Broke, USA

by Gary Rivlin

  For a time Webster got into politics. Again his father proved the catalyst. He had grown up with Dick 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 Washington 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 Washington 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 washing 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 competitor 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 relationship 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 competitors 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 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 attitude 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 competition,” 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 w
as 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 who was trying to figure out how a South Carolina–based 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 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 Associated 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-class 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. “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 assault 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, passed 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 Washington 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 Washington 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 anticipate 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 unilate
rally 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 association they called the Community Financial Services Association, 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 association 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-cashing 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 pawnbrokers might resent the intrusion of payday as an option for those with bad credit seeing quick cash, but the bigger pawn 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 passed 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.