Broke USA Part 7

But Browning was pushing sixty and by that time was earning a base salary of around $30,000 a year. Neither she nor her husband had saved enough for either of them to stop working, and no one was dangling jobs that would pay her that much money. The plan was to put in a few more years and retire.

Still, she was hardly acting like an employee eager to stick around. When a manager from the next region over, a guy named Maurice, began a conversation by saying, "Here's what I need you to do for me, Chris," she couldn't help herself. "I said-and this is word for word-'What I need you to do, Maurice,' I says, 'I need you to go downtown in front of the courthouse. I'll meet you there so I can shove my foot up your a.s.s.'" When I asked her why she would have spoken to a boss like that, she looked at me incredulously. The words practically exploded out of her mouth: "Because he was an idiot!" Only later did she explain to me her real reason for getting angry. Maurice, she said, was phoning to tell her she needed to do a better job recruiting back old customers. "Every morning I'd get a printout listing out all the people who hadn't been in the store in at least twenty-four months," she said. "These are ones who managed to get out of the cycle. And I'm supposed to sit there late every night on the phone, bothering them at home? They know where to find me if they need me."

One day, she spotted three young black men lurking outside her store (roughly 20 percent of Mansfield's population is African-American). Fearing she was about to be robbed, she hid a couple of thousand dollars in cash in a filing cabinet. It turned out to be a false alarm, but, unfortunately, her immediate supervisor chose that hour or two when she was feeling paranoid to make a surprise visit. Finding that she had socked away around $2,000 in a filing cabinet, she was fired. She is now suing Check 'n Go for wrongful termination.

Jared Davis went off when I mentioned Browning's name. How good a manager could she really have been if she was lending out money to people owing money to all these other stores? That made a person a greater credit risk-and you weren't doing that person any favors in the long run. "If we abuse a customer, is that customer coming back?" he asked in a pleading tone. "Come on." He shook his head as if to ask how anyone could believe such nonsense as Browning put forward.

Davis denied that it was Check 'n Go policy to up-sell customers ("If you're asking me did it ever happen-I'm not saying there's not some employees out there who've never done something wrong") but he readily admitted to its practice of contacting those who have not visited one of their stores in sixty days. "Payday lending isn't like it used to be where you just open a store and make money," he said. "You have to keep your brand out there in front of people." With increased compet.i.tion, he said, "we all do what we can to find an edge."

The company's public relations director, Jeff Kursman, sat in our meeting and he piped up. "We work very hard here at being a good corporate citizen," Kursman said. He pointed his chin at the shiny green press packet in front of me. Inside were a series of slick brochures offering parents advice on protecting their kids ("Halloween Safety Checks for Children," "Summer Safety Checks for Children") that Check 'n Go, working in partnership with the National Center for Missing and Exploited Children, distributes at all its stores. The packet also included a copy of CheckPoints, CheckPoints, a short pamphlet Check 'n Go put together with tips for its customers on saving money. The "$10 tip" is to return DVDs on time; the "$40 tip" is to pay your credit card bills before the due date. a short pamphlet Check 'n Go put together with tips for its customers on saving money. The "$10 tip" is to return DVDs on time; the "$40 tip" is to pay your credit card bills before the due date.

"I think we're doing right by people," Davis said. But people like Browning gave the industry a bad name. "It's irresponsible the way she was acting," he said. "The part she never learned is that we're in this for the long haul. If we're abusing people, do you think they're coming back?"

Perhaps-but perhaps people just don't feel like they have any other choice. A few days after my visit, Browning responded to a follow-up email I had sent to her suggesting that I might phone her daughter. "She can speak with you," Browning wrote, "from a former customer perspective about how they kept chiding her to borrow more money." In the end, even after Browning's warnings, her own daughter succ.u.mbed. She had fallen so deep into debt, Browning said, that she and her husband needed to bail her out.

Eleven.

The Great What-If GEORGIA, 20022003 Over barbecue in a town that might as well be a suburban Mayberry, Roy Barnes, self-described good ol' boy, was telling me how close Georgians came to saving the world from itself in 2002. He still thinks about the bill he had signed into law during his final months as Georgia's governor, convinced that had it been allowed to stand, Lehman Brothers and Bear Stearns and the whole lot of them on Wall Street might not have been so quick to buy whatever junk a subprime mortgage lender was peddling. "I was just trying to put my momma's rule into law: You have to live with your choices," Barnes said in a drawl that calls to mind Andy confiding in Aunt Bee. "There had to be accountability. These banks; think about what would have happened if they knew they would have to pay a price for all those loans that were no good."

