The Hard Sell: Combating Home Equity Lending Fraud in California
Executive Summary
Part I of this Report
Part II of this report
Part III of this report
Conclusion
PART I
California Update
WHAT’S NEW
Home equity lending abuse and fraud continues to be a problem for California homeowners. What is different is that there have been significant efforts on many fronts to begin to address the problem. While these advances will not eliminate the problem completely, they are essential tools for combating home equity lending fraud and abuse in California. In this section we will discuss positive changes to help protect California’s most vulnerable homeowners from becoming victims to abusive lending practices. The most significant changes are in the areas of: 1) legislation; 2) new district attorney real estate fraud units; 3) significant prosecutions and civil litigation; 4) increased lawyer training; and 5) greater consumer education.
LEGISLATION
Since the release of Dirty Deeds in October 1995, the California legislature has considered numerous legislative measures to protect the public from home equity lending fraud and abuse. Some have been signed into law; many others have not. Many good bills have gone by the wayside, the victims of bad timing, political maneuvering and the realities of the lobbying and legislative process. Some good bills, which did pass, were watered down from their original versions as a result of the compromises in the legislative process. Nonetheless, there have been several measures passed since Dirty Deeds was published which have had significant impact on the fight against home equity lending fraud and abuse.
The most important legislative improvements since our 1995 report fall into several categories: those that provide opportunities to enhance consumer protections through greater law enforcement and regulatory oversight; those that provide consumers with early warnings regarding potential fraud involving their properties; and, those which protect consumers from certain business practices which often lead to home equity lending fraud and abuse.
The most important proposals presented to the legislature but not enacted include one which would have required a lender to consider a borrower’s ability to repay a loan and another which would have prohibited a home improvement contractor from taking a security interest in a person’s primary residence to secure repayment.
GREATER LAW ENFORCEMENT AND REGULATORY OVERSIGHT
SB 537 (Hughes (2)): This landmark legislation created the funding mechanism for local district attorneys offices to establish real estate fraud units. The bill authorizes local boards of supervisors to pass a resolution to require the county recorder to collect an additional $2.00 fee at the time of recording of every real estate instrument. Collected fees go into the Real Estate Fraud Prosecution Trust Fund for that county. The Trust Fund Committee distributes the funds to district attorneys and local law enforcement agencies for the purpose of determining, investigating, and prosecuting real estate fraud crimes. District attorneys receive 60 percent of the funds and law enforcement receives 40 percent. District attorneys receive 100 percent of the funds in counties without law enforcement agencies.
This bill provides California with the greatest opportunity to enhance law enforcement resources to combat real estate fraud. Its impact will be discussed more fully below in a separate section on the changes in law enforcement.
AB 1828 (Bustamante (3)): AB 1828 requires notaries to obtain the thumbprint of any party that signs a deed, quitclaim deed or deed of trust in an attempt to thwart fraudulent real estate transaction scams and forgeries. It extends statewide a Los Angeles County pilot project to obtain thumbprints for the purposes just mentioned. (That project was the result of AB 1842 in 1992 which contained thumbprint and recorder notification provisions.)
SB 795 (Kopp/Hughes (4)): The purpose of this bill is to eliminate real estate fraud by placing additional restrictions on mortgage loan brokers. Real estate brokers transacting in a certain number or dollar amount of loans must file an annual report and periodic trust fund status reports with the Real Estate Commissioner. A broker must notify the DRE when he or she is no longer servicing loans. This bill increases the Department of Real Estate’s ability to track its licensees’ loan brokering, thereby enhancing its enforcement potential. In order to better protect consumers, brokers are required to list their license numbers on specified advertisements. Brokers must also send conformed copies of a deed of trust to the investor or lender and to the borrower within a reasonable period of time.
PROMPT CONSUMER NOTIFICATION OF POTENTIAL FRAUD
SB 1631 (Watson (5)): This bill reinstates the Los Angeles County Recorders Notification law (enacted as a result of AB 1842 in 1992) which created an anti-fraud program to discourage the practice of recording falsified documents. This program creates an early fraud alert for homeowners who have had deeds recorded against their property. One feature of the program involves a post card notice to signatories of deeds of real property. This pilot program was operative from January 1, 1993 to January 1, 1996. Over one ten-month period 3,400 individuals indicated that the notice had alerted them to deeds which had been recorded without their knowledge. This legislation has resulted in a marked decrease in cases involving forged recorded deeds of trust and grant deeds. It provides law enforcement with a significant evidentiary tool.
NEW PROTECTIONS FOR CONSUMERS AGAINST UNSCRUPULOUS BUSINESS PRACTICES
AB 1610 (Archie-Hudson (6)): This bill is aimed at reducing home solicitation scams that take place during disasters. These scams often involve price gouging and take advantage of homeowner’s fears and desperation. Unsolicited contracts for home repairs are void if they were made within one week after a disaster. If the buyer or his or her agent solicits the contract then the contract is not void.
SB 320 (Petris (7)): SB 320 provides a safeguard for homeowners, mostly elderly and minority, targeted by unscrupulous contractors and loan brokers who convince homeowners to purchase home repairs or services by taking a loan against the home.
The bill makes it a deceptive or unfair act for a person or business to make a home solicitation of a senior citizen for a loan encumbering the person’s primary residence. This applies where the purpose of the loan is to pay for home improvements, and where the transaction is part of a pattern or practice of abuse in violation of certain provisions of the federal Truth-in-Lending Act.
Prohibited "home solicitations" include "any transaction made at the consumer’s primary residence, except those transactions initiated by the consumer." Mailed solicitations are not included in the prohibition.
SB 2045 (Rosenthal (8)): The bill prohibits a mortgage broker or lender from using home improvement contractors to broker or negotiate the terms of any loan secured by the borrower’s residence.
Lenders include real estate brokers, California Finance Lenders, and Residential Mortgage Lenders.
