Debt Deception

iWATCH NEWSBOOK

SHOW CONTENTS Debt Deception ©2011 Center for Public Integrity 2 Table of Contents About The Center for Public Integrity and iWatch News 3 Project Credits 3 About the Authors 4 THE GREAT MORTGAGE COVER-UP Whistleblowers silenced to protect fraudsters, say former 6 Countrywide employees Mortgage industry tanks, fraud continues at Countrywide 20 Loan underwriter found herself in ‘dangerous territory’ 32 A ‘counseling meeting’ then termination at Countrywide 37 LOOSE LENDING Payday lending bankrolls auto racer’s fortune 43 Race car driver Scott Tucker drew elaborate facade around 53 his Payday loan businesses Credit lenders remake themselves in image of Payday lenders 64 Fights over tribal Payday lenders show challenges in financial 74 reform Buyer beware 82 BOWERRO RS NIGHTMARES Disabled homeowner alleges broker, bank sold her mortgage 93 she could not afford Soldiers battle car dealers over inflated prices, loan terms 106 Small town teacher seeks help for big debt 113 $700 dormitory fee costs family Its car 124 Navy pension signed over as collateral for costly quick cash 132

3Cover CONTENTS ABOUT CPI4 Debt Deception ©2011 Center for Public Integrity 3 About the Center and iWatch News The Center for Public Integrity is a nonprofit, nonpartisan, and independent digital news organization specializing in original investigative journalism and research on significant public policy issues. Since 1990, the Washington, D.C.-based Center has released more than 475 investigative reports and 17 books to provide greater transparency and accountability of government and other institutions. It has received the prestigious George Polk Award and more than 32 other national journalism awards and 18 finalist nominations from national organizations, including PEN USA, Investigative Reporters and Editors, Society of Environmental Journalists, Overseas Press Club, and National Press Foundation. In 2011 the Center launched iWatch News. Visit www.iWatchNews.org for ongoing coverage of numerous topics, including the stories featured in this newsbook.

Project Credits

Executive Director: Bill Buzenberg Editors: Julie Vorman and John Dunbar Authors: Ben Hallman, David Heath, Michael Hudson, Amy Biegelsen, Shirley Gao, Jason McLure iWatch Newsbook Design: Roger Fidler, Donald W. Reynolds Journalism Institute in Columbia, Missouri. www.rjionline.org

This iWatch Newsbook collects a number of stories published by the Center between February and October of 2011. Taken together, they provide a look at how massive corporations and shady lending practices have contributed to the decay of the financial system. To see the original stories, along with video and new pieces about the financial collapse and its impact on the country, please visit www.iWatchNews.org

3Cover SHOW CONTENTS FIRST ARTICLE4 Debt Deception ©2011 Center for Public Integrity 4 About the Authors Benjamin Hallman covers business and finance for the Center. He joined in June 2010 after nearly five years as a legal affairs reporter at The American Lawyer, where he covered the business of law, white collar crime, and regulatory Washington. Hallman has reported on the accounting fraud prosecutions of HealthSouth’s Richard Scrushy and Qwest’s Joesph Nacchio; on the massive Google book search settlement; and, from Iraq, on American-led efforts to rebuild the Iraqi justice system. His story about the crash of Lehman Brothers was anthologized in The Best American Legal Writing (2009). He also previously worked as a reporter for the St. Louis Post-Dispatch. Hallman received a master’s degree in journalism from the University of Missouri in 2004.

Michael Hudson covers business and finance for the Center. He previously worked as a reporter for the Wall Street Journal and as an investigator for the Center for Responsible Lending. Hudson has also written for Forbes, The Big Money, the New York Times, the Los Angeles Times and Mother Jones. His work has won many honors, including a George Polk Award for magazine reporting, a John Hancock Award for business journalism and accolades from the National Press Club, the White House Correspondents’ Association and the American Bar Association. He edited the award-winning book Merchants of Misery and appeared in the documentary film Maxed Out. His latest book, THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America— and Spawned a Global Crisis, was named 2010 Book of the Year by Baltimore City Paper and called “essential reading for anyone concerned with the mortgage crisis” by Library Journal.

David Heath comes from The Seattle Times, where he was three times a finalist for the Pulitzer Prize. He co-authored an investigation of conflicts of interest surrounding clinical cancer research at a Seattle hospital. The series won the Harvard University’s Goldsmith prize for investigative reporting, the George Polk award for medical reporting, the Gerald Loeb award, the Scripps Howard Foundation’s public service award, the Associated Press Managing Editors’ public service award and the Newspaper Guild’s Heywood Broun award. Heath’s recent expose on congressional earmarks was recognized by the National Press

Foundation with the Everett Dirksen award for best coverage of Congress. He is a graduate of Grinnell College and was a 2006 Harvard Nieman Fellow.

Amy Biegelsen won the Virginia Press Association’s 2009 and 2011 Best in Show Award for a feature portfolio, and a collection of health and environmental stories. She is the recipient of the Virginia Trial Lawyers Association’s Excellence in Journalism prize for a story on children’s mental health issues and is a two-time finalist for the Livingston Award for Young Journalists. She earned a bachelor’s degree from the University of Chicago.

Jason McLure is a New Hampshire-based correspondent for Thomson Reuters covering the 2012 primary and regional news. Previously, he worked in Africa as a correspondent for Bloomberg News and Newsweek, and his reporting has appeared in The Economist, New York Times, National Law Journal and other publications. A former Peace Corps volunteer in Niger, he is a graduate of the University of Missouri.

Shirley Gao, a former intern with the Center, is a junior at Princeton University majoring in public policy. Her academic interests include global health, conflict resolution, and civil society. On campus, she writes for The Ink at www. universitypressclub.com.

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3Cover SHOW CONTENTS FIRST ARTICLE4 Debt Deception | Mortgage Cover-Up ©2011 Center for Public Integrity 6 Whistleblowers silenced to protect fraudsters, say former Countrywide employees iWatch News investigative series reveals legacy of corruption that still plagues Bank of America By Michael Hudson Published Online | September 22, 2011

n the summer of 2007, a team of corporate investigators Isifted through mounds of paper pulled from shred bins at Coun- trywide Financial Corp. mortgage shops in and around Boston. By intercepting the documents before they were sliced by the shredder, the investigators were THE GREAT MORTGAGE able to uncover what they believed COVER-UP was evidence that branch employees had used scissors, tape and pletely different piece of property. Wite-Out to create fake bank state- Eileen Foster, the company’s ments, inflated property appraisals new fraud investigations chief, had and other phony paperwork. Inside seen a lot of slippery behavior in the heaps of paper, for example, her two-plus decades in the bank- they found mock-ups that indicated ing business. But she’d never seen to investigators that workers had, anything like this. as a matter of routine, literally cut “You’re looking at it and you’re and pasted the address for one going, Oh my God, how did it get to home onto an appraisal for a com- this point?” Foster recalls. “How do

Todd Wawrychuk/Image Group LA Eileen Foster was mortgage fraud investigations chief for Countrywide Financial Corp., which eventually became Bank of America.

you get people to go to work every used against them. Another, she day and do these things and think says, called her and growled into it’s okay?” the phone: “I’m g--d---ed sick and More surprises followed. She tired of these witch hunts.” began to get pushback, she claims, Her team was not allowed to in- from company officials who were terview a senior manager who over- unhappy with the investigation. saw the branches. Instead, she says, One executive, Foster says, sent Countrywide’s Employee Relations an email to dozens of workers in Department did the interview and the Boston region, warning them then let the manager’s boss vet the the fraud unit was on the case and transcript before it was provided to not to put anything in their emails Foster and the fraud unit. or instant messages that might be In the end, dozens of employ-

ees were let go and six branches Bank of America denies Foster’s were shut down. But Foster wor- allegations and stands behind its ried some of the worst actors had decision to fire her. Foster sees the escaped unscathed. She suspected, ruling as a vindication of her deci- she says, that something wasn’t sion to keep fighting. right with Countrywide’s culture — “I don’t let people bully me, in- and that it was going to be rough timidate me and coerce me,” Foster going for her as she and her team told iWatch News during a series of dug into the methods used by Coun- interviews. “And it’s just not right trywide’s sales machine. that people don’t know what hap- By early 2008, she claims, she’d pened here and how it happened.” concluded that many in Country- wide’s chain of command were ‘Greedy people’ working to cover up massive fraud within the company — outing and This is the story of Eileen Foster’s then firing whistleblowers who fight against the nation’s largest tried to report forgery and other bank and what was once the na- misconduct. People who spoke up, tion’s largest mortgage lender. It she says, were “taken out.” is also the story of other former By the fall of 2008, she was out of Countrywide workers who claim a job too. Countrywide’s new own- they, too, fought against a culture er, Bank of America Corp., told her of corruption that protected fraud- it was firing her for “unprofessional sters, abused borrowers and helped conduct.” land Bank of America in a quagmire Foster began a three-year battle of legal and financial woes. to clear her name and establish that In government records and in in- she and other employees had been terviews with iWatch News, 30 for- punished for doing the right thing. mer employees charge that Coun- Last week, the U.S. Department of trywide executives encouraged or Labor ruled that Bank of America condoned fraud. The misconduct, had illegally fired her as payback they say, included falsified income for exposing fraud and retaliation documentation and other tactics against whistleblowers. It ordered that helped steer borrowers into the bank to reinstate her and pay bad mortgages. her some $930,000. Eighteen of these ex-employ-

