Broke USA Part 4

In the end, though, the sheer size of a.s.sociates left the Self-Help executive team feeling they had no choice. a.s.sociates had started its life nearly a century earlier as an auto finance company aimed at helping people buy a Model T. Where Self-Help had a half dozen offices around the state and had made around five hundred home loans in North Carolina in 1998, a.s.sociates had eighty storefronts scattered around North Carolina making or buying thousands of home loans each year. Self-Help relied largely on word of mouth and a network of nonprofits; a.s.sociates had Terry Bradshaw, the former football great, pitching its loans on television and booming, "We make loans that make life better!" At Self-Help they felt like they were really something when in the late 1990s they were making more than $25 million in home loans each year. When, in 1998, Ford spun off a.s.sociates First Capital, as its subprime lending unit was called, through an initial public offering, it was generating nearly $1 billion a year in profits.

"It really hit us in the face," Mike Calhoun said. "We recognized that if we don't do something about predatory lending, we're kidding ourselves that we're really achieving something by putting people in homes." This organization that had always viewed its core mission as helping families build wealth had come to the conclusion that it was equally as important to help families protect the wealth they had already attained. The solution, as they saw it, was for North Carolina to become the first state in the country to pa.s.s an antipredatory lending bill aimed at reining in the most audacious practices of its subprime lenders.

In downtown Durham, an activist named Peter Skillern heard from Martin Eakes and told himself that it was about time. For years, Skillern, the executive director of the Community Reinvestment a.s.sociation of North Carolina, or CRA-NC, had been organizing protests against subprime lenders at home and in Was.h.i.+ngton. He had even been known to don a rubber shark's nose to underscore his point that these lenders were a dangerous breed to avoid. Skillern admired Eakes and all that he had accomplished but Self-Help had declined to take part in CRA-NC's actions. "Martin is a remarkably effective leader," Skillern told me when I visited with him in Durham-but that only made Eakes's lack of engagement in the fight that much more maddening.

Skillern's bete noire wasn't a.s.sociates but a lender much closer to home, NationsBank, based in Charlotte. To him, NationsBank, one of the country's largest, offered a stark example of what he saw as the country's "parallel banking system." "It's like NationsBank has two doors, side by side," Skillern told me. If you were white, middle cla.s.s, and had good credit, you were ushered into one door. If you were low-income and had imperfect credit, you were shuffled into the door for either NationsCredit or EquiCredit, Nation's two subprime subsidiaries. And if you were black your economic cla.s.s or FICO score didn't seem to matter; according to studies, you were far more likely to end up with one of the subprime lenders and one of their high-interest loans just by virtue of the color of your skin. The subprime lenders claimed they needed to charge higher interest rates and steeper fees to offset the increased risk they were taking with subprime borrowers but Skillern thought that was bunk. The big consumer finance companies, Forbes Forbes reported in 1997, were enjoying returns as much as six times greater than those of the best-managed banks. Neither NationsCredit nor EquiCredit was nearly as large as a.s.sociates, but by the late 1990s the two units were generating around $400 million in profits each year. reported in 1997, were enjoying returns as much as six times greater than those of the best-managed banks. Neither NationsCredit nor EquiCredit was nearly as large as a.s.sociates, but by the late 1990s the two units were generating around $400 million in profits each year.

Skillern would prove to be one important Eakes ally against a.s.sociates, Bill Brennan in Atlanta another. Eakes could rely on Rogers to help put a human face on predatory lending and there were others from among the fifty people who had complained about a.s.sociates to the state authorities over the previous year. Brennan, however, provided video, much of it starring Bill Brennan and all of it powerful. Brennan had played a key role in the making of the Primetime Live Primetime Live episode, providing some of the piece's rhetorical fire (he described Ford Motor as "the worst predatory lender in the country") and also its heart. It was Brennan who pointed a producer to the couple who would give the expose its emotional anchor, the Iveys of Atlanta, who almost lost their home of twenty-five years after a broker with a.s.sociates talked them into consolidating some credit card bills in a preposterously expensive home equity loan that included 24 percent in up-front charges and a payment schedule this couple of modest means couldn't possibly afford. episode, providing some of the piece's rhetorical fire (he described Ford Motor as "the worst predatory lender in the country") and also its heart. It was Brennan who pointed a producer to the couple who would give the expose its emotional anchor, the Iveys of Atlanta, who almost lost their home of twenty-five years after a broker with a.s.sociates talked them into consolidating some credit card bills in a preposterously expensive home equity loan that included 24 percent in up-front charges and a payment schedule this couple of modest means couldn't possibly afford.

Then there were all those television pieces Brennan was able to orchestrate in the Atlanta area using his local contacts. Abusive and predatory loans weren't necessarily illegal, and so when he was getting nowhere with a case, he would give a heads-up to a friendly TV reporter. In short order, a story would air about an elderly black woman living on meager means who had been ruined by a.s.sociates, or the short-order cook with diabetes who struggled to stand on his feet all day, or the hardworking couple with two young children, and there would be Brennan, eyes moist, bathing the viewer in sincerity, decrying the terrible injustice that had been done. With the heat turned up high, negotiations would commence and an accord would be reached contingent upon everyone's future silence. Brennan's friends dubbed it the "media-induced settlement." Brennan copied several of these local broadcasts onto a video and, along with the Primetime Live Primetime Live piece and a few other choice offerings (including snippets of depositions with two former a.s.sociates employees, who spoke of the lengths they would go to lard deals with expensive extras), sent it along to Self-Help. piece and a few other choice offerings (including snippets of depositions with two former a.s.sociates employees, who spoke of the lengths they would go to lard deals with expensive extras), sent it along to Self-Help.

In the hands of most advocates, Brennan's tape would have been a useful tool. In the hands of Martin Eakes it took on a life of its own. Inside Self-Help they made jokes about what they called Eakes's "teletubby"-the stout combination TV-VCR that the boss brought with him everywhere during the months they were lobbying for an antipredatory lending law in Raleigh. There were fifty state senators in North Carolina and 120 members of the state a.s.sembly and Eakes, intent on showing the tape to every last one of them, rolled his teletubby door-to-door in the manner of an old-fas.h.i.+oned vacuum cleaner salesman. If a receptionist or some other staffer was reluctant to allow him inside to see a legislator, he would show it to that person, hoping after viewing it he or she would feel compelled to pa.s.s the tape he left behind on to their boss. One news account had Self-Help distributing seven thousand copies of the videotape around the state. By that time, Eakes had testified no fewer than eight times in favor of an antipredatory lending bill. "People say I work hard," Mike Calhoun said, "but he put me to shame in that fight." The initiative was supported by a group calling itself the Coalition for Responsible Lending. The coalition included such mainstream advocacy groups as the NAACP and AARP but the political establishment in Raleigh could be forgiven for thinking this legislative battle was brought to them and sponsored by Martin Eakes and the people of Self-Help.

