Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, December 10, 1994 TAG: 9412120053
SECTION: VIRGINIA PAGE: A1 EDITION: METRO
SOURCE: MIKE HUDSON STAFF WRITER
DATELINE: LENGTH: Long
It turned out, her lawsuit said, that Booker Construction was a front for another company - one that had lost its contractor's license after a long list of complaints to the state.
The lawsuit said the first company's operators stayed in business by getting someone else to create a new company and pose as the license holder - an easily influenced old man who was known to drink as many as a dozen shots of liquor a day.
Weeks ended up with a $3,000 debt - owed at nearly 27 percent interest to a finance company the contractor had set her up with.
Unlike the contractor, though, the lender was no fly-by-night: It was Associates Financial Services, a multibillion-dollar arm of Ford Motor Co., the nation's second-largest corporation.
|n n| Marilyn Gentry says the price started out low when she hired a contractor to put vinyl siding on her Northwest Roanoke home - around $3,500.
She ended up with a $7,200 loan to pay for the work. She says she wasn't aware until after the work was complete that the loan was a mortgage on her house, and she didn't realize how high the interest rate was: 17 percent.
After the contractor told her she had mortgaged her house, Gentry says, she was almost in tears. She felt she'd been tricked. But she didn't put up a fight because she had signed the papers and the siding already was on her house.
"Then you couldn't complain, could you? You couldn't say: 'Well, take it off,''' Gentry said.
Like Booker Construction, the contractor that arranged Gentry's loan, A-Z Construction, lost its license after complaints that it had cheated homeowners.
Once again, the lender behind the contractor was no small-time operator: It was Chrysler First, a huge finance company that NationsBank bought last year from Chrysler Corp. and renamed NationsCredit.
\ Weeks' and Gentry's experiences are not uncommon.
Some of America's largest corporations have been accused of using questionable home-repair contractors or other smaller companies to target minority, low-income and working-class borrowers for high-interest loans.
Lawsuits, government investigators and neighborhood activists across the nation have accused major companies of abusive lending practices or linked them to high-interest loans arranged by shady used-car dealers, brokers, finance companies or "tin men" peddling siding or home repairs.
The corporations include Ford, ITT, Chemical Bank, Citicorp, Bank America and NationsBank. The allegations involve hundreds of thousands of borrowers.
Associates, the Ford subsidiary, paid nearly $3.4 million to settle loan-abuse allegations in Arizona. An Alabama jury hit Chrysler First with a $2.15 million verdict in a suit accusing the company of working with a fraudulent home-repair contractor.
The companies deny wrongdoing. They generally say the smaller operators they do business with are separate companies over which they have no control.
But government investigators and attorneys for borrowers say "predatory" lenders have made huge profits by targeting minority consumers and people with modest incomes or shaky credit. They say these consumers are vulnerable because they often are shut out by banks and savings and loans.
So, these borrowers often turn to lenders-of-last-resort who charge two or three times what competitive-rate lenders do.
They pay rates as high as 30 percent on small consumer loans and 50 percent on used-car loans.
On mortgages, they usually pay between 12 percent and 20 percent - compared to annual interest rates of around 6 percent to 8 percent that customers at banks and other conventional lenders have paid in recent years.
Riskier-credit and lower-income borrowers also generally pay 5 percent to 10 percent in upfront fees on mortgages - compared to fees of 2 percent or less typically paid by other borrowers.
The higher fees are generally legal, and lenders justify them because the borrowers are higher risks.
Jeff Smith III, president of the Virginia Financial Services Association, said consumer-finance companies exist because banks won't provide credit to riskier customers. In exchange for this service, Smith said, "it has been recognized historically that finance companies are allowed to charge a little higher rate."
Advocates for disadvantaged borrowers say the prices are too high - and often are accompanied by high-pressure tactics and fraud.
"The irony is that those people who can least afford to pay end up paying far more than people with money," said Henry Woodward, who directs the Legal Aid Society of Roanoke Valley, a nonprofit agency that represents low-income clients. "The excuse is that they're bad credit risks. But the reality is that they're simply more vulnerable - and they end up paying more in terms of price, in terms of interest and in terms of charges that are often hidden in the transaction."
A spokeswoman for a national trade group, the American Financial Services Association, has accused critics of "putting together some egregious cases with some sweeping statements" to slander the entire finance industry. She said high-interest consumer lenders "make a considerable profit" because they are willing to take risks that banks and S&Ls won't.
