to sign,” a Fleet vice president, Robert Lougee, Jr., told the Globe. Besides, nothing we do is out of step with the rest of the consumer finance industry, Lougee asserted. The difference, he said, is that Fleet has drawn the notice of a publicity-seeking activist and a small group of self-serving lawyers seeing the potential for a large-dollar judgment.
Lougee was right on at least one point: Fleet’s practices increasingly seemed in step with the rest of the industry. There were reports of home repairmen and mortgage lenders working in cahoots to target consumers who were house rich but cash poor in any number of locales. In Los Angeles, a legal aid attorney named Troy Smith might as well have been talking about Atlanta when he told a local reporter about “people going door-to-door, passing out fliers, convincing people to sign up for loans they can’t afford and don’t understand.” In 1991, a jury in Alabama returned a $45 million judgment against Dallas-based Union Mortgage after five black families accused the lender of encouraging fraudulent home repair loans. (Fleet bought millions in loans from Union Mortgage.) Another pair of Alabama juries slapped Union Mortgage with a combined $12 million in verdicts that same year.
Whenever they were talking with the press, Fleet officials insisted that they had nothing to do with the interest rates these loan originators charged or the up-front fees (typically in the double digits) they added. But the Boston Globe was able to expose this claim as untrue. Fleet Finance gave its brokers a financial reward (called a yield spread premium) when a lender put a borrower into a higher interest rate loan, the paper reported. There were internal memos showing that Fleet Finance frequently set the terms of these loans. Its people often reviewed the applications of would-be borrowers before a loan would be made. Marc Siegel, owner of Georgia Mortgage Center, one of the seven Georgia lenders that worked most closely with Fleet, told the Globe he met several times a week with his Fleet contact. The contact was constantly letting Siegel know he would have to do things Fleet’s way or they wouldn’t buy any more loans. A former regional manager named Robert McCall went even further. It was no accident that the system evolved as it did, he said. Fleet wanted to give itself plausible deniability and shield itself from charges that it was using high-pressure tactics or in any way violating the loan origination laws. Of these seven companies—the “seven dwarfs”—four sold more than 96 percent of its loans to Fleet, the Globe found, and the remaining three sold at least half and as much as 78 percent.
Fleet claimed its lending partners needed to charge so high a rate because of the risk profile of its borrowers, despite the fact that putting up one’s home as collateral substantially mitigated those risks. Certainly Fleet didn’t prove itself reluctant to go after a person’s home if they defaulted. In 1991, Fleet foreclosed on the homes of nearly 13 percent of the residents with whom it did business in Atlanta and its suburbs. That was seven times the rate of the next largest lender in the metro area. A Fleet Finance executive claimed that the company lost money when it was forced to foreclose but a reporter for the Journal-Constitution examined the records for the Atlanta area and discovered that while the company lost $17,000 per home on the 101 homes it sold at a loss, it made an average of $32,000 per home on 194 homes. That worked out to a profit of $4.4 million before other expenses.
None of these reports might have made a difference if not for the CBS News program 60 Minutes. Fleet, the show’s Morley Safer told viewers in November 1992, has “set up what amounts to a loan sharking racket.” The program introduced the nation to people like Raymond Bryant, who had paid $3,500 in fees on a $11,400 loan—more than 30 percent in up-front costs on a loan carrying a 23 percent interest rate. And they heard as well from Charles Hastings, who spent his days cruising black neighborhoods in Atlanta in search of potential borrowers. “I’m not a salaried person,” Hastings told Safer. “I just get up every day and go out and find business.” It was Roy Barnes, the lawyer, who offered the episode’s most memorable quote and the one CBS used to promote the episode. “I don’t know what y’all call it up north,” Barnes said, “but down here in the South we call it cheatin’ and swindlin’.” Shortly after the program ran, the Georgia attorney general announced his office would be investigating Fleet Finance; Bill Brennan’s phone again was ringing off the hook.
