Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, December 11, 1994 TAG: 9412120061
SECTION: VIRGINIA PAGE: A1 EDITION: METRO
SOURCE: MIKE HUDSON STAFF WRITER
DATELINE: LENGTH: Long
The Louisiana-based company makes mortgages to people who can't get them from banks or savings and loans. With the help of funding from Wall Street investors, United Companies has captured a growing share of a credit market that financial analysts say may reach $25 billion a year.
"There are 11,000 banks in the country and maybe 2,000 thrifts," United Companies President J. Terrell Brown told a trade publication, The American Banker, earlier this year. "If each one of their branches turns down one loan a week, then it's a lot of small numbers that all of a sudden get big. And that's what really fires me up."
In little more than two years, United Companies expanded from 17 to 34 states, and its loan production has grown from $301 million to a projected $900 million this year. All this has fired up Wall Street - the company's stock price shot up 340 percent last year.
Other people also are fired up about United Companies - but for different reasons.
Freda Spears and her husband got a loan from United Companies to buy a used mobile home to put on the plot of land they owned in the Chamblissburg section of Bedford County.
They had bad marks on their credit history coming into the deal, so they knew it would be difficult to get a bank loan. But she says United Companies' newspaper ad "sounded so rosy: No matter how bad your credit is, you can get a loan."
Spears was pleased to get the credit, and they later refinanced and increased their debt with United Companies to just under $19,000.
But she says she now realizes that the interest rate - 19.85 percent on the second loan - was more than they could afford. And she complains the company added $1,323 worth of credit insurance she didn't want in the loan.
When an injury put her husband out of work and unpaid bills piled up, the couple asked for an extension. "They wouldn't consider it whatsoever," she says.
In the end, the family saved the trailer and land by filing for bankruptcy. Their attorney worked out a court-ordered plan that reduced their interest rate and stretched out their payments.
Spears wishes she'd gone elsewhere: "I think finance companies that charge outrageous rates like that - people should be aware of the way they do. There's probably a lot of people like us who didn't know. ... My advice would be to shop around - and not deal with United Companies at all."
At least a few other borrowers agree. In Alabama, one couple won a $500,000 jury verdict from United Companies over an alleged home-improvement scam and the company agreed to pay $4.45 million to settle a class-action lawsuit. It faces more lawsuits in Alabama and Georgia.
United Companies officials deny breaking the law in any of these cases. They say the rates they charge are fair, and that borrowers sign a disclosure form when they purchase credit insurance with their loans. United Companies says it takes more risks than banks and sometimes it must foreclose to recover the money it lent.
"What we do in our business is make credit available to folks who really need it," spokesman Louis Resweber says. "We've been in business for half a century - and we've received numerous awards for the type of business we do. If you look at the hundreds of thousands of loans we make, I don't think you're going to see anything other than a track record that is commendable and exemplary."
Resweber notes that the company has earned complimentary write-ups in the New York Times, Fortune and other major publications.
United Companies has drawn the ire of some community activists, however, because of the allegations in the lawsuits - and because of the way Wall Street investors have fueled its growth.
"United Companies has refined the art of predatory lending and in some ways has become the epitome," says Marty Leary, a research analyst with the Hotel Employees and Restaurant Employees International Union who has studied high-cost mortgage lenders. "They have figured out a way to tap virtually unlimited resources from Wall Street."
United Companies is a leading example of how the "nonconforming" mortgage market - higher interest loans to people with bad credit or low incomes - has become extremely profitable. The first six months of this year, the company pulled in $28.4 million in after-tax profits on $172.5 million in revenues.
United Companies began in 1946. Its late founder, Lloyd F. Collette, swore by this motto: "Mama might let some other payments slide, but she's going to be sure to pay that house note first."
His successors still follow that maxim, according to the American Banker. But the company didn't reach critical mass until 1992, when it jumped into the "mortgage-backed" securities market. Mortgage-backed securities are a 1980s investment wrinkle that allows lenders to increase their cash flow by selling bonds backed by the income from their mortgages.
