“Private Equity Taking From Working Class To Get Even Richer”
Continued Part III
As treasury secretary, Geithner excoriated predatory lenders and their role in the Wall Street meltdown of 2007. Bonds based on subprime mortgages, he noted at the time, had a role in precipitating the panic.
“The financial crisis exposed our system of consumer protection as a dysfunctional mess, leaving ordinary Americans way too vulnerable to fraud and other malfeasance,” Geithner wrote in his memoir, “Stress Test.” “Many borrowers, especially in subprime markets, bit off more than they could chew because they didn’t understand the absurdly complex and opaque terms of their financial arrangements, or were actively channeled into the riskiest deals.”
In November 2013, it was announced that Geithner would join Warburg Pincus as president. Months earlier, one of the firm’s funds had purchased Mariner Finance for $234 million.
Under the management of Warburg Pincus, Mariner Finance has expanded briskly.
When it was purchased, the company operated 57 branches in seven states. It has since acquired competitors and opened dozens of branches. It now operates more than 450 branches in 22 states, according to company filings.
Twice last year, Mariner Finance raised more money by issuing bonds based on its loans to “subprime” borrowers — that is, people with imperfect credit.
Ex-workers share qualms
To get a better idea of business practices at this private company, documents filed for state licensing, insurance company documents, scores of court cases, and analyses of Mariner bond issues by Kroll Bond Rating Agency and S&P Global Ratings; obtained the income statement and balance sheet covering most of last year from a state regulator; and interviewed customers and a dozen people who have worked for the company in its branch locations.
Mariner Finance has about 500,000 active customers, who borrow money to cover medical bills, car and home repairs, and vacations. Their average income is about $50,000. As a group, Mariner’s target customers are risky: They generally rank in the “fair” range of credit scores. About 8 percent of Mariner loans were written off last year, according to a report by S&P Global Ratings, with losses on the mailed loans even higher. By comparison, commercial banks typically have suffered losses of between 1 and 3 percent on consumer loans.
Despite the risks, however, Mariner Finance is eager to gain new customers. The company declined to say how many unsolicited checks it mails out, but because only about 1 percent of recipients cash them, the number is probably in the millions. The “loans-by-mail” program accounted for 28 percent of Mariner’s loans issued in the third quarter of 2017, according to Kroll. Mariner’s two largest competitors, by contrast, rarely use the tactic.
Mariner generally targets people who have imperfect credit scores, according to the bond rating agencies. After a mailed check is cashed by a recipient, a Mariner rep follows up and solicits more information about the borrower — this helps in collections — and sometimes proposes additional lending. About half of the loans that begin with an unsolicited check are later converted into conventional loans.
“Our customer satisfaction rates with this product are exceptional,” wrote Morton, the company’s general counsel. He said that only about .02 percent of the mailed loan accounts lead to complaints.
Ten of the 12 former employees whom The Post contacted, however, expressed qualms about the company’s sales practices, describing an environment where meeting monthly goals seemed at times to rely on customer ignorance or distress. Those interviewed worked in branches across five states where Mariner is especially active: Virginia, Maryland, Tennessee, Pennsylvania and Florida.
“I didn’t like the idea of dragging people down into debt — they really make it a big deal to call and collect and not take no for an answer,” said Asha Kabirou, 28, a former customer service representative in two Maryland locations in 2014. “If someone started to fall behind on their payments — which happened a lot — they would say, ‘Why don’t we offer you another $200?’ But they wouldn’t have the money the next month, either.”
“Were there a few loans that actually helped people? Yes. Were 80 percent of them predatory? Probably,” said one former branch manager who was at the company in 2016. He spoke on the condition of anonymity, saying he did not want to antagonize his former employer. “I’m still embarrassed by some of the things I did there.”
“The company is here to make money — I understand that,” said Mauricio Posso, 28, who worked at a Northern Virginia location in 2016 and said he viewed it as valuable work experience. “At the same time, it’s taking advantage of customers. Most customers do not read what they get in the mail. It’s just little tiny type. They just see the $1,200 for you. . . . It can be a win-win. In some situations, it was just a win for us.”
While Mariner and industry advocates note that consumers can simply decline a loan if the terms are onerous, at least some of them may lack the time, English skills or other knowledge to shop around. Some are acutely in need of cash.
“I wanted to go to my mother’s funeral — I needed to go to Laos,” Keo Thepmany, a 67-year-old from Laos who is a housekeeper in Northern Virginia, said through an interpreter. To cover costs, she took out a loan from Mariner Finance and then refinanced and took out an additional $1,000. The new loan was at a rate of 33 percent and cost her $390 for insurance and processing fees.
She fell behind, and Mariner filed suit against her last year for $4,200, including $703 for attorney fees. The company also sought a court order to take out money from her wages.
Barbara Williams, 72, a retired school custodian from Prince William County, in Northern Virginia, said she cashed a Mariner loan check for $2,539 because “I wanted to get my teeth fixed. And I wanted to pay my hospital bills.”
She’d been in the hospital with three mini-strokes and pneumonia, she said. Within a few months, Mariner suggested she borrow another $500, and she did. She paid more than $350 for fees and insurance on the loan, according to the loan documents. The interest rate was 30 percent.