ees, including Foster, claim they were demoted or fired for questioning fraud. They say sales managers, personnel executives and other company officials used intimidation and firings to silence whistleblowers. A former loan-underwriting manager in northern California, for exam-

ple, claimed Countrywide Susan Walsh/AP retaliated against her after Countrywide Financial Corp. former she sent an email to the CEO Angelo Mozilo is sworn in during a company’s founder and House Oversight and Government Reform chief executive, Angelo Committee hearing in 2008. Mozilo, about questionable lending practices. The ex- manager, Enid Thompson, warned fired. Her lawsuit was resolved last Mozilo in March 2007 that “greedy year. The terms were not disclosed. unethical people” were pressuring Bank of America officials deny workers to approve loans without Countrywide or Bank of America regard for borrowers’ ability to pay, retaliated against Foster, Thomp- according to a lawsuit in Contra son or others who reported fraud. Costa Superior Court. The bank says Foster’s firing was Within 12 hours, Thompson based only on her “management claimed, Countrywide executives style.” It says it takes fraud seri- began a campaign of reprisal, reduc- ously and never punishes workers ing her duties and transferring staff- who report wrongdoing up the cor- ers off her team. Corporate minions, porate ladder. she charged, ransacked her desk, When fraud happens, Bank of broke her computer and removed America spokesman Rick Simon her printer and personal things. says, “the lender is almost always Soon after, she said, she was a victim, even if the fraud is per-

petrated by individual employees. email about a fraudster within the Fraud is costly, so lenders neces- ranks, she says, he would hit “reply sarily invest heavily in both pre- all” and type, “Track the bastard venting and investigating it.” down and fire him.” When it uncovers fraud, Simon She says, though, that others says, the bank takes “appropriate within the company often screened actions,” including firing the em- his emails, and it’s likely Mozilo ployees involved and cooperating never saw Thompson’s email or with law-enforcement authorities many other messages about fraud. in criminal investigations. “My sense is they kept things Mozilo’s attorney, David Siegel, from Angelo,” she says. told iWatch News it was “unlikely that Mr. Mozilo either would have ‘An old matter’ had a direct role with, or would recall, specific employee grievances, When Bank of America announced and it would be inappropriate for in January 2008 that it was going him to comment on individual em- to buy Countrywide at a fire-sale ployment issues in any event.” Sie- price, some analysts thought it was gel added that “any implication that a great move, one that would leave he ever would have tolerated much the bank well positioned once the less condoned to any extent mis- home-loan market recovered. conduct or fraudulent activity in Almost three years later, defaults loan production and underwriting on loans originated by Countrywide … is utterly baseless.” have soared and Bank of America’s In closed-door testimony a year stock price has plunged as inves- ago, the ex-CEO defended his com- tors and government agencies have pany, telling the federal Financial pursued mortgage-related claims Crisis Inquiry Commission that totaling tens of billions of dollars. Countrywide “probably made more Federal and state officials are difference in society, in the integri- pressing Bank of America and oth- ty of our society, than any company er big players to settle charges they in the history of America.” used falsified documents to speed Foster says that, in her experi- homeowners through foreclosure. ence, Mozilo urged managers to Lawsuits filed on behalf of inves- crack down on fraud. If he saw an tors claim Countrywide lied about

the quality of the pools of mortgag- Foster claimed, went beyond mis- es that the lender sold them during conduct committed at the branch the home-loan boom. level and reached into Country- Bank of America says issues relat- wide’s management ranks. ed to Countrywide are old news. Last Foster told the agency that in- year a spokesman described fraud stead of defending the rights of claims by state officials as “water un- honest employees, Countrywide’s der the bridge,” noting that the bank employee relations unit sheltered settled with dozens of states soon af- fraudsters inside the company. Ac- ter buying Countrywide. cording to the Labor Department, When federal officials an- Foster believed Employee Relations nounced Foster’s victory last week, “was engaged in the systematic Bank of America dismissed the case cover-up of various types of fraud as “an old matter dating from 2008.” through terminating, harassing, and Accounts from Foster and other otherwise trying to silence employ- former employees, however, put ees who reported the underlying the bank in an uncomfortable po- fraud and misconduct.” sition. These accounts, as well as In government records and in in- lawsuits pushed by investors, bor- terviews with iWatch News , Foster rowers and government agencies, describes other top-down miscon- raise questions about how diligent- duct: ly the bank has worked to clean up • She claims Countrywide’s the mess caused by Countrywide — management protected big and whether the bank has tried to loan producers who used curtail its legal liability by papering fraud to put up big sales num- over the history of corruption at its bers. If they were caught, she controversial acquisition. says, they frequently avoided In Foster’s case, the Labor De- termination. partment notes that two senior Bank of America officials — not • Foster claims Countrywide’s former Countrywide executives — subprime lending division made the decision to fire her. concealed from her the level The agency says the investiga- of “suspicious activity re- tions led by Foster found “wide- ports.” This in turn reduced spread and pervasive fraud” that, the number of fraud reports

Countrywide gave to the U.S. workers say that fraud was con- Treasury’s Financial Crimes doned by management. Enforcement Network. Frank San Pedro, who worked as a manager within the investigations • Foster claims Countrywide unit from 2004 to 2008, told the Fi- failed to notify investors when nancial Crisis Inquiry Commission it discovered fraud or other the company worked hard “to root problems with loans that it out all the fraud that we could possi- had sold as the underlying as- bly find. We continued to get better sets in “mortgage-backed” se- and better at it.” curities. When she created a Foster claims He said most of report designed to document Countrywide the fraud was “ex- these loans on a regular basis ternal” — outsid- going forward, she says, she failed to notify ers trying to rip was “shut down” by company investors off the lender — officials and told to stop doing when it and in-house sales the report. discovered staffers who tried In Foster’s view, Countrywide fraud or other to push through lost its way as it became a place problems with fraudulent loans where everyone was expected to loans that it “seldom got away bend to the will of salespeople driv- had sold as with it.” en by a whatever-it-takes ethos. the underlying Gregory Lums- The attitude, she says, was: “The den, former head rules don’t matter. Regulations assets in of Countrywide’s don’t matter. It’s our game and we “mortgage- subprime divi- can play it the way we want.” backed” sion, Full Spec- Bank of America declined to an- securities. trum Lending, swer detailed questions about Fos- says there are ter’s allegations. Simon, the bank thousands of ex-Countrywiders who spokesman, told iWatch News “we can vouch for the company’s hones- are certain” that Foster’s claims ty. When bad actors were caught, he “were properly and fully investigat- says, Countrywide took swift action. ed by Countrywide and appropriate “I don’t care if you’re Microsoft actions were taken.” or you’re the Golf Channel or Du- And not all former Countrywide pont or MSNBC: companies are

going to make some mistakes,” It wasn’t, Mozilo added, that he Lumsden told iWatch News. “What was against cracking down on bad you hope is that companies will apples that took advantage of vul- deal with employees that do wrong. nerable borrowers. That’s what we did.” “These lenders,” the CEO said, “deserve unwavering scrutiny and, when found guilty, an unforgiving The American Dream punishment.” In February 2003, Countrywide’s Around the time Mozilo was giv- founder and CEO, Angelo Mozilo, ing his speech back east, one of his gave a lecture hosted by Harvard’s employees was finding what she Joint Center for Housing Stud- later claimed to be evidence of se- ies titled “The American Dream of rious fraud at Countrywide’s Ros- Homeownership: From Cliché to eville, Calif., branch. Mission.” Employees were falsifying loan Mozilo, the Bronx-born son of a applicants’ salaries in mortgage pa- butcher, had started Countrywide perwork and forging their names with a partner in 1969 and built it on loan documents, according to into a home-loan empire that was a lawsuit filed by Michele Brunel- now on the verge of becoming the li, who was a loan processor and nation’s largest home lender. later a branch operations manager But he saw trouble on the hori- for Countrywide. In March 2003, zon. Before his audience of aca- Brunelli recalled, she used the com- demics and business people, he pany’s “ethics hotline” and lodged complained that a “regulatory ma- what she thought was a confiden- nia” was hurting Countrywide and tial complaint. other “reputable” mortgage lend- Immediately after, Brunelli ers. Overreaching predatory lend- claimed, her regional manager ing laws, he said, were threatening yelled at her for calling the hot- shut the door to homeownership line. Then, she said, her immediate for hard-working low-income and supervisor called her in and repri- minority families. Industry and manded her for making the com- citizenry needed to work together plaint. to prevent government from stran- “Not everyone’s hands are clean gling the mortgage market, he said. in this office,” the branch manager

