JUNE 1991 - VOLUME 12 - NUMBER 6
E C O N O M C I S
Scamming the Poor
by David Lapp
After unsuccessfullyattempting to obtain a home improvement loan from major banks, Lawrence Robinson, an elderly and illiterate homeowner living on Social Security in the Boston- area town of Dorchester, was approached by a man who said he could get help him get a loan. The man, who called himself "Deacon Johnson," negotiated a high-interest loan of over $100,000 to be secured by Robinson's property. The loan company, East Coast Mortgage Co., hired and directly paid a contractor to do interior and exterior house work. The contractor was paid approximately $90,000 for work, valued at approximately $10,000, which was never completed.
Since the work was unfinished, Robinson was forced to hire another contractor, requiring yet another loan. Resource Financial Group, Inc., which purchased the first loan from East Coast, provided the funding, loaning Robinson an additional $47,000. But since monthly payments on the loans totalled $2,800--three times Robinson's monthly Social Security payment-- Robinson has been unable to keep up with the payments, and Resource is threatening to foreclose on his home.
"How could [they] loan my father $150,000 knowing he had a fixed income that was no where near enough to payback the money?" Robinson's son William asked the president of Resource. "The company president responded to me that my father had property that was worth a helluva lot more than the loan," Robinson says.
Thousands of homeowners across the United States tell stories similar to Robinson's. Unscrupulous mortgage companies are targeting homeowners in cities such as Atlanta, Boston, Chicago, Los Angeles and New York. Often scheming with home-improvement contractors, these finance companies aggressively sell high- interest and often fraudulent loans. They focus their schemes on elderly and minority neighborhoods--people who are cash poor, yet property rich--hoping to swindle the homeowners out of thousands of dollars in home equity or to steal their homes outright. Because they lend at high interest rates, these lenders know that many of the homeowners, who are often forced to acquire additional loans, will be unable to keep up their payments, making foreclosure virtually inevitable.
Jeff Kalenka, a New York attorney representing a number of the victims of such schemes, describes how the contractors operated in New York City. "A number of contractors would go door-to-door through the black areas in Nassau and Suffolk Counties ... getting people to sign 100 percent-financed home-improvement contracts for exorbitant prices." Kalenka explains how the contractors manipulated and misled the homeowners. "They were taking people who generally had a large amount of equity in their home, but who really didn't have the money to make the monthly payments.... They told these people that they can consolidate their debts, but what they actually did was place second, third and fourth and in one case six mortgages against the houses. The rate of interest was generally close to 20 percent. And these people were never informed and did not know that mortgages were being placed on their property."
Sometimes the loan applications are falsified in flagrant violation of lending laws, so that the homeowner can receive a larger loan. In one case in Boston, a 81-year-old black man was listed on a loan application as a 60-year-old white man with a monthly income of $1,675.
These schemes have been the subject of numerous lawsuits around the country. Harry Kutner, another New York attorney representing victims of the scam, is waiting for one of his lawsuits to be certified as class action. If it is, he anticipates thousands of defrauded residents in the New York City area alone will join the suit. So far he represents all black homeowners, except for one Hispanic. The named plaintiff in Kutner's lawsuit is a 66-year-old black woman who is diabetic, crippled, blind and living on Social Security. Incredibly, the woman obtained six mortgages secured by her home.
Dan Edelman, a Chicago attorney, has settled two lawsuits alleging similar scenarios, induding one massive class action suit against the Community Bank of Peoria and Community Financial Services. In that case, Edelman represented 6,200 plaintiffs--principally minority and elderly residents--from the Chicago and St. Louis areas who had obtained high-interest loans that were secured by their homes. Edelman has another similar class action suit pending, which, he says, is not limited to the Chicago area.
"The suits allege that deceptive means were used to induce people to engage in home-improvement transactions, and in some cases [the suits allege] Truth-in-Lending violations," Edelman says. The federal Truth-in-Lending Act declares it illegal to falsify loan papers and requires that lenders disclose loan information to the borrowers.
The underbelly of redlining
More than just the mortgage and home-improvement companies are behind the swindles; banks are integral to their success. The home-improvement contractors do poor work, for which they are paid handsomely. The finance company earns the loan points, origination fees and other charges heaped on the victim. The major banks that purchase the loans from the finance companies earn 20 percent interest. And, if all works as planned, the institution owning the loan can foreclose and the victim's house becomes that institution's property. (Late last year, a finance company foreclosed on a house which the victim had originally bought for $15,500 and sold it for $134,000.)
"It's a three-headed conspiracy," explains Kutner. "A home- improvement contractor finds the victims.... Then in conjunction with the finance company, they write 19.8 percent loans to the homeowners." Since the banks either supply credit lines to the finance companies or purchase the loans in bulk, they are "willing participants," he says.