“It was kind of like I was in a trance,” she said of her decision to borrow from Mariner. She paid back some of the money but then fell behind, and Mariner sued. The company won court judgment against her in April for $3,852, including $632 in fees for Mariner’s attorney.
A lucrative addition
The other pool of Mariner Finance revenue comes from selling insurance polices.
Mariner pitches the insurance policies to customers as a way of paying off a loan in case of mishaps: There is a life insurance policy that promises to make the loan payments if you die, an unemployment policy that makes the payments if you lose your job, and an accident and disability policy in case of those possibilities.
Mariner also sells a car club membership that covers the cost of repairs.
These can add several hundred dollars to a loan.
The insurance policies provide “tangible benefits” for customers whose financial arrangements are vulnerable to life’s interruptions, the company said.
Customers are supposed to be informed that the insurance policies are optional. Several former employees alleged that some salesmen tacked on these products and waited for customers to object. They likened it to the add-ons that pad the bill when buying a car.
“If you sold a car club membership, you were like a god,” said a former assistant branch manager in Pennsylvania.
When Mariner salesmen were closing a loan and “went to print out the loan contract, they would just automatically add the insurance on there — every time,” Kabirou, the customer service representative said. “Clients would say, ‘Do I really need it?’ And the person would say, ‘Yes, you need to be covered.’ ”
In response, the company said steps are taken to make sure that customers understand that the insurance is optional.
The company has “numerous safeguards in place to make sure that all of our products are sold in a responsible manner. . . . Our audit teams regularly visit branch locations and monitor loan closings to ensure that our employees are explaining all products correctly. And we call a randomly selected subset of new customers every day to make sure they understand the terms of the loans.”
Mariner makes money from the insurance sales in two ways.
First, Mariner gets a commission from the insurance companies for selling the policies.
Mariner sells insurance policies issued by Lyndon Southern and Life of the South, and these two companies often give sales commissions of as much as 50 percent of the premium price, according to statistics filed with the National Association of Insurance Commissioners.
Mariner Finance officials declined to say how much of a commission Mariner receives on insurance policies it sells.
The second way that Mariner profits from the insurance sales is through its insurance company registered in Turks and Caicos. That company, too, earns money on policies issued by Life of the South and Lyndon Southern.
Essentially, it works like this: Mariner sells the insurance policies written by the two companies. Those two insurance companies, in turn, buy reinsurance from Mariner’s offshore affiliate, called MFI Insurance. Last year, those two insurance companies ceded $20 million in premiums back to MFI, according to documents filed in Delaware, where Lyndon Southern is based, and from Georgia, where Life of the South is.
Mariner declined to discuss its offshore insurance company. According to a Turks and Caicos financial regulator, it is the ease of doing business there — not laxity of regulation — that attracts companies to set up shop there.
“We have a risk-appropriate regulatory framework,” said Niguel Streete, managing director of the Turks and Caicos Islands Financial Services Commission.
But numerous business experts have advised U.S. insurers to set up shop in Turks and Caicos to avoid regulation.
“Much of the appeal of an offshore reinsurer is the modest regulatory climate,” according to a guidebook published by an insurance consulting agency known as CreditRe. Many such reinsurers “were developed as a legal mechanism to generate potential total income in excess of the [state-mandated] commission caps.”
The trouble with the insurance policies like the ones that Mariner sells to borrowers is that they devote so little money to covering claims, said Birny Birnbaum, executive director of the consumer advocacy organization Center for Economic Justice, which has issued reports on the credit insurance industry. He formerly served as the Texas Department of Insurance’s chief economist.
“At the end of the day, these lenders take far more in profit from the insurance premium than the amount paid in benefits for the consumer,” Birnbaum said.
Some regulators call for insurers to allocate at least 60 percent of premiums collected for covering customer claims; by contrast, some of the policies from Life of the South return as little as 20 percent to consumers; the policies from Lyndon Southern offer as little as 9 percent on average, according to the NAIC statistics.
Take, for example, the unemployment policy that Huggins bought from Lyndon Southern. The insurance cost Huggins a total of $172.
The average Lyndon Southern unemployment policy gives half of the premium back to the seller as a commission, according to the NAIC statistics. Less than 9 percent of premiums goes to covering customer claims, an extraordinarily low number, insurance experts said.
Life of the South and Lyndon Southern did not respond to requests for comment. Neither did the parent company of the insurers, known as Fortegra.
So far, Huggins’s unemployment policy hasn’t done him much good. He thought he was covered when he became unemployed last year and informed Mariner Finance. Instead, Mariner Finance summoned him to court.
Huggins said he’s worried about how disruptive the court case may be. He’s lost a day or two from work. More ominously, while he had hoped to raise his credit score enough to buy a house, a legal judgment against him could undo those plans. He and his stepkids are renting a place from a friend for now.
“Who sends someone $1,200 in the mail that they don’t know nothing about except maybe their credit score?” he said. “It was postdated, good for a month. I guess they give you a month to sit around and look at it and everything else until you just convince yourself you really need that money. . . .
“You think they’re helping you out — and what they’re doing is they’re sinking you further down,” he said. “They’re actually digging the hole deeper and pushing you further down.”