said, according to Brunelli. “Are them the story. We told them every- you ready for that?” thing,” Arroyo told iWatch News. Brunelli didn’t back down. She “They said don’t worry, whatever continued reporting evidence of you say, you’re going to be covered. fraud to the executives above her, A month or so later, I was let go.” her lawsuit said. They dismissed Arroyo and Court sued Country- her concerns, she said, saying she wide in state court in Sacramento, was having “emotional outbursts” but Countrywide won an order forc- and accusing her of being “on a ing the case into arbitration. They witch hunt.” decided to drop their claim because In court pa- the odds are stacked against work- “Corporate pers, the compa- ers in arbitration, their attorney, came in. We ny flatly denied William Wright, said. told them her allegations, Some ex-employees say they the story. We accusing Brunelli went high up Countrywide’s chain told them of acting in “bad of command to raise red flags about faith.” Her law- fraud. Mark Bonjean, a former op- everything. suit was resolved erations unit manager in Arizona, They said in 2010. complained to a divisional vice don’t worry, Two other for- president, according to a lawsuit whatever you mer Countrywide in state court in Maricopa County. say, you’re workers, Sabrina Within two hours of sending the VP going to be Arroyo and Linda an email about what he believed Court, claimed were violations of the state’s orga- covered. A they lost their nized crime and fraud statutes, the month or so jobs in 2004 after suit said, he was placed on adminis- later, I was let they complained trative leave. The next day, accord- go.” supervisors were ing to the lawsuit, he was fired. directing them to Another ex-Countrywider, Sha- forge borrowers’ signatures on loan hima Shaheem, claimed she took paperwork. After they informed her complaints to the very top. Like Employee Relations about the forg- Enid Thompson before her, she eries, the company quickly fired said she wrote an email directly to them, they claimed. Mozilo, the CEO, about fraud and “Corporate came in. We told retaliation. She never heard back

from Mozilo, according to her law- from a giant to a colossus. Mozilo suit in Contra Costa Superior Court. had vowed that his company would Instead, the suit said, she was sub- double its share jected to a campaign of harassment Former of the home-loan by company executives and human- Countrywide market to 30 per- resources representatives that CEO Angelo cent by 2008. forced her to leave her job. Mozilo had Some former Shaheem’s case was settled out vowed that Countrywide em- of court, her attorney said. ployees say the A Bank of America spokesman his company pressure to push declined to respond to questions would double through more about allegations by Shaheem, Bon- its share of and more loans jean and other former Countrywide the home-loan encouraged an employees, noting that their claims market to 30 anything-goes at- “are related to situations and inves- percent by titude. Question- tigations that took place at Coun- able underwriting trywide prior to Bank of America 2008. practices often acquiring the company.” helped risky loans sail through the lender’s loan-approval process, they say. ‘Fund the loans’ In one example, Countrywide Countrywide had been slower than approved a loan for a borrower many other mortgage lenders to whose application listed him as fully embrace making subprime a dairy foreman earning $126,000 loans to borrowers with modest a year, according to a legal claim incomes or weak credit. By 2004, later filed by Mortgage Guaranty though, Countrywide had become a Insurance Co., a mortgage insurer. player in the market for subprime It turned out that the borrower ac- deals and many other nontradition- tually milked cows at the dairy and al mortgages, including loans that earned $13,200 a year, the lawsuit didn’t require much documentation alleged. of borrowers’ income and assets. The borrower provided the cor- These loans were part of the rect information, but the lender plan for meeting its CEO’s auda- booked the loan based on data that cious goal of growing his company inflated his wages by more than 800

percent, the legal claim said. Markopoulos couldn’t be reached In another instance, according to for a response. Lumsden says he a former manager cited as a “con- doesn’t recall any incident involv- fidential witness” in shareholders’ ing “loan flipping” allegations. litigation against the company, employees appeared to be involved in Brushed off a “loan flipping” scheme, persuad- ing borrowers to refinance again Eileen Foster knew little about and again, giving them little new Countrywide’s fraud problems money, but piling on more fees and when she took a job with the com- ratcheting up their debt. The wit- pany in September 2005. ness recalled that when the scheme For Foster, the move seemed was pointed out to Lumsden, Coun- like a natural progression. She’d ac- trywide’s subprime loan chief, the cumulated 21 years’ experience in response from Lumsden was “short the banking business, starting out and sweet”: “Fund the loans.” as a teller at Great Western Bank Such episodes weren’t uncom- and working her way up to vice mon, the witness said. In early 2004, president for fraud prevention and he claimed, he discovered that Nick investigation at First Bank Inc. Markopoulos, a high-producing Countrywide brought her on as a loan officer in Massachusetts, had first vice president and put her in cut and pasted information from charge of a high-priority project: the Internet to create a fake verifi- An overhaul of how the company cation of employment for a loan ap- handled customer complaints. plicant. Markopoulos left the com- The company’s systems for han- pany of his own accord, the witness dling complaints, Foster recalls, said, but he was soon rehired as a were disjointed and ineffective. Var- branch manager. ious divisions had differing policies The witness said he contacted a and there wasn’t much effort to en- regional vice president to object to sure that complaints got addressed. rehiring an employee with a history Things had gotten so bad, she says, of fraud. But he said the regional federal banking regulators ordered VP — citing Markopoulos’s high the company to do something about productivity — overruled his objec- the problem. Foster’s task was to tions. standardize the company’s proce-

dures and ensure that people with in her reports. She thought it was complaints didn’t get brushed off. odd, she says, but she didn’t think As she set about fixing the prob- it was evidence of a larger pattern. lems, she says, she encountered She figured it was mostly an exer- things that gave her pause. cise in backside-covering. The company’s mortgage fraud “When we lost at the meeting, investigation unit, Foster says, re- I was like, ‘OK, they want to just fused to share data about the com- cover this up,’” Foster says. “But it plaints it received. Each time she wasn’t anything to the scale that I requested the stats, she says, she thought it would cause great harm.” hit a brick wall. Only later — after she took over Foster says she also ran into a the mortgage fraud investigation hitch when she began distributing unit — did she realize, she says, that a monthly report that broke down cover ups were part of the culture complaint data for each of the com- of Countrywide, and that efforts to panies’ operating divisions. paper over problems had less to do Countrywide Home Loans Ser- with bureaucratic infighting and vicing, which collected borrowers’ more to do with hiding something payments each month, was the sub- darker within the company’s culture. ject of complaints about its fore- “What I came to find out,” she closure practices and other issues. says, “was that it was all by design.” The volume of serious complaints involving the servicing unit topped Bouquets and handbags 1,000 per month, dwarfing the number for other divisions. State law enforcers would later This upset officials with the ser- charge that Countrywide execu- vicing unit, Foster recalls. The com- tives designed fraud into the lend- plaints weren’t “real complaints,” er’s systems as a way of boosting the servicing execs argued, and loan production. During the mort- Foster was making the unit look gage boom, critics say, Country- bad by including them in her re- wide and other lenders didn’t worry ports. about the quality of the loans they The upshot: Foster was ordered, were making because they often she says, not to include many of the sold the loans to Wall Street banks complaints about the servicing unit and investors. So long as borrow-

ers made their first few payments, One Source Mortgage Inc.’s owner, the investors were usually the ones Charles Mangold, had served time who took the hit if homeowners for weapons charges and other couldn’t keep up with payments. crimes, the suit said. Countrywide treated borrowers, One Source received as much California’s attorney general later as $100,000 per month in fees from claimed, “as nothing more than the Countrywide, banking as much as means for producing more loans,” $11,000 for each loan it steered to the manipulating them into signing lender. Mangold, in turn, showered up for loans with little regard for a Countrywide whether they could afford them. One former branch manager Countrywide’s drive to boost loan employee and other employ- production encouraged fraud, for estimated that ees with expen- example, on loans that required lit- borrowers’ sive gifts, includ- tle or no documentation of borrow- incomes were ing flowers and ers’ finances, according to a lawsuit Coach handbags, by the Illinois attorney general. One exaggerated on the suit said. former employee, the suit said, es- 90 percent of Countrywide timated that borrowers’ incomes the reduced- in turn funded a were exaggerated on 90 percent of documentation stream of loans the reduced-documentation loans loans sold out arranged by One sold out of his branch in Chicago. of his branch Source, the suit One way that Countrywide said, even as the booked loans was by paying gener- in Chicago. broker misled ous fees to independent mortgage borrowers about how much they’d brokers who steered customers be paying on their loans and falsi- its way. Countrywide gave so little fied information on their loan ap- scrutiny to these deals that bor- plications. One borrower provided rowers often ended up in loans that pay stubs and tax returns showing they couldn’t pay, the state of Illi- he earned no more than $48,000 per nois’ suit said. year, but One Source listed his in- In Chicago, the suit said, Coun- come as twice that much, accord- trywide’s business partners including to the suit. ed a mortgage broker controlled Mangold couldn’t be reached by a five-time convicted felon. for comment. His attorney said in

