Seven subprime mortgage lenders from across the country have agreed to pay redress or be banned from making certain loans to settle Federal Trade Commission charges that their lending practices violated various laws enforced by the agency. The agreements are part of the Commission's "Operation Home Inequity," a law enforcement and consumer education campaign that seeks to curb abusive practices in the subprime mortgage lending industry. All seven proposed agreements would provide substantial remedies and protections for past and future borrowers. Six of the companies have agreed to pay consumer redress totaling $572,500, two companies must obtain performance bonds before they offer or extend specified credit in the future, and one company is banned from any future involvement with high-cost loans secured by consumers' homes.
"Predatory home equity lenders target the most vulnerable homeowners - the elderly and people in financial or personal crisis - for high-cost loans secured by their homes," FTC Chairman Robert Pitofsky said. "These subprime lenders appear to care little about a borrower's ability to pay, so long as he/she has enough home equity to secure the new loan. The lenders are able to prey on homeowners because mortgage transactions are often very complicated and difficult to understand. These practices are among the most abusive forms of consumer exploitation that I have seen. 'Operation Home Inequity' underscores the FTC's commitment to curtail home equity abuses by unscrupulous lenders."
Pitofsky warned consumers who are thinking of refinancing their home or getting a home equity loan to consider their options carefully: "Don't let anyone talk you into using your home to borrow money you don't need. If you can't make the required payments, you could lose your home as well as the equity you've built up." He also said that consumers should always shop around -- costs can vary greatly. And he warned consumers never to sign any documents that they do not understand. "Call a lawyer, visit legal aid, talk to someone you trust."
AARP appeared at a FTC press conference in Washington, D.C. announcing "Operation Home Inequity." Anne Harvey, Director of AARP's Program Development and Services, said "Older homeowners are popular targets of fraudulent home repair financing schemes because they're likely to live in older homes that need repair, they've built up substantial equity, and are less likely to undertake home repairs themselves. In addition, older homeowners are more likely to be vulnerable to high pressure pitches."
According to the FTC, "subprime" lenders generally extend credit to higher-risk consumers and charge significantly higher rates and fees than lenders charge those who obtain "prime" loans. Subprime lending has grown dramatically in recent years. During 1998, subprime mortgage and home equity lenders originated $150 billion in loans, an increase of almost 58 percent over the prior year. While many subprime lenders are reputable, some unscrupulous subprime lenders make costly home-secured loans to consumers who are unable to repay them, subjecting such consumers to refinancing with additional high or unfair fees and charges and possible loss of their homes through foreclosure or forcing an undesired sale.
The Home Ownership and Equity Protection Act (HOEPA) took effect in October 1995. Congress passed the law to stem the growth of certain predatory lending practices. HOEPA amended the Truth in Lending Act (TILA) and provides special protections for consumers in certain non-purchase, high-cost loans secured by their homes. In loans covered by HOEPA, the lender must give the borrower certain disclosures in writing at least three business days before closing. This information includes a notice that the consumer could lose his/her home and any money put into it, if he/she does not meet his/her obligations under the loan. The notice also requires disclosure of the annual percentage rate, amount of payments and, if applicable, certain variable rate information. The law also bans from high-rate, high-fee loans such terms as balloon payments due in less than five years, increasing the interest rate at default, and most prepayment penalties. Lenders also are prohibited from engaging in a pattern or practice of lending based on home equity without regard to consumers' ability to repay loans ("asset-based lending") and making direct payments to home improvement contractors. Other TILA provisions require disclosure of key credit terms and give consumers three days to rescind after they sign loan documents.
The Commission complaints in the cases allege that the defendants violated HOEPA, TILA and Section 5 of the FTC Act. According to the agency, all seven cases involve serious violations of HOEPA.
The proposed settlements would prohibit HOEPA and TILA violations, as well as related FTC Act violations, including but not limited to the specific violations alleged in the complaints. The defendants in six of the cases have agreed to pay $572,500, in amounts ranging from $25,000 to $250,000, for consumer redress. The FTC expects to send refunds averaging about $2,100 to borrowers in about 275 HOEPA loan transactions.
To prevent injury that could result from retaining prohibited terms in open HOEPA loans, the proposed orders would require the defendants, for each HOEPA loan that they still wholly or partially own, to reform the note or contract by nullifying loan terms that HOEPA prohibits. These include prohibited balloon payment, increased interest rate, and/or prepayment penalty provisions.
