January 31, 2006 (emphasis added by MSFraud.org)
· In the aftermath of Ameriquest, regulators say they're continuing to probe 'sub-prime' firms.
By E. Scott Reckard and Mike Hudson, Special to The Times
Ameriquest Mortgage Co.'s agreement last week to pay $325 million and reform
its operations could turn out to be the first in a series of regulatory actions
targeting mortgage companies specializing in credit-strapped borrowers.
State financial regulators are working jointly on other cases involving so-called sub-prime lenders, said Chuck Cross, director of consumer services for Washington state's Department of Financial Institutions.
constantly talking about who is next," said Cross, a leading investigator
on behalf of 49 states and the District of Columbia in the case against
Sub-prime lenders write mortgages for customers who cannot qualify for traditional "prime" loans, often because they have poor credit or banks don't think they have enough income or home equity.
Federal Trade Commission officials confirmed that they have several open investigations of sub-prime companies but declined to provide details.
Wall Street firm Bear, Stearns & Co. disclosed last month that its loan-servicing unit EMC Mortgage Corp., which collects bills and buys loans from sub-prime lenders, had handed over data and documents to the FTC. In a regulatory filing, Bear Stearns said the FTC was probing "various unnamed sub-prime lenders, loan servicers and loan brokers" for possible violations of consumer protection laws.
John Yanchunis, a Florida attorney who has filed class-action complaints against servicers, has alleged in two federal lawsuits that EMC systematically failed to post mortgage payments accurately, provided inaccurate information to customers and imposed improper charges.
Bear Stearns spokesman Russell Sherman declined to comment.
In announcing the Ameriquest deal last week, Iowa Atty.
Gen. Tom Miller said regulators and consumer protection officials had fielded a
wave of complaints over the last five years about sub-prime lenders such as
Ameriquest and Household International Inc.
Household, now HSBC Finance Corp., paid a record $484 million and
adopted widely praised "best practices" to settle a a nationwide
investigation in 2002.
Both lenders were accused of using deceptive sales tactics to hide high rates and fees, and Ameriquest was also accused of falsifying appraisals and applications to qualify borrowers for loans they couldn't afford. Ameriquest acknowledged isolated problems, saying it had fired or disciplined those involved, but denied pervasive wrongdoing.
Miller, who led the multi-state probes of both firms, did not rule out additional settlements with other retail lenders, as they are known. But he suggested that it might soon be time to look at another part of the sub-prime industry — the so-called wholesale lenders that rely on independent mortgage brokers to generate loans for them.
"The retail side was clearly the more important place to focus," he said. "But at some point we want to take a look at the wholesale operations."
Sub-prime lending has mushroomed to 20% of the mortgage market in recent years, growth made possible by risk-analysis software, high investor demand for mortgage-backed bonds and historically low interest rates.
The FTC has taken action against nearly 20 sub-prime companies since 1998. In a 2003 case, Fairbanks Capital Holding Corp., a mortgage servicer, agreed to pay $40 million to settle claims that it overcharged borrowers with poor credit. In 2002, Citigroup Inc. agreed to pay $215 million to settle FTC allegations that sub-prime unit Associates First Capital Corp. had deceived people into buying overpriced mortgages and unnecessary credit insurance.
Miller said the Ameriquest case was a big victory in the effort to reform what "in some ways has been a very bad industry." He expects Ameriquest to be "one of the cleanest companies going forward," with other sub-prime lenders adopting similar reforms to avoid exposing themselves to investigations and lawsuits.
Some consumer advocates are skeptical about how much the settlement will do to eliminate the industry's bad actors.
"I applaud the settlement that will come from Ameriquest," said former Georgia Gov. Roy Barnes, who championed anti-predatory lending legislation as his state's chief executive and has sued Ameriquest and other lenders as a private attorney. "But where Ameriquest will die down a little and maybe change their stripes, there'll be another company out there doing the same thing, and another, and another."
Not everyone sees the industry's record of legal tussles as evidence of widespread problems.
"There are always a few who will deliberately go out and try to deceive," said Kurt Pfotenhauer, senior vice president of government affairs at the Mortgage Bankers Assn. But borrowers can avoid problems if they shop around, he said, because "the industry is fundamentally honest and is trying to offer a product that's good and useful to borrowers who are asking for it."
Kurt Eggert, a Chapman University Law School professor who has analyzed sub-prime loan collection abuses for the Fannie Mae Foundation, said unscrupulous loan servicers exploit the fact that borrowers in this market are expected to have financial problems and miss mortgage payments.
Opportunistic servicers mishandle tax and insurance accounts, impose high-priced hazard insurance on homeowners who already have coverage, and record defaults even when payments are current, he said.
"They sit on checks until a late fee kicks in," Eggert said. "Then you do what they call pyramiding: When the next payment comes in, they apply it to the late fee and say the borrower didn't make a whole payment. And then they collect more late fees or foreclosure fees."
A lawsuit seeking class-action status in San Francisco Superior Court accuses Wells Fargo & Co.'s sub-prime operations of bait-and-switch tactics similar to those alleged in the Ameriquest case. A spokesman for San Francisco-based Wells Fargo has called the charges an effort "to distort and misrepresent our business practices and procedures."
Lawyers who have sued sub-prime lenders say the high-pressure sales culture that pervades the industry makes fast-and-loose practices inevitable.
Kathleen Keest, a former assistant attorney general in Iowa who is now a staff attorney for a Durham, N.C., advocacy group, said predatory lenders have stayed ahead of government crackdowns and a changing market by abandoning some bad practices while inventing ways to squeeze borrowers.
In recent years, Keest said, sub-prime lenders' aggressive marketing has persuaded many homeowners to refinance so frequently they have no equity left to tap or their incomes can't keep up with rising monthly payments. To overcome these impediments, she said, lenders have turned to shady tactics to keep the loans rolling in — not only exaggerating appraisals and borrowers' incomes but also pushing "interest-only" mortgages and other products that disguise homeowners' less-than-flush finances.
"As long there's pressure to grow and the market's saturated, they'll do it whatever way they can," Keest said. "If they can't do it honestly, they'll do it dishonestly."
William Brennan, director of the Atlanta Legal Aid Society's Home Defense Program, says his office sees a stream of elderly widows whose Social Security incomes have been padded — on paper — by made-up jobs. And 55% of appraisers nationwide say they have been pressured to overstate home values, according to a 2003 survey by October Research Corp., a private real estate research firm.
Industry officials, however, believe market forces work to curtail the number of fraud-tainted loans. Doug Duncan, the Mortgage Bankers Assn.'s chief economist, said that if large numbers of the loans were based on overstated home values or faked incomes, investors' profits would suffer and the investors would punish the offending lender by redirecting their capital toward other lenders.
"The market isn't perfect," Duncan said. "But it is efficient."
Reckard is a Times staff writer, and Hudson a special correspondent