Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, December 12, 1994 TAG: 9412120070
SECTION: VIRGINIA PAGE: A1 EDITION: METRO
SOURCE: MIKE HUDSON STAFF WRITER
DATELINE: LENGTH: Long
The company lent to homeowners who were already in debt, often desperately so. Runnells had worked at a finance company in the 1960s and had figured out a simple fact: People are willing to pay just about any price to borrow money to get creditors off their backs.
About 10,000 families in Virginia, Maryland, South Carolina and Alabama fell victim to Landbank's sales pitch and astronomical fees. Some paid upfront fees and closing costs that equaled 50 percent of the money they actually borrowed. Hundreds lost their homes. It was a $200 million scheme that enlisted the help of dozens of respectable banks and savings and loans and the government-chartered Federal National Mortgage Association - and then made dupes out of those institutions, too.
Runnells stayed in business five years, thanks largely to the General Assembly's loathing for regulations on industry. Legislation to limit fees that Landbank and other lenders charged died in committee in 1985. State Sen. Peter Babalas - a Norfolk Democrat who had earned $66,000 in legal fees from Landbank - cast the deciding vote. A company voucher for $3,000 carried a notation: "This was one we agreed to pay after he stopped legislation in Richmond."
In the end, Babalas was censured by his Senate colleagues for accepting a bribe. Runnells, his wife and other company executives went to prison for defrauding investors. The legislature eventually voted to require licenses for mortgage companies and put limits on the upfront fees they could charge, but not on their annual interest rates.
Consumer advocates say protections for the most vulnerable borrowers are still weak - and that other companies have taken Landbank's place and are profiting, more quietly, on the high-cost mortgage market.
These critics contend that state and federal laws don't do enough to protect consumers from being gouged on credit deals - whether it's mortgages, used-car loans or personal loans. There are no limits in Virginia on interest rates on mortgages and used-car loans, and the legislature appears poised to eliminate interest-rate caps on all but the smallest personal loans from consumer-finance companies.
Jean Ann Fox, president of the Virginia Citizens Consumer Council, says that sends a message to disadvantaged consumers: "You're on your own, and we're not going to protect you. We're putting our trust blindly in competition - even though competition doesn't work when consumers don't have a real choice."
Finance industry leaders and their supporters say stories like Landbank's are the exceptions. They say lenders that market to low- and moderate-income borrowers provide a valuable service to people who have nowhere else to turn for credit.
"I believe in the free enterprise system - I believe in competition," state Sen. Richard Holland, D-Windsor, a banker himself, said at a legislative hearing this fall. "The better-managed companies ... will charge different rates" and prices will come down.
Nationally, the growing number of lawsuits and government investigations over alleged lending abuses has prompted calls for reforms in Washington and a few other state capitals. In some cities and towns across the country, the "predatory lending" issue has energized neighborhood groups to take on some of the nation's biggest financial institutions.
One result has been a federal law signed this fall that puts some limits on high-rate mortgage lenders. It does not regulate the rates they charge, but it requires written warnings about the dangers of these loans and restricts contract terms that sometimes are used to fool unsuspecting borrowers.
For their part, leaders in the "non-bank" financial industry feel under siege from what they see as unfair attacks from consumer activists and the media.
Nancy Donovan, chairman of the American Financial Services Association, concedes "there have been some unscrupulous operators in our industry." But she says fraud is rare, and the rates charged by most lenders reflect the costs and risks they face.
"Forbidding us to charge appropriate rates would not help poor and middle-income people but dry up their sources of credit," she says. "As for fraud, there is no legislative system on Earth that has ever prevented it or will ever prevent it."
Donovan says non-bank lenders must "mount a broad counterattack - to explain the special role we perform, to insist on our value to the economy, and to challenge the consumer groups' claims to represent the best interests of actual consumers."
\ "When the banks say 'No,' Miss Cash says 'Yes.'"
Through the persona of "Miss Cash," Bill Runnells and Landbank drew in borrowers who needed money fast. Once they were in the door, loan officers often misled them about the fees and interest rates they would pay.
Two sisters from Salem paid $3,750 in upfront fees and closing costs to borrow $7,500.
A Hollins resident, Alice Mae Garrison, almost lost her home to foreclosure after paying 26 upfront "points" on a Landbank mortgage. But that finance charge wasn't reflected in the annual interest rate of 18 percent that the lender disclosed. The Virginia Supreme Court ruled Landbank was guilty of charging hidden interest and other illegal fees.
