“To think that a bunch of people who don’t know the first thing about business or how we operate just ups one day and says they’ve changed their minds, ‘We’re not going to let you do business here anymore, we’re going to put all these people out of work,’” Jones said. Was it any wonder, then, that Jones, Webster, the Davis brothers, and several others kept operating in North Carolina even after the enabling legislation expired?
The payday lenders would lose that battle as well—eventually. They tried to talk to the new attorney general, Roy Cooper, but it was their bad luck that he was the former Senate majority leader who had proven so critical to passage of the predatory mortgage bill back in 1999. “He did everything he could,” Jones said of Cooper, “to make sure no matter what we tried, we couldn’t make a go of it as a business there.” Cooper’s office sued, as did the state’s Division of Banking. Advance America operated for another four years before they were finally ousted from the state, and Check Into Cash, Check ’n Go, and a third company called First American Cash Advance lasted for nearly five years. That trio would pay a collective $700,000 in fines but only after collecting multiple millions in fees in the intervening years.
Defeat in North Carolina had been a bitter pill for the payday lenders to swallow, but practically speaking it had not proven much of a setback. North Carolina had been a good market, not a great one, and there was still plenty of room for growth. At that point there were perhaps ten thousand paycheck advance stores in the country and analysts were saying the country could handle more than twice that many. “We probably should have taken [Eakes] more seriously earlier on,” Webster said, “but we also were growing our businesses and looking for better ways to compete.”
Federal bureaucrats had refused to intervene to stop Citigroup’s acquisition of Associates but the lender did not fall off the regulatory radar screens entirely. Eighteen months after Citi was permitted to acquire Associates, the FTC took action. Citigroup might have hoped they could acknowledge Associates’ past abuses and quietly pay a modest fine, but the FTC was seeking a settlement in the hundreds of millions of dollars. Citi balked at the cost, negotiations stalled, and the agency filed suit, naming not only Associates in its complaint but also Citigroup and CitiFinancial.
The lawsuit was probably an FTC negotiating tactic. If so, it was a particularly effective one. The
“What had made the alleged practices more egregious is that they primarily victimized consumers who were the most vulnerable—hard working homeowners who had to borrow to meet emergency needs and often had no other access to capital,” Jodie Bernstein, the director of the FTC’s consumer protection bureau, told the
Citigroup held its annual shareholders meeting one month later. At his behest, a group that owned large positions in Citigroup, including Warren Buffett and Bill Gates, Sr., invited Eakes to present a resolution on their behalf that, if passed, would link Weill’s compensation to Citi’s record on social responsibility. Eakes flew to New York to confront the CEO directly and see if he might be able to increase the pressure on Citigroup at a time when it might already be reeling from negative press.
The meeting was held in Carnegie Hall. Eakes’s first shock was the stagecraft of the day. “Little plebeians like me,” Eakes said, lined up in the hall’s center aisle, awaiting their turn at the microphone. The theater was dark so that each presenter was a disembodied voice over a PA system. Weill, meanwhile, stood center stage, a spotlight trained on him, “as if he were God himself,” Eakes recalled. Eakes refused to be intimidated. Citigroup, he said when his turn came, had “steadfastly refused” to adopt standards of responsible lending. The company had “aggressively opposed” legislative efforts to rein in predatory lenders. And then he turned up the heat on Weill himself. “Any CEO who will cheat his customers,” Eakes boomed, “will eventually cheat and lie to his shareholders.” Eakes claimed that his remarks won him an ovation from the crowd, but if so, that was about all he got. The resolution was soundly defeated.
It may have been easy to dismiss Eakes or any dissident shareholder. No one usually pays much attention to what goes on at a company’s annual meeting, especially back then. But Citigroup was a large consumer company whose caretakers were skittish about more negative press, a fact driven home for Jim McCarthy in Dayton when he lost his temper with a roomful of Citi lawyers while trying to negotiate on behalf of a client he believed had been trapped in a predatory loan.
McCarthy didn’t hesitate when I asked him to name those he considered the worst subprime lenders operating in Dayton. “CitiFinancial has to be at or near the top of my list,” he blurted. In part that was due to the volume of loans CitiFinancial wrote and the terms of those deals. But McCarthy confessed he felt a special enmity for the New York–based giant in no small part because of the attitude of the Citi lawyers he mixed it up with while attending mediation sessions on behalf of people about to lose a home. “They were so damn arrogant and condescending,” McCarthy said. He and his allies were activists and couldn’t possibly understand how a business works. “And because we didn’t understand, that’s why we were asking for these ridiculous things like a reasonable interest rate that might actually let the people stay in their home and continue to pay on a mortgage.” Citi would send eight or nine people to every mediation session, McCarthy said, “and then they wouldn’t offer a thing.”
By that point McCarthy was spending his days listening to old people frightened about losing homes they had owned for thirty years, angry at themselves for making the mistake of walking into the wrong office door. His pent- up frustration and anger boiled over during a meeting on behalf of several CitiFinancial customers. “I’m telling them, ‘I’ll get in front of the television cameras and just blast you for what you’re doing to these people. I’ll put them in front of the camera so they can tell everyone what you did to them. I’ll bully you in every way we can think of in front of the media.’” McCarthy had no idea whether he could back up any of these threats, but to his amazement, the gambit worked. Citi agreed to write off the loans, essentially letting the three borrowers off the hook. “These were the early days of all this stuff,” McCarthy said with a laugh, “so it was still possible to talk about hurting the reputation of one of these lenders.”
Citi followed with other concessions aimed at appeasing its critics, including the announcement in June 2001, ten months after its purchase of Associates and six months after the FTC announced its suit, that it was phasing out its single-premium credit insurance product. It would continue to sell credit insurance, Citi said, but it would be sold separately from the mortgage and be paid for with regular premiums through the life of the policy. Perhaps Citigroup was motivated by a sense of moral responsibility but an alternative explanation was that the financial giant wanted to avoid additional criticism. The Democrats had recently taken control of the Senate, and Paul Sarbanes, the new chairman of the Finance Committee, had just announced that he would hold hearings to look deeper into predatory lending.
Another year would pass before Citigroup agreed to pay $215 million to settle its suit with the FTC. At the time it stood as the largest consumer protection settlement in FTC history. Citigroup also agreed to pay up to $20 million to settle an investigation into Associates that Attorney General Roy Cooper of North Carolina initiated shortly after he took office.
Citigroup would set another record in 2004, when the Federal Reserve hit the company with a $70 million penalty—the largest fine the Fed had ever imposed for a consumer lending violation. This wasn’t for misdeeds committed by Associates pre-Citigroup but for newer improprieties that dated back to 2001. CitiFinancial, the Fed claimed, was routinely converting personal loans into equity loans secured by a person’s home without regard to a borrower’s ability to pay. The Fed also charged CitiFinancial with trying to mislead regulators once they started to investigate.
Eakes, meanwhile, had never stopped trying to convince Citigroup to change. In May 2005, five years after Citi announced it was acquiring Associates, Eakes stood at a podium and publicly praised Citigroup. The company had finally agreed to drop a clause from its subprime contracts requiring borrowers to agree to mandatory