Vincent Fort, a black state senator who jokingly describes his politics as "neo-confrontational," told me more or less the same story in a conference room across the street from the state capitol. "I'll tell you what, man," he said in a deep ba.s.s voice. "You just had to see the way they came after us to know that we were on to something." Like the 1999 North Carolina law, the bill that Fort drafted and Barnes refined was aimed at clamping down on predatory subprime loans but went one critical step further. It dictated that any ent.i.ty taking possession of a "high cost" subprime loan-including a big investment bank on Wall Street that held it only long enough to sell it off in small tranches to munic.i.p.alities, pension funds, college endowments, and anyone else in the market for a mortgage-backed security-was legally liable for the integrity of that loan. The law defined high cost as a loan carrying more than five percentage points in up-front costs or an interest rate more than eight percentage points higher than the rates on a comparable Treasury bill. Perhaps if they knew they might get sued, the banks might have taken at least a cursory look at a loan's terms before snapping it up on a secondary market and selling it off in small slices to investors as far away as Reykjavik and Berlin.

Eventually other states, including New York, would follow Georgia's lead and pa.s.s similar laws. And those states would then learn that there was another impediment in their way as they tried to crack down on the most reckless subprime lenders. But in Georgia, in 2002, a half-dozen years before the world would be lamenting America's subprime mortgage mess, lawmakers had devised if not the perfect prophylactic against financial disaster, then at least the beginnings of a solution. "In Georgia," Fort says, "of all places."

"I twisted arms," Roy Barnes said. "I called in favors. I had legislators out to the mansion every morning. I threatened everyone. It was the hardest bill I ever pa.s.sed-and I changed the Georgia flag." And then, when the state's white majority denied Roy Barnes a second term that November because he sided with the blacks and the liberals and others seeking to erase the Confederate stars and bars from the Georgia state flag, Fort said, the real fight began.

Vincent Fort was teaching at Morehouse and other local colleges in the early 1990s when Bank of America announced it was shutting down branches in black neighborhoods around town, including one not far from his home in south Atlanta. Fort, whose specialty was black studies and the civil rights movement, had always stressed the centrality of economic inst.i.tutions to the health of the black community. Fort began speaking out at community meetings around town and working with others to organize demonstrations. "We beat up on them pretty good," Fort recalled with a laugh. When the dust settled, black Atlanta still had several fewer bank branches but it also had a new leader, then in his late thirties. "I said then a day will come when we'll engage these folks again," Fort said.

That day came a half-dozen years later when he was nearing the end of his first term in the state senate. Andrew Cuomo, the HUD secretary, was coming to Atlanta for the first of five hearings he was holding around the country to investigate predatory lending. A friend of Fort who was helping to organize the event suggested he attend. Cuomo was already on record calling the issue of high-interest mortgages and excessive fees a "national crisis...with a troubling racial factor." Fort decided to sit in.

Bill Brennan testified that day, as did one elderly African-American widow facing foreclosure and another seemingly on the verge of disaster. Fort had spent most of his first term championing an anti-hate law in Georgia but sitting in the audience that day he wondered how he could be on the sidelines when abusive lenders were targeting the city's black neighborhoods. A HUD study released shortly before Cuomo's visit found that a borrower living in a predominantly black community in 1998 was five times more likely to end up in a subprime loan as someone living in a community that was predominantly white. Even an upper-income African-American, the study found, was twice as likely to hold a subprime mortgage as a lower-income white homeowner. Worse, Fannie Mae had a.n.a.lyzed its portfolio of mortgages for that same year and discovered that half of all those paying the higher rates and fees on subprime mortgages qualified for conventional loans. Fort was so incensed by what he was learning that he stood up and audaciously declared that he would see to it that Georgia pa.s.sed the country's strongest antipredatory lending law.

"That would be my first mistake," Fort said with a deep rumbling laugh. A lobbyist with the Georgia a.s.sociation of Mortgage Brokers sidled up to Fort and offered him his card. "He tells me how much he's looking forward to helping me with my legislation," Fort said. "And then from that point on, he and his folk would work tooth and nail against me."

Fort is on the short side, a portly man in oversized tortoisesh.e.l.l gla.s.ses. He is bald and sports a graying beard. He can be an easy political foe to underestimate. The day we met he was wearing a white dress shirt marred by two large coffee splotches, a wide-lapel pinstripe suit he described as "very off the rack," and Rockport-style walking shoes. Even the cultured, refined way he speaks is more professor or preacher than state senator. "I think it really bothered a lot of these good ol' boys I was taking on that I wasn't a real politician," he said. "I didn't go out of my way to be aggressive but at no time was I going to stoop or bow."

Those first months would be an education. Fort had a.s.sumed Bank of America's decision to shut down branches around town was a cost-saving measure. Only once he dove headfirst into the antipredatory lending fight and started hanging around with the likes of Bill Brennan ("he would become a good friend," Fort said) did he learn that at the same time they were shutting down full-service branches, the big banks were purchasing subprime lenders. Bank of America, for instance, bought the subprime lender SP Financial Services during the 1990s. "It's not like these brand-name banks really fled our neighborhoods like we originally thought. They just replaced their branches in working-cla.s.s neighborhoods with these off-brands making subprime loans to people and making enormous amounts of money," Fort said. "Citigroup, Bank of America, Wachovia, First Union-they all did it." Was it any wonder, then, that the Federal Reserve showed that while the volume of conventional mortgages remained flat between 1993 and 2000, subprime loans grew sevenfold? Unsurprisingly, foreclosures spiked 68 percent through the second half of the decade despite a robust economy. In Atlanta, the numbers were even more shocking. The foreclosure rate between 1996 and 1999 fell by 7 percent for those holding a conventional home loan but it soared by 232 percent among those holding subprime loans.

