Broke, USA Page 5
The Birth of the Predatory Lender
ATLANTA, 1991–1993
If you think that if only there had been some warnings, the subprime lenders could have been stopped before they practically destroyed the world economy, then you should avoid the office of the Atlanta public interest lawyer Bill Brennan. It would be too upsetting.
Since that day in 1991 when eighty-year-old Annie Lou Collier sat across from his desk because a bank was threatening to take her home of thirty-eight years, William J. Brennan, Jr., has been talking about virtually nothing else but the need for people in power to impose some basic regulatory standards on the country’s lenders. A staff attorney for the Atlanta Legal Aid Society, Brennan has paid his own way to Washington, D.C., numerous times to testify before Congress and the Fed. He has spent more than he wants to admit doing reconnaissance work at industry-sponsored subprime lending conferences. Over the years he’s put so many flights and hotel stays and subscriptions and overnight deliveries on credit cards that for a time he put himself and his spouse, Lynn Simmons, a schoolteacher, in debt. “My wife wasn’t happy with me but we don’t need to get into that,” he says sheepishly. His collection of subprime-related material began small: some articles, a few key memos, a legal brief somebody had sent him. But when Brennan reached twenty or so cartons, Simmons put her foot down. She banished every last box from their home, so on top of everything else, Brennan now spends around a hundred and fifty dollars each month on a storage locker.
“Ninety-eight percent of everything good that’s happened in the fight against predatory lending is because of Bill,” his friend Howard Rothbloom told me. Back in the early 1990s, Rothbloom, then a young bankruptcy lawyer, called Brennan hoping to get up to speed on a new rash of predatory lending he was seeing in Atlanta. “Bill offers to send me a couple of articles he thought I’d find interesting,” Rothbloom said—and the next day a FedEx van was delivering a heavy box to his office. “Just quickly…,” Brennan will say when leaving a voice mail for his boss, Steve Gottlieb, the executive director of Atlanta Legal Aid. But it’s never quick. The Legal Aid voice mail system gives callers five minutes to leave a message but Brennan invariably needs to call again to finish a message and sometimes he needs to call a third time. Gottlieb asked Brennan to stand at his wedding but he has also banned his friend from using the office copier.
Brennan has no tolerance for halfway measures. He became a regular reader of the New York Times business section and he bought a subscription to the Wall Street Journal. And when he learned that the lenders he was following were reading something called Inside B&C Lending (its motto: “Everything you need to know about subprime mortgage lending—making loans with less than ‘A’ credit”), he decided he would read that as well, though an annual subscription cost $495. He has unusual dedication and focus. Brennan once spotted Steve Gottlieb walking down the street at seven or eight o’clock at night as Gottlieb and his wife were heading to a restaurant for dinner. “Steve! Steve!” Gottlieb heard—and he turned to see Brennan, tall and lanky, dashing toward him with a large packet of materials in his hand. He had stopped his car in the middle of the road and ran from it with the engine still running and a door wide open.
Brennan has a kind, open face and a gentle disposition. He’s bald, with a fringe of gray hair, a thin gray mustache, and gold-framed glasses. He has a courtly manner and dresses smartly at the office, preferring ties and blazers and trousers with sharp creases. He smiles a lot, but often it is the pained smile of someone who feels the world’s burdens more heavily than the average person does. He stoops slightly when standing, as if apologizing for his height. Jim McCarthy, a housing activist in Dayton, Ohio, was anxious the first time he called Brennan at the end of the 1990s when McCarthy was starting to get involved in the fight against predatory subprime lending. “Here I was, this nasal-voiced kid from Ohio who knew next to nothing,” McCarthy said, “and he gave me all the time in the world.” Of course, a FedEx box filled with follow-up materials arrived at McCarthy’s office the next day.
