Knox defends payday loans

In 1999, all over Pennsylvania, thousands of people strapped for cash lined up at the storefront offices of a short-term loan company.

They got money, fast, from a bank called Crusader, headed by a self-made millionaire named Tom Knox.

The loans averaged $250 apiece. But the interest was so steep that community activists cried foul, and federal regulators zeroed in on the bank. Eighteen months after it began making these so-called payday loans, Crusader, under pressure from regulators, agreed to stop.

Now, the man who ran Crusader is running for mayor of Philadelphia, and his wealth has transformed the race.

Knox's role in the much-criticized payday lending industry is only a brief chapter in his career - "a very small part" of his earnings, as his wife, who was a Crusader director, put it. Knox, who was a millionaire before he bought Crusader, has made his rags-to-riches life story the center of his campaign.

But as polls show Knox surging into second place in the five-way Democratic field, his rivals are already hinting that they'll make an issue of "predatory lending," as candidate U.S. Rep. Bob Brady said last month, and Knox is facing questions about his past involvement in payday loans.

Knox, who served briefly as a $1-a-year deputy mayor under Mayor Ed Rendell in the early 1990s, said in an interview last week that he had no regrets about having gotten into payday lending in 1999 and 2000.

But the longtime insurance executive also acknowledged that it was not one of his best business decisions - and said he "did the right thing" by getting out of payday lending.

Knox acknowledged that federal thrift regulators - "they're like Gestapo" - had pushed Crusader to stop this practice. He said the bank wanted out, having tired of criticisms from "social groups, do-gooder types" and federal regulators.

"They wanted us out of the business. We wanted to extricate ourselves," Knox said. "We got out."

At the time, he said, he thought the loans served working-class people well. "I thought at the time it was a service to the community," Knox said.

He said he did not realize at first that the loans, if unpaid and renewed again and again, could lead lower-income people into spiraling debt.

"When we went into this business, we weren't aware that people were rolling over these loans and it was costing them this money. . . . We were going to make a couple of dollars [per loan]. As it turned out, there were these rollover loans, and that was what all the regulators and all the people who were criticizing us were talking about."

While taking pains to say his bank's loans had not been improper, Knox said that if he became mayor, he would ask banks to offer cheaper short-term loans at no profit.

"I'd like to see the city require some of the banks that we do business with provide what we call 'micro loans' to people that need them, and to do it on a break-even basis," Knox said.

He said his concern now, as then, is to help people who have no place to turn for small loans - much like the situation in which Knox said he found himself after joining the Navy at 17. When returning home, he said, he had to borrow $3 and pay back $5 to afford a round-trip bus ticket from Norfolk, Va., to Philadelphia.

"I believe people in that situation should not be ignored," Knox said.

Knox bought Crusader Bank in 1989. He had already made millions in the insurance business, starting out as a $100-a-week life-insurance salesman in South Philadelphia and eventually founding and leading a firm, Preferred Benefits Corp.

He said he got his first $1 million commission on an insurance policy in the late 1970s. "I've been making a lot of money for a long time," said Knox, who is 66.

At Crusader Bank, he said, he got involved with payday loans when one of the bank's lawyers introduced him to Advance America - one of the nation's biggest payday lenders.

The lawyer, as Knox recalled, said, "We think they have a great idea for you, and this is a business you would probably want to be in."

Here's how Crusader's payday loans worked: A customer who borrowed $100 would owe $117 two weeks later. The idea was that the borrower would get his or her regular paycheck by then and repay the loan and the interest.

In many cases, though, borrowers couldn't repay in time. The bank would then add another $17 interest for a second two-week period, or "rollover."

That meant a customer who didn't have much money in the first place now owed $134 for a loan of $100.

"Credit heroin" is how Allentown lawyer Alan Jennings describes payday lending practices in general. Jennings, who heads Community Action Committee of the Lehigh Valley, said that too often, people who had gotten such loans "kept going back for more."

Crusader's loans were made from 80 storefront offices - in Allentown, the Philadelphia area, Pittsburgh, Harrisburg and Scranton. Knox's campaign said the bank made "hundreds of thousands" of payday loans.

By the summer of 2000, the federal Office of Thrift Supervision was raising serious concerns about Crusader's payday lending business. So was a consumer advocacy group, the National Community Reinvestment Coalition, which in a letter to the Federal Reserve System said the terms of Crusader's payday loans amounted to annual interest rates of up to 431 percent.

With angry regulators on its back, the bank made an agreement with the Office of Thrift Supervision to pull out of this type of lending just 18 months after it had begun.

The next year, Crusader was sold to Narberth-based Royal Bank, netting Knox about $17.2 million. He owned 48 percent of the bank at the time.

In recent weeks, Knox's wealth has become an issue in the mayoral campaign. His $2 million self-funded TV advertising blitz vaulted him to second place in the latest poll, and set off calls from some politicians for changing the campaign-contribution caps that Philadelphia adopted in 2003.

When one of Knox's rivals, Brady, launched his candidacy on Jan. 25, he spoke mostly about stopping crime and improving the city - and also vowed to curb lenders who engaged in "predatory lending and foreclosures." A few days later, a Brady ally in City Council, Carol Campbell, lamented how the race had been reshaped by Knox's wealth - "by whatever means acquired."

Knox had initially said he would spend up to $15 million on his campaign. In the interview last week, he revised that, saying he would spend "whatever it takes" to win the May 15 Democratic primary and the mayor's office in the fall.

He played down payday lending's importance at his former bank, saying it was a small slice of total operations. His campaign referred some of The Inquirer's questions to two former Crusader directors - his wife, Linda R. Knox, and Bruce Levy.

Levy estimated that payday lending produced roughly $1 million in profit during the first full year that the short-lived lending program ran. Later in the interview, he said the program produced about 20 percent of the bank's overall profits that year.

Tom Knox stressed that his former bank had been right to get out of payday lending. "We did the right thing and got out," he said. "It's as simple as that."

1967-86: Chief executive officer, Preferred Benefits Corp.

1987-92: CEO, Knox Group Inc.

1988-90: CEO, Kasser Industries and Gimco Holding.

1992-93: $1-a-year deputy mayor for management and productivity in cabinet of Mayor Ed Rendell.

1993-95: State-appointed rehabilitator, Fidelity Mutual Insurance.

1989-2002: Chairman and CEO, Crusader Holding Corp.

1999-2004: CEO and chairman, Fidelity Insurance Group.

2004-06: CEO, United Health Care of Pennsylvania.

2006: Retired.

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