2007 that Mangold denied all of the down a branch in the Chicago state’s allegations against him. area, he said, after a rash of quick- Countrywide, the state’s suit defaulting loans sparked a review said, kept up its partnership with that uncovered evidence of bogus One Source for more than three appraisals and forged signatures years. It didn’t end the relationship on loan paperwork. One manager, until the state sued One Source for Forwood says, tried to rational- fraud and slapped Countrywide ize the fraud, telling investigators: with a subpoena seeking docu- What was the ments relating to the broker. The company big deal if, say, As questionable practices con- maintained a five out of ev- tinued, Countrywide’s fraud inves- “do not use” ery 30 loans tigation unit had trouble keeping list of crooked was fraudulent? up, according to Larry Forwood, appraisers When the who worked as a California-based unit shut down fraud investigator for Countrywide who’d been a branch in in 2005 and 2006, before Foster caught falsifying southern Cali- took over the fraud unit. His per- home values, fornia after un- sonal caseload totaled as many as but the sales covering simi- 100 cases at a time, many of them force often lar evidence of involving dozens or hundreds of ignored the list fraud, Forwood loans each. recalls, it got Some cases involved mortgage and used these some push- brokers or in-house staffers who appraisers back. It came pressured real-estate appraisers to anyway. all the way inflate property values. The com- from the top, pany maintained a “do not use” list he says, via a phone call to the of crooked appraisers who’d been fraud unit from Mozilo. caught falsifying home values, but “He got very upset,” Forwood the sales force often ignored the list says. “He basically got on the phone and used these appraisers anyway, and said: ‘Next time you need to do Forwood says. that, clear it with me.’” Countrywide’s fraud investiga- Mozilo’s attorney didn’t respond tion unit did have some successes to questions from iWatch News during Forwood’s tenure. It shut about Forwood’s account. n

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Mortgage Cover-Up ©2011 Center for Public Integrity 20 Mortgage industry tanks, fraud continues at Countrywide By Michael Hudson Published Online | September 23, 2011

he mortgage market was struggling in March 2007 Twhen Countrywide promoted Eileen Foster to executive vice president and tapped her to take over the company’s mortgage fraud unit. Home prices were sputtering, borrower defaults were climbing, THE GREAT MORTGAGE and the industry leader, County- COVER-UP wide, would soon be forced to ask Bank of America for an infusion of company’s fraud investigation re- capital to help it keep afloat. sources were balkanized. In ad- The fraud investigation unit was dition to the company-wide fraud also struggling. The company had unit that Foster had taken over, laid off several experienced inves- many of the operating divisions, tigators, according to Foster. Those such as Countrywide’s subprime who remained were faced with an unit, had their own smaller investi- ever-growing number of fraud com- gative teams. plaints. This didn’t make sense to Foster. Foster had roughly two dozen It meant the smaller investigative investigators working for her, but teams reported to divisional sales only four or five had real investiga- executives who might be tempted tive chops, Foster says. Many of the to discourage aggressive fraud in- rest had been brought over to the vestigations in order to protect the unit from clerical jobs, she says. flow of loans into the company’s The other problem was that the production pipeline.

Chuck Burton/AP File Bank of America, their N.C. headquarters are shown above, acquired Countrywide Financial in Jan. 2008.

One of her first tasks was to says, only that it wasn’t the right oversee a fraud mitigation “reengi- time for a reorganization. neering” that would consolidate all She didn’t have time to dwell on fraud investigation within her unit. the setback. In July, her unit had In June 2007, she presented the fielded a call from an ex-employee plan in a series of meetings with di- who claimed he’d been fired be- visional presidents. cause he’d objected to fraud at one A few weeks later, she learned of Countrywide’s subprime loan of- that the plan had been shelved. fices in the Boston area. There was no explanation why, she Foster arranged to have the con-

tractor that handled the Boston phony activities of these employees branches’ shredding set aside the were known … and tolerated by paperwork they hauled off site and management,” Foster later said in hold it in a secure location. Then a a witness statement in a Country- team made up of her investigators wide shareholders lawsuit in fed- and other company representatives eral court in Los Angeles. headed to Boston to go through the After the company had closed one piles of paper. branch and was preparing to shut After finding evidence of “cut and five more, Lumsden, the company’s paste” document forgery, the team subprime lending did a full sweep of the offices in In some of chief, called Fos- question. On top of workers’ desks, the offices, ter and angrily ac- Foster says, they found an unusual investigators cused her of run- number of Wite-Out dispensers. And found more ning a witch hunt, inside their desk drawers, she says, than one fax Foster claims. they found folders holding blank Foster told templates for account statements machine. iWatch News from various banks and brokerage Workers that, during a firms, such as Bank of America and admitted that later conference Washington Mutual. the extra call, Lumsden ar- In some of the offices, investiga- fax machine gued that the tac- tors found more than one fax ma- was used to tics that workers chine. During interviews with in- were using in the vestigators, workers admitted that simulate faked branches weren’t the extra fax machine was used to documents designed to take simulate faked documents being being sent in advantage of cus- sent in by borrowers, Foster says. by borrowers. tomers, but rath- To eliminate a paper trail, she says, er were a way branch staffers had programmed of cutting red tape and speeding the sending fax machine so there deals through the company’s loan- was no banner identifying the fax approval system. number from which the transmis- “This is jaywalking,” Foster re- sion originated. calls him saying. “Not murder.” The fraud seemed routine and Lumsden told iWatch News he the investigation showed “that the didn’t recall the phone calls Foster

describes. “I’m not able to really com- fices, some employees in the field ment on anything she has to say,” he were getting first-hand lessons, says. “I don’t remember Foster, and they say, in how far the company’s I don’t remember the conversation.” go-go sales culture was willing to As for the Boston investigation, go. Lumsden says the company han- Lupe Manegdeg, a loan special- dled things the way it should have. ist at a Countrywide office in Glen- “I don’t know what else to say,” he dale, Calif., claimed that, in early says. “People who did things wrong 2007, she discovered that loan offi- were terminated.” cers in her branch were defrauding Roughly 44 employees in the borrowers in a variety of ways — Boston area lost their jobs. including forging their signatures Foster says, though, that she was on documents and lying to them blocked from establishing what re- about the type of loans they were sponsibility upper level executives getting. might have had for the problems in She reported this, she said, to those branches. her supervisors, to Countrywide She says her unit wasn’t allowed human-resources officials and to to interview Markopoulos, the for- the company’s fraud hotline. The mer loan officer who had risen to company responded, her lawsuit in executive vice president of the sub- state court in Los Angeles said, by prime division with supervisory firing her. authority over the Boston region. The case was settled last year be- Instead, she says, Employee Rela- fore Countrywide had a chance to tions conducted the interview, ask- respond to Manegdeg’s allegations. ing Markopolous a series of “tepid” One of the highest-level employ- questions and then allowing his ees to complain about fraud inside boss, Lumsden, to review the tran- Countrywide was Mark Zachary. script before it was turned over to Zachary took a job in August Foster’s unit. 2006 as a vice president in the Hous- ton, Texas, division of Countrywide KB Home Loans. The lender was ‘Shadow approvals’ owned by Countrywide as part of a While Foster was fighting battles joint venture between Countrywide within Countrywide’s corporate of- and KB Home, one of the nation’s

largest home builders. Country- Instead, Zachary charged, Coun- wide KB Home Loans provided the trywide KB Home Loans began credit that allowed home buyers to OK’ing applications through a back- purchase houses being constructed door process in which loans were at a furious pace by KB Home. in essence “being approved without Soon after he started, Zachary a review by an underwriter.” began questioning Countrywide ex- These authorizations, he said, ecutives about inflated property ap- had a special name: “Shadow Ap- praisals and “other grave illegal is- provals.” sues,” according to a lawsuit [5] he And Zachary? A supervisor wrote later filed in federal court in Texas. him up for “performance issues,” The bogus appraisals duped both he said, a stark turnaround from the consumers, who ended up bor- a glowing performance evaluation rowing more than the homes were he’d received three months before. actually worth, as well as the inves- He was terminated two weeks af- tors who bought the loans on Wall ter the written warning, his lawsuit Street, Zachary said. said. In April 2007, his suit said, he After Zachary sued, Countrywide sent an email to Countrywide’s em- said it had “investigated each of his ployee relations unit, warning that claims and found no merit to his selling people overpriced homes accusations.” It said Zachary had and putting them into loans they “received verbal counseling on his couldn’t afford was a “formula for performance, as well as written disaster.” feedback in the form of his evalu- His suit claimed that he also ation, before he first made allega- clashed with management over a tions of impropriety.” requirement that the lending unit Countrywide said its lending approve 10 percent of backlogged operations were “prudently and loan applications each day so the effectively managed” and that its green light could be given to KB ethical standards were “rigorously Home to start building the homes enforced.” under contract. After he said he Zachary and Bank of America couldn’t meet that goal, he was reached an out of court settlement “taken out of the loop” and “treated in the case in 2009. As part of the like a pariah by his supervisor.” settlement, Zachary agreed not to

talk further about his experiences Foster also began clashing with at Countrywide. Countrywide’s employee relations unit, which had a key role in disciplinary actions against employ- ‘Everybody’s flipping out’ ees. Employee Relations, she says, After the Boston investigation, Fos- worked with sales managers to ter says, she continued to run into shield high-producing salespeople problems with Countrywide’s man- from scrutiny. agement In one case, a branch manager She says she urged the compa- hung on to his job despite fraud al- ny’s internal audit unit to investi- legations that went back five years. gate the lack of accurate reporting Workers complained he was doing of suspicious activity reports. An drugs and ranting and screaming in audit report about fraud across the the office. After the manager swore company’s divisions was “edited he only took prescription drugs, down” and in the end “said almost Foster says, Employee Relations nothing” about problems with re- labeled the drug allegations unsub- porting the suspicion activity re- stantiated. ports, Foster says. One witness claimed the man- She also hit a roadblock, she ager had threatened to kill an em- says, when she started putting to- ployee’s family. Another supposed gether a report listing all the ques- witness was too scared to speak, tionable loans that had been sold trembling uncontrollably, Foster to investors. A superior, she says, says. But because it was the man- told her: “You need to pull it. Every- ager’s word against the word of a body’s flipping out.” single witness, Foster says, Em- Management didn’t want the in- ployee Relations also listed the formation put down on paper, she murder-threat allegation as unsub- believed, because then it would stantiated. have to buy back the bad loans. These and other investigations The company left it up to investors, convinced Foster that Employee she says, to find fraud-tainted loans Relations was doing more than ex- themselves — a difficult task given cusing fraud, according to Labor the volume of loans pooled into Department records. It was, in her mortgage-backed securities deals. view, actively working to cover up