Bill Brennan wanted to be a Catholic priest, but after entering the seminary he found cloistered life too confining and so transferred to Emory University. His parents, who had grown up poor, pushed their son to attend law school but Brennan felt ambivalent about a legal career even after graduating from Emory Law School in 1967. He took a job teaching at a school for the mentally disabled in a poor black community in Atlanta and threw himself into the politics of the day. He marched on the Pentagon in 1968 to protest the Vietnam War, and got involved on the periphery of the civil rights struggle. He was driving his car when he heard a speech on the radio by the man then running Atlanta Legal Aid. Martin Luther King, Jr., had just been assassinated and this lawyer was talking about using the law to battle poverty, racism, and other social ills. Brennan went for an interview the next day and has toiled in the trenches of legal aid ever since.
Brennan seemed to have a nose for crusades that pit him against people seeking to get rich off the poor. In his first year on the job he exposed a pair of city inspectors who bought apartment buildings on the cheap after citing the original owners for code violations and then jacked up the rent without making repairs. Several years later he took on a former top housing official under Atlanta mayor Andrew Young for demanding under-the-table payments from the Section 8 tenants (those receiving rent subsidies from the federal government) living in properties he owned. The man was sentenced to five years in prison. In 1989, Bill Dedman of the Atlanta Journal-Constitution won the Pulitzer Prize for an astonishing series that could be summed up in a pair of nearly identical maps, one showing the city’s predominantly black neighborhoods, the other identifying those communities where banks almost never made a loan. Brennan was a key member of the housing group that had first gone to the newspaper with the original idea of an investigative piece exposing the redlining policies of the city’s largest banks.
Brennan picked up his first mortgage fraud case at around the same time the Journal-Constitution was running its series. And then his second, third, and fourth. Each of his clients told Brennan more or less the same story. All had fallen behind on their mortgages and they heard from a local business, Brown Realty Associates, offering to help. The name of that business rolls easily off Brennan’s tongue twenty years after the fact, as if he’s been talking about them regularly ever since: the Browns of Brown Realty Associates, a husband-wife team and their adult son. One of the Browns would tell the beleaguered homeowners that clearing everything up was as easy as signing a few papers to make payments to Brown Realty until they were all caught up. “What these folks didn’t realize is they had signed a legal document called a ‘quitclaim,’ transferring ownership of the home to the Browns,” Brennan said. “As soon as they missed a payment, the Browns would file to take possession.” The Browns had gotten their hands on dozens of homes before he and others with Legal Aid figured out what was going on. Joining forces with a pair of local private attorneys, Brennan and his cohorts won millions in damages against the Browns and forced them out of business.
Perhaps most disturbing to Brennan was the fact that a major downtown bank had granted Brown Realty a $1.5 million line of credit. Without it, he figured, the company could not have accumulated that many homes in so short a period of time. Brennan didn’t care how much the bank knew about what the Browns were doing with the money. They were financing scam artists who were “targeting black neighborhoods to steal people’s houses,” Brennan said, at the same time they were refusing to make legitimate loans to qualified would-be homeowners in those same communities. In 1988, with additional funding from the county, he convinced his bosses to create a Home Defense Program, the first of its kind in the country. Brennan has served as its executive director ever since.
Brennan learned from the Brown case that established financial institutions were no longer ignoring the black community entirely. What he discovered working the next set of cases the Home Defense Program took on was that t
he challenge was larger than a few rogue lenders working the area’s working-class and poor communities. In these same neighborhoods, larger financial concerns were now aggressively peddling loans that were so destructive that they left borrowers in a far more precarious financial position than when they started. “It was incredible,” said Brennan. “These banks went from making no loans in all these black neighborhoods to making loans that were totally abusive.” Jack Long, one member of the group that Brennan assembled to fight back, gave the phenomenon a name: “reverse redlining.”
The first firms to recognize the profits to be made from the neighborhoods that the banks had historically ignored were nonbank lenders such as Champion Mortgage. A Legal Aid attorney named Ira Rheingold watched in wonder as Champion used redlining as its main selling point. Its advertising campaign featured the slogan “When your bank says no, Champion says yes.” It was, Rheingold had to confess, devilishly brilliant—and also underscored the shortsightedness of the established banks.