Barry Cooper Properties
In its complaint, the FTC alleges that Barry Cooper violated HOEPA, and the FTC Act by including a prohibited prepayment penalty and by engaging in asset-based lending practices.
As part of the settlement, Cooper would pay $25,000 in redress to consumers. The proposed order also would prohibit Cooper from offering or making any HOEPA loan for five years, unless he first obtains a $150,000 performance bond. In addition, the proposed order also would require Cooper to reform consumers' contracts containing prohibited prepayment penalty provisions by nullifying those provisions.
Capitol Mortgage Corporation
The complaint against Capitol Mortgage and its sole principal, Thomas D. Lakey, alleges that they violated HOEPA and/or the FTC Act by failing to give consumers the required notice and term disclosures and improperly depriving consumers of the three-day waiting period created by the HOEPA advance disclosure requirement. The complaint also alleges that the defendants included prohibited balloon payments, increased interest rate provisions, and prepayment penalties in loan documents. The complaint further alleges that Capitol Mortgage violated the TILA by failing to make required disclosures, by making disclosures that did not reflect the terms of the legal obligations between the parties, and by engaging in practices that deprived consumers of the three-day right to rescind.
The proposed settlement would bar the defendants from participating in any activity related to certain high-cost loans secured by consumers' principal dwellings. It also would require the defendants to reform existing contracts to nullify prohibited balloon payment, increased interest rate, and prepayment penalty provisions. They also would be required to extend the term of loans with balloon payments so that any outstanding principal balance will not be due for at least five years. According to the FTC, Capitol Mortgage has ceased doing business and the defendants are unable to pay redress.
CLS Financial Services, Inc.
The complaint against CLS Financial Services and its main principal, Gerald Vanhook, charges that they violated HOEPA and/or the FTC Act by failing to provide required HOEPA notices and disclosures, and using prohibited balloon payment and interest rate increase provisions. According to the complaint, CLS also made loans that involved asset-based lending in violation of HOEPA.
Moreover, CLS allegedly falsely labeled loans as "open-end" credit in an attempt to evade HOEPA, in violation of Section 5 of the FTC Act.
CLS has agreed to pay $60,000 in consumer redress, to reform open loans to nullify prohibited balloon payment and interest rate increase provisions, and to extend the term of loans with improper balloon payments so that the outstanding loan balance is not due for at least five years.
Granite Mortgage, LLC
The FTC's complaint against Granite Mortgage, Able Loan Company, Stonington Properties and two principals, Thomas M. Stoeckinger and Steven J. Mischner, alleges that the defendants violated HOEPA and/or the FTC Act by failing to provide required HOEPA notices and disclosures. The complaint also alleges that the defendants violated HOEPA and/or the FTC Act by using prohibited prepayment penalty provisions and engaging in asset-based lending. The agency also charges a failure to give required TILA disclosures.
Granite has agreed to a settlement that includes $132,500 for consumer redress and reformation of open loans to reduce interest rates and to nullify prohibited prepayment penalty provisions.
Interstate Resource Corp.
Newburgh, New York
The complaint against Interstate Resource Corp. and two principals, James Ludlow and John O'Brien, alleges that the defendants violated HOEPA and/or the FTC Act by failing to provide material credit information as required by HOEPA. The defendants have agreed to a settlement that includes $50,000 for consumer redress.
LAP Financial Services, Inc.
The complaint against LAP Financial Services and its sole principal, Louis A. Pomerance, alleges numerous HOEPA violations and/or violations of the FTC Act. These include failure to provide required notices and disclosures, asset-based lending, using prohibited prepayment penalties, and making direct payments to home improvement contractors. The complaint also alleges that LAP Financial violated TILA by failing to provide required disclosures and engaging in rescission-related violations.
The defendants have agreed to pay $250,000 in consumer redress, and to reform loans by nullifying prohibited prepayment penalty provisions.
Wasatch Credit Corp.
Salt Lake City, Utah
The complaint names Wasatch Credit Corp.; Wasatch Equities Corp.; Wasatch Loans, Inc.; Wasatch Recovery Corp; RHK Family Trust; and David Knudson and Holly Knudson, principals and owners of the Wasatch companies. The FTC charged that the defendants violated the FTC Act and/or HOEPA by failing to provide notices and disclosures that HOEPA requires, and by improperly depriving consumers of the three-day HOEPA waiting period. The complaint also alleges that they used prohibited balloon payment and increased interest rate provisions and engaged in asset-based lending. It further alleges that they violated TILA and/or the FTC Act by failing to provide required disclosures and engaging in practices that deprived consumers of their right to rescind.
