Eakes never did so but it was Eakes who had been an inspiration for many and Eakes who served as the pied piper for responsible subprime lending. “Martin has to take some of the blame for giving credence to this notion that the best or only way to serve lower-income households is to charge them more,” Loftin said. From his perspective, the real shame of it was that all the energies of a group as talented and creative as Self-Help went into the development and growth of the subprime home loan.
Loftin trained as community organizer, and seems to have a preternatural ability to pose the kind of fundamental questions that get you thinking differently about an issue that had been settled in your mind. “Risk- based pricing” is supposed to be one of the great innovations in finance. Where in the old days, only those with good credit could secure a loan, risk-based pricing meant the extension of credit to everyone—so long as you’re willing to pay more to cover the greater risk in lending money to you. “The underlying logic of subprime mortgages and payday loans is the same: that the only way to expand credit to minorities and lower-income people is to dumb-down credit standards and charge them more for the added risk,” Loftin said. “But there are other tools in the box”—including financial literacy. “No one is born with poor credit,” he continued, “and teaching people how to manage their finances is a tool that has proven itself to work and to work over the long haul.” But it’s easier and quicker to charge people more than to go through the hard work of teaching people good habits.
“To the extent that ‘responsible subprime lenders,’ including Martin, gave credence to the notion that the best or only way to serve lower-income households is to charge them more, they have to take some of the blame for what happened,” Loftin said.
Mortgage brokers need to make a living. All those former subprime salesmen need to put food on the table—and who better to help a distressed borrower negotiate a loan modification than those who proved so adept at negotiating the tricky shoals of this world in the first place? The
But whether those borrowers are any better off after paying a fee of up to $3,500 for help is another question. By mid-2009, the Better Business Bureau was receiving hundreds of complaints about FedMod and similar companies. FedMod’s managing partner confessed to Goodman that the business had largely been a bust as far as rescuing people but, he claimed, it wasn’t for a lack of trying. But there were reasons to doubt his sincerity, starting with the former FedMod salesman who told Goodman he wanted to talk with him because he felt so bad about the small part he had played in a business he considered unethical: “Our job was to get the money in and then we’re done. But I never saw one client come out of it with a successful loan modification.” In April 2009, the FTC sued FedMod, charging that they often did little or nothing to help their customers. The FTC sent warning letters to another seventy-one similar companies and ended up filing charges against at least seven of them.
The problem with reporting on the poverty business is that it’s so broad and multifaceted. There are newfangled businesses like FedMod and old standbys experiencing a resurgence in hard economic times: debt collectors and those in the debt consolidation business (“Bill collectors got you down? Find yourself in debt? We can help.”) and their close cousins, companies promising people a higher FICO score—for a fee, of course. Boosting a credit score is not hard to do, at least temporarily. You challenge every ding on a person’s credit report; some are suspended while the dispute is investigated, and meanwhile a person’s credit score goes up. The problem is that it plummets back down a couple of months later when all the black marks are returned to a person’s credit record— but now they’re worse off because they just wasted $500 on a bit of financial cosmetic surgery.
There are any number of strange but seemingly lucrative splinters that are part of the poverty industry. There are those in the business of buying large legal settlements from those who otherwise would be paid in monthly or annual payments (one, Peachtree Financial, tells potential customers that it “helps people who are holding structured settlements or annuity products enjoy the benefits of receiving their money faster”) and also the lucrative world of subprime student loans. As recently as ten years ago, most college kids received low-cost, federally guaranteed student loans with interest rates in the 6–8 percent range. But the private lenders moved in with products that included 10 percent origination fees and interest rates as high as 15 or 18 percent. A report put together by investigators for the Congressional Committee on Education and by Andrew Cuomo, New York’s attorney general, found “troubling, deceptive, and often illegal practices” among these lenders.
The auto title loan is confined mainly to the South and is tiny compared to the payday sector. But it’s still a half-a-billion-dollar-a-year business and so controversial that even Allan Jones and Billy Webster question the morality of this product that lets people risk their car when they feel trapped and in desperate need of a short-term loan. Similarly, rent-to-own. “It’s an awful business,” Clay Taber, an Aaron’s franchisee from 2003 to 2008, told me. Taber, unlike most other entrepreneurs I would speak with, doesn’t pretend there was anything noble about this idea of renting people their televisions and dining room sets by the month. “I was looking at this as an annuitized income,” he confessed—a reliable source of easy money for him and a group of investors he had put together. But he ended up the slumlord who thought life would be as easy as cashing checks once a month—except he forgot to factor in that it might bother him seeing the way people lived.
“You go hang flyers at public housing projects but these people have never been trained to pay bills,” Taber said. “You tell them, ‘You give me $100 and that TV will be in your house later today.’ That’s your hook.” But that $100 was still a big hurdle for some so he and his people did as the corporate office suggested, Taber said, and ran “99 cents” sales. “The basic idea is for only a dollar, you get the item in their house, and then you’d just hammer them with payments for twenty-four months,” he said. He would occasionally call the home office for advice. “Basically their attitude was ‘You do whatever you have to do to get your money.’” Taber described himself as so disgusted by his experience running three stores in Canada that he has sued the company. Maybe most frightening is that by all accounts, the rent-to-own business had already cleaned itself up by the time Taber became a franchisee.
At around the same time the payday lenders hired Steven Schlein and his firm to try to dress up the image of the industry, Allan Jones decided it was time to hedge his bets. He knew nothing about selling cars but he certainly knew the poverty industry, and so in 2005 he took the plunge into the used car business by opening several lots in and around Cleveland. A year or so later, he opened the first of two pawnshops.
Jones told me he hated the used car business. He did it in part to help the man who had married his daughter and it only brought headaches from day one. “It’s really the collections business,” Jones said. “A lot of these people have weekly payments so you need to be on them after every paycheck.” It’s even more labor intensive than payday, he said. “These people, they don’t send in their checks, they stop by the lot on their way someplace,” Jones said. “So you have to stop whatever you’re doing, call up the file, and mark their payments.” Under Tennessee law, he can charge an interest rate of 21 percent, but that’s too low, he complained, given the customers he deals with. He estimated that one in four loans were past due, and invariably a portion of those were going to be written off as losses.
“I might give ’em to you for free if you’ll take ’em off my hands,” he told me in a woe-is-me voice that had become familiar. “They ain’t worth nothing.” Earlier in his career, Jerry Robinson had run Just Right Auto Sales, a ten-lot used auto business. Everyone needs a car, Robinson said when I visited him in Atlanta, and in hard economic times “this will be a fabulous business for the next five years.” When I mentioned this to Jones, he responded by calling Robinson “an idiot.”
Pawnshops, though, had been a different story entirely. He had always looked at pawn, he said, as a “lower- class business,” but then Cash America, the pawn giant, made an offer for Check Into Cash and he opened his eyes. He ended up saying no to them but the experience taught him that he was missing a big opportunity to make a lot of money.
“The rule of thumb with pawn is you pledge three times collateral,” he said. So if one of his clerks thinks they can sell a flat-screen TV for $300, they will loan that person $100. That borrower pays a little more than $20 a month in interest on that $100 (Tennessee allows pawnshops to charge a 256 percent APR); meanwhile, the pawned item remains in the shop’s back room as long as that customer keeps current with his or her loan. If that customer can’t repay the loan or decides not to, the shop puts the item up for sale. “I make money if they can pay off the loan,” Jones said. “I make money if they can’t pay off the loan.” At the start of 2009, he was operating two U.S. Pawn shops and was looking to open more. He only wished that it hadn’t taken him so long to recognize the