Calhoun, whom Bill Brennan described as "the smartest lawyer I've ever worked with," was the resident expert on consumer law within Self-Help, so it fell to him to type out a draft of the legislation. ("You're not going to see a lot of clerical staff at Self-Help," Calhoun sighed.) The aim of the bill was to impose limits on what a subprime lender could charge its customers. Roy Cooper, the senate majority leader and a Democrat, agreed to sponsor the bill. "We were beginning to see complaints filed by consumers and we began to hear concerns voiced by lawyers seeing these unfair terms at closings," said Cooper, who had been elected to his second term as North Carolina attorney general by the time I visited him in the fall of 2008. "So we realized we needed to put some bright-line limits on the amount of charges a.s.sociated with the loans." Years later Cooper still remembered Freddie Rogers-not just his name but also his exact hourly wage and other details of his case.

Initially a long list of senators joined Cooper as co-sponsors, but after the lobbyists weighed in, Cooper ended up as its sole sponsor in the Senate. "North Carolina is the second-largest banking state in the country, so the banking industry is a significant economic engine here," Cooper said. "They had a significant influence over the legislature and government process." The key was to bring the banks around, or at least convince them to remain on the sidelines. That would be no easy task given the hundreds of millions in profits a local giant like NationsBank was booking selling subprime loans.

A year after the predatory lending fight was over, Eakes asked Keith Corbett, an executive at North Carolina Mutual, the nation's oldest black-owned insurance company, to join them at Self-Help. "We don't pay a lot in salary," Eakes told Corbett. "But if we see someone who's been mistreated, we're willing to spend two to three million dollars to right that wrong." Corbett was sold. year after the predatory lending fight was over, Eakes asked Keith Corbett, an executive at North Carolina Mutual, the nation's oldest black-owned insurance company, to join them at Self-Help. "We don't pay a lot in salary," Eakes told Corbett. "But if we see someone who's been mistreated, we're willing to spend two to three million dollars to right that wrong." Corbett was sold.

That's exactly what happened in the case of Freddie Rogers. Mike Calhoun was among those working out an out-of-court settlement with a.s.sociates that allowed Rogers to refinance with Self-Help under terms he could afford. A few years later, a developer seeking to gentrify Rogers's neighborhood paid him a substantial bounty for his home. By that time he had remarried.

Over the years Eakes had made his share of political enemies in Raleigh. "Imam" or "ayatollah" were among the less flattering nicknames given to him inside the state capitol by those resenting his sermonizing and righteousness, but there was also no denying his effectiveness. "He got along with a lot of my Republican colleagues, maybe better than I did," Wib Gulley said. To his activist allies he might have been the accidental banker who was still one of their own, but for political purposes he was a subprime mortgage banker horrified by the lending practices of some of his more unscrupulous rivals. He was also a man on a first-name basis with the CEOs of some of the state's largest lending inst.i.tutions. He made the same pitch to each: The bad practices of the worst subprime lenders hurt the reputations of all in the mortgage business. Eventually even the North Carolina Bankers a.s.sociation supported the reform bill. "That was Martin," Roy Cooper said. "Working and working and working to bring the industry into the fold."

The political fighting over the antipredatory lending bill raged for the better part of a year. The bill was modified, for instance, to allow a lender to charge a borrower as much as 5 percent in up-front fees. "If your parents paid five points on a loan, you wouldn't be very happy," Calhoun said. But the legislation banned prepayment penalties on any mortgage less than $150,000 and made it illegal to roll into a loan the cost of credit insurance (credit insurance itself, with separate monthly payments, was still legal). Lenders could charge interest rates well above the rates enjoyed by prime customers but anyone wanting to sign a deal that would have them pay rates more than ten percentage points higher than a Treasury bill would be required to meet with a credit counselor. The bill was signed into law in July 1999.

Even with its limitations, consumer advocates hailed the law as a significant breakthrough. Inside Self-Help's offices, the phone was now ringing with activists from places such as New Jersey, Chicago, and Dayton eager to pa.s.s something similar in their locale. "Initially we thought we pa.s.sed this predatory lending bill, okay, good, we're done, now we can go back to our day jobs," said Mark Pearce. "But people wanted to know how we did it, especially as North Carolina wasn't exactly seen as the most liberal, consumer-friendly state in the country."

Six.

The Great Payday Land Rush SPARTANBURG, SOUTH CAROLINA, THE LATE 1990s 1990s Allan Jones parks in front of his old office building and a sly smile appears on his face, like someone antic.i.p.ating the punch line of a favorite joke. He points his chin at a drab, low-slung cement bunker of a structure sitting in the corner of a shopping center parking lot. This is where he played host, he tells me, when all those investment bankers flew south to see him in the late 1990s to talk about taking Check Into Cash public. They would arrive dressed in Bill Bla.s.s and Brooks Brothers and Armani. He would be wearing an off-the-rack suit he bought at a discount place in town. He would then usher them into his "conference room"-maybe ten metal chairs around a banged-up, folding banquet table-where he would make his presentation. Check Into Cash's revenues were on pace to more than double in 1998; its profit margins were well above 20 percent. At that point, Jones said, they could have cared less had he been naked and standing in a cave: "Them numbers are all they ever noticed," he said.

CIBC Oppenheimer agreed to serve as the lead underwriter on Check Into Cash's IPO. CIBC wasn't Goldman or Morgan but it was a large bank, respectable and legitimate. He even got to New York and rode the subway, where he saw a man with a hairdo he later learned was called a Mohawk. For months he entertained Doughball and the rest of the boys with stories about life up north. I must have arrived, he would say mockingly, because now I have me a real-life lawyer with a Park Avenue address.

Jones claims to have been relieved rather than disappointed when CIBC put the IPO on hold. They told him it was temporary, a short-term setback while the market recovered from a financial crisis everyone was calling the Asian flu, but the compet.i.tion was heating up and he was anxious for his money. In Cleveland (Ohio), an old-time bank called National City was awakening to the profit potential of subprime and he convinced officials there to loan him the $50 million he had planned to raise through a public offering. The IPO would have meant $50 million in the bank while borrowing from NatCity meant paying back the loan with interest, but remaining private had its own rewards. He was not a man who liked answering to anyone but himself.