LEGISLATION NOT ENACTED
The California Legislature passed but the Governor vetoed two of the most important measures that would have reduced the number of homeowners who become obligated to pay on loans they cannot afford from the beginning, and curtailed a home improvement contractor’s ability to take unfair advantage of senior homeowners. These bills would have made a difference for those individuals who are targeted for home equity lending fraud and abuse by closing some of the legal loopholes that allow unscrupulous practices to continue. Both bills were unopposed.
SB 589 (Hughes (9)): This bill would have required a lender to consider the borrower’s ability to repay a mortgage loan. It established several identifiable high-risk indicators that increased the possibility that the borrower could not afford to repay the loan. The bill was aimed at stopping the practice of some lenders making mortgage loans to individuals who cannot afford to repay the loan as a way to take a home away through foreclosure.
The bill would have required an identified "high risk" borrower to seek and obtain independent advice and counseling from an independent third party, including a HUD approved counseling agency, or a community credit counselor. If the counselor determined that the loan put the borrower over a 60% debt to income ratio, then the counselor would be required to have the borrower read and sign a notice acknowledging the possibility of losing his or her home to foreclosure if the borrower could not pay the debt.
SB 214 (Hughes (10)): This bill would have reduced home equity fraud by prohibiting the seller of a home improvement contract from taking a security interest, other than a mechanic’s lien, in a person’s primary residence to secure payment of the contract. The bill was limited to home improvement contracts where the purchaser is 65 years or older.
The bill would have also prohibited payments made directly to a home improvement contractor from a loan secured by a mortgage. The payments must be issued jointly to the borrower (homeowner) and the contractor, or at the election of the borrower, through a third-party escrow agent. Finally, the bill provided strong remedies for wronged homeowners.
POSITIVE CHANGES IN LOCAL LAW ENFORCEMENT RESOURCES:
NEW DISTRICT ATTORNEY REAL ESTATE FRAUD UNITS
As mentioned earlier, in 1995 California State Senator Teresa Hughes (D-Los Angeles) authored SB 537, landmark legislation, which created a funding mechanism for local district attorneys offices to establish special units to investigate and prosecute real estate fraud cases. Prior to this legislation, many district attorneys’ offices did not pursue real estate fraud cases and often cited a lack of financial resources as the reason. Los Angeles County had the only district attorney’s office with a unit dedicated to real estate fraud. The Los Angeles County District Attorney’s Real Estate Fraud Prosecution Unit served as the impetus for this legislation and as the model for other local district attorney offices once the legislation was enacted.
SB 537 made it possible for local county governments to assist in establishing real estate fraud prosecution units. So far, five new real estate fraud units have been established. The units are in the counties of Los Angeles, Santa Clara, Santa Cruz, San Diego, and Alameda.
By passing SB 537, the California Legislature created a way to increase law enforcement efforts to protect the public from all types of real estate fraud, including home equity lending fraud and abuse. This approach to increasing public protection is unique and has drawn the interest of federal legislators. In March 1998, the U.S. Senate Special Committee on Aging held hearings on predatory lending. (These hearings are discussed more fully below at p. 22. The Committees recommended (among other things) that other states look at the California District Attorney Real Estate Fraud program as a model to be replicated in other jurisdictions in order to protect consumers from home equity lending fraud and abuse.
SIGNIFICANT REAL ESTATE FRAUD PROSECUTIONS
The creation of real estate fraud prosecution units in local district attorneys’ offices has led to some significant convictions. These convictions have sent a strong message to those who prey on the elderly and vulnerable that law enforcement is serious about investigating and prosecuting cases involving real estate fraud, including home equity lending fraud and abuse. In this report, we take a closer look at some prosecution statistics and some case highlights.
The San Diego County District Attorney’s office established its real estate fraud unit in 1996. So far, the unit has received 127 complaints. According to news reports, in San Diego, there are more than 1,300 alleged victims who estimate their losses at as much as $26 million, mostly in cases of home equity fraud. Thirty cases are currently under investigation. Fourteen cases have been filed resulting in ten convictions (11).
In Los Angeles County, according to news reports, in 1996 alone, nine deputy district attorneys and investigators reviewed 114 cases involving 236 victims with more than $18 million in estimated losses in 1996 (12). This same source reported that these cases resulted in 11 criminal convictions. Additionally, in the Fall of 1997, cases under investigation by the Los Angeles County District Attorney involved 13,000 potential victims and more than $300 million in losses to homeowners and investors (13).
In this report, we profile two significant cases the Los Angeles District Attorneys Office has prosecuted since 1995. One involves home equity fraud and the other a form a real estate fraud that targets the elderly in much the same way as in classic home equity fraud cases (14).
LOS ANGELES COUNTY
Timothy Barnett
The Los Angeles County District Attorney alleges that over a period of eight years, Timothy Barnett successfully defrauded more than twenty victims out of their cash and their homes. According to the Los Angeles District Attorney’s office, almost all of Barnett’s victims lived in South Central Los Angeles, and all were African-American. Barnett, also African-American, lived in an exclusive area of Orange County. The complaint states that his victims were usually elderly, unsuspecting and unsophisticated homeowners who were experiencing financial difficulties. In some cases his victims were facing imminent foreclosure or eviction.
According to the District Attorney’s office, Barnett snared his victims by making himself credible by holding himself out as a "man of God." He contacted some of his victims by using church membership rolls, through personal solicitations at church services, and by advertising in Christian church publications.
The facts described by the District Attorney illustrate what we described in Dirty Deeds as the classic foreclosure rescue scenario. He allegedly gained his victims’ trust then "helped" them by either getting them a new loan on their property, or by buying and selling their homes. The complaint alleges that he had his victims sign numerous blank, legally binding documents such as loan applications, trust deeds, and grant deeds (15). Most victims did not understand the significance of such documents. The few that did understand the nature of the document signed them based on false promises Barnett made to them, according to the District Attorney’s office. Those people believed that Barnett would hold the documents, unrecorded, as security for the loan. Instead, the District Attorney alleged, Barnett used these documents to gain title or financial access to the property and borrowed large sums of money secured by a property’s equity. Thus, the complaint alleges, Barnett systematically siphoned off the home equity in the properties which he illegally took from his unsuspecting victims.