Fort introduced his bill at the start of the 2001 legislative session. He might have chided himself for telegraphing his intentions but it probably wouldn't have made any difference. North Carolina had caught the industry by surprise but by 2001 the big banks and other lenders were ready. A few in the press had a good time with a Dallas-based conference that served as a kind of predator's ball, where what the New York Times New York Times described as a "swat team" of lobbyists formed, ready to parachute into any state wherever they might be needed. To beef up its political connections, Household Finance hired Thomas McLarty, Clinton's former chief of staff, and Connie Mack, the former Republican senator from Florida, to serve on a board of advisers and the big banks like Citigroup had their own teams of staff lobbyists at the ready. described as a "swat team" of lobbyists formed, ready to parachute into any state wherever they might be needed. To beef up its political connections, Household Finance hired Thomas McLarty, Clinton's former chief of staff, and Connie Mack, the former Republican senator from Florida, to serve on a board of advisers and the big banks like Citigroup had their own teams of staff lobbyists at the ready.

The industry didn't try to beat back Fort's legislation so much as they tried to co-opt it. The Georgia Senate's Banking and Financial Inst.i.tutions Committee pa.s.sed a predatory lending bill carrying Fort's name but by that time it had been so thoroughly eviscerated it bore no resemblance to the legislation he had written. The Georgia House never even bothered voting on the measure. It was time for a Plan B.

By instinct, Fort was more community activist than politician. The day after the end of the 2001 legislative session, he headed to a CitiFinancial office in Clayton, one hundred miles away. There he stood next to an older black woman he said CitiFinancial "had put into one of the worst predatory loans I've ever seen." That would be the start of an unusual media campaign designed to sway an audience of one: Governor Barnes. "I knew I didn't stand a chance if I didn't bring Roy Barnes on board," Fort said. "I was doing anything I could think of to make sure he made this part of his legislative package in 2002."

The first thing he would stipulate for the record, Roy Barnes told me as I slipped into a booth across from him for our lunch interview, was that people with poor credit should pay more for a loan than people with good credit. "I'm a capitalist through and through," he told me. He and his brother have started two banks together and they've bought a third. As governor he angered environmentalists by pursuing an aggressive growth agenda and he worked hard to abolish teacher tenure. He's been a Democrat all his life, but he is not what anyone might call a cla.s.sic liberal.

Perhaps because at heart he was an old-style banker he took the changes he witnessed in the finance industry more personally than most. Interest rates nationally were strikingly low through the first half of the 2000s but people of modest means were paying more than ever for their money. "When I was a young prosecutor," Barnes said, "we prosecuted people who charged more than twenty-five percent a year as loan sharks. Now Wall Street welcomes them as respectable businesses." For years Barnes had fought what in Georgia they call the industrial lender-homegrown consumer finance shops that make small-denomination loans at annual interest rates of 60 percent. Now the payday lenders and t.i.tle loan shops (called t.i.tle p.a.w.n lenders in Georgia) charged closer to 400 percent.

"Under normal circ.u.mstances, I'd say sixty percent is usurious," Barnes said. "But compared to what the t.i.tle p.a.w.n and payday lenders are charging, they're low-cost." When he was younger Barnes backed a law that would have capped the fees tax preparers could charge for an instant refund and he worked with the consumer groups to rein in rent-to-own. But now, Barnes said, "in the rank ordering of things, these things don't seem so bad. We've become immune." The biggest shock-and the most distressing to him personally-has been all those old-line inst.i.tutions that succ.u.mbed to temptation. "Some of the most recognizable names are the biggest predatory lenders," he said. He mentions Wells Fargo, a bank with roots dating back to 1852 and a bank he had long respected. "Wells Fargo! Wells Fargo funds these predatory lenders," Barnes said. "Wells Fargo made all these predatory loans. Banks have a responsibility to serve the community. It's outrageous."

Barnes is a bulky man with blue eyes, a thick mane of gray hair, and the breezy, aw-shucks style of a country lawyer. A successful legal practice and those banks he owns with his brother gave him a net worth estimated at more than $10 million but the day we met he dressed like an English Lit professor in a brown corduroy sport coat and seemed to greet every person we pa.s.sed on the street with a "Hi, how y'all doin'?" He was twenty-six years old when he was first elected to the Georgia Senate and practically grew up there, cutting deals and learning the nuances of cloakroom politics. It was no wonder that Fort, the former black studies professor, saw Roy Barnes as the perfect partner. The case against Fleet Finance had been one of the biggest of Barnes's legal career, and Barnes wasn't just the sitting governor but also a master at twisting arms and counting noses.

Another elected official would have sought a meeting with Barnes or at least one of his top people. Instead Fort took to the airways. If nothing else, Roy Barnes was a politician who read the polls, especially then as he geared up for a tough reelection. Getting Barnes to embrace predatory lending as a priority, Fort figured, required him to move the public opinion dial. And so Fort was all over the local media as 2001 turned into 2002, doing what he could to call attention to the problem of predatory lending in Atlanta.