But Landbank grew quickly, fueled by the help of 40 legitimate S&Ls and banks that bought its mortgages after the loan contracts were signed - taking over the right to collect the monthly payments and in turn funneling down money that allowed Landbank to make still more loans.
Banks and S&Ls also fueled the growth of another notorious high-rate mortgage lender, Richmond-based Freedlander Inc., which made 37,000 loans nationwide before, like Landbank, it collapsed. NCNB, the forerunner of NationsBank, was one of Freedlander's biggest investors.
Top executives at Freedlander and Landbank were convicted of stealing from investors and sent to prison. Runnells - who led authorities on a two-year international manhunt before he was captured - was given a 40-year federal sentence.
Critics said the General Assembly had been too cozy with the likes of Landbank and moved too slowly to stop its practices. At least four top legislators had business dealings with Landbank.
Del. George Heilig, D-Norfolk, headed a joint legislative committee studying abuses in the mortgage industry at the same time he was representing a businessman who was negotiating to buy Landbank. Heilig said there was no conflict of interest.
In 1987, the legislature voted to license second-mortgage companies and to cap the upfront fees they could charge at 5 percent. The legislature also weakened penalties for lenders who are caught misleading borrowers about their fees and interest rates.
A report this year by the Virginia Department of Housing and Community Development said many home-equity loans to low- or fixed-income consumers "have inflated interest rates, excessive carrying costs and unaffordable repayment terms."
Most state lawmakers say they see no reason to increase regulations on mortgage lending.
On the federal level, the Home Ownership and Equity Protection Act was signed into law this fall. It defines a mortgage as "high-cost" if its interest rate is 10 points above the rate on federal treasury bills, which are now approaching 7 percent.
For loans that meet that test, the law restricts the use of prepayment penalties and other fees. It also assigns greater legal responsibility to banks and other financial institutions that purchase fraud-tainted mortgages.
However, some of the original bill's tougher provisions were dropped after industry lobbying. David Rubinstein, who directs the Virginia Poverty Law Center, said the new law will help, but it won't wipe out mortgage abuses.
He said high-rate mortgage lending in Virginia is not as rapacious as it was was in Landbank's heyday. But "there are definitely still predatory practices. There are people out there desperate for money who aren't very sophisticated and can be convinced to take out loans that aren't in their best interests - and put their homes on the line."
\ When Virginia's House banking committee met in October to vote on a proposal to eliminate the interest cap on small consumer loans, the bill's opponents weren't optimistic.
Currently, consumer finance companies are limited in the rates they can charge for small personal loans - which, unlike mortgages, are not secured against real estate. The State Corporation Commission sets the rates much as it does for public utilities; currently, the maximum rates range between 24 percent to 33 percent, depending on the loan's size.
But a bill passed early this year by the Virginia Senate was designed to eliminate the cap on small loans and raise the maximum that finance companies could lend on such loans from $3,500 to $6,000.
To start the hearing, Sen. Richard Holland, the bill's sponsor, offered one change designed to make it more palatable to legislators concerned about stories of abuses in the industry. The industry would agree to a cap at a higher level - 36 percent - on loans from $1,500 on down, as long as there were no limits on loans above that amount.
There was a motion for an amendment and a second, and committee chairman Heilig asked for a vote.
Del. Bernard Cohen, D-Alexandria, interrupted.
"Wouldn't it be appropriate," Cohen suggested, "to hear from the opponents" before voting?
"I'd like to act on this," Heilig said. "We'll let the opponents come forward [afterward] and offer any amendments they have."
The committee approved the change on a voice vote.
From there, an industry spokesman squared off with consumer activists who were still unhappy with the bill.
Jeff Smith III, president of the Virginia Financial Services Association, argued that regulation was hurting the industry. Since 1978, the number of loan offices operated by finance companies statewide has dropped from 425 to 313. This has left 32 communities without a consumer finance company, Smith said.
"The system is broke and we need to try and repair it," he said. The bill would "produce a cure" both for consumers and lenders "so that borrowers who come to finance companies have a reasonable source of funds at a reasonable rate."
Smith argued that taking the cap off the interest rates would increase competition and drive rates down. For example, he said, deregulation of credit-card rates has increased their availability: "Last night when I got home I had three credit-card solicitations in the mail."
