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
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
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
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.”
Allan Jones wasn’t seeking to launch an industry in the spring of 1993 as he sat in the cockpit of his single-engine Piper Saratoga on his way to Johnson City, Tennessee. He only wanted to convince a man to come to work for him.
Jones was still in his early twenties when he took over his father’s small collection agency and built it into a multi-city behemoth—“the largest in Tennessee,” he’ll tell you—but it gnawed at him that he had no presence in the northeast corner of the state. “My final plug on the map,” Jones recalled in a marbly Tennessee drawl. So when he heard that an old friend of his father’s who lived up that way had been let go after years in the business, Jones jumped on the opportunity. He lives in Cleveland, Tennessee, a rural outpost thirty miles north of Chattanooga. He told Steve Hixson, a childhood friend whom he calls “Doughball,” to meet him at the small airport where he kept his plane. “We’re gonna see ol’ James Eaton and see if we can’t get him to come work for us,” he told Hixson.
Hixson and Jones told me the story after work one day. We were at the bar of the Bald Headed Bistro, a restaurant that Jones opened a one-minute walk from his office. Jones, who has made a couple hundred million from the payday business, was sipping what he calls a “Scotch slushie”—the single malt he drinks over crushed ice