fraud by discouraging employees learned that over a period of two from reporting wrongdoing to her to three years, several workers team, violating the confidentiality had been transferred or fired after of tipsters and using its influence telling Employee Relations that over personnel decisions to retali- Michael Eckhart, a high-produc- ate against whistleblowers. ing loan officer at a Countrywide “Without ER, the sales people branch in Nashville, was commit- couldn’t have done what they did,” ting fraud. Her team also uncovered Foster told iWatch News. Employee evidence that a regional vice presi- Relations had “the ultimate power dent had kept Eckhart apprised of to silence the whistleblower. They the progress of investigations tar- were the controlling factor. Without geting him, according to Foster’s them, it wouldn’t work.” witness statement in Countrywide shareholders litigation. Eckhart’s attorney says that Eck- ‘A rare opportunity’ hart died last year. The attorney de- In January 2008, Bank of America clined to comment about the fraud announced that it had reached a allegations raised against him. deal to purchase Countrywide, In late February, Foster began which had lost $1.6 billion over the voicing open criticism of Employ- previous six months. ee Relations’ actions, pressing the Countrywide’s CEO, Mozilo, said issue with senior executives in it was “the right decision for our emails and meetings, according to shareholders, customers and em- the Labor Department. In May, she ployees.” Bank of America called it a informed Employee Relations that “rare opportunity” for the company she intended to refer her allega- to add what it believed to be the best tions about its treatment of whistle- “mortgage platform” in the nation. blowers to Countrywide’s internal Foster continued her duties as audit unit. fraud investigation chief, while As Foster was reporting her con- applying for a chance to work for cerns about Employee Relations’ Bank of America once the merger conduct, Labor Department records was completed July 1. say, Employee Relations launched In February 2008, Labor De- an investigation — not of Foster’s partment records indicate [6], she allegations, but of Foster herself.

A senior vice president from Em- On Sept. 8, 2008, a Monday, Fos- ployee Relations began questioning ter reported to work with a busy members of Foster’s team about week ahead of her. She was sup- her management style, according to posed to meet the following week, the Labor Department. One of Fos- she says, with officials from the ter’s fraud investigators later com- bank’s federal regulator, the Office plained, agency records show, that of the Comptroller of the Currency. Employee Relations reps grilled The subject: questions about Coun- him for almost three hours, asking trywide’s reporting of suspicious leading questions and trying to get activity reports. She had a spread- him to say damaging things about sheet showing the Countrywide’s her. He said he worried that many subprime division was grossly un- employees might simply cave to the derreporting these reports, she pressure. says. Foster remained unaware of the The phone rang at 8 a.m. It was investigation against her for several a call she’d been expecting from a weeks. In early July, with the merg- Bank of America human-resources er complete, she got some good official. She thought they would be news: Bank of America named her discussing salary structure for her senior vice president in charge of team members. its new combined mortgage fraud Instead, with the Bank of Ameri- unit. ca official on the phone, two Coun- Foster says she learned about trywide officials walked into her Employee Relations’ investigation office, turning it into a conference later in July. She was questioned by call. They presented her with a 16- Employee Relations in August. page severance agreement. By early September she thought Bank of America offered her a the investigation was dead, she buyout totaling almost one year’s says. Bank of America had stripped salary, nearly $230,000. The catch Countrywide’s employee relations was that, to get the money, she had unit of power to conduct investi- to agree to a gag order that would gations, she says, and she believed prevent her from talking about the new owners weren’t going to what she knew about the compa- put stock in anything Employee Re- ny’s practices. “I was just furious,” lations had to say about her. she says. When she refused to sign,

she says, the buyout offer turned by Bank of America doesn’t square into a straight-up firing. with their recollections of Foster as They asked for her ID badge and a colleague and boss. Among them keys. Then Bank of America secu- is Larry Goebel, a former captain rity operatives escorted her out of in the Los Angeles Police Depart- the building. ment’s internal affairs unit who It was her 51st birthday. worked with Foster at Countrywide Later, in an email exchange, the and Bank of America. “She had a lot employee relations official who’d of integrity,” he says. Any sugges- led the investigation told Foster tion she was unprofessional is “to- that her firing was due to her “in- tal b---s---, to be honest with you.” appropriate and unprofessional behavior” and “poor judgement as ‘Sleaze factor’ a leader.” Within her unit, the official said, there was a perception After it fired Foster, Bank of Amer- that Foster would retaliate against ica named Goebel to replace her as underlings who crossed her. As a head of its mortgage fraud investi- result, the official said, Bank of gation unit. America’s senior managers had The former police detective “lost confidence” in her ability to was surprised, he says, to find that lead the team. many sales-department holdovers The Labor Department later not- from the Countrywide era contin- ed that the bank never consulted or ued using fraudulent tactics to try interviewed Foster’s direct super- to maintain their production and visor during the investigation, and commissions as the mortgage mar- that it violated its own progressive ket fell in on itself. “It was a culture disciplinary policy: She’d never that wouldn’t die,” he says. been written up, suspended or dis- Management didn’t block him ciplined previously, and in fact was from investigating fraud cases, “a high-performing employee with Goebel says, but it never gave him no history of poor performance or enough trained investigators to conduct issues.” keep up with the huge volume of Four former coworkers told fraud. Bank of America didn’t show iWatch News that the picture of much interest, he says, in rooting Foster’s management style painted out the culture of corruption or

getting a reading on just how much gotten personal gains. misconduct had gone on inside The bank also agree to pay $108 Countrywide. “It wasn’t really like: million to settle fraud charges ‘We need to take a look back, we against Countrywide Home Loans need to clean house.’” Servicing, the same unit Foster Nine months after taking over says forced her to stop highlighting the fraud unit, Goebel says, he quit, its complaint data in her reports. fed up with the “sleaze factor” that The Federal Trade Commission al- had overtaken the mortgage indus- leged that the servicing unit gouged try. He now works as head of secu- homeowners rity for the Performing Arts Center The Federal with illegal fees of Los Angeles County. Trade and misled them Bank of America declined to an- Commission about how much swer questions about Goebel’s ac- alleged that they owed on count of his time in charge of the the servicing their mortgages. fraud unit. Countrywide Since the merger, Countrywide unit gouged Home Loans Ser- has produced little but headaches homeowners vicing now op- for Bank of America. with illegal erates as BAC The bank agreed to an $8.5 bil- fees and Home Loans Ser- lion settlement with a group of misled them vicing, but it con- 22 big mortgage investors. It also about how tinues to draw the helped Countrywide’s founder, ire of regulators Angelo Mozilo, settle charges that much they for its conduct he’d added $141.7 million to his owed on their under the Bank personal fortune through fraud and mortgages. of America ban- insider trading. (Mozilo’s attorney ner. A coalition of called the charges “baseless.” ) state attorneys general and federal The final settlement was for $67.5 authorities are pressing Bank of million, with Bank of America and America and other big banks to pay Countrywide’s insurers chipping in $20 billion or more to settle claims $45 million and Mozilo paying $22.5 that they used so-called “robosign- million — or about 16 cents out of ers” to falsify foreclosure docu- his own pocket for every dollar au- ments and push homeowners out of thorities claimed he’d taken in ill- their homes.