Mainly that meant borrowing from the Bill Brennan playbook and offering the media the stories of elderly Georgians facing the street because of a deal they had done with a subprime lender-people like Ralph and Ethel Ivey. They had been making do since Ralph, eighty, a retired construction worker, had been incapacitated by a series of strokes, but then they needed a few thousand dollars' worth of home repairs on the small turquoise-colored bungalow they had paid off years earlier. So they turned to Household Finance for help. "Atlanta is under siege by predatory lenders," a consumer reporter told listeners on the town's ABC affiliate. "These lenders were your friend so long as you owned equity in your home," said Fort in an interview with Creative Loafing Creative Loafing, the local alternative weekly. "They'd get as much out of you as they could and then...they took your house." Where once the polls had shown only nominal interest in the problem of abusive mortgage lending, by 2002 between 70 and 80 percent of the electorate was in favor of predatory lending legislation.

"I'd hear the stories and get mad," Barnes said. "They were loaning money to people who couldn't afford it. They were churning people through loans to collect more fees. They were not using any underwriting criteria because they were just going to sell the thing on Wall Street through securitization. So I had my administration take over Senator Fort's bill."

The governor's people fiddled with the language but otherwise left the key provisions in place. As in previous legislative efforts, the bill created a special category for "high cost" loans. The bill defined that as any home loan carrying fees exceeding 5 percent of the loan amount (versus 8 percent under the federal HOEPA law) or an annual interest rate more than eight percentage points higher than the corresponding Treasury bill (Fort had initially proposed six percentage points). The proposed law would ban balloon payments and prepayment penalties on any high-cost loan and required a borrower to receive counseling from a nonprofit organization before a deal could be consummated. The bill also capped the financial reward a lender could give a mortgage broker for putting a borrower into a more expensive loan (in the trade, a "yield spread premium") and stipulated that there must be a clear tangible financial benefit to a refinancing on a loan less than five years old. And, as Fort's original bill had done, the proposed legislation also gave any borrower burdened by a high-cost home loan the right to sue not only the original lender but anyone taking possession of that loan.

"I saw that as the key," Barnes said. "Wall Street had legitimized subprime lending and predatory lending by allowing for the securitizing of mortgages. We had to get at that if we were gonna get a handle on all the abuses."

The bills might have been virtually the same but the result wasn't. Again the legislation came before the Senate Banking and Financial Inst.i.tutions Committee but this time it pa.s.sed unanimously and cleared the full Senate by a vote of 522. It was in the Georgia House that the lenders would make their stand.

Wright Andrews, Jr., ran the National Home Equity Mortgage a.s.sociation out of his offices in Washington, D.C. From those same offices he ran a group he called the Coalition for Fair and Affordable Lending and also a third that went by the name of the Responsible Mortgage Lending Coalition. Andrews was a top lobbyist for the subprime mortgage industry so Bill Brennan was understandably surprised to hear Andrews inviting him to a conference in Palm Beach, Florida. They were having a panel discussion on regulation and would Brennan partic.i.p.ate? Seeing this as a perfect chance for some choice reconnaissance work, Brennan readily said yes.

The trip wouldn't disappoint, but only because Brennan, being Brennan, stayed through to the end for some final remarks from Andrews. "He tells everyone that the next battlefield is Georgia," Brennan recalled. "He tells the group, 'We're going to Georgia to stop Roy Barnes from pa.s.sing this anti-lending ordinance.'"

Barnes took to calling his bill the Lobbyist Relief Act of 2002. Between the mortgage brokers, the local banks, the out-of-state banks, and nonbank lenders such as Countrywide and Ameriquest, Barnes said, "they hired every lobbyist in town." And then there were troops who had been flown in from out of the state. Fort remembers in particular a pair of female lobbyists for Ameriquest ubiquitous in those weeks when the two sides were vying for support in the House. "One was black and one was white and they're both in their mid-twenties," Fort said. "And I'll tell you what, they were both really attractive." In a series of articles that ran at the end of 2007, once the subprime market was already showing deep cracks, the Wall Street Journal Wall Street Journal reported that one of Wright Andrews's groups, the Coalition for Fair and Affordable Lending, spent $6.3 million to blunt state laws like Georgia's, and that Ameriquest, then the country's seventh-largest subprime lender, by itself made more than $20 million in political contributions. reported that one of Wright Andrews's groups, the Coalition for Fair and Affordable Lending, spent $6.3 million to blunt state laws like Georgia's, and that Ameriquest, then the country's seventh-largest subprime lender, by itself made more than $20 million in political contributions.