While on bail awaiting trial, Barnett allegedly defrauded two more victims using the false name "Asthenia Barnett." Faced with the testimony of so many victims, Barnett eventually pleaded no contest to twenty felonies. In 1997, he was sentenced to nine years in state prison.
Louis Hollingsworth
According to the Los Angeles District Attorney, in 1994, Louis Hollingsworth became the ringleader of various conspiracies to commit grand theft of real estate in South Central Los Angeles, and by 1997 had left a string of victims. Both victims and co-conspirators described Hollingsworth as a friendly, persuasive talker who could convince one to do almost anything. Hollingsworth was active in local politics. Hollingsworth was the very picture of a successful businessman and involved community member: he was friendly, well-dressed, and was the block captain of the local Neighborhood Watch program.
According to the District Attorney’s complaint, this pleasant façade hid the fact that Hollingsworth’s principal income came from real estate fraud. One of his alleged scams involved tricking people, all of whom were elderly and infirm, into parting with their homes. The Hollingsworth cases illustrate the spectrum of scams used to trick homeowners out of their equity and homes. Allegedly, Hollingsworth would use an appeal to a common ethnic/racial background to try to build trust. The District Attorney alleged that Hollingsworth would send letters in mass mailings discussing how it "breaks his heart" to see African-American neighborhoods taken over by "outsiders," and implore the reader to resist this by contacting him, a fellow African-American, when they wanted to sell their home.
Two of Hollingsworth’s alleged victims: Mrs. Lucille Bell and Mrs. Canzata Castleberry
According to the Los Angeles County District Attorney, at the time of her dealings with Hollingsworth, Mrs. Lucille Bell was a 92-year old widow with Alzheimer’s disease and had lived in her home since the 1950s. She lived at that house with her husband and mother, until they both passed away in the 1970s. After that, she lived alone with the help from a neighbor. Mrs. Bell owned her home free and clear with no existing liens or mortgages. The District Attorney alleged that Louis Hollingsworth met Mrs. Bell at her church and that he gained her confidence by engaging in prayer with her at her home. Hollingsworth introduced his wife Yolanda to Mrs. Bell, and both of them prayed with her. According to the District Attorney, Hollingsworth convinced Mrs. Bell she needed to have an "affidavit" notarized in order to prevent a (nonexistent) contractor named "Garcia" from placing a mechanics lien on her home.
The District Attorney alleged that in actuality, Hollingsworth and his wife Yolanda tricked Mrs. Bell into signing a grant deed transferring title of her house from Mrs. Bell to himself. According to the complaint, after obtaining the grant deed, Hollingsworth made a deal to sell Mrs. Bell’s home to a third party for $90,000. The title company wanted two affidavits from Mrs. Bell about her sale of the property to Hollingsworth in order to close the deal. Hollingsworth allegedly promptly forged two affidavits from Lucille Bell. The District Attorney alleged that when the escrow closed, Hollingsworth then forced Mrs. Bell to move out of the home where she had lived for the last forty years.
Mrs. Bell, upon discovering that Hollingsworth was claiming to own her home, filed complaints with Legal Aid and the Department of Consumer Affairs. However, she was unable to prevent the sale of her home. Mrs. Bell, suffering from acute Alzheimer’s disease, recently passed away in a rest home. The District Attorney alleged she was never paid a dime for her house, and she lost everything she owned due to Hollingsworth’s fraud.
Mrs. Canzata Castleberry was luckier than Mrs. Bell. According to the Los Angeles County District Attorney, when Mrs. Castleberry was dealing with Mr. Hollingsworth, she was 81 years old, handicapped with osteoporosis, lived alone, and could not drive. When she inherited her brother’s home, she was not physically able to manage the property, so she put it up for sale. Allegedly, Louis Hollingsworth called Mrs. Castleberry and met her at her brother’s old house. According to the District Attorney, he lied to her, telling her he was a real estate broker. In order to gain her confidence, he drove her around town to run errands. Soon, Hollingsworth allegedly begged Mrs. Castleberry to sell him the house at a special low price. According to the District Attorney, at one point, Hollingsworth even had his little girl ask Mrs. Castleberry to "please sell the house to my daddy." Mrs. Castleberry believed Hollingsworth’s alleged statements that his family would live in the house, so she lowered the price. She wanted him to have it because he had been so nice about driving her around; even though she had paid for his gas and bought him meals. In reality, allegedly Hollingsworth simply substituted two other buyers for himself in the contract, never taking title to the home.
According to the District Attorney, in the end, Hollingsworth also tricked Mrs. Castleberry into taking a worthless IOU as part of the sale, thus cheating her out of another $10,000. Hollingsworth was allegedly paid an additional $3,000 outside of escrow by an unscrupulous escrow agent for "closing" this deal. The District Attorney alleges that once Hollingsworth had Mrs. Castleberry’s money, she called him many times. According to the District Attorney, Hollingsworth changed his telephone number and never contacted her again.
Hollingsworth eventually pleaded guilty to ten felonies, and was sentenced to seven years in state prison.
SANTA CLARA COUNTY
Lowell Hoxie
In 1996 Santa Clara County established the first local Real Estate Fraud Prosecution unit in the San Francisco Bay Area. One of the most significant prosecutions to emerge from that office involves defendant Lowell Ellsworth Hoxie.
Hoxie’s scheme does not directly involve home equity lending fraud, but it is included in this report because it involves allegations of the type of fraud that undermines homeownership. Homeowners are threatened by foreclosure because they are left deep in debt at a time in their lives when they planned to be more debt-free and financially secure. What is tragic is that the allegations indicate that victimized homeowners thought they were using their homes to become more financially secure. Based upon the allegations, it appears that Hoxie preyed upon the same type of individuals who are usually targeted for home equity fraud schemes: the elderly, the trusting, and the vulnerable. In some cases, these were minority homeowners. Like many of the perpetrators of home equity fraud, the allegations suggest that Hoxie used his superior knowledge and position of trust to take advantage of unsuspecting homeowners. According to the District Attorney’s allegations, when the homeowners began asking questions when things didn’t seem right, Hoxie lied to them to reassure them and to regain their trust. This case also illustrates what a real estate fraud prosecution unit can do for similarly situated victims when these cases are pursued.
