(3 of 3)
Once customers are in the door, the successful sub-prime lender keeps them on a tight leash. Within days of missing a payment, the delinquent is contacted to work out a new repayment schedule. If that doesn't work, repossession of car, house or other collateral often follows quickly. And when loans do go bad--in some parts of the industry, losses run 10% or higher even during good times--in-house or outside collection agencies and networks of "repo men" may be called in. Independent bill collectors alone employ an army of 65,000 people, who deploy everything from computerized phone banks for dialing deadbeats to liens and litigation.
CEO Coss founded Green Tree in 1975 to finance trailers and recreational vehicles. Mobile homes remain its biggest business--the company claims 28% of the market--as it diversifies into leasing office products and secured credit cards. Most mobile-home customers are first-time home buyers or retirees with annual incomes of about $26,000; the trailers cost an average of $34,000. Green Tree's break came in the 1980s, when the savings-and-loan crisis drove many thrifts out of the mobile-home market. The company moved quickly into the vacuum. The gamble paid off big when the mobile-home market took off in the early 1990s. Since then, the firm has upgraded its relationship with dealers, establishing 24-hour service centers in St. Paul and Rapid City, South Dakota.
Coss, the company's founder, keeps a low profile. A rider and an aficionado of Thoroughbred horses, he likes to relax on his South Dakota ranch or at another residence in Flagstaff, Arizona.
Making high-cost loans to lower-income borrowers doesn't sound like God's work, and the industry continues to hear criticism that it takes advantage of unsophisticated or desperate customers. "There is a whole segment of lenders who target low-income families and try to trap them in a vicious cycle of debt," complains Congressman Joseph Kennedy, a member of the House Banking Committee, who has pushed successfully for legislation to limit mortgage interest and fees. "It's a strategy that allows them to rake in hefty profits off the misery of others."
The industry has attracted numerous lawsuits around the country filed by customers who claim they have been ripped off. In a case that drew considerable public attention, an Alabama jury found Mercury Finance liable for fraud involving an auto-loan scheme that allegedly netted the firm hundreds of millions of dollars. The collection agencies that work hand in glove with the lenders have also been targeted for harassing or even threatening delinquents.
To the industry and to many economists, it is only logical that risky borrowers should pay more for credit. But those same laws of economics should work for consumers too. If the spectacular growth
of sub-prime continues, it will attract enough new competitors to act as a brake on interest charges. By that time, however, Green Tree's Coss won't be making $100 million. Shareholders recently voted to calculate Coss's pay using a new formula. If the company's performance continues at its current level, that would limit his salary and bonus to the $7 million range. Even at that, he seems like a good credit risk.