Naming Names: Every Bank and Business That Is a Subprime Lender

Wells Fargo, JPMorgan Chase, and Bank of America. Goldman Sachs, Morgan Stanley, and American Express. H&R Block, General Motors, Ford Motor, General Electric, Walmart.

How many of the country's largest, best-known banks and corporations took huge, deep gulps at the well of the poverty industry?

Well, how much time do you have, and how long is too long for a Huffington Post piece?

To start with the payday loan industry: The business barely existed twenty years ago but today it's a massive, $40-billion-a-year beast making short-term loans at rates so shockingly high that Florida is considered a low-cost payday state because, by law, lenders operating there can "only" charge fees that work out to an interest rate of 250 percent. More typically, payday lenders are collecting 400 percent or more on the money they have out on the street.

How did the payday industry get so big so fast? Start ticking off the names of some of the country's better-known banks and you'll no doubt hit on a few that provided critical funding to those seeking to make it rich in the strange business of loaning the working poor emergency cash against their next paycheck.

Wachovia, Wells Fargo and NationsBank (now Bank of America) - that's a partial list of the brand-name banks that in the mid-1990s provided seed money to Advance America, the industry's largest payday lender with 2,500 stores scattered across 32 states.

"We basically borrowed forty or fifty million dollars," Billy Webster, Advance America's co-founder, told me . "We had infrastructure for 500 stores before we had even one."

The regional banks also took to playing venture capitalist to every wannabe payday mogul. It was National City, for instance, an old-time bank based in Cleveland, Ohio now operating under the name PNC Financial, that loaned payday pioneer Allan Jones the $50 million he needed at the end of the 1990s to transform his company, Check Into Cash, from a business generating a few million dollars in returns a year into a chain of 1,200 stores generating more than $20 million a year in post-tax profits.

First National Bank of South Dakota, Goleta National Bank, and People's National Bank (PNB) are just a few of the smaller banks that have dipped their beak into the subprime pool by partnering up with a payday lender.

One might consider payday lending too down-market for the country club types at Morgan Stanley, a top-tier investment bank whose people claim they only bring public the highest-quality companies. But we've learned over the past couple of years that Wall Street generally views "quality" as something that has the potential to earn its people enormous financial rewards. And the payday lenders were generating the kind of profits (20-plus percent) and growth rates that draw attention even in places like Silicon Valley.

"Them numbers are all they ever noticed," said Allan Jones about all the investment bankers who flew to Cleveland, Tenn. to try and talk him into taking his company public.

Morgan Stanley was particularly keen on playing kingmaker in the payday field, according to Jared Davis, who founded Check 'n Go, today a payday chain of 1,200 stores. "Investment bankers have been at the door since the beginning," Davis told me, but none as frequently as Morgan Stanley, which he said has knocked "several times" since 1997. Morgan Stanley led the Advance America IPO when the company decided to started selling share on the New York Stock Exchange in 2004. Wells Fargo and Bank of America also shared in the bounty by serving as co-leads on a deal that gave Advance America co-founder Billy Webster, a former aide to Bill Clinton, a net worth north of $100 million -- despite being in a business making fast cash loans to the working poor $200 or $400 at a time.

Goldman Sachs, as far as I know, never dirtied its hands in the payday business. Instead they played banker to CompuCredit, one of the more notorious of the early subprime credit card companies.

Founded in 1997, CompuCredit has reigned as one of the more successful peddlers of what consumer advocates call "fee harvesting." Typically those are credit cards sold to consumers so desperate for a piece of plastic in their wallet that they'll pay almost anything to have it. Recent reforms enacted by Congress and signed by the president have meant wholesale changes in this splinter of the poverty industry but until recently the customer with battered credit wanting an "Imagine Gold Credit Card" would immediately incur $150 in upfront fees for a card with a $300 credit limit and then pay a $6.50 a month "maintenance fee."

Goldman Sachs, Citigroup's Salomon Smith Barney unit, and Merrill Lynch were among the big firms that helped to bankroll CompuCredit, according to "Fee-Harvesters: Low-Credit, High Cost Cards Bleed Consumers," a report written by Rick Jurgens and Chi Chi Wu at the National Consumer Law Center. This trio of blue-chip investment banks apparently had no trouble working with the two debt collectors from Atlanta who founded CompuCredit but the Federal Trade Commission did. At the end of 2008, the company agreed to refund at least $114 million to customers after the FTC sued CompuCredit for engaging in "deceptive conduct in connection with marketing credit cards."

Bank of America provided a $110 million revolving line credit to J.D. Byrider, a chain of 124 used-car lots scattered across the U.S. that generates more revenue financing the autos they sell at annual interest rates of 20 or 22 or 25 percent, if not higher. Byrider is so infamous that Brian Grow and Keith Epstein used the company as its primary example in a 2007 Business Week investigation of the "dark side" of businesses that cater to the working poor.

The list seems endless. American Express provided critical early funding to ACE Cash Express, the country's largest check cashing chain with 1,700 stores, and this stock exchange stalwart is huge in the debit card business. So, too, is Walmart, which over the past couple of years has opened a new front on its assault on the poverty industry by rolling out check cashing services in around one-quarter of its U.S. stores.

Maybe it's just a matter of time before Walmart attacks the instant tax refund business, a multibillion industry that for years has been dominated by trio of large corporations: H&R Block, JPMorgan Chase, and HSBC, the London-based financial giant.

Any number of brand-name banks played critical behind-the-scene roles in the corporatization of the pawn business. When a Texan named Jack Daugherty started snapping up pawnshops around the country in the early 1980s, no respectable bank would talk to him. Last year, his company, Cash America, booked more than $1 billion in revenues and pre-tax profits of $150 million.

"When we started being successful and profitable, then it got people's attention," Daugherty told Bill Minutaglio of The Dallas Morning News back in 1988. "Now Merrill Lynch, now Dean Witter, now Goldman Sachs - who would not even talk to us - we get letters from all of them."

And then there's the role the big banks and other brand-name companies played in the subprime mortgage disaster that sparked the global recession. Ford Motor owned most of Associates, a scandalous subprime mortgage lender that offers a perfect case study in the predatory side of subprime mortgage lending. Citigroup purchased Associates for $31 billion in 2000 -- and ended up paying more than $300 million in fines to various governmental regulators because of consumer lending violations that happened both before their watch and also during it.

More companies joined the parade. H&R Block must have enjoyed the subprime profits it was generating running instant tax mills in low-income communities (its stock more than doubled during the first four tax seasons it offered what it called a "refund anticipation loan"). In the mid-1990s, Block purchased Option One, a subprime lending whose practices proved so odious that Massachusetts Attorney General Martha Coakley sued the company, charging its people with targeting black and Latino borrowers and then selling them loans that were likely to blow up in no small part because they were higher priced than those sold to similarly-situated whites. General Motors and General Electric are among the other big, name-brand U.S. corporations that got heavily involved in the subprime home loan business.

Eventually, the attitude seemed every into the pool. By 2006, according to the annual tally kept by a publication called Inside B & C Lending, subprime subsidiaries owned by HSBC, Citigroup, and Wells Fargo ranked among the top 10 subprime mortgage lenders (HSBC topped that year's list). JPMorgan Chase and Washington Mutual made the top 20 that year.

I could go on but I've just picked up an advance copy of a new book by Mike Hudson, a journalist who has been writing about dirty home lending practices since at least the early 1990s. The book, called The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis, is due out in October. The book is all about naming names in a report from a top-flight journalist.

To be continued...