The Federal Housing Finance computer showed that nothing was Agency, which oversees mortgage happening.” investing giants Fannie Mae and In response to the Nevada ac- Freddie Mac, has filed massive law- tion, Bank of America said it was suits charging that Countrywide, disappointed that the state had Bank of America and other lenders sued, because it had been “a coop- misled Fannie and Freddie about erative partner” with attorneys gen- the quality of the loans they pooled eral around the country in working into mortgage-backed securities. out solutions for distressed home- A lawsuit by Nevada’s attorney owners. “We are already underway general, meanwhile, charges that with further improvements to our Bank of America’s servicing unit has processes and programs for Bank engaged in a pattern of misconduct of America customers,” the bank in the way it handles homeowners’ said. requests for loan modifications. The practices, the suit says, include Holding the line falsely promising that their homes wouldn’t be foreclosed on while Eileen Foster says she didn’t set their applications were pending, out to be yet another of Bank of promising them one set of terms America’s legal adversaries. but then delivering agreements “In the beginning, I just want- with different terms, and providing ed my job back,” Foster says. “I “inaccurate and deceptive reasons” thought as soon as Bank of America for denying their requests. looked into it, they would bring me One former employee told the back.” attorney general’s office the com- It didn’t happen. Instead, she and pany gave instructions to mislead the bank’s lawyers spent almost borrowers about their modifica- three years locked in a punishing tions. “One time I complained to fight inside the Labor Department’s my supervisor that I felt I was ly- whistleblower protection division. ing to borrowers,” the ex-employee Since last week, when the labor said. “Her instructions … were just agency ordered that Bank of Ameri- to give the borrowers their status ca rehire her, Foster has declined to and tell them that they are ‘in the comment on the bank’s role in her process,’ in spite of the fact that the case, noting that she may end up

going back to work there. tive law judge. That could set up a In interviews with iWatch News lengthy round of litigation. before the ruling, she expressed Foster says she remains a reluc- mixed feelings about the bank. She tant whistleblower. She’s turned said she thought that the bank may down interview requests from have been misled by Countrywide many media outlets, and agreed to holdovers, and wondered whether go on the record with iWatch News the bank’s lawyers had prevented only for publication after the Labor it from realizing she’d been done Department issued its final ruling. wrong. It was important, she says, to tell At other times, she expressed her story — and the story of other stronger feelings about the bank. employees who tried to blow the “They had multiple opportunities to whistle on fraud. fix things,” Foster said in an inter- “I don’t want this to be about view earlier this year. “They chose me,” Foster says. “The only reason I not to do the right thing.” have a voice is because of my posi- Foster was unemployed for more tion. It’s not the same for somebody than two years after Bank of Amer- who’s an underwriter or production ica fired her. staff assistant. Management can “I applied for 145 jobs before I call them disgruntled or whatever.” got one,” she says. Fraud flourishes, she says, when She’s now vice president of se- companies are allowed to intimi- curity at Lockheed Federal Credit date and abuse employees. With- Union in Burbank, a job that pays out protections for whistleblowers, about half what she would have it’s easy for big companies to “beat been making at Bank of America. people down” and silence them. But she says it’s a good place to “It’s very difficult to hold the line work and the credit union’s CEO is and do what you believe,” she says. n a model of openness and straight- shooting. What her next step will be is unclear. Although the Labor Depart- ment ordered Bank of America to rehire her, the bank has vowed to appeal the order to an administra-

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Mortgage Cover-Up ©2011 Center for Public Integrity 32 Loan underwriter found herself in ‘dangerous territory’ at Countrywide By Michael Hudson Published Online | October 11, 2011

fter she lost her job in the fall of 2007, Cassandra Dan- Aiels had a word with a trio of her managers. As she recalls it, she told them she was praying that, someday, they’d learn to use their po- sitions of power “to uplift your staff instead of destroying people.” She cleaned out her desk and THE GREAT MORTGAGE taped a handwritten sign to her com- COVER-UP puter screen, quoting one of her fa- vorite gospel songs: “GIANTS DO When she rejected loans that were FALL.” based on inflated income statements That marked the end of Daniels’ or other questionable information, tumultuous relationship with Coun- she says, management overruled her trywide Financial Corp., the nation’s and pushed the deals through. largest home lender during the mort- “The sad part is I lost hope in the gage boom. integrity of any system,” Daniels re- For Daniels, her four years as a called in an interview with iWatch loan underwriter inside Country- News. “Because there were sup- wide’s mortgage-production machine posed to be checks and balances. were a blur of 12- and 14-hour work- But there weren’t. All these people days and frequent clashes with man- were driven by pure greed. And they agers and salespeople regarding loans didn’t care that it was at the expense she believed were tainted by fraud. of other human beings.”

Damian Dovarganes/AP file A California branch office of Countrywide Financial in 2007.

Bank of America Corp., which even if the fraud is perpetrated by bought Countrywide in 2008, de- individual employees.” clined to comment on Daniels’ account of her time at the lender. ‘Fast and sleazy’ However, a spokesman has dismissed the idea that Countrywide Before she began working at a management encouraged fraud Countrywide branch in Chicago’s inside the company. When fraud western suburbs in the summer of happens, the spokesman said, “the 2003, Daniels, a single mom, was lender is almost always a victim, working two jobs, as a manager at a

local bank in Naperville, Ill., and as Her branch was selling “Fast and a night auditor at a Marriott hotel. Easy” loans and other mortgages She thought going from two jobs so fast that Daniels and other un- to one was a good idea, especially derwriters had trouble keeping up. with the prospect of earning $50,000 Daniels recalls tables stacked with to $60,000 a year in salary and bo- pending loan files. Managers told nuses at a brand-name company that her: “Just grab one and get it done.” seemed to be growing bigger every There was no checkout procedure day. or safety measures to make sure no As an underwriter, Daniels was one walked out the door with a file an important line of defense against full of sensitive financial data about fraud, vetting loan loan applicants, she says. According packages submit- “I wondered, ‘Where is all the se- to Daniels, ted by the sales curity in this?’” she recalls. there was department to see The company expected her and no checkout if they met Coun- other underwriters to get through procedure trywide’s guide- eight to 12 loan packages a day. lines and whether She’d get in early, work all morning or safety the information and afternoon, then rush out to pick measures to on applications up her 3-year-old son at day care. make sure no was truthful. She’d hit a drive-through restaurant one walked She says she window to pick up some food, and out the door got little training; then head back to the office. Her with a file full before throwing son would fall asleep as she contin- her into the mix, ued to work on files, sometimes as of sensitive her manager spent late as 11 p.m. or midnight. financial data 2½ hours showing The next day she’d do it all over about loan her how to under- again. applicants. write Country- wide’s “Fast and ‘Making widgets’ Easy” loans, which required little or no documentation of borrowers’ in- She began tangling with managers come and assets, prompting some and salespeople, she says, when mortgage industry hands to dub them she started rejecting loans that “Fast and Sleazy” loans. looked fishy. This earned her a deri-

sive nickname from the sales staff: In court records and in inter- “The Decline Queen.” views, former employees say Coun- Many of the disputed deals, Dan- trywide executives cared little iels claims, involved paperwork about fraud or whether borrowers that listed questionable Social Se- could afford their loans. Most loans curity numbers or claimed appli- declined by underwriters would cants were making huge sums of “come back to life” when new infor- money working in nail salons or mation supporting approval would running housecleaning or landscap- “miraculously appear,” according to ing businesses. a former under- She didn’t believe that the pro- In court writer in Coun- prietor of a housecleaning busi- records and trywide’s Jack- ness could be pulling in $100,000 or in interviews, sonville, Fla., $120,000 a year. But when she asked former loan-processing for more documentation — such as employees say center who was copies of loan applicants’ tax re- cited as a “confi- turns — her managers scolded her, Countrywide dential witness” she says, telling her that, with “Fast executives in shareholders’ and Easy” loans, such paperwork cared little litigation against wasn’t necessary. about fraud the lender. One borrower owned eight in- or whether Brian Koss, vestment homes in the northern borrowers who oversaw 54 Chicago suburbs and had default- loan branches ed on local real-estate taxes owed could afford in New England against the properties, Daniels their loans. and upstate New says. But Countrywide still ap- York as a senior proved a series of refinance deals regional vice president, told Bloom- that allowed the investor to suck berg Businessweek that company hundreds of thousands of dollars in officials “approached making loans cash out of the properties. like making widgets, focusing on “I realized I was in dangerous cost to produce and not risk or com- territory,” Daniels recalls. “I told pliance. … The fiduciary responsi- my family: ‘You know what? The bility of making sure whether the mortgage industry is nothing but le- loan should truly be done was not as galized fraud.’” important as getting the deal done.”

To make matters worse, Dan- ardy. I never knew. It was uncom- iels claims, management worked to fortable.” quash investigations by her division’s The end came in September 2007. internal fraud investigations unit. The mortgage market was in a free At one meeting, she says, super- fall, and Countrywide announced visors told workers they were mak- that it was sacking 10,000 to 12,000 ing too many referrals to the inves- workers across the country, slash- tigations unit. The managers said ing its 60,000-strong workforce by that if anyone had suspicions about as much as 20 percent. fraud, the matter should be referred Managers called her into an of- to them, and they would decide fice and told her: “This is your last whether it should be reported. day of employment at Country- “They pretty much put a lid on wide.” She’s still not sure whether it,” Daniels says. she was terminated or was included Another former employee at as part of the layoff, she says. Daniels’ branch agreed with Dan- Within a few months, America’s iels’ assertion that management home-loan giant had indeed fallen, worked to paper over questionable gobbled up at a going-out-of-busi- loans and get them funded. ness-sale price by Bank of America. “There was a lot of fraud, I be- Since she left Countrywide, Dan- lieve,” the former employee, who iels has worked temporary jobs and spoke on the condition her name done some consulting as a leader- not be used, told iWatch News . “It ship development trainer. Even was all about getting the files out, though she could use the money, making numbers for the month.” she won’t go back into the mort- iWatch News attempted to con- gage business. tact former managers at the branch “I have no trust in the banking but was not successful. industry, period,” Daniels says. “All these major banks — they were major contributors to all this. They ‘This is your last day’ were all doing the same thing. I Daniels acknowledges that no one have no desire to be part of that.” n ever directly threatened to fire her for reporting fraud, but says she “always felt like my job was in jeop-