Andrews offered something of a mea culpa in the Journal Journal series: "I certainly was not aware of the degree to which many in the industry clearly failed to follow proper underwriting standards-the standards which they represented they were following to us who were lobbying." But in 2002 Andrews was describing the proposed Georgia law as "so bad" it might even prove a good thing. Georgia should "wake up and truly unite" the mortgage industry, Andrews told series: "I certainly was not aware of the degree to which many in the industry clearly failed to follow proper underwriting standards-the standards which they represented they were following to us who were lobbying." But in 2002 Andrews was describing the proposed Georgia law as "so bad" it might even prove a good thing. Georgia should "wake up and truly unite" the mortgage industry, Andrews told American Banker American Banker, to the need for federal legislation that would "pre-empt" those state and munic.i.p.al governments trying to impose limits on subprime lenders and in the process creating a balkanized and confusing regulatory system.

The other side, of course, was offering much the same complaint: A fractured system meant fighting the same battle in town after town and in state after state. At the end of 2001, the Federal Reserve, which Congress had deputized to monitor the field, modified its definition of a "high cost" loan to include any loan carrying an interest rate eight percentage points higher than a Treasury bill, putting it in line with the North Carolina law and Georgia's proposal, and declared that any lender making a "high cost" loan needed to take into account a borrower's ability to repay the loan. Yet both sides had their powerful stalwarts in Congress, and neither could muster enough support to change the system. So despite the wishes of either side, the fight played out in states and cities around the country, creating a complex and multilevel battlefield (if not also a lucrative one) for Andrews and other lobbyists.

Martin Eakes had proven that a lender could make loans to subprime borrowers at rates around one percentage point above the going rate for prime borrowers and at least break even. Self-Help was a nonprofit, but even if charging only two or three percentage points above the conventional rate, a lender could still make double-digit profits. Georgia's proposed law only applied to mortgages that charged rates eight percentage points above conventional rates, yet Andrews and his colleagues deemed the proposed new rules unduly excessive. It will hurt first-time homebuyers. It will chase away the legitimate lenders, not just the crooked ones. "I had one bank CEO in my office telling me that Georgia is going to become an island; no one is going to make a loan here," Barnes scoffed. "We were the third or fourth fastest-growing state in the nation, at least at the time. I just couldn't believe no one was going to loan us money when we were growing that fast." In one meeting, a contingent of out-of-town lenders argued that if Georgia insisted on imposing its own rules on mortgages, then it would be difficult to sell them in the secondary market. Mortgages are the latest commodity sold on the global market, they explained, but Barnes was thinking these guys weren't thinking beyond next quarter's bonuses.

"I'm telling 'em, 'You're in for a crash here, this isn't going to end well,'" Barnes said. "But they're looking at me like I'm the one who doesn't understand."

Barnes was confident he could outmaneuver the out-of-town lenders. He knew he could best the mortgage brokers, but the state's biggest banks, even those not making high-cost loans, were also aligned against him and that had him worried. So he called them into his office to threaten them en ma.s.se. "I have this vacancy on the banking commission," Barnes recalled telling them, "and if y'all don't back off this bill, I'm going to do a nationwide search to find me the most sandal-wearing, long-haired, liberal consumer activist I can find to regulate every last one of you.'" Whether that was a bluff was not something they were willing to find out. "I finally backed them off," Barnes said.

Even many of his fellow Democrats were opposing him. "You'd've thought I was proposing the repeal of the Plan of Salvation, that's how much they were fightin' me on this," Barnes said. Some told him that they were worried his measure would make them appear antibusiness. "This ain't about business," he'd tell them, "this is about taking advantage of folks." And when reason wouldn't work, he reminded them that he was governor and could make life miserable for them if he set his mind to it. "They were mostly mad because they were enjoying those thick steaks and the cold liquor they were getting from the lobbyists," he said.

Fort confessed to experiencing a few pinch-me moments during those weeks of arm-twisting and uncertainty. He would be sitting in a hearing room overstuffed with lobbyists and activists and feel something like shock. "The whole focus nationally was on stopping us in Georgia so it wouldn't spread to other places," he said. "It was almost surreal to think what we had started in 2000 had gotten to this level." Fort had staked out the conference room next to his legislative office, where every Friday a small coterie of strategists would gather. He had Bill Brennan on hand to help him monitor small changes in the bill, along with Self-Help's Mike Calhoun, who had helped Fort write the original bill. Another regular, Kathy Floyd, a lobbyist for AARP, arranged for tens of thousands of its members to phone legislators in support of the Barnes-Fort bill.

"As this process moved along, my job was to make a lot of noise," Fort said. "It was to our benefit for them to think I was militant or racial or whatever. The crazier they saw me, the more dealing with Roy didn't seem so bad."

Despite everything they were doing, Fort thought they were a goner when Fannie Mae waded into their fight. In a letter addressed to Barnes, the government-backed mortgage giant warned that the measure "could unintentionally shrink the availability of responsible credit for the most vulnerable consumers." Fannie Mae asked to be exempted from the bill. But rather than respond directly to Fannie Mae, one of the governor's people enlisted Fort. "So I blast Fannie Mae and hint at the crowds we'll mobilize to protest their actions," Fort said. And the next thing he knew, Fannie Mae had rescinded its statement and issued one in support of the bill. The agency blamed the whole thing on a low-ranking staffer.

