Eakes!

Forbes's flawed probe of a prescient consumer advocate

Forbes readers will be forgiven their confusion after reading a recent profile of Martin Eakes, a leading anti-predatory-lending crusader.

Headlined “Subprime’s Mr. Clean,” the piece is accompanied by a photo illustration of Eakes in a knight’s armor with blotches of mud on it. The subhead says, “Martin Eakes campaign to straighten out subprime lending has some wrinkles.”

Clearly, Forbes wants its readers to know there’s something wrong with Eakes, who heads the Center for Responsible Lending, a Durham, North Carolina, nonprofit that has made a name for itself with valuable research on, and prescient warnings about, abusive practices among subprime and other bottom-tier lenders.

Trouble is, Forbes can’t find any facts—not even one—that even remotely qualify as mud. To support its premise, the piece crosses the line from tough to unfair by trying to cast benign or irrelevant facts as somehow sinister.

Even Forbes’s headline is wrong. Eakes’s campaign to straighten out subprime lending has no “wrinkles” at all, or at least Forbes can’t find any. The story in fact has little to do with subprime mortgages, but instead focuses on Eakes’s campaign against payday lending, a form of cash advance, which is not the same thing.

Payday lending, by the way, is even ranker than subprime mortgage lending, which, despite years of diligent research in sub-basement laboratories, has yet to find a way to charge the working poor 400 percent annual interest rates, as payday lenders do.

So, no—zero—wrinkles found in Eakes’ anti-subprime campaign. As for his utterly laudable anti-payday lending campaign, there really aren’t any wrinkles there, either, as we’ll see.

That’s a lot of problems for a 700-word story.

Stephane Fitch, the lead writer, a Forbes veteran and a fine reporter, said in an interview that Eakes needs a look because, among other reasons, he’s now an influential figure in banking circles and on Capitol Hill, where Congress, the Fed, and the Bush administration are hammering out a borrower rescue bill.

Okay. I’m all for tough reporting, and Eakes is certainly fair game. But the facts have to support the premise.

The reason all this is important is that there’s a war of words on, and business-press readers ought to be aware of it. The financial-services industry—from the payday crews to Goldman Sachs—is rightly being blamed for breathtaking corruption that led to the cratering of the U.S. economy and global credit markets. Subprime and payday lenders in particular are fighting hard to fend off long-overdue reforms aimed at shutting down their three-card-Monte business practices. Eakes and his group exposed abuses in subprime and other lending—mostly by doing the research and reporting, it should be added, that put business-news organizations, including Forbes, to shame.

Now the Swift Boat-style campaigns against borrowers and their advocates have begun; business journalists just need to be on guard.

The story begins by describing Eakes, accurately enough, as the Ralph Nader of the lending business, citing his role in pushing states to ban payday lenders and abusive mortgage-lending practices, such as high mortgage-broker fees, which provide brokers with incentives to stick borrowers with bad loans, and prepayment penalties that trap them in those loans. Eakes, Forbes says, is also pushing Congress to ban prepayment penalties nationwide and, critically, to allow bankruptcy judges to rewrite mortgage terms. True enough.

The Forbes story includes a self-deprecating quote from Eakes:

“Half the people I know say they’d take a bullet for me, and half say they’d be happy to provide the bullet,” he says.

And adds:

So far his enemies’ weapons are limited to pointed remarks about his claims.

That “so far” is a cheap shot, but never mind.

The story then veers into a defense of payday lending, which Eakes has fought to ban.

An outgrowth of the check-cashing business, payday lenders provide small amounts of cash to strapped borrowers who need a job and a bank account to qualify. For a $300 loan, a typical amount, a borrower writes a check for $345, post-dates it to the next payday and gets $300 cash. On payday, the lender cashes the check and the loan is extinguished, in theory. The payday industry claims exception from state consumer lending laws because its loans are supposedly “short term.”

In fact, though, and not surprisingly, 90 percent of payday loans are rolled over, most of them more than five times. Why? Because someone who needs a 400 percent loan is probably too strapped to pay it back. This so-called product CRL rightly calls “financial quicksand.”

Payday lending is illegal in eleven states, including blue state New York and red states Georgia and North Carolina, Eakes’s home base. Even President Bush signed a law capping consumer loans to military families at 36 percent, protecting them, at least.

So, a defense of the payday lending industry shouldn’t be taken lightly, and yet Forbes relies on a single unpublished paper.

The magazine quotes from a working paper by Donald P. Morgan and Michael R. Strain, two economists at the New York Federal Reserve, who argue that eliminating payday loans doesn’t help but hurts struggling borrowers.

In his November report Morgan shows the Center for Responsible Lending has overstated the number of problem borrowers and argues that bans lead to more people bouncing checks, filing for bankruptcy and fighting with collectors.

The paper is available here.

The paper is a good-faith attempt to rethink payday lending, but it is an academic work that relies on assumptions that only an economist could make. I wish Forbes had applied its usual skepticism to this paper before giving it such currency.

The paper, for instance, calls payday loans “popular with customers” and says that “absent shocks or subterfuge, rational householders keep themselves free of debt traps and predators’ clutches.”