Lending to these consumers has become big business. Financial analysts estimate that the markets for personal loans, mortgages and used-car loans to people who can't get bank loans total $150 billion a year. These downscale markets have grown with an infusion of cash from Wall Street investors who have realized the potential for profits in high-priced loans.
For example, a subsidiary of Fleet Financial Group, New England's largest bank, earned $50 million a year in the early 1990s on mortgages to disadvantaged consumers.
Critics say Fleet and other major corporations have used smaller front companies to originate high-profit loans for them. In some cases, smaller companies work directly with the bigger lender, using the big-name company's application forms and, in effect, serving as loan officers for the national lender. Small operators also will make loans in their own names and "sell" the loan to bigger lenders, which take over the right to collect on the debt.
Lawsuits in Virginia and other states have accused major lenders of charging exorbitant interest rates and fees, tacking on hidden charges, misrepresenting the true interest rates and fees, manipulating borrowers into buying credit insurance, using deceptive sales pitches, even forging borrowers' names on loan documents.
"The whole lending industry is under siege," Mary Burt of the National Association of Mortgage Brokers told The American Banker recently. "There seems to be an attitude that if you make money you must be crooked."
David Rubinstein, who directs the Virginia Poverty Law Center, said no one objects to companies making a profit - just as no one objects to lenders charging more to cover the risks of lending to borrowers who are less credit-worthy.
The question, he says, is how much more is fair.
He argues that the prices high-cost lenders charge often have less to do with real risks than with the companies' ability "to seduce borrowers through good marketing" based on their need for money right away and their poorer educations. "Some of these elderly borrowers in particular have very little knowledge of today's market conditions," he said.
Consumer-finance companies and other lenders who specialize in higher-risk customers say their default rates are not much higher than banks'. In Virginia, consumer-finance companies regularly perform better than banks on standard measures of profit-making. Last year their small-loan operations earned three times higher "return on assets" and a 26 percent higher "return on equity."
Despite the success, many companies have paid a price - in legal troubles - for diving into the downscale market.
Since 1990, ITT's consumer lending unit has been hit with loan-abuse allegations involving as many as 1 million borrowers and has paid at least $80 million to settle state investigations and lawsuits in California, Wisconsin and other states.
A spokeswoman says ITT has not cheated borrowers: "To have a few people stand up and say things like that ... that's a real slap in the face."
Fleet came up with settlements totaling $284 million to end attorneys general investigations and lawsuits involving more than 20,000 borrowers in Massachusetts, Georgia and other states. This fall Fleet agreed to a $2 million payment to 300 customers in Virginia - including homeowners in Roanoke, Salem and Bedford and Franklin counties. Their lawsuit claimed the company paid kickbacks to loan brokers to reward them for signing borrowers up for high-cost mortgages.
Fleet officials deny breaking the law, but acknowledge "some excesses."
Associates faces class-action lawsuits in Alabama and Minnesota and has settled lawsuits in Virginia and other states.
A spokesman for the Ford subsidiary denies wrongdoing: "We've been in business 75 years and pride ourselves in the integrity of our company."
In her lawsuit in Roanoke, Judy Weeks claimed Associates manipulated her into purchasing insurance with her loan contract.
When Weeks noticed the extra charge for insurance, the suit said, she told the loan officer she didn't want it.
Weeks said the agent told her she should sign the loan papers as they were, and then file a request to cancel the insurance. She did, she said, but the company wouldn't cancel.
According to her lawsuit, Booker Construction assured Weeks it could arrange a loan from Associates, took her to the lender's office and helped her fill out the paperwork. Associates wrote Weeks a check, and Weeks paid Booker Construction $2,960 out of the loan.
The work never was completed and Weeks quit paying. Associates sued to collect on the loan.
Weeks countersued with the help of Legal Aid. This summer she and Associates reached a confidential settlement.
Thomas Lloyd, an attorney for Associates, said the company settled to avoid the cost of taking the case to trial. The lender had no way of knowing the contractor was going to take advantage of Weeks, Lloyd said. "She's not the only one they left holding the bag. I suggest to you that they also took advantage of Associates, too."
\ Critics of the lending industry say "predatory lending" flourishes because banks and other competitive-rate lenders discriminate against minorities and less-affluent consumers.
Bankers say they don't intentionally discriminate against anyone, and they have worked to make more loans to modest-income and minority consumers.