Barnes probably compromised more than Fort would have had he been the chief negotiator. The biggest concession was giving up on judicial foreclosures. In many states, foreclosures are overseen by the courts but not in Georgia. There are strict rules governing the procedure, but a lender can auction off a property without ever going before a judge. The Barnes-Fort bill sought to change that but Barnes dropped that proposal to win the support of the Speaker of the House, a Democrat. But the bill pa.s.sed mainly intact, including the provision that would allow a borrower to sue anyone who takes possession of his or her mortgage. "There's a compa.s.sion issue here," state senator Bill Stephens, a Republican, told the Atlanta Journal-Const.i.tution Atlanta Journal-Const.i.tution, explaining why he and so many other members of the GOP voted for Barnes's bill. "You can't hear the stories without having it tug at your heart."

Barnes signed the bill into law in April 2002. He held a signing ceremony in Atlanta and similar events in Savannah, Augusta, and Macon. Before the week was out, he would hold no less than seven public ceremonies to sign a bill that advocates and critics alike were describing as the toughest antiabusive lending law in the land.

Barnes had generously singled out Bill Brennan and his staff during that first signing in Atlanta. This would never have happened, the governor said, without them. What pa.s.sage of this bill meant to Brennan nearly a dozen years after he first came across that first flurry of Fleet cases became clear to Fort a few weeks later, at a celebration sponsored by Atlanta Legal Aid. No one expected them to win, Fort said from the podium. Not the good ol' boys who were still stunned that they had lost-and not even those pushing for the bill. While he was speaking, Fort recalled, he spotted Brennan standing off to the side, overcome with emotion. "Bill doesn't know that I noticed," he said, "but I saw tears coming down his cheeks."

On election night, Roy Barnes saw the early returns from the rural white counties and knew he was in trouble. He might have won a John F. Kennedy Profile in Courage award for changing the Georgia state flag but apparently not everyone was so impressed with his convictions. In the end, the 2002 race wasn't even close; GOP challenger Sonny Perdue beat Barnes by five percentage points and, for the first time in 130 years, a Republican was seated as the governor of Georgia. "Bill, you know it's over," Fort said when he called Bill Brennan the next day. And even Brennan, ever the optimist, had to confess that his friend was probably right.

Lenders had threatened to stop making loans in North Carolina but studies showed that those were empty threats. A Morgan Stanley survey concluded that rather than reduce the availability of subprime loans there, the law had saved consumers in North Carolina at least $100 million in fees. But Georgia, of course, had implemented a more restrictive law. Countrywide and Option One announced they were greatly curtailing their activity in the state and Ameriquest announced it was pulling out of Georgia altogether. In time it would become clear that this should have been cause for celebration but at the time it had the intended effect of spooking more than a few legislators. Freddie Mac compounded the fear by announcing it would no longer buy any "high-cost" loans from Georgia lenders. One might have asked why a government-sponsored mortgage finance company like Freddie Mac was trafficking in these high-priced loans but the news further softened legislators to the industry's argument that there were unintended consequences to the Barnes-Fort bill.

Still, the original legislation might have survived largely intact if it were not for the unexpected intervention of the nation's largest credit rating agencies. Less than two weeks after Sonny Perdue took over as governor, Standard & Poor's announced that it would no longer rate the creditworthiness of any mortgage-backed security that included even a single loan out of Georgia-even conventional mortgages. Since any party purchasing a predatory loan was potentially subject to a lawsuit in Georgia, the New Yorkbased rating agency reasoned, and since the Georgia law placed no cap on potential damages, the legal exposure was incalculable. Moody's Investors Service and Fitch Ratings soon followed suit.

If one were a.s.sembling a list of actors whose reputations were badly tarnished by the 2008 subprime meltdown, the big three credit rating agencies would likely be near the top. Far from being reliable third parties offering impartial financial judgments, together they were "a central culprit of the financial crisis," Eric Dash of the New York Times New York Times would write in mid-2009. They stamped their highest ratings on junk. The problem was that the very people asking them to rate the integrity of these mortgage-backed securities were also the same people paying their fees. Dash likened the system to one in which Hollywood studios paid movie critics to judge their films. In 2003, however, the announcement caused panic inside the Georgia Capitol. The legislature was suddenly in a great rush to undo the damage. would write in mid-2009. They stamped their highest ratings on junk. The problem was that the very people asking them to rate the integrity of these mortgage-backed securities were also the same people paying their fees. Dash likened the system to one in which Hollywood studios paid movie critics to judge their films. In 2003, however, the announcement caused panic inside the Georgia Capitol. The legislature was suddenly in a great rush to undo the damage.

Those who had auth.o.r.ed the law had not done themselves any favors: It turned out that the law needed fixing as soon it had been pa.s.sed. Fort described it as a matter of a few minor "tweaks," but that meant opening the bill to reconsideration during the next legislative session, which played into the hands of the opposition. Fort and his colleagues proposed a cap on the financial liability of any single investor, but the legislature was intent on going much further. The amendment that Sonny Perdue signed into law in early March 2003, just five months after the original law had taken effect, limited liability to the original issuer of a loan while watering down a number of provisions in the Barnes-Fort bill. "It's as bad as not having a bill at all," a dispirited Fort told the a.s.sociated Press.