Paul Sakuma/AP A ‘counseling meeting’ then termination at Countrywide By Michael Hudson Published Online | October 18, 2011

ays before Mari Eisen- ments and manipulating the home man was to undergo cancer appraisal process. Dsurgery, a senior vice presi- The executive, Eisenman later dent with her employer, Country- claimed in a lawsuit, chastised her wide Financial Corp., called her in for causing trouble, complaining for a “counseling meeting.” that one of the executive’s protégés The impetus for the meeting, had been suspended because of her according to Eisenman: her com- whistleblowing. plaints that workers at her branch While she was at home recover- in Colorado were falsifying docu- ing from her surgery, her suit said,

it became clear she was going to be fired. Eisenman claimed she contacted Countrywide’s home office in California and sought intervention “from the highest officials” to provide her safe harbor as a whistleblower. The officials, her lawsuit said, “indicated that all actions THE GREAT MORTGAGE taken against Mrs. Eisenman were COVER-UP proper and the corporation would not provide protection for her.” Eisenman’s description of her tigation, prior to and after the ac- rocky tenure at Countrywide is sim- quisition, it conducted concerning ilar to accounts from other former fraud at Countrywide. employees who claimed the lender Before the merger, Countrywide punished them for pushing back chief executive Angelo Mozilo and against corrupt practices. The retal- other company officials blamed iation, many of them charged, came market conditions for the wave not just from low-level mangers or of dicey loans and defaults that coworkers, but was also carried out weighed down the lender’s balance or condoned by upper-level execu- sheet. tives. “No one, including Mr. Mozilo, A spokesman for Bank of Amer- could have foreseen the unprec- ica, which purchased Countrywide edented combination of events in 2008, declined to answer ques- that led to the problems borrow- tions about Eisenman’s allegations. ers, lenders and investors face with The bank has refused iWatch News’ many of these loans today,” a Coun- requests to discuss specific allega- trywide spokesman told The New tions by former Countrywide em- York Times in 2007. ployees, saying they involve allegations of problems that occurred ‘Stay quiet’ before the bank acquired Country- wide. It has also declined to answer iWatch News identified 18 former questions about how much inves- Countrywide employees who said

they’d been retaliated against for tura County (Calif.) Superior Court trying to prevent fraud. The allega- charged. tions date back as far as 2003 and When he refused, Noyola said, as recently as 2008. They involve managers told him to “stay quiet” various Countrywide divisions op- and transferred him so he would no erating in multiple regions, includ- longer have access to the falsified ing Alabama, Arizona, California, documentation, then terminated Colorado and him. Hobart Curtis Texas. Noyola and Countrywide settled Sanders, who Some of the the case before Countrywide for- supervised former work- mally responded to his allegations. more than 20 ers were non- Others who claimed they were employees as supervisory punished for whistleblowing were employees who managers with broader access to the manager said they were information about the company’s of a loan- fired for refus- operations. Many of these manag- sales branch ing orders to ers claimed they were fired for try- in California, commit fraud. ing to report fraud to higher-ups. claimed Antonio Hobart Curtis Sanders, who Countrywide Noyola claimed supervised more than 20 employ- Countrywide ees as the manager of a loan-sales fired him in fired him after branch in California, claimed Coun- April 2004 for he refused to trywide fired him in April 2004 for complaining falsify mortgage complaining about predatory lend- about predatory documents and ing tactics. These practices, he lending tactics. complained charged in a lawsuit in Los Ange- that paperwork les Superior Court, included “price was being “routinely” doctored or gouging” and “contract knavery” backdated. Noyola, a licensed nota- — sneaking added costs and other ry, said he was ordered in late 2006 provisions into loan contracts with and early 2007 to notarize docu- the idea that, amid the small print ments “for dates that were incor- and many pages of mortgage paper- rect, for persons that he did not in work, borrowers would miss the fact know, and to falsify his ledger add-ons. accordingly,” his lawsuit in Ven- Countrywide denied Sander’s

allegations. In a court filing, it as- original property appraisals failed serted that Sanders had mishandled to qualify the individual for a loan.” a sexual harassment complaint She claimed she also observed against one of his employees by other bad business practices, in- failing to report the issue up the cluding improper disposal of bor- chain of command until his supe- rowers’ confidential information riors had heard about it indepen- and alcohol consumption inside the dently. He wasn’t fired but instead branch. left the company after he refused Eisenman said she forced an in- to accept a demotion or transfer, vestigation by the company’s fraud Countrywide said. unit by reporting the illicit activi- Sanders and Countrywide ties to a regional executive. After reached a confidential settlement her allegations were substantiated, in the case. her suit said, a branch manager and several loan officers were fired or forced to resign. ‘Action plan’ Instead of rewarding her for ex- Eisenman, the former Countrywide posing the fraud, Eisenman claimed, employee in Colorado, said she un- higher-level managers began laying covered indications of fraud soon a trap for her. She claimed one after the company hired her as a manager hired the wife of a person- branch operations manager at its al friend and encouraged her to file Bergen Park, Colo., location. “false reports” against Eisenman. She started the $200,000-a-year The woman claimed that Eisenman job in June 2004. By October 2004, had made disparaging remarks her lawsuit said, she suspected that about the woman’s husband, who managers in the branch and beyond also worked at Countrywide. were either taking part in or con- Soon after, in February 2005, a doning illegal practices. senior VP called her in for her coun- The practices, she said, included seling meeting and presented her inflating applicants’ incomes, mis- with an “Action Plan” that included representing whether customers a 30-day “final” written warning. were buying homes as residences or Eisenman’s suit said the plan as investments and “securing mul- was full of fabricated informa- tiple property appraisals when the tion, including a made-up state-

ment that Eisenman had previously fed the regional center. been reprimanded for engaging in She discovered, she later said in intimidating behavior and making a lawsuit, evidence that the lender inappropriate comments to other was violating federal consumer employees. laws and putting itself at risk of While she was on leave for can- big fines and big hits to its balance cer surgery, her suit said, the com- sheet. pany moved someone else into her Wingard claimed Countrywide position. She learned that she was was inflating borrowers’ incomes being fired, the suit said, through a on loan applications, approving “COBRA” notice informing her that loans based on “unverifiable” bor- she was entitled to continue her rower employment histories, and health insurance until she found a failing to provide borrowers with new job. paperwork informing them of their The lawsuit was resolved in right, under federal law, to change 2008, according to the clerk’s office their minds within three days and for Arapahoe County (Colo.) Dis- cancel their loans. trict Court. Bank of America didn’t Three incidents made it appar- respond to a request for a response ent, she claimed, that the fraud was about Eisenman’s allegations. being tolerated or encouraged by upper management: ‘Go home’ • A worker at a branch in Au- burn, Ala., complained to Win- Diana Wingard, who worked as a gard that her supervisor was manager across the country in Al- forcing her to approve loans abama, said her career arc at the she believed were fraudulent, lender, like Eisenman’s, was brief declaring that if she refused to and turbulent. go along she “could just get in Wingard began working in No- her car and go home.” vember 2006 as a team manager at Countrywide’s regional operations • When Wingard investigated center in Montgomery, Ala. Her job a mortgage that appeared to was to oversee the processing and be backed by an inflated ap- underwriting of loans streaming in praisal and murky income from various branch offices that documentation, her immedi-

ate boss, a regional vice presi- company changed its story, telling dent, forbade her from talking the unemployment office that she to the loan underwriter who had been terminated for “mishan- had signed off on the deal. dling a group of loans,” her suit said. • Later, in a meeting, her boss Wingard said both rationales and a vice president of opera- were made up. tions ordered her to discontin- She filed a whistleblower claim ue her fraud audit and to stop with the U.S. Department of La- advising employees to call bor under the 2002 Sarbanes-Oxley the company’s “fraud hotline” corporate reform law, then tried to when they suspected wrong- move her case to U.S. District Court doing. in Alabama. A judge dismissed the On Jan. 2, 2007, soon after Win- lawsuit, ruling Wingard had no gard’s meeting with the two execu- right to go to court and bypass the tives, the company fired her, claim- administrative process within the ing she had falsified employee time Labor Department. cards, according to Wingard’s law- A spokesman for Bank of Amer- suit. Later, when Wingard tried to ica didn’t respond to questions collect unemployment benefits, the about Wingard’s claims. n

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3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Loose Lending ©2011 Center for Public Integrity 43 Payday lending bankrolls auto racer’s fortune A joint investigation of iWatch News and CBS News By David Heath Published Online | September 26, 2011

cott Tucker used stealth to become a millionaire. Now Sthe mysterious businessman from Kansas is spending his fortune to become a famous auto racer. Though Tucker has not won any premier races outright, his publicity machine already compares him to NASCAR superstar Jimmie Johnson. LOOSE LENDING It produced a slick documentary of his team’s third-place finish at a contrasts sharply with his secrecy in Daytona race which played at film business. He describes himself sim- festivals and aired on the Discovery ply as the CEO of Westfund, which is Channel. A glowing Wall Street Jour- a fledgling private-equity firm with nal profile last year dubbed Tucker no visible marketing and a mail drop as “Racing’s One-in-a-Million Story.” as a corporate office. Tucker competes mostly in a spe- What Tucker doesn’t publicize: he cial class for wealthy owners, taking is an ex-convict who runs a contro- turns behind the wheel with hired versial business that regulators in professional drivers. But he burst at least five states have tried to shut through obscurity last year to be- down for violating their laws. Hiding come — at age 48 — rookie of the behind a labyrinth of shell companies year in endurance racing’s American and operating from the ether of the Le Mans Series. Internet, Tucker’s businesses make Tucker’s quest for fame in sports payday loans over the Web even in