First, if 400-percent loans are so popular, why doesn’t Steve Forbes have one? And rational households get into debt traps often because they have imperfect information, unlike lenders, who do what they do for a living. This imbalance of information between borrowers and lenders is the same as that between amateurs and professionals in any setting. Is this complicated?

The economists also try to tie complaints to the Federal Trade Commission to a ban on payday lenders.

The most aggrieved defaulters will complain, and the tally of their complaints will register the financial shock like a simple seismograph.

But in the real world, any reporter knows that borrowers either don’t know what FTC is, or if they do, wisely don’t waste their time complaining to it. Consumers complaints as a seismograph? Does anyone believe that?

The working paper tries, moreover, to link increases in bankruptcies to state bans on payday lending. This strikes me as a bold assertion. Is it true? Maybe. Or maybe people go bankrupt for a lot of reasons.

It should be stressed that this paper has not been peer-reviewed. Why is this important? Here is how the paper controls, among other things, for changes in employment after payday lending bans.

DEP VAR = a + as + at + bUR + cGA + dNC + ePOST-BANGA + fPOST-BANNC + gGAxPOST-BANGA + nNCxPOST-BANNC + ε st.

I’m not qualified to say whether this regression analysis is valid, and neither is Forbes, and that’s the point.

In an opinion piece in The Wall Street Journal, George McGovern quotes the paper’s finding as fact that banning payday lenders leads to higher bankruptcy rates.

It may be true that taking away $300 loans actually drives people into bankruptcy. It’d be nice to know it was tested.

And it should be remembered this is an alternative view on payday lending; even the Fed economists acknowledge a broad consensus, at least among do-gooders and “government at all levels,” that payday lending is harmful. Forbes should have, too.

In contrast to this unpublished workpaper, Eakes’s research has been tested—by reality. Afer all, he was warning about subprime back when the rest of us all thought it meant cheap cuts of meat. Now look. And who was listening when CRL predicted 2.2 million foreclosures back in December 2006?

Forbes? The New York Fed? I don’t think so.

Turns out CRL was conservative.

That might be why the Fed just appointed CRL’s president to its Consumer Advisory Council, citing the organization’s “ground-breaking research,” while this payday paper is still looking for a publisher.

In any case, if Forbes want to take a serious look at payday lending, that’s one thing. But this story just drives by the topic to make the obscure point that opposing 400-percent loans is some kind of blemish. I don’t get it.

Forbes then goes further by implying that Eakes fights payday lenders to help his own organization. Eakes, you see, runs a credit union—Self-Help Credit Union—which has thrived by offering subprime borrowers loans that don’t charge 400 percent interest.

Who, then, really benefits from payday loan bans? Credit unions, for one, notes Morgan.

Oh, please. But it gets worse.

In payday-loan-free North Carolina Self-Help has thrived. Its assets have jumped from $114 million in 2003 to $292 million last September. Its return on average assets is 1.4%, reports snl Financial, versus the industry average of 1.1%. Terry L. Kibbe, a former think tank fundraiser who last year started a libertarian consumer advocacy outfit, Consumers Rights League, notes that Self-Help’s high delinquency rate—it’s seven times that of the typical credit union—proves that Eakes is as bad at judging borrowers’ ability to pay back loans as anybody else. Self-Help says less than 1% of its loans ultimately default.

Let’s unpack that paragraph, because nearly every figure in it is a manipulation.

First, Self-Help thrived long before North Carolina became “payday-loan-free,” which didn’t happen until 2006. So to imply that the credit union thrived because the state banned competition is misleading.

As for its high “return on average assets,” well, that’s a good thing, not a bad thing, as Forbes seems to be signaling.

Put another way, would falling asset values and a sub-par ROA be cause for praise in Forbes’s view? I doubt it.

I’m still trying to figure out why that quote from Kibbe is in there. What does the credit union’s high delinquency rate have to do with anything? The fact that only 1 percent of borrowers actually default means Self-Help solves problems. So what?

And a little perspective here: Self-Help’s subprime portfolio of poor borrowers is doing much better than the nation’s regular borrowers, fully 2 percent of whom—forget default—are actually in foreclosure.

And it pays to remember why the housing market is in such turmoil. It’s not because of Eakes, that’s for sure.

Forbes here is guilty—at best—of false balance, the everyone-must-be-a-crook school of journalism. But it doesn’t take a Columbia J-school degree to understand the moral difference between Eakes, who fought to head off the crisis, and the financial-services industry that caused it.

Likewise, there’s a difference between the Center for Responsible Lending, which has hard-won credibility on lending issues, and something called the Consumers’ Rights League, a heretofore-unknown, self-styled libertarian advocacy group quoted by Forbes. This ersatz “CRL” (same initials; hmm) popped up like a Jack-in-the-box just as the Forbes story ran, and appears to exist for no other purpose than to attack Eakes and promote the payday lending industry.

Again, investigating Eakes is not the problem.

But all these contortions point to a time-honored journalism principle: if facts can’t be found to support the premise, reexamine the premise.

Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.