Not that their efforts were for naught. Like North Carolina, Georgia helped to inspire activists and legislators living in other locales. Soon after Georgia, New York State pa.s.sed a tough antipredatory lending law that also gave borrowers the right to sue whatever inst.i.tution held their mortgage, even if it was owned by a third party. But that right was granted only if someone could prove that the third party had been complicit in committing fraud (or, in the event of foreclosure, a borrower could get out of his or her financial liabilities to a third party if the loan is deemed predatory under state law). The New York law went into effect in April 2003. Other states followed. Every state after Georgia was certain to put in place a cap on a mortgage holder's potential liability. "That way the rating agencies like Standard & Poor's could at least calculate the potential for damages," said Patricia McCoy, a professor at the University of Connecticut School of Law, who has studied the issue.

But victories in New York and elsewhere would do little to help those communities in Georgia devastated by the subprime meltdown. By 2006 the state would rank third in the nation in foreclosures.

Predictably the problem was felt much more acutely in the state's black precincts. Nearly half of all blacks buying a house in Atlanta in 2005 or 2006 ended up with a subprime mortgage, according to a 2007 a.n.a.lysis by the Atlanta Journal-Const.i.tution Atlanta Journal-Const.i.tution, compared to 13 percent of white homebuyers. The difference was even more p.r.o.nounced among those earning more than $100,000. Four in ten black homeowners earning in the six figures ended up in a high-interest subprime mortgage compared to less than one in ten whites in that income group. The rate of foreclosure among those blacks would be disproportionately high.

Bill Brennan continued to do what he could, one client at a time. If there was an upside to the 2002 fight, it was that now Brennan had an ally in Fort who could frighten banks into doing the right thing. In recent years, Fort has phoned top bank executives ranging from Countrywide's Angelo Mozilo to Bank of America's Ken Lewis to scare them into fixing the most egregious of Brennan's cases. Fort depicted for me what happens after he leaves a message with one of their a.s.sistants. "They'll google my name, they'll figure out who I am, and then my phone rings an hour later," he says. "They figure it's better to work things out than face a picket line."

"That's how we settle a lot of cases nowadays," Brennan told me. "Not all but well over half."

A man named John D. Hawke, Jr., played only a peripheral role in the legislative fight over predatory lending in Georgia. As head of the U.S. Office of the Comptroller of the Currency (OCC), Hawke regulated the country's national banks. He blanched every time a state encroached on his turf, and even before the Barnes-Fort bill took effect, he had already granted a blanket exemption to the banks under his supervision. That didn't help giant mortgage lenders like Countrywide or Ameriquest but it provided relief to big banks like Wells Fargo and Washington Mutual. But it was another judgment Hawke made in 2003, one month after Sonny Perdue broke the hearts of Fort, Brennan, and others in Georgia, that stands out as the other great what-if of the early 2000s. Bill Clinton had nominated Hawke to a five-year term as OCC chairman that began in 1999 and from the start he seemed intent on standing in the way of those trying to crack down on predatory lending. man named John D. Hawke, Jr., played only a peripheral role in the legislative fight over predatory lending in Georgia. As head of the U.S. Office of the Comptroller of the Currency (OCC), Hawke regulated the country's national banks. He blanched every time a state encroached on his turf, and even before the Barnes-Fort bill took effect, he had already granted a blanket exemption to the banks under his supervision. That didn't help giant mortgage lenders like Countrywide or Ameriquest but it provided relief to big banks like Wells Fargo and Washington Mutual. But it was another judgment Hawke made in 2003, one month after Sonny Perdue broke the hearts of Fort, Brennan, and others in Georgia, that stands out as the other great what-if of the early 2000s. Bill Clinton had nominated Hawke to a five-year term as OCC chairman that began in 1999 and from the start he seemed intent on standing in the way of those trying to crack down on predatory lending.

It was more than just legislators in states like North Carolina, Georgia, and New York who were eager to do something about the more egregious forms of subprime mortgage lending. A number of state attorneys general were also intent on taking action, so much so that within their national a.s.sociation they had formed a predatory lending committee. Iowa Attorney General Tom Miller, whose investigation of Ameriquest led to that company paying a $325 million fine, served as co-chair of the committee. So too did North Carolina's Roy Cooper, who had been displeased with Hawke ever since the latter exempted (as he would do in Georgia) national banks from the state law Cooper had championed while he was president of the North Carolina Senate. In April 2003, a small contingent of attorneys general converged on Washington hoping they could convince Hawke to work with them instead of against them.

Hawke agreed to a meeting but then asked himself why he had even bothered. He was annoyed with the lot of them even before they showed up at his offices. The day before they were scheduled to arrive, Eliot Spitzer, then the New York attorney general, had held a press conference blasting Hawke as a pinheaded bureaucrat for standing in the way of his efforts to crack down on unfair lending practices, especially in black and Latino neighborhoods. Spitzer wasn't at the meeting with Hawke but his presence was felt just the same. "Are we here for a press event," Hawke began when he took his seat, "or do you want to talk issues?" The attorneys general were no happier with their publicity-hungry colleague from New York but there was also nothing they could do. "We couldn't control Spitzer but that didn't change the fundamental issue that we were there to talk about," Cooper said.