The Santa Clara Count District Attorney alleged that over the years Hoxie engaged in a fraud scheme which snared hundreds of victims. According to the allegations, the victims were enticed into signing for a special home loan program that promised early pay-off of the principal debt. For example, borrowers allegedly were promised that their 30-year mortgage notes could be paid off in as few as ten to 12 years. According to the District Attorney, Hoxie positioned himself as the middleman between the borrower and the lender (usually a bank). The complaint alleged that Hoxie required borrowers to send him their monthly mortgage payment to be forwarded to the lender, and an additional check (usually around ten percent of the mortgage payment) to be deposited into a separate trust account for early pay-off. Hoxie forwarded the mortgage checks to the lender. He deposited the early pay-off checks into special trust fund, the proceeds of which the District Attorney alleged that Hoxie said he would use to "invest" to increase the value of that trust fund for the ultimate early pay-off.
Twenty-one victims were involved in the case that led to his conviction, although the District Attorney alleges that as many as 473 people lost thousands of dollars in Hoxie’s scheme. The 21 victims named in the indictment lost a total of $655,914.50. Hoxie received the maximum sentence of ten years when he was convicted of 16 counts of grand theft and 12 counts of filing false documents.
SAN FRANCISCO CITY AND COUNTY
Although it has not yet established a unit dedicated to real estate fraud, the Office of the District Attorney in San Francisco is prosecuting a significant case involving allegations of home equity lending fraud. The San Francisco District Attorney has charged the Rev. Thomas McCall with nine counts of grand theft for allegedly convincing several elderly couples at the Concord Missionary Baptist Church to take out a total of $840,000 in inflated loans against their homes to rebuild the church. In total, "prosecutors are charging McCall with stealing 2.5 million, which is the collective value of his congregrants’ houses and other liabilities (16)."
The couples claim that the money they gave to McCall for the renovation was used instead to support his allegedly lavish lifestyle which included several expensive homes and luxury cars (17). They claim that they obtained the loans on their homes from 1988 to 1993. It was reported that until 1996, McCall repaid the parishioners as promised then failed to continue making payments exposing the parishioners to losing their homes through foreclosure.
Most of the couples involved in the case are elderly, longtime residents of the working-class Bayview district in San Francisco. One of them, an 85 year old gentleman, said he is now stuck with a $918 per month payment on his home as a result of the loan he expected to be repaid by the church. Another woman claims she mortgaged her home for $137,000, and she too is left holding the bill (18). The case has deeply divided the congregation with some choosing to remain loyal to McCall and others choosing to renounce him. The church is facing foreclosure and could be sold if it doesn’t pay off nearly $1 million in construction loans. Those involved in the case fear that if the church is sold in foreclosure, they may never recover the money they claim they lost through McCall.
In addition to the grand theft charges, McCall was charged with one count of arson for allegedly setting fire to his rented San Francisco condominium where investigators claim they discovered tax documents and other evidence that prosecutors had been seeking to prove the original theft charges.
McCall has pleaded not guilty to both the embezzlement and arson charges. The outcome of the case is still pending.
These cases represent just an indication of the law enforcement’s potential to provide more consumer protection by vigorously prosecuting real estate fraud cases, including cases of alleged home equity lending fraud and abuse. This enforcement potential will only increase as more counties develop dedicated real estate fraud prosecution units with sufficient resources and conviction to pursue these often complex and labor-intensive cases.
LAW ENFORCEMENT TRAINING
California District Attorneys Association Real Estate Fraud Training Seminars: SB 537 also provided for training law enforcement to recognize and investigate cases of real estate fraud. Prior to the legislation, it was not uncommon for a victim of real estate fraud to be turned away from a police station when attempting to make a report about real estate fraud. Unfortunately, many local law enforcement agencies were not adequately trained to recognize that real estate fraud is more than just a "civil" matter. It often involves serious elements of criminal fraud as well.
For the last two years, the California District Attorneys Association has sponsored annual Real Estate Fraud Prosecution seminars for prosecutors and law enforcement in California. Seminar sessions have included topics such as setting up a real estate fraud unit, real estate fraud investigations, and home equity lending fraud and abuse. For the participants, these conferences have been extremely useful for sharing knowledge, making connections, and discussing strategies to best prosecute real estate fraud cases.
George Johnson, an Investigator with the City of Costa Mesa Police Department (CA) teaches one of the most popular seminars at the annual California District Attorneys Association Real Estate Fraud Training Seminars. Mr. Johnson specializes in teaching law enforcement about the elements of different types of real estate fraud, including home equity fraud, and how to properly investigate these cases. He has taught this course since 1982 to many branches of law enforcement including the Federal Bureau of Investigation/Secret Service and the California Department of Justice. The development of real estate fraud prosecution units as a result of SB 537 has expanded his audience to include local California district attorneys and police officers who are investigating and prosecuting real estate fraud cases. This education effort has enhanced law enforcement’s interest in and ability to pursue cases of real estate fraud, including home equity lending scams.
Bet Tzedek Legal Services of Los Angeles Training Video: Bet Tzedek Legal Services of Los Angeles, California has created an excellent law enforcement training video entitled They Steal Houses, Don’t They? Investigating Home Equity Fraud. The video provides basic information about home equity fraud cases and investigation techniques. Actual victims speak about their cases and about the impact that home equity fraud has had on their lives. The video is available to law enforcement agencies for free, while supplies last.
THE CALIFORNIA REGULATORY CLIMATE REVISITED
The California Department of Real Estate (DRE): In 1995, we reported that the existing regulatory structure did little to discourage abusive home equity lending. At that time, consumer advocates, victims’ lawyers, and law enforcement officials interviewed for Dirty Deeds consistently accused the Department of Real Estate of being weak and indifferent in its enforcement efforts concerning mortgage brokerage activities of its licensees.