"We have board meetings at Check Into Cash," Jones likes to joke, "but I win every vote one to nothing." He mentioned a compet.i.tor named Billy Webster, whose company, Advance America, has traded shares on the New York Stock Exchange since 2004. "How much of his company does Billy own?" Jones asked. "How much of my company do I own? Go ask Billy and I'll bet he'll tell you: His shareholder meetings are a lot longer than mine."

William M. Webster II lost everything during the Depression. His son, William M. Webster III, started from scratch, turning a single gas station in Greenville, South Carolina, into a modest-sized empire of twenty stations that he would sell to Marathon Oil in the 1970s at a handsome profit. Yet in the eyes of his son, William M. Webster IV, whom everyone called Billy, his father could have accomplished so much more. Billy Webster spent a good part of his teen years working for his old man, pumping gas and thinking how he would be different. His father had inherited his grandfather's skittishness and worry about taking risks. He vowed that would never be him.

While he was still in college Billy Webster bought a laundry and charged other students a fee to wash their clothes. A Fulbright scholars.h.i.+p took him to Germany to spend a year studying Romantic poetry, but it was while he was studying law at the University of Virginia that his father started talking about the long lines of people queuing up at the Bojangles chicken shack near one of his old gas stations. That spelled the end of his legal career. "I graduated law school on a Sat.u.r.day and Monday night I'm in the back of a Bojangles, learning how to fry chicken, being taught by a sixteen-year-old black guy from Frogmore, South Carolina," Webster said. Ten years later, Webster and his father sold their holdings back to Bojangles; the pair were operating two dozen stores generating a combined $24 million in annual sales. By almost any standard, though not his own, Billy Webster was a rich man.

For a time Webster got into politics. Again his father proved the catalyst. He had grown up with d.i.c.k Riley, who would serve two terms as South Carolina's governor (the elder Webster had served as chairman of Riley's first political campaign). Riley introduced Billy Webster to Bill Clinton, and when the new president appointed Riley to serve as education secretary, Riley brought Webster to Was.h.i.+ngton to serve as his chief of staff. Webster resigned after two years, intent on returning to the private sector, but then Clinton invited him for a run around the Mall. My scheduling office is a mess, the president told him, and I think you're the man to help me straighten it out. So Webster spent one more year in Was.h.i.+ngton before returning to South Carolina to figure out what he would do next.

"I'm not an engineer," Webster told himself. "I'm not a software guy." It was the mid-1990s but starting a technology company was out. This man who had made his money selling fried chicken and was.h.i.+ng other people's clothes reminded himself to keep it simple. He thought of his father's friend, George Dean Johnson, Jr. He had gotten into the garbage collection business before selling it to Waste Management and then jumped into the video rentals market, opening more than two hundred Blockbuster stores before selling them back to the parent company for $156 million. The key was to find a field before it came under the control of its Blockbuster or Home Depot and then aggressively attack it with money, MBAs, and an all-or-nothing aggressiveness.

Webster went to visit Johnson, who by that time had moved back home to Spartanburg. Johnson, who had served three terms in the South Carolina legislature when he was younger (the first as a Democrat, the second as a Republican, the third as a declared Independent), was already on to his next business, Extended Stay Hotels, but he told Webster he would be happy to provide him with financial backing. You find a business that you think you can run, he told him, and I'll take care of the money.

Webster mulled a return to the food business. He contemplated starting an automotive supplies company and thought about creating a compet.i.tor to the Sylvan Learning centers. Sometimes he would drive around town looking for businesses that had lines of people wanting to buy what they were selling. The idea for getting into the payday lending business came when George Johnson suggested Webster go talk to someone at Stephens, Inc., a boutique investment bank based in Little Rock, Arkansas, that had staked out the "specialty finance" sector as its own. There Webster spoke to a junior banker gung-ho about the moneymaking potential of the cash advance business. It was Jerry Robinson, who had moved to Tennessee to help Toby McKenzie take his rent-to-own company public but ended up helping him get into payday loans. We have a relations.h.i.+p with one of the industry's top players, Robinson told Webster. He'd be happy to make the introductions.

Webster didn't know what to think about payday when he first heard about the idea in 1996. He was intrigued, though, so he flew to Tennessee to spend the day parked outside one of McKenzie's stores. He was struck by the sheer number of people visiting this one small outpost on the outskirts of Cleveland and asked Robinson to approach McKenzie about letting him see the operations from the inside. If that first trip to Tennessee left him eager to learn more, then the three weeks Webster worked the counter at a National Cash Advance storefront convinced him he had found what he was searching for. "I didn't see an unhappy human being in my three weeks working there," Webster said.

Back home Webster worked the phone. There were budding chains of 100 or 200 stores, he discovered, "but there was no dominant national player who could leverage efficiencies over hundreds and hundreds, if not thousands and thousands of operating units." Those who had arrived before him in these low-rent credit fields hardly struck him as invincible. Jones and McKenzie, from what he could tell, were payday's "Hatfields and McCoys," two men with high school degrees building their businesses with one eye on the other and by the seats of their pants. In Cincinnati, the Davis brothers, with access to their father's connections and his millions, could prove a more formidable team but already Webster was picking up reports of strife inside the family. "It didn't take too much to figure out everyone was distracted," said Webster, who then dryly added that "distracted" is "an understatement." The opportunity seemed that much more bright given the sorry state of the typical payday outlet-"storefronts with a hole cut in the wall," he said.

It didn't take much effort for Webster to sell George Johnson on the idea, nothing more than two lines on a piece of paper. One line was the cost of a payday loan and the other depicted the rising costs of a bounced check or credit card late fee. "When those lines crossed," Webster explained for Johnson, when the penalties a bank charged started costing more than these short-term quick loans, "the industry just grew and grew and grew." Both put up money (Johnson invested the lion's share) to start a company they called Advance America. Using their connections, the pair secured sizable lines of credit at Wells Fargo, Wachovia, and NationsBank. "We basically borrowed forty or fifty million dollars before we made anything," Webster said. "We had an infrastructure for five hundred stores before we had even one."

Advance America opened 300 stores in 1997 and then opened another 400 the next year. In 1999, Webster started calling compet.i.tors to see who might be interested in selling. Jones turned him down, LBJ-style, while soaking naked in a tub in a summer home he owned outside Cleveland, but McKenzie jumped at the chance, selling to Advance America for $150 million. Advance America opened 300 more stores in 1999 on top of the 450 or so they had bought from McKenzie. By the start of 2000, Advance America was operating more than 1,400 stores, including 250 in California, 150 in Florida, and another 120 in Ohio, each looking identical.