Their meeting lasted only an hour. It was decorous despite its contentious start but hardly satisfying for either side. The attorneys general asked for more lat.i.tude in cracking down on predatory lending; Hawke held forth on the doctrine of preemption and why it was critical that the federal government not relinquish any regulatory power. We're not trying to intrude on the business of ensuring the safety and soundness of the nation's banks, the attorneys general countered, but we have the right to protect our citizenry from the oppressive loans that some lenders under your charge are making. States have also always had the right to regulate real estate transactions within their borders, Cooper argued when it was his turn to speak, and they have the power to enforce consumer rights laws even if that abuse is at the hands of a nationally chartered bank (or a bank's subprime subsidiary, for that matter). There were more practical considerations as well: The states were closer to the problem and could react more quickly than the federal government. Hawke, however, would not budge.

"He took fifty sheriffs off the job when the lending industry was becoming the Wild West," Cooper, who was still angry with Hawke when I visited him in North Carolina, told me at the end of 2008. "What was going on was unrestrained and uncontrolled. You had these no-doc [no doc.u.mentation] loans. You had lenders that weren't even looking at the borrower's ability to pay because they knew they would just be selling these loans on the secondary market." If the federal government had chosen to remain neutral, Cooper said, "I believe the fight against these lenders would have spread like wildfire across the country because of just the basic unfairness." Instead, Hawke and the OCC threatened lawsuits at every turn.

"I blame him for the meltdown," Bill Brennan said of Hawke. "He knew exactly what was going on and didn't do a thing about it."

Hawke was fed up with that kind of statement by the time I reached him at the end of 2008. "Everyone's looking around for a scapegoat," he said. "So people point a finger at me." It's not as if he did nothing, he said. He asked the attorneys general to give his staff any evidence they had of reckless lending "but they just completely dropped the ball on that." He suspected that's because their main interest was in generating headlines. He pointed out that shortly after meeting with Cooper and his colleagues, he sent out rules clarifying the OCC's position: Loans should be based not solely on the worth of a borrower's collateral but also on his or her ability to pay. To him, if people are looking for someone to blame, look at the investment banks and their "unquenchable thirst" for more subprime loans they could package and sell.

Hawke is a heavyset man with thinning gray hair and dressed in suspenders and a bright blue-and-white striped dress shirt. After his term expired in 2004, he returned to Arnold & Porter, the Washington, D.C., powerhouse law firm where he had worked prior to his appointment. There he represents some of the same banks he had supervised as the chairman of the OCC, but to his mind there is no conflict of interest because his fight with the states had been over jurisdiction and never the behavior of the banks under his domain. "One of the benefits of being a national bank is you can operate under a single set of rules," Hawke said. As he had done in his meeting with the attorneys general, Hawke gave me a short lecture about the Const.i.tution and the primacy of delegated federal authority over states' rights. "Preemption is not something for us to give up on because it might be convenient," he said.

If ever he doubted himself, Hawke had the courts to provide him solace. The OCC filed suit against Spitzer after he opened an investigation of possible discrimination by banks under his charge. The federal district court ruled in favor of Hawke's agency and the U.S. Court of Appeals upheld the lower court's decision. "He challenged us," Hawke said of Spitzer, "and we beat 'im every time." Six months after my visit, though, Hawke was no doubt feeling less smug. The U.S. Supreme Court concluded that the OCC had been wrong and had had no right to block a state trying to enforce its own law. An unusual coalition had formed behind this ruling, with Antonin Scalia writing for the majority in an opinion that also had the consent of the Court's four more liberal justices.

The alarms, meanwhile, continued to ring, even as most people in power chose to ignore them.

Twelve.

Public Enemy Number One DURHAM, NORTH CAROLINA, AND WASHINGTON, D.C.,.

20022006 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 sc.r.a.ppy, 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 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 THE PIT BULL OF PUBLIC RELATIONS-that was the headline BusinessWeek 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. 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 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 pa.s.sed 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 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 pa.s.sed 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 Post, she basically ranted at me, 'I'm not giving you slime-b.a.l.l.s 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 shtetl with next to nothing. He left a pair of successful jewelry stores to his heirs but Schlein wishes his grandfather had been a p.a.w.nbroker. "It was totally random, him getting into the jewelry business," Schlein explained. And p.a.w.n 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 with next to nothing. He left a pair of successful jewelry stores to his heirs but Schlein wishes his grandfather had been a p.a.w.nbroker. "It was totally random, him getting into the jewelry business," Schlein explained. And p.a.w.n 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 New York Times or or Wall Street Journal 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 gla.s.ses. 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 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." 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 compet.i.tor 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 antic.i.p.ation loans, even the humble corner p.a.w.nbroker: 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 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 a.s.signed. 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 a.s.signed.