Today, the enforcement efforts of the Department of Real Estate draw mixed reviews from consumer advocates, victims’ lawyers and law enforcement officials. Some feel the Department is doing a good job and others feel that the Department could improve its efforts to protect consumers.
According to the Department (19), in addition to its ongoing enforcement efforts, it has taken some proactive consumer protection activities since 1995. These efforts may explain why the Department of Real Estate has been viewed more favorably by some of those who criticized the agency in 1995. Of those efforts, the following are those that have direct bearing on helping to prevent home equity fraud and abuse:
· The Department participates in the Los Angeles District Attorneys Real Estate Fraud Task Force in or to maximize the State, County, and Federal criminal prosecution of DRE licensees and unlicensed perpetrators.
· In conjunction with the Los Angeles City Attorney’s office, the DRE produced a video on home equity loan fraud scams and how to avoid becoming a victim.
· The DRE cooperated with the Bureau of Consumer Protection within the Federal Trade Commission (FTC) to facilitate the FTC’s perusal of DRE files to verify compliance with the federal statute on high-cost mortgages.
· The DRE placed the licensee database on the Internet allowing consumers to verify license status and any license disciplinary action taken. Desist and Refrain Orders issued to unlicensed persons are also listed on the Internet (20).
· The DRE participated in various forums and community outreach programs to inform consumers about real estate fraud, reverse mortgages and how to avoid being defrauded.
We hope that the Department of Real Estate will continue to be more proactive in protecting the public against home equity fraud and abuse. We are encouraged that the Department is working closely with various agencies — both local and federal — that are stepping up enforcement efforts against the perpetrators of home equity lending fraud and abuse. However, we believe that the Department should investigate and implement ways to conduct effective investigations yet streamline the process to allow for a more speedy resolution for consumers. Unfortunately, consumer advocates have reported that it often takes a year or more for the Department to bring a case to hearing even when cases have been assigned to the high-priority Crisis Response Team. We believe that the legislature should appropriate sufficient funds to the Department of Real Estate in order to facilitate investigation and resolution within a more reasonable time period.
The California Department of Corporations (DOC): The Department of Corporations pursued its first case under the California Residential Mortgage Lending Act (21). On June 26, 1997, Corporations Commissioner Keith Paul Bishop announced the DOC was seeking to revoke the license of Preferred Credit Corporation, a mortgage lender headquartered in Irvine, California, and bar its owners from conducting business in the industry. Concurrently, the DOC filed a lawsuit in Orange County seeking an injunction and a monitor over Preferred Credit to ensure that the lender paid restitution to the 10,000 borrowers who may have been affected by Preferred Credit’s abusive home loan practices alleged by the Department.
The Department alleges that Preferred Credit falsified loan documents and files, filed a false application with the Department, failed to remit funds to borrowers in a timely manner, and charged excessive interest payments in up to 10,000 residential loans. The Department alleged that Preferred Credit made borrowers wait for their money after the closing of a home equity-based loan was completed and, in addition, charged interest during that period.
The Department sought a court appointed monitor to conduct a complete review of the company’s loan files and to refund all excessive interest payments to borrowers who were allegedly overcharged from March 1, 1996 to the date of the action, estimated to be at least $1.5 million.
A settlement was reached last December without any admission of wrongdoing by Preferred Credit. The DOC and Preferred Credit entered into a stipulation permanently enjoining all three principals of the company from violating any provisions of the California Residential Mortgage Lending Act. Preferred Credit agreed to the appointment of a monitor to review its records and to ensure that the company provided full refunds to its customers. Preferred agreed to pay a civil fine of $1 million dollars. It is expected that within the next month the monitor will complete his duties of ensuring compliance with the stipulations.
SIGNIFICANT CIVIL LITIGATION
COMPLETED
In addition to the law enforcement activities, private litigation by individual homeowners also has brought some victories for consumers.
Murris Johnson vs. Congress Mortgage Company: On December 21, 1995, Murris Johnson of Oakland, California won a $1.9 million verdict against Congress Mortgage Company of San Jose, California. Mr. Johnson alleged that Congress Mortgage tricked him into taking out two loans. According to the papers filed in court, Congress Mortgage charged Mr. Johnson 14 percent interest on a variable rate note without any cap. Mr. Johnson said he paid an origination fee of 15 percent of the amount of the loan and more than $1,500 in other finance charges. Mr. Johnson fell behind on his payments and attempted to file for bankruptcy. According to the allegations, Congress Mortgage opposed the bankruptcy, then foreclosed on Mr. Johnson’s two homes which were valued at a total of $215,000. As described in an Associated Press story, "Jurors in the Alameda County Superior Court . . . found Congress Mortgage deceived Johnson into taking out loans he did not need and could not afford and then charged him exorbitant interest and hidden finance charges (22)." A newspaper account concluded that "Jurors in the Johnson case were sending a message. ‘When you see someone whose life has been destroyed by this, you have to do the right thing,’ said Dianne Butler" a juror in the case (23).
PENDING
Mattie Aikens v. First Capital Finance: As alleged in court documents (24), Mattie Aikens is a 79-year old African-American widow and a resident of Oakland, California. Mrs. Aikens alleged that before becoming involved in the loan which is the subject of this litigation, she owned her home free and clear except for a $23,000 first deed of trust. She alleged that her income consisted of social security and a small pension. According to Mrs. Aikens, she has a minimal education and was not well versed in financial matters.
Mrs. Aikens alleged that she decided in early 1993 to fix the foundation to her house which was damaged in the Loma Prieta earthquake of 1989. She contacted a contractor who toured her house. According to Mrs. Aikens’ court complaint, after the contractor reviewed her home, the project expanded from only foundation repair to include an entire house remodel, including turning the downstairs garage into living quarters. She alleges that the contractor led her to First Capital Finance (First Capital), a mortgage brokerage company, in order to arrange the financing for the work. First Capital required a co-signer for the loan. According to court documents, the contractor estimated that the work would cost $88,073.