In the early days, payday could sometimes seem like something out of a Quentin Tarantino film rather than a burgeoning industry. Those touting the business had been excited when the Wall Street Journal Wall Street Journal sent a reporter to Tennessee to do one of the first big profiles of payday lending-and then Jones hooked up the guy with a store manager who, when asked if he was worried about people paying him back, pointed over his shoulder to the baseball bat he kept prominently displayed behind the counter and said, "I like to call that an att.i.tude adjustor." McKenzie could be even more of a loose cannon. When an Indiana legislator floated a bill that would have lowered the rates lenders could charge (back then, at least, Indiana allowed lenders to charge as much as $33 for every $100 they loaned out), McKenzie rushed north to lend a hand-and then handed his foes a fat gift when he was caught boasting in front of a meeting of his employees that "I've never seen a legislator I couldn't buy." The jobs of all those working to promote payday would be easier with George Johnson, a former state legislator, and Billy Webster, the friend of a sitting president, atop the industry's largest company. "You would hear people say, 'Payday can't be too bad if Billy Webster is involved,'" Martin Eakes said. sent a reporter to Tennessee to do one of the first big profiles of payday lending-and then Jones hooked up the guy with a store manager who, when asked if he was worried about people paying him back, pointed over his shoulder to the baseball bat he kept prominently displayed behind the counter and said, "I like to call that an att.i.tude adjustor." McKenzie could be even more of a loose cannon. When an Indiana legislator floated a bill that would have lowered the rates lenders could charge (back then, at least, Indiana allowed lenders to charge as much as $33 for every $100 they loaned out), McKenzie rushed north to lend a hand-and then handed his foes a fat gift when he was caught boasting in front of a meeting of his employees that "I've never seen a legislator I couldn't buy." The jobs of all those working to promote payday would be easier with George Johnson, a former state legislator, and Billy Webster, the friend of a sitting president, atop the industry's largest company. "You would hear people say, 'Payday can't be too bad if Billy Webster is involved,'" Martin Eakes said.

"You don't normally want compet.i.tion," Jared Davis said, "but in this case, we think Billy's been a big help to the industry. From a lobbying perspective. From a legitimacy perspective."

For a year or two it was enough for Advance America to build in states where others had gone before them but a company that ambitious could play fill-in for only so long. Before the end of that first year Webster was already staffing up a government affairs office. "There was always an overt business objective-to broaden the geography," Webster said. In 1998, South Carolina legislators welcomed payday lenders into their state, as did elected officials in Mississippi, Nevada, and the District of Columbia. By the end of 2000, twenty-three states had legalized payday lending, and the likes of Advance America and Check Into Cash were operating in eight more because there was no law specifically forbidding them from doing so. Where a traditional lender was earning a return on investment of between 13 and 18 percent, Jerry Robinson, the investment banker who had worked for Toby McKenzie before taking a job with Stephens, Inc., told Business Week that the average payday lender was earning an average return of 23.8 percent.

At first reporters scratched their heads over this odd new business. "I don't know how someone who just does payday advance is going to make it," a local check casher told a reporter with the Sacramento Business Journal Sacramento Business Journal who was trying to figure out how a South Carolinabased company had opened twenty stores in the greater Sacramento area in a matter of months. Each would need to attract a "high volume" of customers, the check casher posited, just to cover the rent and labor costs; otherwise more than a few would be closing their doors as suddenly as they had opened them. who was trying to figure out how a South Carolinabased company had opened twenty stores in the greater Sacramento area in a matter of months. Each would need to attract a "high volume" of customers, the check casher posited, just to cover the rent and labor costs; otherwise more than a few would be closing their doors as suddenly as they had opened them.

But quickly a new story line emerged: the payday client who had gotten him or herself into deep financial trouble availing themselves of a product pitched as requiring no credit check. Reporters never seemed to have much trouble finding unhappy customers. Readers of the New York Times New York Times would meet three when the paper turned its attention to the payday loan in 1999, including a thirty-nine-year-old woman named Shari Harris who earned $25,000 a year working computer security in Kokomo, Indiana. Harris had borrowed $150 from the Check Into Cash store near her home after the father of her two children stopped paying child support-six months later she owed $1,900. An a.s.sociated Press article that appeared around the same time featured a woman named Janet Delaney, a $16,000-a-year hospital food worker from Cleveland, Tennessee, who borrowed $200 from a Check Into Cash after falling behind on some bills. One year later, Delaney had paid nearly $1,000 in fees but had yet to pay back the original $200. "I'm just lucky," that same AP article quoted Allan Jones as saying. "I hit on something that's very popular with consumers." would meet three when the paper turned its attention to the payday loan in 1999, including a thirty-nine-year-old woman named Shari Harris who earned $25,000 a year working computer security in Kokomo, Indiana. Harris had borrowed $150 from the Check Into Cash store near her home after the father of her two children stopped paying child support-six months later she owed $1,900. An a.s.sociated Press article that appeared around the same time featured a woman named Janet Delaney, a $16,000-a-year hospital food worker from Cleveland, Tennessee, who borrowed $200 from a Check Into Cash after falling behind on some bills. One year later, Delaney had paid nearly $1,000 in fees but had yet to pay back the original $200. "I'm just lucky," that same AP article quoted Allan Jones as saying. "I hit on something that's very popular with consumers."

One theory offered to explain the immense and sudden popularity of payday loans was that ours is an instant-gratification society where almost anything we desire is only a few clicks away. Others pointed to a society at once comfortable with, and addicted to, debt; in a country where so many middle-cla.s.s people were willing to mortgage the future for a new bathroom or a large flat-screen TV, was it any wonder that those of modest means might likewise avail themselves of these corner lenders? But there were deeper structural reasons for payday lending's popularity, financial in nature rather than cultural, starting with the widening gap between the haves and have-nots. A full-time worker at Walmart, the country's largest private employer, might make $15,000 or $16,000 her first year on the job, and polling showed that nearly one in two Americans was living paycheck to paycheck. The problem was particularly acute among the bottom 40 percent, whose income growth was flat in terms of real dollars throughout the 1990s while the cost of everything from health care, heating oil, and housing soared. For those living on the economic margins, payday offered a simple solution they could squeeze in after work, between the grocery shopping and making dinner for the kids. "Our motto is 'quick, easy, and confidential,'" Jones had told the Wall Street Journal Wall Street Journal. "We can get people in and out in thirty seconds."