Finally, the complaint alleges that the defendants directed borrowers to falsely characterize consumer loans as business loans, in an apparent attempt to evade HOEPA and the TILA, in violation of the FTC Act.
In order to settle the FTC charges, the defendants have agreed to pay $55,000 in consumer redress. The proposed settlement also would prohibit the defendants from offering or extending consumer credit, unless they first obtain a $250,000 performance bond that would remain in effect for five years. The defendants also agreed to reform contracts to nullify prohibited balloon payment and increased interest rate provisions.
As part of "Operation Home Inequity," the FTC launched a consumer education campaign to give valuable information to consumers who are considering refinancing or obtaining home equity loans. The agency today released a new Consumer Alert, titled "Need a Loan? Think Twice About Using Your Home as Collateral," which advises consumers on ways to protect their homes and equity. It also identifies early warning signs for consumers, suggesting that they avoid any lender who:
tells you, or requires you, to falsify information on the loan application.
pressures you into applying for a loan or applying for more money than you need.
pressures you into accepting monthly payments you can't make.
fails to provide required loan disclosures or tells you not to read them.
misrepresents the kind of credit you're getting. For example, calling a one-time loan a line of credit.
promises one set of terms when you apply, and gives you another set of terms to sign-with no legitimate explanation for the change.
tells you to sign blank forms - the lender says they'll fill them in later.
says you can't have copies of documents that you've signed.
The Commission votes to approve the consent decrees in settlement of the court actions were 4-0. Commissioner Orson Swindle concurred in part and dissented in part, stating, "The allegations that defendants violated TILA and HOEPA, and engaged in deceptive practices by failing to disclose material loan information, are well supported. It is unnecessary to stretch beyond these solid allegations to construct expansive unfairness theories that do not satisfy our statutory unfairness requirements." He noted that "[t]hese unfairness allegations are based on the theory that although these actions, standing alone without HOEPA, do not meet the test for unfairness, factoring in HOEPA as evidence of 'established public polic[y],' 15 U.S.C. § 45(n), tips the balance toward establishing unfairness." Commissioner Swindle stressed, however, that "factoring in HOEPA does not overcome the failure to meet the primary statutory requirements that the likely harm be substantial and not reasonably avoidable by consumers." In addition, he stated that, since HOEPA binds only creditors, this theory of unfairness "still does not provide a basis for alleging that those [non-creditor] defendants who are not bound by HOEPA engaged in unfair acts or practices in violation of Section 5. . . . If the underlying actions do not independently violate Section 5 without the inclusion of HOEPA's 'public policy,' I do not see how the Commission can rely on HOEPA's policy to establish that the creditors' actions are unfair but then disregard the clear limits on HOEPA's applicability by stretching that policy to cover entities that are not creditors. By doing this, the majority creates a mechanism to strip a statute of its explicit jurisdictional limits and extend its reach -- as well as that of the Commission -- to those whom Congress has explicitly excluded."
The stipulated final judgments and orders were filed in the U.S. District Court for the Central District of California (Barry Cooper Properties), the U.S. District Court for the Eastern District of Kentucky (Granite Mortgage), the U.S. District Court for the Western District of Kentucky (LAP Financial Services), the U.S. District Court for the Southern District of New York (Interstate Resource), the U.S. District Court for the District of Utah (Capitol Mortgage and Wasatch Credit), and the U.S. District Court for the Western District of Washington (CLS Financial Services).
The Office of the Utah Attorney General, the Kentucky Department of Financial Institutions, and the Utah Department of Financial Institutions assisted in the investigations.
NOTE: These judgments are for settlement purposes only and do not constitute an admission by the defendants of a law violation. The judgments have the force of law when signed by the judge.
Copies of the stipulated final judgments and orders are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
FTC File Nos. Barry Cooper Properties (9823200), Capitol Mortgage (9823203), CLS Mortgage (9823171), Granite Mortgage (9823170), Interstate Resource (9823196), LAP Financial (9823169) and Wasatch Credit (9823191).
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