"The experience out there is that the rates will drop," Smith said.
The legislation's opponents disagreed. When consumer finance rates were deregulated in South Carolina, they said, rates shot up - in many cases above 40 percent and in some instances above 100 percent.
"If competition worked," Cohen said, "it would work with the existing law." If finance companies were going to charge less, he said, they could do that now: the current law has only a ceiling on rates, not a floor preventing them from charging lower, competitive prices.
If the bill passes, Cohen predicted, "you're gonna see triple-digit rates being charged to some unsuspecting folk."
Fox, the state consumer council president, said competition doesn't work in the consumer finance market because its customers are usually the least educated and have the least bargaining power.
She acknowledged that the bill included one consumer-friendly touch - it forbids the lenders from charging borrowers prepayment penalties when they refinance or pay them off early. But she said the industry's agreement to give up an "unfair practice" is simply "sweetener for the deal" that will get the industry huge concessions.
She also disagreed with the argument that the consumer finance industry is on the ebb.
In Virginia, finance companies' small-loan receivables have grown at a rate slower than inflation - from just under $365 million in 1985 to $371 million last year. But receivables from finance companies' other lending - which includes home equity and auto loans - has exploded from $415 million to well over $1 billion.
Also, critics said, the industry's profits are still high.
Since 1982, consumer finance companies have done exceptionally well on the two most-accepted measures of profitability: They made a higher "return on equity" than state-chartered banks in every year but one, and their "return on assets" has been more than double the returns earned by banks.
Their total profits on small loans have risen 53 percent in the past two years - during a time when the SCC had lowered the maximum rates they could charge.
The industry's spokesman said those figures didn't prove anything. "If profits are so great," Smith said, "why has there been a substantial decline in the number of companies doing business in Virginia?"
After the debate was over, Smith came up with one more concession: The industry agreed to raising the amount that would carry the 36 percent cap from $1,500 to $2,500.
The committee voted 11-3 to send the bill on for action by the full House of Delegates early next year, with Heilig abstaining because of the legal work he performs for finance companies.
Afterward, Smith complained that consumer groups were unwilling to discuss any sort of compromise: "They always oppose anything that's offered. Consumer groups are opposed to the very existence of these companies."
And he wondered: "Do these people represent the majority of the consumers? I don't know."
Consumer advocates said the bill would reduce the protections for disadvantaged borrowers, but they felt fortunate to keep some limits on loans up to $2,500.
"We had to work real hard to get even that," the poverty law center's Rubinstein said. "We were definitely steamrolled in that hearing."
\ In their battle with lenders, advocates for lower-income consumers must contend with state legislators' long-standing financial ties to the lending industry. Many top legislators serve as closing attorneys for mortgage lenders, and banks and other lenders give generously to state election campaigns. Heilig, who chairs the House banking committee, received more than $10,000 from lenders during his last election campaign.
Pro-regulation forces also run up hard against state officials' philosophical distaste for laws that put limits on business practices.
When the Landbank scandal first became public in 1985, the state's commissioner of financial institutions, Sidney Bailey, gave voice to this philosophy in explaining why he didn't see the need to pass regulations to fight predatory lenders such as Landbank.
"There's probably enough law to protect most consumers," he said. "There will never be enough law to protect all consumers. I object strenuously to being told I have to wear my seat belt. I am overprotected these days when I try to get the top off an aspirin bottle."
At the recent consumer-finance hearing, Bailey suggested that it made little sense to regulate prices on consumer loans. After all, the state doesn't regulate the prices of milk, gasoline or other items that are much more vital than credit.
Dow Chamberlain, who directs the Virginia Interfaith Center For Public Policy, had another view. He told legislators that Biblical traditions support usury limits to protect the vulnerable. He said the state shouldn't pass laws that "enforce contracts which may be legal but - by any spiritual definition - are immoral."
People who are desperate "will sign anything," Chamberlain said.
As an example of this, the consumer council's Fox noted that the state attorney general has sued five check-cashing companies in Tidewater and Northern Virginia, accusing them of making unlicensed loans with annual interest rates that reached as high as 2,000 percent.
Before his Landbank empire came tumbling down, Bill Runnells gave this explanation of what drives the market for high-cost credit:
"When you're broke, you'll borrow money at any price. It's like buying tomatoes. Everybody's got a price."
by CNB