People who joined Brennan over the years in his crusade to out the country’s predatory subprime mortgage lenders speak of him as a living legend. “He deserves a ton of credit for showing the rest of us how destructive this lending was,” said Mike Calhoun, the president of the Center for Responsible Lending, the organization that has taken the lead against predatory lending in its various forms. “He got involved before the rest of us, when it was the Wild West of lending and lenders were just grabbing huge amounts of home equity.”
Bill Brennan, however, gives credit to a woman named Kathleen Keest. “Keest is the original brains behind all this stuff,” Brennan said. “She’s our guru. She started figuring out what was going on in the mideighties.” In 1985, Keest moved to Boston to take a job as a staff attorney at the National Consumer Law Center monitoring the various vehicles that entrepreneurs and large corporations were concocting to get rich off warehouse workers, store clerks, and retirees struggling to make ends meet. “I’ve watched entire industries grow up,” Keest said. “And I’ve seen a lot of people get hurt.” In 1996, she took a posting as an assistant attorney general in Iowa, where she played a key role in exposing Ameriquest Mortgage, one of the more reckless subprime lenders in the first half of the 2000s. In 2006, she moved to North Carolina to take a job as a senior policy counsel at the Center for Responsible Lending.
Keest was running a regional legal aid office in Des Moines in 1984 when she picked up her first predatory mortgage case. This was early in what Keest dubs “wave one” of the subprime debacle, when some of capitalism’s scrappier practitioners took advantage of a seemingly sensible set of policy changes. For years many states had a cap—typically around 10 percent—limiting the interest rates banks could charge on a mortgage. Those went by the wayside when the country experienced double-digit inflation through much of the 1970s and the credit markets for people looking to buy a home froze. States were starting to lift those caps and if some locales were foresighted enough to keep in place a floating ceiling on the amount a mortgage lender could charge, those would be wiped out when the federal government, in 1980, passed a law barring the states from imposing limits on the rates a lender could charge on a real estate transaction. Two years later, during President Ronald Reagan’s tenure, the federal government would go further, giving lenders the latitude to sell more creative home loans, from balloon mortgages (in which most principal payments are deferred to the end of the loan period) to adjustable rate mortgages, or ARMs, which can see the interest rates a borrower pays fluctuate dramatically over the life of a loan.
The big consumer finance companies such as Household and Beneficial were among the first to jump on this first wave. Traditionally consumer finance firms had specialized in small, high-interest loans in the neighborhood of $500 or $1,500 to customers needing financing to replace a broken refrigerator or to buy a bedroom set for the kids. But this newly deregulated environment meant they could sell larger loans to these same customers at similar rates. “Once these guys moved up the food chain,” Keest said of the consumer finance companies, “we started seeing countless examples of people who purchased homes in the prime market”—when home loans were still regulated—“only to lose them in the subprime market.” People spoke of a new era of “risk-based pricing,” where interest rates were set based on the risk profile of a borrower, but Keest saw it as “opportunistic pricing”: charge as much as you can despite the security of a person’s home as collateral.
“Who cared if companies were screwing poor people?” Keest asked. “It was the eighties.”
With this first wave a new set of terms entered the lenders’ vocabulary. A lender was said to be “packing” a loan when a salesperson had been able to load it with points and fees and expensive baubles like the credit insurance Household sold Tommy Myers. “Flipping” was a broker’s ability to convince customers to refinance again and again—packing each new loan with additional points and broker fees. Another common gambit was to convince borrowers to consolidate their bills into a single home loan—often not realizing that in exchange for the convenience of a single monthly bill they had suddenly placed at risk their most valuable possession, their home. All of these practices added up to “equity stripping,” the fiendish art of siphoning off the equity people have built up in their homes.
Keest spotted other forms of subprime lending creeping into the culture by the end of the 1980s. Deregulation was one cause but broader economics were a factor as well. The country grew more prosperous during the 1980s and ’90s but the relative wages of the working class fell, expanding the pool of would-be borrowers desperate for the quick cash that could tide them over between paychecks. It was almost inevitable that a raft of clever entrepreneurs would try to fill the gap—for a price.