Mrs. Aikens and two of her sons signed a home repair contract with the contractor which Mrs. Aikens now alleges did not comply with many aspects of the law governing home improvement contracts. She also alleges that the contract failed to include required notices about certain homeowners’ rights to a mechanics lien release and their right to require the contractor to provide a performance bond.
Mrs. Aikens’ legal complaint states that First Capital proposed a 30-year fixed loan in a gross amount of $121,600 to be paid out over seven years, with monthly payments of $1,464.90 and a final balloon payment of $120,080. The proposed interest rate was 14.25 percent and the transaction fee would have been $15,791. Mrs. Aikens alleges that after an appraisal was completed, which was part of the loan proposal, there were a series of changes made to the work contract. According to court documents, those changes were not properly signed off by all of the parties to the original work order, as the law requires. Mrs. Aikens alleges that eventually, the lender drew up a promissory note which was for a principal amount of $160,750 at an interest rate of 13.5 percent for eleven months with a final balloon payment of $162,172 due in the twelfth month. Monthly payments on the note were $1,841.25, increasing Mrs. Aikens’ total monthly indebtedness to $2,291.25 (25). Mrs. Aikens’ alleges that the principal included $17,480 in fees to First Capital and of this amount, $16,075 was taken by First Capital as a "loan origination fee."
Mrs. Aikens and her son Wilbert allege that a First Capital representative, Mr. Oliver, had assured them they shouldn’t worry about the balloon payment because the contract would be "re-written" at the end of the first year. According to court documents, he told them that when that happened, their payments would go down and they would have a regular 30-year loan. They allege that based upon this oral representation, they signed the loan documents. The loan documents, however, did not contain this assurance. According to court documents, when the first 12 months had passed, First Capital offered Mrs. Aikens and her son, Wilbert, not a conventional 30-year loan but another balloon payment loan for a total new debt of $240,000.
Mrs. Aikens alleged that in the end, the work the contractor performed was substandard at best. According to court documents, the Aikens’ home roof leaks worse than it did originally. The downstairs walls are covered in mildew caused by poor drainage and/or the leaky roof. There is no working electricity in the living room and hallway. The house continues to slope in large areas caused by the foundation problems. Mrs. Aikens alleged that balconies were removed from in front of French windows, and were never replaced, creating hazardous conditions.
According to court documents, Mrs. Aikens and Wilbert attempted to refinance the First Capital loan with her senior lienholder, American Savings. According to Mrs. Aikens, they obtained approval on a 30-year finance of the First Capital loan. Court documents allege, however, that before the close of escrow the contractor made a demand on the American Savings escrow, claiming he hadn’t been paid for $18,000 of work on the Aikens home. He then filed a mechanics lien. Court documents allege that these actions effectively ended Mrs. Aikens’ hopes of refinancing the First Capital loan with one by American Savings.
The court documents allege that when the family refused to enter into a new agreement with First Capital, the property went into foreclosure. Mrs. Aikens filed Chapter 13 bankruptcy to stop the foreclosure sale. Mrs. Aikens home was sold through a trustee’s sale. When Mrs. Aikens was about to be evicted from her home, her story made the front page of the San Francisco Examiner (26). Mrs. Aikens’ plight immediately drew the interest of concerned regulators who prompted investigations into the origins of Mrs. Aikens case. The United States Department of Housing and Urban Development (HUD) commenced an immediate investigation into First Capital based upon allegations of violations of the Fair Housing Act made by Mrs. Aikens. That investigation is ongoing.
On April 10, 1998, First Capital (also known as Homeowners Resources Corporation) and its principals, Charles Oliver and Cynthia Cecil Oliver, filed a complaint for damages against several news organizations and Consumers Union alleging defamation in the form of libel and slander. Consumers Union denies these allegations (27).
First Alliance Mortgage Co. Cases: Five lawsuits were filed in the San Francisco Bay Area against First Alliance Mortgage Co. since August 1996. These suits include significant private attorney general causes of action for unlawful and unfair business practices. Some of the alleged practices include misrepresenting the nature and terms of loans, not providing borrowers with required disclosures and documentation, rushing borrowers through the loan closing process, and deliberately covering up disclosure information while directing borrowers to the signature line on documents. Some borrowers allege that First Alliance induced them to sign separate mandatory arbitration agreements which would bar their access to having a court of law decide any dispute with between these borrowers and the company. They say that they did not know they were signing such an agreement and that they did not intend to enter into any such arrangement with First Alliance. So far, the courts have refused to enforce these agreements in four instances.
Several of the lawsuits have been filed on behalf of indigent elders. In some cases, plaintiffs suffered from physical and mental disabilities. In many cases, borrowers allege they did not meet their borrowing objectives, were placed in loans far in excess of what they requested, and paid loan origination fees far in excess of what they were told.
The remedy requested is injunctive relief as well as disgorgement of illicit profits. If successful, the litigation seeks to recover disgorgement of the total volume of loan origination fees (or between $20 and $30 million dollars per year) for four years. Currently, these cases are in litigation.
On May 6, 1998, The American Association of Retired Persons (AARP) filed a motion to join the lawsuits. "AARP takes very seriously these abusive financial practices aimed at the most economically vulnerable homeowners," said Nina Simon, an attorney with AARP Foundation Litigation. "The Association is ready to take legal action against those lenders who prey on older homeowners," she added. AARP charges that First Alliance Mortgage Co., one of the largest subprime lenders, targets the most vulnerable homeowners and charges fees eight to ten times those of mainstream banks or savings and loans. According to AARP, the victims, typically older homeowners, often end up losing the equity in their home and have no way to replenish their lost "nest egg."
Litigation is but one avenue to pursue to seek redress for those wronged by unscrupulous lending practices. Homeowners with serious cases of home equity lending fraud and abuse are finding more help as more lawyers become proficient in managing the complexities of these cases. Cases involving home equity lending fraud and abuse have taken on a higher profile as the public has become more aware and outraged about lending practices that exceed the bounds of what is acceptable even though in some cases, those practices may not be illegal.