Critics contend mortgage-backed securities have an undesirable side effect: They've opened up a vast pool of money for shady lenders and shady lending. Fleet Financial Group, New England's largest bank, used these securities to expand its business in "nonconforming" mortgages - until lawsuits and government investigations forced the lender out of the market.
Leary, the union financial researcher, says bond underwriters and other Wall Street players have given their blessing to mortgage-backed securities deals arranged by United Companies and other lenders that seek out disadvantaged borrowers. He argues that investors get the best of all possible worlds - low risks, high returns - because these borrowers pay a "poverty tax" of higher fees and interest rates that far outstrip any risks created by their lower incomes or flawed credit records,
Resweber, the company spokesman, said United Companies actually charges lower rates than most other non-bank mortgage lenders that serve the same pool of borrowers. Last year United Companies charged an average interest rate of just under 12 percent, compared to the national average of between 6 percent and 7 percent charged by banks and S&Ls. United Companies also charged upfront fees of 7 percent, compared to a national average of 1.75 percent on conventional mortgages.
Its loans are a bit more likely to have late payments or get written off as bad debts than conventional bank loans, company President Brown told the American Banker, "but hopefully we priced our risk adequately."
Resweber says the company's aim is to help borrowers "repair their credit history and position themselves to qualify for conventional credit as quickly as possible."
As an example of the company's community spirit, Resweber points to the case of a Pensacola, Fla., man it saved from homelessness. United Companies sold John Jones - a retired truck driver who had been evicted from his rental home - a house for just $57 a month for 10 years. Its employees also organized a clean-up and repair day to whip the house into shape. "I can't tell you how much this means to me," Jones said. "Nothing ever happened like this before in my life."
Some other customers have been less appreciative of United Companies:
In 1991 the Alabama Supreme Court upheld a $500,000 verdict against the company. The justices agreed with the jury that the company was guilty of fraud and breach of contract against a couple who had borrowed $12,000 for home repairs.
According to testimony, Abram Brown and Rosie Holcombe already had someone to do the work, but United Companies said it would make the loan only if it picked the contractor. The contractor never finished the work, but the loan officer talked them into paying anyway, promising he'd make sure the work was done. It wasn't, and a county judge said the couple was forced to "live in deplorable conditions for months and months" - in a kitchen without water, rooms without walls and a bathroom with a hole in the floor instead of a toilet.
United Companies argued there was no proof the loan agent intended to defraud the couple, and that there was no breach of contract because the loan officer's promises were never put into writing.
Last year the company settled a lawsuit in Tampa, Fla., that charged it had violated federal truth-in-lending rules on a home-repair loan. Andres and Paula Guajardo claimed the lender had charged them a $1,300 broker's fee that it didn't deserve - because the loan had been arranged by a subsidiary, United Companies Mortgage of Florida, and not by an independent broker.
Last year United Companies agreed to pay $4.45 million to settle a lawsuit that charged it with overcharging 1,000 to 1,500 poor and working-class borrowers in rural Alabama.
The borrowers' lawyers say the company charged them as much as 20 percent in upfront finance fees - even though state law limited such fees to 5 percent. According to expert testimony, one customer paid the equivalent of an annual interest rate of 61 percent.
United Companies now faces two class-action suits involving thousands more borrowers in Alabama and Georgia. The Georgia suit claims the company targeted black homeowners for discriminatory prices. The Alabama suit charges the company paid secret "kickbacks" to loan brokers as an incentive for steering borrowers into high-cost mortgages.
Cathy Lucrezi, a lawyer with Florida Rural Legal Services, says there's "some nugget of truth" to the company's argument that it provides a service by lending money to people when they really need it. She says the problem is that the cash comes "with outrageous strings attached" at a time when they're most desperate and vulnerable.
Company spokesman Resweber counters that if the lender mistreated its customers, "we wouldn't have the referral rate that we do. We wouldn't have the repeat business rate that we do."
He said the complaints are isolated cases - representing a handful of loans compared to the 58,000 mortgages United Companies has outstanding.
"With any organization," he says, "there are are lot of things happening out there."
by CNB