Opposition was inevitable, of course. Before Martin Eakes there was Jean Ann Fox at the Consumer Federation of America. Fox's first a.s.sault on what she originally called "delayed deposit check loans," or "check advance loans," was called "The Growth of Legal Loan Sharking." This report, released in 1998, and subsequent ones provided an early chronicle of an industry largely getting its way in state legislatures around the United States. But Fox's main contribution to the debate was adding an element of math. As she read it, the Truth in Lending Act, pa.s.sed in 1968, required any business to express the cost of a loan not only in dollar terms but also as an annual percentage rate, or APR. The $15 per $100 that payday lenders could charge in stricter states like Ohio and Was.h.i.+ngton worked out to an APR of 391 percent. In Arkansas, where payday lenders could charge as much as $21 for every $100 borrowed, the APR was 546 percent, and in Colorado, where the going rate was $25 per $100, 650 percent. Borrowers in Indiana, with its $33 per $100 cap, were paying the equivalent of 858 percent on a two-week loan.

In Spartanburg, Webster tried not to get angry as he read Fox's reports. Instead he flew to Was.h.i.+ngton to meet with her. Webster prides himself on his ability to get along with anyone but he confessed Fox proved the exception. "A person says stuff like 'legalized loan-sharking,'" he said, "and it's hard not to take this stuff very personally." But he had to agree with Fox on at least one point: the need to state the cost of their loans as an annual percentage rate. That was what Advance America's general counsel had concluded after researching the law. Webster could have overruled her, but he figured people didn't care about the APR, they only cared that they could have $300 today and what they would owe in two weeks. And so Advance America, alone among the big chains, started posting its rates not only as a dollar figure but also as an APR.

It bothers Webster when people think there's a taint to the way he's made his money. People don't say anything directly to him, he told me when I visited with him in Spartanburg in early 2009; they are too polite for that. But he hears things secondhand and he always addresses it immediately when it comes up. He prefers to give someone a tour of an Advance America store but, if they're not willing to do that, all he asks for is a bit of their time. "I have to say that virtually to a person, if I have thirty minutes to explain the business to them, they'll let me know that it makes perfect sense: 'I didn't understand that.'"

The hallways of the handsome postmodern brick building that Advance America has built as its headquarters in central Spartanburg are lined with posters that express good feelings in words and images. The self-affirming artwork justifying what everyone inside does for a living seems a staple of the big Poverty, Inc. chains. More typically they are more wholesome and upbeat, leftovers from old advertising campaigns that depict a veritable Rainbow Coalition of handsome, extraordinarily happy young people ("They showed me the money!" the young Latino man with the smoldering brown eyes and thousand-watt smile exclaimed in an ad for a company called Instant Tax Service) but at Advance America, at least in the winter of 2009, they were more playful and droll, a series of small testimonials to some of its archetypal customers. For the postal worker, the payday loan is for when "the mail bag's heavy but your pockets are light." The working mom needs Advance America for "those times when your eyelids weigh a little more than your wallet."

Webster is a slight man, with angular features and a tiny pug nose. Dressed in jeans and running shoes, he bobbed his foot incessantly through our few hours together. Webster had served as chief executive through Advance America's first nine years but several years ago, when he was in his late forties, he stepped down because his wife was sick and he wanted to take care of the couple's four children. He had recently returned, replacing George Johnson as board chairman, but he started by telling me that he had been reluctant to meet with me, despite being back at the helm. It was the APR. "Most journalists stop at the 391 percent interest rate, and the only question is, 'How on earth can you charge so much?'" he said. He had his answers, just like the other payday lenders did when I visited them. But to him, it's a meaningless number-like saying salmon costs $15,980 per ton or advertising a hotel room as costing $36,500 per year. A flat fee is not an interest rate. Webster shakes his head. He had been the first to post the APR and had to confess, "It has been a millstone around our neck ever since."

Webster listed his decision to post the eye-popping, three-digit APRs as one of his "two gross misjudgments." The other was his failure to antic.i.p.ate the hailstorm of criticism that would rain down on the payday lenders. "If there's an irony to all this, it's that we both should have been more politically aware that there was a political dimension to this business," he said of himself and Johnson. "It's hard to imagine but back then there was little controversy about payday lending." Sure, there were companies overly aggressive in their collections and lax about posting their fees. But Advance America, Webster said, was trying to clean things up. They refused to criminally prosecute anyone who failed to pay them back and unilaterally announced that they would give people twenty-four hours to change their mind about a loan. Along with the other big chains, Advance America, in 1999, formed a trade a.s.sociation they called the Community Financial Services a.s.sociation, or CFSA, so they could offer a narrative that might serve as a counterforce to the shock of a three-digit APR. "With a trade a.s.sociation in place," Jared Davis said, "we thought we could actually get back to doing what we do, which is create new jobs and give people access to credit when they need it."

As the 1990s turned into the 2000s, worried payday lenders told themselves to relax. Theirs was a young industry experiencing a bit of turbulence but that was to be expected. The rent-to-own furniture stores had gone through a similar boom period in the late 1980s and early '90s; their brethren in the check-cas.h.i.+ng business had been fighting with regulators and their critics for more than a decade. Legislatures around the country had implemented caps on the fees check cashers could charge and regulators frustrated the more aggressive rent-to-own entrepreneurs by dictating new business practices that cut into their profits, but both industries adjusted and both were posting big profits.

For all the bad publicity the industry was receiving, the payday lenders were also thriving. The check cashers would hold workshops at their annual meeting about getting into the payday loan business and the session would be standing room only. For many it was a no-brainer given it required no special expertise. Small-time p.a.w.nbrokers might resent the intrusion of payday as an option for those with bad credit seeing quick cash, but the bigger p.a.w.n chains were now seeing only opportunity in these quick, unsecured, cash loans that earned triple-digit interest per year, and they jumped. "It was an easy way to add rocket fuel to the bottom line," said Jerry Robinson, the former Stephens, Inc. banker. The industry pa.s.sed the 10,000-store mark by 2001 and entrepreneurs with national ambitions were still lined up at the industry's door, hoping to get in.

"It got unbelievably compet.i.tive," Jared Davis said. "It was literally a race from s.p.a.ce to s.p.a.ce." It was, Davis said, like all those horses and wagons lined up on the Oklahoma border in 1889 for the great land rush. And, oddly, probably the most frantic opening of a new market took place in 2003-in Oklahoma. "If I could do anything differently," Billy Webster told me, "it would be to spend more time telling our story to journalists, editorial boards, and opinion leaders." But who had the time when there were still great stretches of the country to conquer?

Seven.