TRAINING, EDUCATION AND ADVOCACY
Educating the public is an important component to seeking reforms and enforcing protections for the likely targets of home equity lending fraud and abuse. We recognized the need for increased consumer education when we issued Dirty Deeds and recommended that this be one of the highlights of reform efforts to protect the public. Education efforts aimed at those in high-risk areas, specifically areas which have many "equity-rich but cash-poor" homeowners are the keys to providing the first line of defense against exploitative home equity lending. Creating a ready pool of trained attorneys to respond to issues surrounding home equity lending fraud and abuse is another critical component. Efforts in Northern California and Southern California reflect a variety of effective approaches to accomplish the goal of providing a comprehensive net of protection for the public.
NORTHERN CALIFORNIA
The Bar Association of San Francisco (BASF) has created a unique and extremely valuable resource for homeowners who believe they may have been the victims of home equity lending fraud and abuse. BASF staffs and maintains the Volunteer Legal Services Program’s (VLSP) Home Equity Fraud Hotline that homeowners can call if they have problems with home equity borrowing. According to Haydee Alfonso, supervising attorney for the BASF Consumer Project and the Nonprofit Community Organization Representation Project, the number of cases the Equity Fraud Hotline has placed with private attorneys has steadily increased. In 1996, the Hotline placed nine cases involving problem home equity loans. In 1996, it placed thirteen cases. And in the first five months of 1998, the Hotline has already placed seventeen problem home equity loan cases. San Francisco Bay Area consumers can contact the project at (415) 782-8903.
Homeowners call the Hotline number and reach an answering machine and are asked to leave their names and numbers. Generally within one to two business days, a BASF intern returns the call and conducts a comprehensive five- to six-page intake interview. Based on this interview, BASF attempts to gather additional relevant information and documents for further review. The case is then reviewed by an expert from a private San Francisco law firm. If it is determined that the case provides a basis for a legal remedy, Ms. Alfonso attempts to match the homeowner with a pro bono attorney trained in the subject matter. Because the cases that come into BASF through the Hotline are generally labor intensive and require substantial legal resources, they are often placed with large law firms which have more resources to handle these demanding cases.
The VLSP Lawyer Training is an essential component to the success of the BASF Equity Fraud Hotline. Since 1994, attorneys Tom Jenkins and Dan Mulligan have trained over 200 lawyers in two-day sessions about all of the intricacies of effectively representing clients in equity fraud and abuse actions in California. The training program is done in conjunction with the National Consumer Law Center. On the second day of the training program, Gary Klein of NCLC teaches participants about federal foreclosure practice and the bankruptcy aspects of defending homeowners in home equity lending fraud and abuse cases. Those who partake in the training course receive a manual entitled Mortgage and Foreclosure Defense Training. Participants must agree to handle two home equity lending fraud or abuse cases through the VLSP annually on a pro bono basis. More information about the VLSP training program can be obtained at (415) 782-8914.
This pool of trained attorneys provides the legal resources to respond to the cases that come in through BASF’s Equity Fraud Hotline. Ms. Alfonso believes that an attorney pool of a certain size is needed to run a program like this because of the resources required. While it might be difficult for smaller counties to replicate what BASF is doing, certainly larger counties with substantial legal communities may be able to use the BASF program as a model for developing their own similar program. BASF also offers training at senior centers and for social service providers in areas of high senior homeowner concentration. To arrange for a speaker, call (415) 782-8914.
Consumers Union, West Coast Regional Office: The Homeowners Project of the West Coast Regional Office of Consumers Union is dedicated to educating low-income senior and minority homeowners in five Bay Area counties about home equity lending fraud and abuse. The Project also informs senior homeowners about the pros and cons of a popular home equity-based product just for seniors: reverse mortgages. The Project has created easy-to-read consumer information brochures on two topics and provides these to the public for free. They are entitled "Don’t Lose Your Home. Home Equity Fraud" and "Guarding the Golden Years. Reverse Mortgage Essentials." Both brochures are available in English and Spanish. Also available, "The Home Improvement Resources Guide: Where to Get Help in Your Community," which lists resources for low- or no-cost home improvement loan and grant programs in five San Francisco Bay Area counties. The Project uses these materials in conjunction with a curriculum designed for the Project’s target audience at free community education seminars throughout the Bay Area. The seminars teach homeowners how to recognize home equity lending fraud, informs them about what steps to take to protect themselves and provides a comprehensive list of Resources for more individualized free counseling available throughout the Bay Area. During the second year of the project, Consumers Union will teach other community based organizations how to use the curriculum and materials developed by Consumers Union in order to increase the Project’s impact into the future. To arrange for a seminar or for copies of the brochures, call (415) 431-6747.
Consumer Action has several publications available on topics involving home equity fraud and protecting homeownership. All of these publications are available in English and Spanish. Some are available in other languages, such as Chinese and Vietnamese. Some of the available titles include: "Questions and Answers About Home Equity Fraud," and "Let’s Talk About Home Equity Loan Scams." They also distribute four publications prepared by the Legal Aid Foundation of Los Angeles. These publications include, "Buying a Home," "Real Estate Terms You Should Know," "Financing Home Repairs," and "Before You Add Someone To Your Title." To obtain these brochures, contact (415) 777-9635.
SOUTHERN CALIFORNIA
The Los Angeles County Department of Consumer Affairs conducts a real estate fraud and information program to protect consumers from all types of real estate fraud, including home equity lending fraud and abuse. The Department actively investigates cases of real estate fraud and coordinates with other agencies to prosecute these cases. The Department maintains a toll-free (800) number accessible in Los Angeles County where consumers can call for more information or to report a fraud. The Department answers approximately 1,600 calls per month on the toll free number. Currently the Department is trying to establish a database of loans applied for but never consummated because the applications were either canceled or not approved. This would give the Department the ability to track loans more easily to detect when lending institutions or mortgage companies record deeds of trust even though a loan is not consummated. The Department received 20 such complaints in the first two-month period after the Registrar-Recorder program, described below, was reinstated.