Keest struggled to keep up with all the new developments in a bimonthly newsletter she wrote and edited for the Consumer Law Center. Keest, a short, slim woman with a long narrow face framed by a pageboy hairdo, remembers the first time she learned about what she dubbed “postdated check loans.” It was 1988 and a reporter in Kansas City called to ask her about the legality of a local company making short-term loans to customers who put up their next paycheck as collateral. To Keest, this was a revival of the “salary buyers” who popped up around the country in the second half of the nineteenth century—the so-called “five for six boys,” since people would borrow $5 on a Monday and pay $6 on Friday. The country had outlawed the salary buyers early in the twentieth century but now in state after state, legislatures were providing carve-outs in their usury laws to legalize this new crop of lenders. “Tennessee was the first place to take it big but then plenty of states followed,” Keest said.
There were always novel credit schemes to keep Keest busy. One of the more creative was the “auto title loan,” which she first heard about in the early 1990s. These were similar to loans made by the country’s pawnbrokers except that a lender would take possession of the title as collateral rather than the vehicle itself, allowing people to continue driving while a loan was outstanding. Even businesses that had been around since well before the 1980s, such as rent-to-own and check cashing, provided plenty of fodder for her newsletter as these industries scored legislative victories that fostered further expansion. She felt that she was fighting a losing battle. The gap between the well-off and the less fortunate was widening and a slew of high-interest, high-fee products promised to exacerbate the disparity.
“The first time the issue of subprime had gotten anywhere near the kind of attention it deserved was with Fleet,” she said. “Until Fleet, we had never gotten any traction with our issues.”
Keest remembers riding the train with Bruce Marks and arguing over his use of the phrase “predatory lender.” She was worried that it was too inflammatory, that such a loaded term might turn people off to their cause. She also wondered about the focus on Fleet when she knew they were no worse than the others, only larger and more successful. Years later, she laughed at how little she understood the workings of the media then. It had to be Fleet, precisely because it was so big. While its size gave it strength, it also made it vulnerable to public pressure and outrage.
In the months following the CBS broadcast, both the U.S. House and Senate held committee hearings to probe Fleet Finance’s lending practices. Bruce Marks did his part to ensure that the Senate Banking Committee hearing was especially memorable. “Ride an all-expense paid chartered bus to Washington,” read the flyers Marks’s group passed around poor neighborhoods in Boston, Atlanta, and Augusta, Georgia, in the days leading up to the hearing. Roy Barnes picked up most of the tab for those willing to travel north from Atlanta (meals included) and Marks’s organization footed the rest of the bill. So many people took them up on their offer—press accounts put their numbers at between three hundred and four hundred while Marks claimed a crowd in excess of five hundred—that the hearings had to be moved to a larger room. The demonstrators, dressed in their bright yellow “loan shark” T-shirts, broke into chants and song. “It was like a gospel revival meeting,” Marks said in interviews afterward. Defending his bank before the committee, Fleet president John Hamill said that the average annual interest rate on a Fleet Finance loan was 15.9 percent and not 20 percent or more as some were claiming. “I’ve got to tell you,” committee chairman Donald Riegle, Jr., told Hamill, “that 15.9 percent…bothers me and it ought to bother you…. It’s very troubling to me and frankly I think it’s hurting the country.”
The fight lasted several more months. Fleet thought it might out-smart Marks by having a lawyer issue a subpoena requiring him to testify in Boston on the day of its next annual shareholders’ meeting in Providence. They wanted it to be a celebratory day as the bank was about to announce a 113 percent jump in its first-quarter profits in 1993. “We just assumed even an ego that size couldn’t be in two places at one time,” a bank spokesman told the Globe. Marks simply ignored the subpoena and marched along with the two dozen people who showed up to picket its annual meeting.