Subprime City DAYTON, OHIO, 19992000 Dean Lovelace first focused on all the payday lending shops sprouting up around Dayton. It was the second half of the 1990s and to Lovelace, who had served on the Dayton City Commission since 1993, it felt like his hometown was under attack. It was no wonder. By 1999, Allan Jones and Billy Webster had each opened seven stores in the greater Dayton area and Toby McKenzie had opened six. Jared and David Davis, the brother tandem behind Check 'n Go, had added another four. It was as if the demographics from this one unprepossessing blue-collar city in the heartland had been poured into a database and bells started clanging and lights started flas.h.i.+ng JACKPOT JACKPOT! on computer screens in the corporate development offices of payday chains across the country. Closer to home, there was Lee Schear, a local entrepreneur whom Lovelace was inclined to describe as a "profiteer." For years Schear had been making plenty off the working poor, cas.h.i.+ng checks (for a fee) and selling lottery tickets at the small chain of grungy grocery stores he ran in Dayton's poorer precincts. But with the legalization of payday, he was now operating two dozen of these storefronts in and around town. By the end of the 1990s, Dayton, a city of 150,000, and the surrounding suburbs were home to more than fifty payday shops.

Lovelace had grown up in Dayton, born to a single mother who raised three children largely on her own. It was only after his mother died during his senior year in high school that he learned that she never earned more than $200 a week. Looking through her papers he finally realized why they had moved every year he was in high school; his mother had fallen behind on the rent and each time they had been evicted. Lovelace would go on to earn an undergraduate degree in business from the University of Dayton and a master's in social economics at Wright State University. He then worked as a planner inside city hall until taking a job as the director of neighborhood development at the University of Dayton, a post he would hold for more than twenty-five years. He won a seat on the Dayton City Commission (its equivalent of the city council), a part-time position, on his third try. He lives in a nice-size, handsome house in a modest middle-cla.s.s community in Dayton but there could be no dismissing Lovelace as a silver-spooned elitist who has never been desperate for quick cash. He knew what it meant to be broke.

The payday lenders started showing up in 1996 shortly after the Ohio legislature, after intense lobbying from the industry, voted to exempt small, short-term loans from the state's 28 percent usury cap, thereby legalizing payday lending. As a commissioner, Lovelace had championed a living wage ordinance (but had to compromise on an $8.80 an hour minimum wage that applied only to those doing business with the city) and to him shutting down the payday lenders was the flip side of the same coin: Making sure people earned a better wage would mean little, he reasoned, if they only spent that extra money borrowing money at usurious rates from these new shops. The issue really hit home when his niece phoned him one day. "They got me," she told him. She barely made minimum wage but after frittering away hundreds of dollars in fees that she couldn't afford, she was now in a deeper mess. "They're calling me at work," she told Lovelace. She was scared she might lose her job.

Lovelace didn't know what a city commissioner could do about a statewide law that had only just pa.s.sed a few years earlier, but he felt compelled to do something. Using his limited clout, he held a series of community meetings around the city. "I just figured at that point I needed to raise awareness," Lovelace said. "I at least wanted to start a dialogue." He wanted to alert people to what he saw as a growing menace to the city's economic health.

Only around thirty people showed up at that first meeting. A couple of consumer advocates were enlisted to explain why high-interest, short-term loans were very seldom an effective answer to a customer's cash flow crisis and a local legal aid lawyer told the group about the hundreds of payday-related default judgments clogging the local courts. A few payday customers stood to voice their displeasure over these new neighbors taking over empty storefronts in strip malls throughout town. You borrow to "bridge a gap," a woman named Pam Shackelford explained, "except there's no way you're gonna bridge a gap if the gap keeps getting bigger." But then a woman named Suriffa Rice, a home health-care worker, took her turn at the microphone. "I can't go to my mama," Rice said. "I can't go to a bank. I can't go to my church. Where am I supposed to go if I don't have payday [loans] anymore?"

Dean Lovelace is a short and stocky black man with a mustache and silver-framed gla.s.ses that always seem to be sitting slightly askew on his face. When his turn to speak came, he had to confess to Rice that he didn't have much of an answer for her. A couple of credit unions around the state were experimenting with what they were calling "stretch pay loans" but that was about it. An economist by training, Lovelace recognized that the real issue was better financial education and other reforms. Whether or not the payday lenders were greedy would be a moot point if banks actually offered products aimed at the working poor. In the end, his meetings generated a few articles but added up to little more than some high-profile hand-wringing.

Lovelace was hardly done, though. He has a mild-mannered and pleasant disposition yet by nature he is a battler and a crusader and not one who goes along just to get along. Early in his career, C. J. McLin, Jr., the G.o.dfather of black politics in Dayton, took him under his wing but Lovelace proved incapable of serving the gofer role he was expected to play. He ran the Dayton chapter of the Rainbow Coalition for Jesse Jackson's two presidential bids in the 1980s and led the local fight against police brutality. He had also spearheaded a coalition formed to pressure the city's big banks over their lack of lending in Dayton's low-and moderate-income communities. In fact, at around the same time he was organizing his hearings into payday lending, a local activist named Jim McCarthy, the executive director of the area's Fair Housing Center, invited him to join a committee they were putting together to figure out what was happening on the home owners.h.i.+p front. Businesses were starting to lend in the city's lower-income communities but it wasn't turning out to be a good thing.

Ever since its frontier days, Dayton had always been a place that devoted itself to making things: steam pumps and water wheels in its earliest history, stoves and solvents, tool-and-die machines, cardboard boxes, and a goodly portion of the country's cash registers well into the twentieth century. "The city of a thousand factories"-that's what Dayton, once home to 260,000 people, dubbed itself.

But then a sizable portion of those thousand factories shuttered their doors, moving south or overseas, in search of lower taxes and weaker unions, or simply going out of business. The city lost more than one-fifth of its people through the 1970s and more kept leaving. By the time Forbes Forbes dubbed Dayton one of America's fastest-dying cities in 2008, it had lost 40 percent of its people. A few months later, the magazine singled out Dayton again, placing it in the top five of the country's "emptiest cities." dubbed Dayton one of America's fastest-dying cities in 2008, it had lost 40 percent of its people. A few months later, the magazine singled out Dayton again, placing it in the top five of the country's "emptiest cities." Forbes Forbes had a point. The city's rental vacancy rate stood at 22 percent, which was more than twice the national average and second highest in the country. Nearly 4 percent of the city's houses sat unoccupied. Was it any wonder that those in the poverty industry saw Dayton as a place rich with possibilities? had a point. The city's rental vacancy rate stood at 22 percent, which was more than twice the national average and second highest in the country. Nearly 4 percent of the city's houses sat unoccupied. Was it any wonder that those in the poverty industry saw Dayton as a place rich with possibilities?