“I don’t know if it was because of their own prejudices or because of the limits of the system they built, but traditional banks failed to recognize that there was plenty of need and desire in low-income and minority communities that was going untapped,” said Rheingold, who worked as a legal aid attorney in both suburban Washington, D.C., and Chicago before becoming the executive director of the National Association of Consumer Advocates. “So companies like Champion moved in and figured out that not only could they make money lending to these people, they could make a lot more money than a bank. These were unsophisticated consumers who didn’t know how banks worked, so the Champions of the world came in and said, ‘We’re going to go in as your best friend and act as your trusted adviser.’” The typical customer, Rheingold said, didn’t feel ripped off paying interest rates of 20 percent or more but instead felt grateful that, finally, someone was saying yes.
“It took them time,” Rheingold said, “but eventually the banks figured it out.”
Annie Lou Collier had been living in the same home since 1953 when a man who could have stepped out of the movie Tin Men knocked on her door in 1990. He was a home-improvement salesman who wanted to talk about a new roof. Collier had paid off the house years earlier but she was eighty years old and scraping by on a modest fixed income. She told him she couldn’t afford a new roof but the man advised her that given the worth of her home, she could simply borrow the money. He even offered to drive her to a lender who would lend her $6,900 that very day. “She was this wonderful lady,” Brennan recalled, “but they gave her this crazy loan she could never afford.”
Predictably, Collier quickly fell behind in her payments and by 1991, one year after signing the deal, she was already in arrears on a loan that included 22 percent in points and fees and carried an annual 25.3 percent interest rate. Brennan contacted the lender, who told him that they had Collier’s signature on the loan papers and that’s all the proof they needed that she understood the terms of her loan. It did not seem to matter to the person on the other end of the phone that Collier had a second-grade education and could not read or that, given her income, she couldn’t possibly afford the monthly payments. It didn’t matter, either, that the contractor had not completed the job that she had paid for. When the Home Defense Program heard from several more elderly people living in southwest Atlanta who found themselves in a similar predicament to Collier’s through strikingly similar circumstances, Brennan figured that they again would be combating a small-time local firm like Brown Realty. The loan terms were “so terribly abusive,” he reasoned, there couldn’t possibly be a legitimate company behind them. The going rate for a conventional mortgage at the time was around 9 percent, but he had one client who was being charged 29 percent on a home loan. Consequently, he suspected the lender was more interested in seizing homes through judgments of default than in accruing steady profits through regular monthly payments. Brennan would be shocked when he learned that the institution holding paper on all these loans was Fleet Bank, a large, publicly traded firm from Providence, Rhode Island.
For years activists had been lobbying the likes of Fleet to make more loans in the country’s less affluent communities. But this was not what they had in mind. These were not loans to first-time homebuyers; they were mortgage refinancings and home equity loans. They were also not conventional loans made through bank branches; they were deals arranged by a subsidiary called Fleet Finance.
While the morality of what Fleet was doing might be questionable, there was no doubting its profitability. Through much of the 1980s, the Economist reported in March 1990, banks across the country were posting big losses. One exception was Fleet, which was posting a return on equity (a “spanking 17 percent,” the magazine wrote) that made it the envy of the industry. Its “prize performer,” the Economist wrote—“the jewel in Fleet’s crown”—was its “hugely profitable” consumer finance subsidiary. Fleet Finance, with 150 offices in twenty-seven states, produced $43 million in after-tax profits in 1989. Its portfolio would generate another $55 million in profits in 1990. By 1991, Fleet had surpassed the venerable Bank of Boston to reign as New England’s largest bank. The financial press hailed Terrence Murray, the company’s chief executive and chairman, for transforming a small Rhode Island bank into a regional powerhouse.