The final straw came in the fall of 1993, when Marks learned that Fleet’s Terrence Murray had been invited to speak at a breakfast for business leaders sponsored by the Harvard Business School. Marks had about thirty-five people planted around the room that morning. “We got the names of Harvard Business alum and started registering in their names,” he said. “We just took their names. We didn’t ask permission.” Marks sidled up to Murray as people were gathering and told him matter-of-factly that they would make sure he wouldn’t be speaking that morning. Murray was a working-class kid from Providence who had attended Harvard on scholarship. “In front of everyone, Murray got up there and said he was going to resolve the troubles he was having with Fleet Finance,” Marks said. A few days later, the two sat down for the first of a trio of long talks, each lasting three or four hours. “I get a call from Bruce saying he’s meeting with Murray, what would it take to settle my suit,” Brennan said. When Marks phoned him back a few hours later to tell him that Fleet had capitulated and it was a done deal, Brennan wished he had asked for a larger number.
Fleet paid $6 million to settle the separate class-action suit that Howard Rothbloom and Roy Barnes had filed on behalf of Lillie Mae Starr and twenty thousand other Georgians who had received home loans through Fleet Finance. That was very good news for Starr and the other named plaintiffs and also Rothbloom and Barnes, who (along with two other lawyers) split $2 million in fees and another $150,000 in expenses for their efforts. Jack Long in Augusta fared even better, negotiating a $16 million settlement for himself and his clients. Fleet pledged another $115 million to settle claims filed by the attorney general, a portion of which would provide refunds and other relief to those who had done business with Fleet Finance in Georgia. Fleet set aside $800 million for programs aimed at helping low-income borrowers, $140 million of which would be distributed by Marks’s organization. “I want to be the banks’ worst nightmare,” Marks told BusinessWeek in 1993—until they turned into his best friend with a big donation to his group. “What they have put together,” Marks said of Fleet in an interview with the Wall Street Journal, “is a shining example for the entire industry.”
The hearings Congress held to look into Fleet’s lending practices led to the passage of the Home Ownership and Equity Protection Act, or HOEPA, which Bill Clinton signed into law in the fall of 1994. The law laid out a series of additional protections for anyone taking out a “high-cost loan,” defined by the new law as any mortgage carrying an annual interest rate more than ten percentage points higher than the yield on a U.S. Treasury bill (the trigger point in 1994 would have been around 17.5 percent) or points and fees adding up to more than 8 percent of the loan amount. Among other things, the law banned prepayment penalties on high-cost loans as well as balloon payments lasting less than five years and mortgages that allowed the principal owed to grow rather than shrink. The law also granted new authority to Chairman Alan Greenspan and the rest of the Federal Reserve, deputizing them to serve as the regulatory authority charged with monitoring the practices of the subprime lenders.
Bill Brennan felt ecstatic after their victory over Fleet. He thought the HOEPA triggers should have been much lower but he felt that a very strong message had been sent by both the federal government and the media. “I really thought after 60 Minutes no bank would dare to target black communities like Fleet did; that no bank would ever do these horrible things,” Brennan said. The lending practices of its consumer finance subsidiary had cost Fleet nearly $150 million in fines, wiping out two or three years’ worth of profits. The price tag had been almost $1 billion if the bank’s other fair-lending commitments were factored in. The bank had taken a huge public relations hit in the view of a banking analyst quoted in an article Brennan faxed to practically everyone he knew. Given the potential for negative publicity and expensive lawsuits, this analyst said, he imagined that other banks would be reluctant to move into subprime. He was wrong.
NationsBank had already plunged into the subprime pool when it spent more than $2 billion in the fall of 1992 to buy Chrysler First, a consumer finance and mortgage company, from the Chrysler Corporation. At the time, NationsBank, based in Charlotte, North Carolina, was the country’s fourth-largest bank but its people didn’t seem spooked by the potential pitfalls of subprime lending. The potential for controversy might be great—Chrysler First had two hundred consumer lawsuits pending when it was sold—but apparently so too were the profits, because several years later the Charlotte-based giant also bought EquiCredit, then the country’s tenth-largest subprime lender. First Union, Bank of America, HSBC, and Citibank: These were among the name-brand banks that would buy a consumer finance company to cash in on subprime mortgage lending in those first few years after the passage of HOEPA.