Jim McCarthy can remember pretty much the exact moment when he realized Dayton was being aggressively targeted by a new kind of business. It was 1999, he was thirty-three or thirty-four years old, and, as the newly installed head of Fair Housing, he was a member of an advisory board the county had created to oversee an affordable housing fund. Fair Housing routinely heard from people claiming they had been denied a loan because of their race, but in recent weeks several people, all of them African-American, had contacted his organization making something like the opposite a.s.sertion: They were about to lose their home because of a refinancing. When he mentioned this during a meeting of the advisory board, someone offered that he too was noticing something strange. Over the years the federal government had set aside billions of dollars to make low- and no-interest home loans available to people living in areas that had designated community development zones, yet now people were coming to his office with large checks in hand to pay off these loans. "These are the kinds of loans you basically don't pay off until you die," McCarthy said. "It made us all ask the question, 'What the h.e.l.l is going on?'"

The advisory board decided to form a group to look into the matter. Dean Lovelace joined them and so did Beth Deutscher at Consumer Credit Counseling Services. Like Lovelace, Deutscher didn't need any convincing. She oversaw a Consumer Credit project created to help first-time homebuyers but in recent months she seemed to be spending as much time aiding existing homeowners who had fallen into trouble. Where her organization had typically heard from maybe one or two people a week seeking mortgage default counseling, the call volume had jumped to four or five per day. She grew more alarmed, she said, once the agency's counselors started meeting with people. "These were loans designed to bring maximum profit to the lender and minimum benefit to the borrower," Deutscher said. Rounding out the group were executives with KeyBank and Fifth Third, two of the bigger banks in town, along with representatives from the local board of Realtors and the home builders' a.s.sociation.

The industry representatives were initially defensive. You beat us up for failing to make loans to these customers and now do you see what happens? "There was a real 'I told you so' att.i.tude around the table," McCarthy said. But they dug deeper and even the bankers had to concede the point: The problem wasn't the people but the product they were being sold. The staff in the county clerk's office told of brokers and lenders rummaging through residential tax records, looking to see who had fallen behind in their property tax payments. They were poking around the owners.h.i.+p records as well to determine how long people had owned their homes. "It was like they were focusing on elderly African-American ladies, mostly widows, who all lived within a few miles of each other in west Dayton," said Stan Hirtle, a legal aid lawyer in Dayton.

Dora Byrd was ninety years old, a widow for the previous thirty-five years, when a man knocked on her door to talk about some home repairs. "'He was a nice, clean-cut young man'-she kept saying that to me over and over," McCarthy said. "'He was so nice he'd even read my mail for me.'" Byrd, who had owned her home outright for twenty-seven years, had made a modest living running a small beauty salon out of her home. She had been enough of a businesswoman to recognize it would be unwise to let her home fall into disrepair, and this nice young man talked her into financing several home-improvement projects, all in the name of maintaining a property that ended up in foreclosure. Byrd died before the issue would be settled in her favor.

"She was this little bitty, tiny, frail woman who sat on her front stoop with her head in her hands and just cried," McCarthy said. "She said she was so embarra.s.sed this had happened to her." Others would feel equally foolish-people like Gloria Thorpe, who was living on a monthly Social Security check of $354 when a lender sold her a $5,000 home equity loan. With fees, the deal ended up costing Thorpe $12,000 and so, at the age of seventy-two, she found herself working once again, a security guard on the second s.h.i.+ft at a local factory. "They're sitting there talking to you and making it sound so good," Thorpe told the Dayton Daily News Dayton Daily News in 2000. "And me, my stupid self, I signed. But it was too much paper to read." One study showed that in a three-year period, from 1997 to 1999, subprime home equity loans had quadrupled in the Dayton area. Another found that at least one in three refinancings had been initiated by the lender, not the borrower. in 2000. "And me, my stupid self, I signed. But it was too much paper to read." One study showed that in a three-year period, from 1997 to 1999, subprime home equity loans had quadrupled in the Dayton area. Another found that at least one in three refinancings had been initiated by the lender, not the borrower.

Even those in McCarthy's working group were stunned when, at the start of 2000, the county government agreed to fund what they called the Predatory Lending Solutions Project. They had asked for $350,000-but county officials gave them that much plus another $600,000 to educate the public about these loans based on the worth of someone's home rather than a person's ability to pay. "It really worked in our favor that most of these people were senior citizens," McCarthy said.

Those behind this new project tried everything they could think of to spread the word. They leased billboard s.p.a.ce along busy thoroughfares warning people about predatory loans; they took out ads in the Dayton Daily News Dayton Daily News that employed arrows and circles to teach people to decipher the gibberish of the HUD-1 disclosure form that by law is part of every home loan. They ran ads on the sides of buses and ads inside those same buses. An advertising agency was hired to develop a series of radio and TV ads warning people against signing deals that sound too good to be true ("If you're not careful," a baritone-voiced narrator intoned, "you can end up with huge payments, even lose your house"). Glossy brochures were handed out to real estate agents ("Help your clients avoid predatory loans"), and another set explained terms like "origination fee," "balloon payment," and "prepayment penalty" for potential borrowers. They established a hotline and stamped its phone number on everything from refrigerator magnets to plastic water bottles to lawn signs. They used yellow and black for everything because the agency had taught them that these colors suggested caution and hazards ahead, like police tape and road signs. that employed arrows and circles to teach people to decipher the gibberish of the HUD-1 disclosure form that by law is part of every home loan. They ran ads on the sides of buses and ads inside those same buses. An advertising agency was hired to develop a series of radio and TV ads warning people against signing deals that sound too good to be true ("If you're not careful," a baritone-voiced narrator intoned, "you can end up with huge payments, even lose your house"). Glossy brochures were handed out to real estate agents ("Help your clients avoid predatory loans"), and another set explained terms like "origination fee," "balloon payment," and "prepayment penalty" for potential borrowers. They established a hotline and stamped its phone number on everything from refrigerator magnets to plastic water bottles to lawn signs. They used yellow and black for everything because the agency had taught them that these colors suggested caution and hazards ahead, like police tape and road signs.

The Miami River cleaves Dayton in two, and the vast majority of the city's black citizenry lives to the west of it. The Predatory Lending Project focused mainly on the city's west side because that's where the lenders were focusing their efforts. Its people, mostly volunteers, set up a booth at the Dayton Black Cultural Festival and did Sat.u.r.day blitzes in west side neighborhoods, borrowing a replica trolley from the regional transit authority and showing up eight, ten, or twelve strong, dressed in yellow-and-black T-s.h.i.+rts that read DON'T BORROW TROUBLE DON'T BORROW TROUBLE: ANTIPREDATORY LENDING SOLUTIONS ANTIPREDATORY LENDING SOLUTIONS. They distributed door hangers and brochures and trinkets stamped with their hotline number and spoke with thousands-8,578 residents in their first full year, according to the report they submitted to the county. Yet while they were busy spreading the word in one part of town, lenders were working the other side of the river.