Every year, Atlanta Legal Aid gets summer law interns whom the staff is never quite sure what to do with. Brennan sent several to the county deed room in search of any loan involving Fleet Finance. They found more than sixty and then contacted the borrowers in search of people who might talk. Brennan was not drumming up business so much as looking for a discernable pattern of abuse. All the borrowers contacted by the interns were black and they tended to live in the same few neighborhoods. Their homes had been paid off or they had lived in them so long that they had built up considerable equity. Most were older than sixty-five and had little in the way of available cash; almost all had ended up signing a loan with Fleet because they had been enticed by a seemingly helpful contractor offering its services to fix a porch or a roof or some other part of the house in visible disrepair. Fleet never made the loans themselves but used what Brennan called “pass-through companies”: local mortgage lenders that would sell the loans to Fleet, often on the same day the loan papers were signed. Typically the repair work would be left unfinished, leaving borrowers with the same problem propelling them to sign the loan—though of course they now had a steep new monthly bill that put further repairs beyond their financial reach.
Brennan knew it would be futile to sue the home-improvement contractors. Annie Lou Collier’s roof job might have been only half completed but these were fly-by-night operators who would disappear before he could serve them with papers. Even if he gained a judgment against them, he could be reasonably certain their bank accounts would be empty. He would name two of the intermediary mortgage companies in the suit he filed but he saw them as virtual “shell companies” that were hardly the main culprits. With his boss’s blessing, Brennan filed a class action against Fleet itself, charging the bank under the country’s racketeering laws. He called a press conference to announce his suit, his first in more than twenty years as a legal services attorney. Then the calls started coming.
Some were from people who believed that they too had been victimized by a Fleet-financed home-repair scam. Several were advocates wanting to join the fight. That’s how bankruptcy attorney Howard Rothbloom came to contact Brennan. He had been working late at his office when a woman named Lillie Mae Starr phoned looking for help. Starr was a retired factory worker who had left school after the eighth grade. Now in her sixties, she owned a small home in Vinings, a predominantly black community just west and north of Atlanta. Her financial woes began years earlier when she borrowed $5,000 to fix her windows. She fell behind in her payments and, after two refinancings, she owed Fleet $63,000. Facing foreclosure, she had phoned Rothbloom thinking that bankruptcy might be the solution.
Rothbloom was skeptical as he liste
ned to her story. She claimed to be paying 23.3 percent interest but that seemed too high for a home loan. She brought in her loan documents, which he showed to Roy Barnes, a more senior lawyer working in the same small office building on the edge of the Atlanta metropolitan area. Barnes, who owned an interest in a trio of local banks, was equally incredulous.
But there had been no mistake. That first $5,000 loan had cost Starr more than $9,000, including points and fees. She had paid Fleet more than $19,000 over nine years yet somehow she still owed the bank three times that amount. “She was this real quiet lady who was embarrassed that this was happening to her,” Rothbloom said. “I was the one who had to tell her how badly she had been taken.” Over the coming months, Rothbloom would meet dozens of Fleet customers. Most were older African-American women living on their own and with a Bible by their bed or the couch. “These were people that trusted other people,” Rothbloom said. All seemed more angry at themselves than at Fleet. It struck Rothbloom that just as he had been oblivious to abuses routinely occurring on the squalid edges of the financial system, the victims of this system had little idea of what is fair and what is not in the larger financial world.
Starr had only asked Rothbloom to help her figure out whether or not it made sense for her to declare bankruptcy, but Rothbloom decided to enlist the help of Barnes, who after serving fifteen years in the state senate had recently lost his bid to be the Democrat nominee for governor. “They’d do deed record searches looking for people with high equity,” Barnes told me when I asked him why he took on the case. “They had their bird dogs walk a block, writing down those homes in need of repair. These were bad people.” Together the two filed a class-action suit against Fleet claiming the bank was conspiring with a cabal of loan originators to defraud customers. Like Brennan, the two lawyers also accused Fleet of violating the country’s racketeering laws.