Rustam Wadia, the community investment coordinator for NationsBank in Roanoke, says a "lack of education, a lack of awareness" prevents many people from getting bank mortgages. Others simply don't have adequate incomes or credit records, he said. "There are some people who, because of their economic circumstances, simply cannot afford to buy a home."
Federal statistics show minority loan applicants in the Roanoke Valley are three times more likely to be turned down for mortgages from banks and S&Ls than whites - even when their incomes are similar. Roanoke's banks also make fewer loans in low-income and working-class neighborhoods, whether residents are black or white.
After her experience with A-Z Construction and Chrysler First, Marilyn Gentry refinanced her loan with another high-rate finance company.
"People always tell you that you have to get a particular rate because of your credit record," she said. But she wonders whether her race has something to do with the higher rates: "Is it because they picked out some black people and that's what your rate is going to be?"
She said she later went to NationsBank's home-loan unit to see if she could get an equity loan at the advertised rate - which had dipped below 7 percent.
She says the woman she talked to told her "I probably did not fall into the category to get the low interest."
Gentry says the woman hadn't taken any information - all she knew was that Gentry was black and had a finance-company loan. Gentry said the woman told her she could still fill out an application, but Gentry gave up.
Wadia, the NationsBank executive, said he could not comment specifically on Gentry's situation. But he said the company trains loan officers to make sure they don't discourage people - even unintentionally - from applying.
"A bank is in the business of making loans and we're shooting ourselves in the foot if we do anything where we're not taking up those opportunities that present themselves to us. ... Because we are looking to make good loans."
\ Many lawsuits against lenders involve the sales of insurance with loans. Credit insurance is supposed to protect borrowers and their families by paying off the loan if borrowers die, get sick or lose their jobs.
The Consumer Federation of America calls it the "nation's worst insurance rip-off," often overpriced and worthless. Lawsuits have accused lenders of using devious tactics to get vulnerable borrowers to buy credit insurance with their loans. State laws generally say lenders can't require that borrowers buy insurance from them as a condition of the loan.
Consumer attorneys in Alabama have filed class-action lawsuits accusing five major lenders - including General Motors Acceptance Corp. and Ford Motor Credit Corp. - of tricking borrowers into buying more credit insurance than they needed.
The companies deny any misconduct. Lenders and insurers say credit insurance is valuable and most borrowers who buy it are satisfied. Industry officials say cases of customers being tricked into buying insurance are rare.
Many complaints over credit insurance sales have been aimed at consumer-finance companies, which generally serve people with lower incomes or bad credit.
Last year consumer-finance companies in Virginia took in $22.6 million in revenues from credit insurance. This form of insurance is lucrative because lenders can earn sales commissions - often from an insurer owned by the lender or a parent company - and because they can collect interest on the insurance they write on their loans.
State law limits interest rates for small loans from consumer-finance companies to a maximum between 24 and 33 percent, depending on the size of the loan. But a bill nearing approval in the legislature would raise the cap for loans under $2,500 to 36 percent and eliminate limits on loans above that.
Jean Ann Fox, president of the Virginia Citizens Consumer Council, says the change would result in sky-high rates. After South Carolina stopped regulating consumer-finance loans, rates climbed as high as 100 percent.
Fox says consumer-loan companies make much of their money by refinancing borrowers again and again. The lenders add more fees and insurance and charge "prepayment" penalties on the previous loan, she said, making the loans grow even though borrowers are getting little new money.
"This is indentured servitude," she said. "It's not new business coming in all the time - it's just churning what they've got."
Smith, president of the state consumer-finance trade group, says Fox is "crying wolf."
"People that need money are going to get money," he said. "When a customer is rolled over or their account is renewed, I'm sure it's done for a purpose."
Finance companies have no incentive to jack up borrowers' interest rates and debt beyond what they can afford, Smith said. That would create defaults and the lenders would never get their money back. Virginia's finance companies "are not in the business of making loans that people can't afford to pay back," he said.
\ No type of consumer lending has drawn more regulatory attention and big-dollar lawsuits in recent years than the market for high-priced mortgages to borrowers who can't get bank loans:
In 1991, Union Mortgage, a Dallas-based subsidiary of Finland's Skopbank, was hit with more than $57 million in jury verdicts in Alabama. In one case, five families won $45 million after being scammed by a tin man who was hired by the lender even though he had a record of at least 14 previous lawsuits and court judgments against him.