In January, 1998 Los Angeles County reinstated its Registrar-Recorder Program. To protect the public, the Registrar-Recorder mails property owners copies of recorded documents that impact ownership of their property. Materials mailed to property owners provide information on how to obtain free assistance. The Registrar-Recorder also includes a tip sheet of common warning signs of real property fraud and a postcard for comments. In February 1998, 3000 postcards were returned. Ninety-eight percent of the respondents were in favor of the notification program. Fifteen percent of the respondents (450 individuals) indicated that they needed some assistance as a result of the information provided through the notification. These respondents were either unaware of the recording, unaware of a mechanics lien placed on their property, or acknowledged their signature but denied signing it to any document that was recorded.
A Real Estate Fraud Task Force meets monthly to discuss real estate fraud, trends, cases and strategies for prosecution in the Los Angeles area. Approximately 90 percent of the task force members are from law enforcement, including state boards and bureaus. Lending institutions and legal aid groups such as Bet Tzedek Legal Services and Public Counsel make up the other 10 percent of the group. According to Nick Aquino, an inspector with the Los Angeles County Department of Consumer Affairs, Real Estate Fraud and Information Program, and a member of the task force, the types of cases this group sees tend to vary depending upon the state of the economy.
Foreclosure scams tend to predominate if the economy is in a downswing; refinance scams and home equity frauds are more common when the economy is improving. Mr. Aquino reported that a common type of fraud in the Los Angeles area involves a contractor who steers homeowners toward loans with lending institutions that have a direct or indirect relationship with the contractor that benefits both the lender and the contractor.
Bet Tzedek Legal Services of Los Angeles continues to be at the forefront of Los Angeles-based efforts to educate consumers about home equity lending fraud and abuse. Bet Tzedek participates with the Los Angeles Area Agency on Aging in co-sponsoring monthly forums on elder abuse. It focuses on teaching senior about what they need to know in order to avoid falling victim to home equity fraud and abuse. Bet Tzedek continues to represent victims of home equity fraud and abuse. It also uses the media to warn consumers about the latest scams. The U.S. Senate Special Committee on Aging invited Bet Tzedek to submit materials on home equity fraud in Los Angeles. These materials were considered during this Committee’s March 1998 hearings on predatory lending.
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Footnotes:
(2) Adds Cal. Gov’t Code Section 27388. (Chaptered October 16, 1995. Effective January 1, 1996.)
(3) Amends Cal. Gov’t Code Section 8206. (Chaptered October 4, 1995. Effective January 1, 1996.)
(4) Amends Bus. & Prof. Code Sections 10153.6 and 10232, and adds Bus. & Prof. Code Sections 10234.5, 10236.4, and 10236.5. (Chaptered September 29, 1997.)
(5) Adds Cal. Gov’t Code Sections 27297.6 and 27387.1. (Chaptered July 17, 1996.)
(6) Amends Civ. Code Section 1689.14. (Chaptered July 18, 1995. Urgency Measure, took effect immediately.)
(7) Amends Civ. Code Sections 1761 and 1770. (Chaptered August 1, 1995. Applies to contracts entered in to on or after January 1, 1996.)
(8) Amends Civ. Code Section 1770. (Chaptered September 23, 1996. Effective January 1, 1997.)
(9) Would have amended Civ. Code Section 1804.10. (Stricken from Senate File. Veto sustained February 13, 1998. Vetoed by Governor October 13, 1997.)
(10) Would have amended Civ. Code Section 1804.10. (Stricken from Senate File. Veto sustained February 13, 1998. Vetoed by Governor September 28, 1997.)
(11) Anastasia Hendrix, Teamwork key to curbing spread to loan fraud, San Francisco Examiner, October 26, 1997, p. A1.
(12) Id.
(13) Id.
(14) We wish to thank Victor Minjares, Deputy District Attorney for Los Angeles County, who provided the following case summaries included in this report. Mr. Minjares also assisted the U.S. Senate Special Committee on Aging by submitting these case studies for examination during the recent hearings on predatory lending in Washington, DC, discussed more fully below.
(15) A trust deed is a legally binding document used in mortgage financing. It gives the mortgage provider the right to foreclose on a borrower who does not pay as agreed. A grant deed is a legally binding document that transfers the ownership interest in real property from one person to another.
(16) Jaxon Van Derbeken, Pastor Accused of Theft Now Charged with Arson, San Francisco Chronicle, June 17, 1998, p. A19.
(17) Jaxon Van Derbeken, Suspicious Fire Rekindles Probe of S.F. Pastor, Blaze turns up documents linked to alleged swindling, San Francisco Chronicle, May 30, 1998, p. A15.
(18) Jaxon Van Derbeken, Pastor Pleads Not Guilty to Embezzlement, Angry parishioners jam courtroom—bail is $1 million, San Francisco Chronicle, June 16, 1998, p. A15.
(19) Correspondence from Betty Ludeman, Assistant Commissioner Enforcement, Department of Real Estate, to Consumers Union (March 19, 1998).
(20) While it is not clear how many of those targeted for home equity lending fraud and abuse have access to the Internet, generally we think making this information more accessible to the public is a good idea.
(21) SB 1978, which passed the California Legislature and was signed by governor Pete Wilson in 1994, provides for a separate license for mortgage bankers (but not brokers) administered by the California Department of Corporations. Previously, all mortgage bankers were regulated by the California Department of Real Estate.
(22) Oakland man wins suit against mortgage firm, The Inter-City Express, December 22, 1995, p. 1.
(23) Id.
(24) Offer of Proof at 1, In re Mattie Aikens, No. 96-40999 NG, Chapter 13 (N.D. Cal March 30, 1997).
(25) Mrs. Aikens alleged that she was already paying $450.00 per month on her senior lien then held by American Savings.
(26) Anastasia Hendrix, Attempt to finance repairs may force woman’s eviction; Oakland widow: "They stole my house," San Francisco Examiner, April 13, 1997, p. A1.
(27) Homeowners Resources Corp. et al. v. Hearst Corp. et al., No. 994280 (Super. Ct., San Francisco, filed April 10, 1998).
Executive Summary
Part I of this Report
Part II of this report
Part III of this report
Conclusion