The HOEPA legislation wasn’t without its influence. Kathleen Keest uses its passage to mark the start of subprime’s second wave, or what she calls the “HOEPA evasion model.” In Boston, Keest shook her head as she watched the big lenders react to HOEPA. If a high-cost loan was one carrying an interest rate of 17.5 percent, they would loan money at a rate of 17.2 percent and charge 7.9 percent in up-front costs to avoid the 8 percent trigger. To the extent even these small concessions ate into profits, the lenders more than made up the difference pushing overpriced products such as credit life insurance, which pays off a loan in the event of a death.
Fleet exited the subprime mortgage business in Georgia, but the company sold its portfolio to a rival named Associates, so Brennan found himself doing combat with a giant based in Dallas and owned primarily by the Ford Motor Company rather than one based in Providence. If anything, Brennan and Keest said, Associates was more insidious than Fleet. “They just packed loans with credit insurance and other junk, and then flipped people over and over and over,” Keest said. Brennan saw the same thing. Whenever he met a new client coming to him because of Associates, they were invariably on their third or fourth refinancing.
In 1998, Brennan would travel to Washington, D.C., to testify about predatory lending at the Senate’s Special Committee on Aging. He would fly to the nation’s capital again two years later to talk about the same issue, though this time the invitation came from the House. In April 2000, when Andrew Cuomo, then the HUD secretary, was holding hearings to investigate subprime lending, Atlanta was the first stop on his five-city tour and Brennan was one of the featured speakers. “Finally, it’s our day in the sun,” he told a reporter for the Atlanta Journal-Constitution.
It wasn’t to be. Instead the dawning of the twenty-first century marked the start of Keest’s third wave. By this time, a wide cast of players had joined the consumer finance companies, including a new crop of nonbank lenders such as Ameriquest and New Century. Increasingly, mainstream banks were revving up profits by purchasing or starting a subprime subsidiary. Unlike during waves one or two, the lenders were offering first mortgages as well as refinancings. Rather than holding the loans they wrote, they began selling off the mortgages to third parties that would in turn bundle and sell them on Wall Street. They were still frequently selling people loans more expensive than their incomes could handle, but they gambled that home prices would continue to rise at a brisk rate. The homeowner wanting a new mortgage could easily refinance as the home appreciated in worth and, in the event of a foreclosure, the bank would have repossessed a property that had grown in value. Of course, the gamble would prove disastrous if housing values were to fall. Brennan’s message remained consistent throughout: The Fed must aggressively crack down on lending that bears no relation to a borrower’s ability to repay. In particular it galled him that Fannie Mae and Freddie Mac, both created by the government explicitly to foster home ownership by buying and selling home mortgages, acted as a guarantor of some of these alternative subprime products. These twin giants of the mortgage world lent credibility to the subprime field and could cost the government untold billions if everything came crashing down. “Fannie and Freddie, as government-sponsored entities, might very well turn to Congress for a financial bailout similar to the bailout of the savings and loan industry in the 1980s,” Brennan warned when he testified before Congress in 2000. His words were prophetic but seemed to fall on deaf ears.
Brennan works out of a satellite bureau that Atlanta Legal Aid maintains in Decatur, just east of Atlanta. The bookshelves in his office are crammed with books on race, and the pictures on the wall include shots of John F. Kennedy and King. Most striking, though, are the souvenirs of his fights, including the many awards he has collected over the years. He has been honored by his fellow legal aid attorneys, the state bar of Georgia, and various national consumer groups. Black groups have honored him for his work, as have religious groups, women’s groups, and groups representing the elderly. He has so many plaques and awards that he has room only for a small portion in his modest-sized office. The rest sit in a pile in one corner of the room.
In the fall of 2008, the board of Atlanta Legal Aid honored Brennan with a resolution acknowledging his forty years of service to the poor and working poor. He felt pride that day, but the moment mainly made him feel glum. “I find all the awards discouraging,” he said. For Brennan they served as periodic reminders of how hard they had all worked and how little things had changed. “You work on something for twenty years,” he said, shaking his head, “and it’s been worse than it’s ever been.”