Many of the homeowners were told to sign blank papers and never knew they were risking losing their homes, Kutner says. Once the papers are signed, the salesperson, the loan broker and others take out high fees. On a $10,000 loan, for example, slightly over half may actually be used to pay the contractor--for overpriced work that may never be completed--with the remainder paying the "fees" of the other parties involved. The person taking the loan never actually receives any money because the finance company pays the contractor directly.
Bruce Marks, who directs the Union Neighborhood Association in Boston, reserves most of his ire for the banks. He calls the home-loan rip-offs "the underbelly of redlining," asserting that "these people were set up to lose their homes." Boston-area banks have redlined poorer neighborhoods of Boston, causing the residents to turn to the mortgage companies that charge the usurious rates, Marks explains. "Every community needs credit, and when you can't get loans [from the banks at standard interest rates], that's when you have to go to hard lenders."
Two years ago, Marks says, the Union Neighborhood Association began to uncover the banks' continued role in the communities they had seemingly abandoned. According to Marks, the banks profit from the racist lending policies because they provide the capital and the lines of credit, and purchase the loans made by the credit companies. Marks says the banks in the Boston area that have been involved include Fleet/Norstar Financial Group, Inc., Shawmut, Baybanks, U.S. Trust, Bank of Boston, State Street and the Bank of New England.
Another deregulatory nightmare
Many of the same factors that contributed to the collapse of the savings and loan industry have created the opportunity for lenders to institute these scams. Federal and state deregulation and weak enforcement of remaining regulations in the 1980s broke the market wide open for lending institutions. With fewer rules to protect them, unsuspecting consumers are more easily deceived.
"The efforts of U.S. attorneys and attorneys general in terms of corporate crime and consumer fraud have diminished over the past decade," argues Bob Hobbs, deputy director of the Consumer Law Center in Boston. "A good number of states deregulated their interest rate ceilings during the high interest rate times of the early eighties.... [With deregulation] there is the subtle message that we don't care so much about predatory practices in the marketplace because, in theory, they can't occur. So a green light is given to the worst elements in the business community to go to it. And they do."
The booming housing market in many urban areas has provided an added impetus for unprincipled finance and home-improvement companies. During the 1970s and 1980s, real estate appraisals skyrocketed, and many homeowners paid off their mortgages, making them eligible to take out new mortgages for larger amounts. "When you have large increases in appraised values on homes, there is a pot of gold," says Marks. "These contractors and mortgage companies went in there to mine that gold ... with many property owners losing their homes."
Looking for a solution
While the devastation of minority communities across the nation has largely been ignored by the mass media, the plight of the residents of the Boston minority neighborhoods was the subject of a series of articles in the Boston Globe. The publicity has spurred a number of public officials to look into the problems, including the Republican Massachusetts Governor William Weld and Democrats U.S. Senator John Kerry and U.S. Representative Joe Kennedy.
Kerry and Kennedy's concern resulted in the House and Senate banking committees holding a joint hearing in Boston, at which House Banking Committee chair, Representative Henry Gonzalez, D- Texas, said, "We must explore whether the failure of banks to operate and lend in minority communities increases the likelihood that undesirable lending activity will take place, or drives credit-worthy borrowers to unregulated lenders that charge excessive rates of interest."
Massachusetts Attorney General Scott Harshbarger has also become involved on behalf of consumers. After the Globe published its series, he issued advisories in both English and Spanish to urban homeowners in Boston, warning them "that they may be targeted by home-improvement contractors or unlicensed mortgage companies offering quick cash in exchange for a mortgage on the owner's home." The result of the schemes, says Harshbarger, "is easy debt at high interest rates--sometimes 24 percent or more-- and repairs that are shoddy or incomplete."
Legislation has not yet been introduced to curb the unethical practices, though many community leaders and victims' lawyers see a desperate need for laws that would prohibit usurious interest rates and control the unscrupulous home-improvement contractors. "The way to resolve this is not through lawsuits," asserts Jack Long, an Atlanta attorney, who has also represented numerous scam victims in lawsuits to keep their homes. "Lawsuits are good, but you need to have some good legislation."
Marks asserts that laws such as the Community Reinvestment Act (which obligates lenders to serve minority communities), must be enforced. "These loan sharks can only survive when conventional credit is cut off," Marks says. "We have to force the banks to invest capital within the communities. Clearly, they have done the opposite, profiting from racist policies."
As long as regulation is inadequate and enforcement weak, those with less access to financial institutions and resources will be vulnerable. Says Hobbs, "Without law enforcement agencies and appropriate regulation, [the lenders] will have a field day. With those things in place, the harm that they will do to other people in society will be minimized."