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SAN JOSE, CA -- There's a hard and time-worn lesson to be learned
from a recent court settlement with an Irvine, CA-based mortgage
company charged with failing to disclose excessive fees.
"If it appears too good to be true, it probably is," said David Hofmann, legal counsel for more
than a half dozen California homeowners who say they are victims of
predatory lending practices from the same company.
In one suit, one day after opening arguments in the case's Santa
Clara County Superior Court jury trial last week, Irvine, CA-based First Alliance Mortgage
Corp. and Fresno, CA home
owner Joanne Pagter settled with a confidential agreement.
Joanne Pagter and her husband, Edward, filed suit four years ago
claiming First Alliance hid from them refinanced mortgage terms that
amounted to more than $20,000. In 1996 Edward Pagter was terminally
ill with renal disease, and the couple wanted to lower their monthly
mortgage payments to help prepare for retirement.
Edward Pagter died last year.
First Alliance, a public Delaware corporation traded as FACO on the
NASDAQ stock exchange, denied wrongdoing and said the couple should
have reviewed the terms of the mortgage closely and had three days to
cancel the loan within three days after signing it.
More outstanding suits
The company also denied wrongdoing when it settled for $6.85
million in a class action suit filed in Alameda County in 1989 for
similar truth-in-lending violation allegations.
Last year, First Alliance also agreed to pay $4,000 to each of
approximately 150 borrowers with similar claims. The mortgage lender
said it's ready to settle in other cases, including two more in San
Jose due for trial in April.
Still more cases against First Alliance are outstanding in
Illinois, Massachusetts and California.
In California, the American
Association of Retired People joined another suit brought in 1995
by Hofmann's Steinbock & Hofmann law firm to stop First Alliance from
engaging in what the AARP says are unfair and deceptive practices,
including hiding rates and terms of loans from borrowers.
Such practices are of special concern in California and other
fast-appreciating areas where a booming housing market has spawned
sudden equity riches.
The AARP-Hofmann suit's plaintiffs include older, retired couples,
but the plaintiffs are primarily single women, 55 and older --
vulnerable consumers First Alliance targets, the suit alleges.
Generally, the suits say First Alliance allegedly:
Misrepresented loan origination fees to be less
than the actual amount.
Misrepresented as "free" an initial no-payment
period of one to several months. First Alliance told borrowers they
didn't have to make payments for a month or more but the payments were
actually financed with the rest of the mortgage, effectively granting
advance mortgage payments to First Alliance, the suit alleges.
Misrepresented interest rates as low, without
disclosing they were teaser adjustable rates that within years could
swell beyond what the borrower could afford and beyond going market
rates the borrowers could likely land.
"From the experience that others have suffered, people should learn
to exercise caution, particularly when you are refinancing.
That's where the process works to hide the cost of the loan," said
Hofmann.
Predatory lending practices
Norma Paz Garcia, an attorney with Consumers Union and author of "The
Hard Sell: Combating Home Lending Fraud in California," said
lenders also use several common practices to sell high-cost
home-equity and refinanced loans to homeowners, regardless of their
ability to repay the loan
Lenders make loans in conjunction with home
improvements that often never materialize.
They sell loans under the guise of "rescuing"
homeowners from foreclosure, when merely saddling owners with more
debt.
They offer high-interest, disaster-related home
loans.
They consolidate debt into unaffordable
home-equity loans, again under a guise, "making life easier."
Garcia said much of the problem is related to lenders able to
charge what they please. In most states, there are no limits on the
points and fees lenders can charge.
Against sweeping legislation that would strip consumers' bargaining
power, Jack Guttentag, the "The
Mortgage Professor", says some of the blame is with consumers.
"Borrowers pay mortgage brokers an average $1,500 to $2,000 --
about what it costs to paint a modest sized house. But consumers
wouldn't dream of hiring a house painter without the price in advance
and in writing," he said.
"States should require that mortgage brokers operate the same way
other businesses must in a market economy. Brokers should be forced to
quote the price for their service and not be allowed to conceal it
until the transaction is completed," he added.
Avoiding predatory lenders
Consumers Union teaches consumers how to spot
come-ons, also offers tips
to help protect you against predatory lending practices.
Before you start looking for an equity loan
(including those for reverse mortgages, bill consolidation or to stave
off foreclosure) or home improvement loan, get free, independent loan
counseling from your city or county's housing department, community or
social group, credit counseling service or recognized consumer
advocacy agency.
Avoid door-to-door and direct-mail pitches for
home-equity loans and loans connected to unsolicited home improvement
contracts. Instead, get referrals from family members, friends,
co-workers and others you trust.
Avoid loans with interest rates high above market
averages. Shop around to compare the going market rates among savings
and loans, banks, mortgage lenders and brokers.
"The Internet makes this very easy today," says Hofmann.
Avoid come-ons that begin "No credit? No job? No
problem! Don't worry. You have plenty of equity in your home to
qualify for a loan." What really "qualifies" you for the loan with a
disreputable company is your inability to pay it. When you fail to
meet payments, they can legally take your home.
Avoid interest-only, non-amortizing or partially
amortizing loans. After you make years of payments you will still owe
the money you borrowed, often as one large "balloon" payment at the
end of the contract's term.
Avoid loans based solely on your equity, rather
than your ability to repay.
Don't apply to lenders or brokers who require a
high, non-refundable application fee.
Never allow yourself to be pressured into signing
a contract unless you've read and understand every word. If the offer
is good today, it should be good tomorrow. Likewise, don't sign
anything with blank spaces. They could be filled in later with an
amount you wouldn't agree to.
The U.S. Federal
Trade Commission offers an on-line complaint form to report
mortgage fraud and questionable practices.
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