Union's attorneys called the jury award "obscene." The company made 40,000 predatory high-interest loans nationwide - including about 40 in Roanoke - before lawsuits in Alabama and elsewhere forced it out of the business.
In Roanoke, a local company that serves high-risk borrowers has been hit with three lawsuits charging it with abusive lending practices.
Beard Development Corp. settled two cases filed last year by Legal Aid by forgiving nearly $70,000 in loans and interest. A lawsuit filed this year by Legal Aid charges the lender with concealing the true finance charge on a home-repair loan to a disabled woman and her 79-year-old father. The $7,920 loan carried a stated interest rate of 21.49 percent and a pre-paid finance charge of 8 percent .
After paying $150 a month over five years, the borrowers would have owed a final lump-sum payment of $8,098 - more than they borrowed in the first place.
Company owner John Beard denies breaking the law. Beard - who said he has received financial backing from NationsBank and other major banks - says he helps people with bad credit get back on their feet.
Last year an investigation by New York City's Consumer Affairs Department concluded that thousands of families had been fleeced in recent years by home-repair contractors. The report linked Chemical Bank, Citibank and Security Pacific (a company now owned by BankAmerica) to some of the worst offenders. It said NationsBank's recent acquisition, Chrysler First, bought mortgages that had been arranged through questionable contractors and lenders.
In 1992 a jury awarded $2.15 million to an Alabama couple that charged Chrysler First with forgery and home-repair fraud. The company also has settled class-action lawsuits involving hundreds of borrowers in Baltimore, Massachusetts and Minnesota. It now faces more lawsuits in New Jersey and a class action in Georgia charging it with targeting black homeowners for higher rates.
Last year community activists tried unsuccessfully to use such cases to block NationsBank's $2.1 billion purchase of Chrysler First.
Chrysler First argued that it faced relatively few lawsuits - 189 - out of a portfolio of 370,000 loans. "Chrysler First's policy is to follow to the letter all federal and state law applicable to the consumer finance business," a company statement said.
Several Roanoke homeowners who had home-repair loans through Chrysler First said they had no regrets.
"Everything has been straight," Walter Brewer said. "I've never had any trouble with them."
"A couple of pieces of my siding blew off," Odessa Tucker said. "I've been satisfied otherwise."
But one said she had to "keep bugging" Andrews Construction, the North Carolina-based contractor that arranged her loan, to do the work properly. "It was just one of those nightmares you read about," said the woman, who asked that her name not be used. "But I was very persistent and it eventually got done. It was a learning experience."
\ James Stone is less diplomatic when he talks about Chrysler First and Andrews Construction. He and his wife, Helen, are suing the lender in Roanoke Circuit Court over his home-repair loan.
They paid $3,500 down and borrowed another $8,884 for vinyl siding on their home in Henry County's Leatherwood section.
He contends the contractor promised him an interest rate of 12.9 percent - but it turned out to be 16 percent. He said the contractor ruined their roof when he put on the siding.
"The first time it rained," Helen Stone said, "we'd like to got washed out of the house. We had 14 pots all over the place to catch the water. I'd have had more if I had any more to put down."
Andrews Construction is no longer licensed in Virginia or North Carolina and could not be reached for a response.
James Stone, 63, sells fruit and vegetables from a small roadside store. He said he paid Chrysler First $6,500, but he stopped paying when eye problems forced him into the hospital.
Just before it completed its purchase of Chrysler First, NationsBank promised to work with borrowers who had complaints "to remove or resolve the source of dissatisfaction."
Stone has a different story. "I called time and time again to try to straighten it out. But every time, they just ignored me. They said: 'You're going to pay.'''
The company won a $6,200 judgment from him in Roanoke General District Court. Stone countersued in Circuit Court.
Andrew Goldstein, an attorney for the company, said he could not comment on the details of Stone's claims. "Mr. Stone made all of those allegations in General District Court and the court did not find in his favor," Goldstein said.
NationsBank spokeswoman Martha Larsh said the Chrysler First lawsuits "are basically against a company that has undergone a big change" since NationsBank bought it and transformed it into NationsCredit.
She said NationsBank has tried to deal with Chrysler First customers in a "fair and reasonable manner" by looking at each case on its own. "We consider them a very important and substantial part of the value of the franchise."
James Stone says he had been willing to settle his case by paying another $3,500, but Chrysler First wanted more.
"I tried to do what was right about it," he said. "But they don't care about nothing - but money."
by CNB