Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, July 15, 1993 TAG: 9307150040
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
SOURCE: MIKE HUDSON STAFF WRITER
DATELINE: LENGTH: Long
But two borrowers have claimed the Roanoke Valley mortgage company fleeced them instead of helping them.
Their lawsuits accused the company of charging illegal interest and fees - and have forced Beard Development to forgive mortgage debt and interest totaling nearly $70,000.
The company settled the cases two weeks ago after months of negotiations with the Legal Aid Society of Roanoke Valley.
One lawsuit accused the company of charging 10 times the legal limit for upfront service charges on mortgages. That loan, made to an elderly Southeast Roanoke couple in 1986, carried an upfront fee of 10 percent and an annual interest rate of 18.9 percent. The husband has since died.
In addition to forgiving the loan, Beard Development agreed to pay the 68-year-old widow $2,500.
The other lawsuit charged the company with using a complex loan arrangement to inflate the amount of interest it collected. That 1990 loan increased the interest rate on Mary L. Hilbert's house note from 8 percent to 16.25 percent.
The company paid Hilbert no money in the settlement but did agree to forgive the remainder of her loan. Hilbert's attorney said the settlement shows Beard Development knew it had no chance of exonerating itself in court.
"They just folded," said David Beidler of Legal Aid Society. "She could not have done better had she gone to court and won."
Sandy Tucker, Beard Development's attorney, said the settlements are not an admission of wrongdoing - only an acknowledgement of the costs and risks of taking the cases to trial.
Across the nation, a growing number of lenders are being accused of exploiting low-income or credit-damaged borrowers. A recent congressional hearing focused on charges that Fleet Finance, a subsidiary of New England's largest bank, was preying on minority borrowers via high-interest loans and home-repair scams.
During the 1980s, two Virginia-based second-mortgage companies, Landbank and Freedlander, became notorious for loan and investment schemes that eventually landed many of their top executives in jail.
John Beard could not be reached this week for comment. But in an earlier interview, he said that some people unfairly lump his business in with Landbank and other scam lenders that have preyed on low-income and working-class borrowers.
Beard said his legal problems are a result of confusing laws and shifting court decisions about what's allowed in loan contracts. "If you start twisting things around," Beard said, "you can make it look any way you want to."
Beard's office is on Starkey Road in Roanoke County. It offers to refinance mortgages for people who need money to catch up their house notes or pay off other debts.
The elderly Roanoke couple, for example, was seeking to escape a high-cost loan from Landbank when they came to Beard Development to refinance.
Beard said he charges interest rates above the going rate for most mortgages. But he said he has to because he takes bigger risks than other lenders.
"A lot of people will have applied at four or five different places - and they've been turned down," Beard said. His company gives them another chance, he said. "We're truly performing a service to try to get people's credit straight so they can move back into traditional lending."
That, he said, was what he was trying to do for Hilbert. Beard said Hilbert's credit history would have made it hard for her to get a loan from anyone but him.
Hilbert came to Beard three years ago because she needed money to pay some medical bills and buy out her ex-husband's share of her home in Northeast Roanoke.
The loan deal was so complicated that Hilbert, who works as a safety officer for an electrical contractor, didn't feel qualified to question the specifics.
"I figured they were in this business, and they knew more about it than I did," she said. "So I trusted them."
Hilbert said she started to wonder when the monthly payments turned out to be more than she understood they'd be. She struggled to keep up, fell behind, and feared she was going to lose her home.
But Hilbert didn't get angry until she went to Legal Aid about another legal matter.
She mentioned her problems paying the mortgage. Beidler looked into it and - according to her lawsuit - found the company was using a tangled financial arrangement to squeeze more interest out of her.
Here's a summary of what happened on Hilbert's loan:
In 1977, Hilbert and her husband at the time borrowed $18,050 to buy a house on Plantation Road. Their interest rate was 8 percent.
By 1990, Hilbert's first marriage had ended and she had remarried. She owed a balance of $14,700 on her first mortgage to First Union Mortgage Co. She was paying $132 a month in principal and interest.
To buy out her first husband and pay other bills, she needed about $10,000. So she went shopping for a second mortgage.
In a typical second mortgage, the borrower takes out a second loan and makes two payments each month - one toward the first mortgage and one toward the second.
Beard Development offered her a "wraparound" second mortgage, a somewhat unusual arrangement.
She would make only one payment a month - $376, not counting insurance and taxes - to Beard Development.
Beard Development would then deduct $132 from the $376 and send it to First Union to pay the first house note.
Under this arrangement, the face value of Hilbert's second mortgage from Beard would include both the new money she wanted to borrow plus the $14,700 she still owed on the first mortgage.
That brought the total amount she borrowed under the loan contract to more than $26,000. The interest rate grew to 16.25 percent.
In all, the contract required that she come up with about $22,000 in monthly installments over five years. Then she would owe a lump-sum "balloon payment" of more than $27,000.
Hilbert said that, until closing, she had understood that her balloon payment would be only $10,000.
Beard said an assistant dealt with Hilbert, but he believes Hilbert was fully informed about the loan deal. Hilbert and other customers "know what they're getting. Whether they fully understand it or not - I assume they do. If they didn't, I assume they would ask questions."
Hilbert said that when the loan was being arranged, "they more or less talked around me. At the time, I thought I understood it."
Later, "I would call them and ask them questions. Their response to me was: `Don't worry about it. We've got that under control.' And they would never really answer any questions that I had."
Beard said he planned to refinance the loan once the balloon payment came due. If Hilbert had consistently paid on time, Beard said, her credit rating would have improved, and she would have qualified for a much better interest rate.
But the lawsuit claimed Beard Development took advantage of Hilbert by writing the $14,700 into the contract. That, the lawsuit said, allowed the company to collect thousands of dollars in interest on that amount simply for forwarding the first mortgage payments to First Union.
"They're collecting interest on money they never loaned," Beidler said. "It's like a bank lending you $14,700 and then never giving you the money."
The lawsuit cited a 1992 Virginia Supreme Court decision that concluded a similar wraparound loan was illegal.
The high court ruled that a Tidewater mortgage company had acted illegally when it used a wraparound loan to convert a second mortgage of less than $4,300 into a $50,000 loan.
The justices said the company couldn't collect interest on the $45,700 merely because it was performing the "clerical responsibility" of forwarding the borrowers' first mortgage payments each month to the original note holder.
Tucker, Beard Development's attorney, said the company had no way of knowing when it made Hilbert's loan in 1990 that the Supreme Court would rule that way. The company was relying on "state of the law at the time" when it wrote up Hilbert's loan contract, he said.
"Beard is kinda caught in a crack here, unfortunately," Tucker said. "It's a murky situation. I don't think anybody had any intent to do any wrong."
Hilbert sees things differently. "People are out here trying to make a living and trying to have homes," she said. "And then people like Beard Development are out there pulling junk like this. It's not fair - not fair at all."
by CNB