"Apparently they started to reach a saturation point in the inner city so they moved into the rest of the city," McCarthy said. So in 2001, its second year of operation, the Predatory Lending Project added the Appalachian Mountain Days festival to its list and dispatched the trolley and its teams of volunteers into white working-cla.s.s neighborhoods.

But they remained perpetually one or two steps behind the lenders. In 2001, Richard Stock, the director of the Center for Business and Economic Research at the University of Dayton, released a study offering the first snapshot of subprime lending in Dayton. The first surprise in his study was the steep rise in foreclosures. There had been barely 1,000 foreclosures in 1994 but the county registered nearly 2,500 in 2000. The city's deteriorating manufacturing base could explain some of the rise but Stock's numbers also revealed an eightfold spike in foreclosures involving subprime home loans.

The second surprise involved the names of the most active subprime lenders. Those behind the Predatory Lending Project were pleased that the county had been so generous in providing them funding yet it turned out they were fighting large corporations with millions to spend on marketing and millions more to invest in sales teams. They included H&R Block, which was one of the area's most aggressive subprime lenders through a subsidiary called Option One, and a list of large banks as impressive as it was disturbing. Bank of America, Bank One, First Union, and Was.h.i.+ngton Mutual ranked among the top subprime lenders in the Dayton area, but topping Stock's list were Household Finance and Citigroup, the New Yorkbased giant that promoted itself as the world's leading bank.

The final surprise-and perhaps the biggest-was how widespread the problem had become in so relatively short a period. Stock and his team of researchers found that a large portion of those default judgments involving subprime loans weren't occurring on the west side or even in the white working-cla.s.s enclaves on the city's east side but instead in first-ring suburbs that had fallen on hard times. Zip code and the color of a borrower's skin, it turned out, wouldn't make a difference to subprime lenders seeing nothing but opportunity in Dayton's economic decline. They were, McCarthy concluded, "equal opportunity predators."

In 1998, Senator Charles Gra.s.sley of Iowa, the Republican chairman of the Senate Special Committee on Aging, held a one-day hearing into subprime mortgage lending. The t.i.tle he chose for the event left no doubt about his sympathies: "Equity Predators: Stripping, Flipping, and Packing Their Way to Profits." Among those testifying on Capitol Hill were Ormond and Rosie Jackson, an elderly Brooklyn, New York, couple living on Social Security, whose loan had been "flipped" so many times that, six years after a salesman knocked on their door promising that new windows could be theirs for just $43 a month for fifteen years, they owed $88,000 and were facing foreclosure-the "stripping" of their equity. Helen Ferguson, a seventy-six-year-old widow from Was.h.i.+ngton, D.C., living on a monthly $504 Social Security check, told a similar story, except that in her case it wasn't a knock on the door but an ad she saw on television pitching low-interest home-improvement loans. Prior to that, her mortgage payment had been $229 a month, but-in part because her loan had been "packed" with an expensive credit insurance policy that a woman living alone did not need-five years later she had a house payment of $810 per month. "My perfect customer," a former salesman for several subprime lenders told the senators, "would be an uneducated woman who is living on a fixed income-hopefully from her deceased husband's pension and Social Security-who has her house paid off, is living off credit cards and having a difficult time keeping up with her payments."

People in Dayton reached out to their congressional delegation hoping for help in Was.h.i.+ngton. They did their homework, and Jim McCarthy made contact with Martin Eakes and Bill Brennan. They were fighting national banks and other publicly traded companies with a broad geographical reach. This was a problem best fought in Was.h.i.+ngton, D.C., not Dayton city hall.

Those hoping to warn the rest of the country about the threat posed by the subprime lenders had their successes. Andrew Cuomo, in his final days as HUD secretary under Bill Clinton, spoke out publicly against the problem and Cuomo, along with Larry Summers, the Treasury secretary, created a short-lived task force in April 2000 to examine predatory lending in the United States. That same year Congress would again turn its attention to the subprime lending industry when Congressman Jim Leach, a Republican from Iowa and the chairman of the House Committee on Banking and Financial Services, held a hearing to look at the situation. But it was the misfortune of those advocating reform that in the 1950s, a woman named Florence Gramm managed to buy a small bungalow home in Columbus, Georgia, despite the risks inherent in extending her credit.

There's no doubting Florence Gramm's grit and fort.i.tude. Her husband, Kenneth, suffered a stroke shortly after she gave birth to their son Phil. That left him partially paralyzed and unable to work. But Florence Gramm, a nurse, convinced a finance company to loan them the money they needed to buy a home, even though that meant she would need to work double s.h.i.+fts. Throughout his political career, which included three terms as a U.S. senator, Phil Gramm spoke frequently about the subprime loan that enabled his mother to become the first person in her family to own a home.

Gramm wasn't just any senator; he was determined to serve as his party's resident expert on the financial industry-once he settled on a political party. He held a Ph.D. in economics and had taught at Texas A&M, while running an economic consulting firm on the side, before deciding to get into politics in the 1970s. The surest route to victory in Texas back then was to run as a Democrat, and that was what Gramm did when he was first elected to Congress, but he had switched to the Republican Party by the time of his election to the Senate in 1984. He is probably best known for his co-authors.h.i.+p of the landmark Gramm-Rudman-Hollings Act, which in the 1980s established deficit reduction targets for the federal budget. More recently, he was the primary sponsor of the Gramm-Leach-Bliley Act, the bill that undid the post-1929 crash reform mandating that banking, brokerage, and insurance businesses remain separate. There was no denying his power through the 1990s and into the 2000s. Any federal legislation curbing the behavior of the country's subprime lenders would need to first pa.s.s muster with the powerful chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Senator Phil Gramm of Texas was not about to meddle with this corner of the free enterprise system that had played so exalted a role in his family's history.

"Some people look at subprime lending and see evil," he said on the Senate floor during debate over a bill to clamp down on subprime lenders in 2001. "I look at subprime lending and I see the American dream in action. My mother lived it as a result of a finance company making a mortgage loan that a bank would not make." And if nostalgia were not enough to ensure his gung-ho support, then there was also the generosity of these lenders who helped to keep him in office year after year. Between 1989 and 2002, commercial banks were more generous with Gramm tha