by Gary Rivlin
“It got unbelievably competitive,” Jared Davis said. “It was literally a race from space to space.” 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, 1999–2000
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 flashing 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, cashing 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-class 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 passed 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 glasses 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 godfather 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 ownership 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 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 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 assertion: 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 hell 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’ association.
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’ attitude 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 ownership 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 embarrassed 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 shift at a local factory. “They’re sitting there talking to you and making it sound so good,” Thorpe told the 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.
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 space along busy thoroughfares warning people about predatory loans; they took out ads in the 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.
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 Saturday 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-shirts that read DON’T BORROW TROUBLE: ANTI–PREDATORY 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-class 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 Wa
shington Mutual ranked among the top subprime lenders in the Dayton area, but topping Stock’s list were Household Finance and Citigroup, the New York–based 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-class 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 Grassley of Iowa, the Republican chairman of the Senate Special Committee on Aging, held a one-day hearing into subprime mortgage lending. The title 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 Washington, 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.”