Level 5 Motorsports/Flickr Payday lender turned racecar rookie, Scott Tucker.

states where they are outlawed. He of Tucker’s tactics are common offers quick cash to people desper- among businesses operating on the ate enough to borrow money from a fringes of the law. By setting up a faceless Web site, even signing over confusing array of shell companies access to their bank account to total and selling over the Internet, busi- strangers. And he charges nearly 800 nesses are often able to frustrate percent interest on loans that take state investigators trying to figure months to pay off. out simply who’s who. iWatch News found that some But Tucker’s most innovative tac-

tic has given businesses a new, pow- employee of the tribe’s payday lend- erful tool for eluding state authori- ing business but did not elaborate ties. The tactic has survived major on his role. The Modoc and Santee court challenges, but the practice is Sioux declined to comment. so questionable that even storefront Tucker himself said, “Due to a payday lenders —hardly known as confidentiality agreement, I am not paragons of business probity — de- permitted to discuss the business nounce it as unethical. of my employer.” Tucker has partnered with a Tucker has Tucker has number of small Indian tribes to partnered with eluded the grasp provide his payday lending busi- a number of of several state ness with the cloak of tribal sover- authorities. Col- eign immunity. Under federal law, small Indian orado Attorney tribes are equal to states as sover- tribes to General John eign powers. So they are immune provide his Suthers has been from being sued in state court. payday lending trying to stop Tucker says his payday lending business Tucker for seven businesses are now owned by the Mi- with the years. He con- ami and Modoc tribes of Oklahoma vinced a Denver as well as the Santee Sioux of Ne- cloak of tribal judge to order braska. However, iWatch News found sovereign Tucker and his evidence in court and public records immunity. company to stop showing that Tucker secretly runs making payday the payday lending business from his loans in Colorado. He even has a offices in Overland Park, Kan. warrant for Tucker’s arrest for vio- Lawyers in the Colorado attorney lating a court order. Yet Tucker is general’s office described Tucker’s so contemptuous of the warrant tactics as a “web of deceit.” Others that, after it was issued, he bought refer to it as “rent-a-tribe.” an $8 million vacation home in As- In a written statement Friday, pen, Colo., through a limited part- the chief of the Miami tribe, Tom nership in his wife’s name, and he Gamble, said the payday lending now flies to Colorado undetected business was “100 percent tribally on his private Learjet that retails owned and operated.” For the first for $13 million. time, he acknowledged Tucker is an The contrast between Tucker’s

lifestyle and those of the tribes that claim to own the lucrative business is stark. Tucker flashes his wealth on the race track. He is reported to have a fleet of 15 race cars, including custom-built pro- totypes that can cost more than $500,000. He em-

ploys a team that includes David Heath/iWatch News accomplished drivers, The exterior of Miami Nation Enterprises, among them the 1993 Le which has an online payday lending business Mans winner Christophe that has sovereign status beyond the reach Bouchut of France. He of state regulators. travels constantly, even shipping his cars overseas for races. In France last June, his and other budget cutting measures. team finished tenth in the grueling The Miami and Santee Sioux and legendary 24 Hours of Le Mans. tribes have tried to obscure their Meanwhile, the Miami tribe, connection to Tucker in court de- whose business offices adjoin farm spite an irrefutable paper trail. De- land and rundown properties, cau- spite this effort, the Colorado Su- tioned its members last year that preme Court last November handed it was struggling through tough fi- the tribes and Tucker’s businesses a nancial times after losing partial major victory. The court ruled that ownership of a casino in a small businesses claiming to be part of a Oklahoma town. The tribe won’t tribe have sovereign immunity, too. talk about the presumably lucrative That protection even covers busi- payday lending business it claims to ness done off the reservation. have owned since at least 2005. But The justices also ruled that the the chief said in the tribal newslet- state has to prove a business is not ter last year that hard times were an arm of an Indian tribe before forcing the tribe to consider layoffs it can take court action or issue

subpoenas. That puts authorities Meanwhile, the business of on- in a Catch 22 — having to prove a line payday lending is sizzling. In company is lying without the power 2010, revenue was up 32 percent, to compel the company to answer with online payday lenders making questions. $10.8 billion in loans in the United States, according to Stephens Inc., an investment firm that tracks the Tangled web frustrates states industry. That equates to more than Some states have given up trying to 30 million loans, with Stephens es- stop illegal online payday lenders timating that the loans racked up claiming tribal affiliations. Regula- interest and fees of $2.7 billion. In tors in Washington state and North contrast, revenues for storefront Carolina concluded that the effort payday lenders would be too costly and difficult. Yet The business are fizzling. industry analysts say Indian tribes of online Tucker’s oper- are now clamoring to get involved payday lending ations are likely in payday lending. Frank Cotton, only a sliver of an industry analyst in Atlanta, es- is sizzling. In that business. timates at least 30 payday lenders 2010, revenue While exact fig- and possibly double that number was up 32 ures on how are affiliated with Indian tribes. percent, with much his opera- Still, states are banding togeth- online payday tions make are er against Tucker in one court lenders making unavailable, one battle. In 2009, Tucker’s lawyers court document convinced a local Kansas judge to $10.8 billion revealed that block Colorado court orders, ar- in loans in the Tucker’s busi- guing that Colorado courts have United States. ness paid $80 no power in Kansas. But last July, million in 2008 attorneys general from 22 states just for sales leads. That suggests joined forces to argue in a Kansas he could be making millions of on- appeals court that unless it revers- line payday loans a year. es this judge’s decision, any culprit Many of Tucker’s borrowers com- could violate a state’s consumer plain about being harassed. Melissa laws simply by operating out of an- Rush of Vancouver, Wash., tears up other state. about the never-ending phone calls

from online payday lenders to her the alternative to an online loan cell phone, her friends and her co- would be, at best, simply to write workers. a bad check, or, at worst, the pros- In January 2009, the former mort- pect of bankruptcy and the loss of gage loan officer borrowed $300 their home, or worse yet, pressure from US FastCash, one of Tucker’s toward more desperate and unpro- brands. She couldn’t keep up with ductive behaviors.” the payments, which totaled $1,200, In the past five years, the Better and ended up borrowing more to Business Bureau of eastern Okla- try to pay off existing loans. That homa has received more than 2,000 only buried her deeper. complaints about payday lenders Now the calls are constant. In tied to Tucker and the tribes. The fact, US FastCash called while an bureau’s chief officer, Rick Brin- iWatch News reporter interviewed kley, has gone to the tribes’ offices her. As a reporter listened in, Rush to investigate without any success. asked 31 times for the company’s ad- “Most people think that loan dress. She wanted to write a letter sharking is illegal,” said Brinkley, telling them to stop calling her. After who is also a Republican state repeatedly ignoring her request, the senator in Oklahoma. “The reality debt collector finally said he didn’t is that in this particular case if you have to give her an address. can become affiliated with a tribe Rush, who ironically is a debt and be able to avert local and state collector herself, has researched laws then, in my opinion, apparent- the company but says she can’t fig- ly loan sharking is legal.” ure out who’s really behind it. She had never heard of Scott Tucker. The beginning of the legal fight The Miami tribe’s chief acknowledged that there are complaints An epic legal saga in Colorado be- from borrowers who don’t pay off gan on Nov. 3, 2004, when a woman their loans. But he defended the sent two brief letters complaining business, saying that it “provides to the attorney general. a vital service to many Americans Desperate for cash, the woman who would otherwise be without had found a pair of payday lend- access to short-term financial assis- ers online willing to deposit a to- tance. For many of our customers, tal of $550 directly into her bank

account. What she hadn’t given Advance and Preferred Cash Loans much thought to, or didn’t under- to stop making illegal payday loans stand, was that the two loans came in the state. Cash Advance ignored with an interest rate of nearly 800 the order. Curiously, Preferred Cash percent. In interest alone, the five- Loans sent back a brief, unsigned month loans would cost the cash- note, saying it had forgiven its loan starved woman $1,575. to the woman. But there was no The woman, whose name the promise to stop lending in Colorado. state won’t reveal, said she had The legal wrangling quickly esca- discovered that lated. Still, both Cash Advance and Out of nowhere, the loans were Preferred Cash Loans kept ignor- illegal. They vio- ing court orders. By June 2005, the two Indian lated Colorado’s attorney general asked a Colorado tribes — the payday loan judge to cite the lenders for con- Santee Sioux laws. On top tempt. of Nebraska of that, neither At that point, the case took an and the Miami lender — Cash unexpected twist that left the state of Oklahoma Advance and of Colorado’s top law enforcement Preferred Cash official stumped to this day. — swooped Loans — was li- On July 20, 2005, out of nowhere, into court and censed to make two Indian tribes — the Santee proclaimed that loans in the Sioux of Nebraska and the Miami they were the state. of Oklahoma — swooped into court true owners of The two lend- and proclaimed that they were Preferred Cash ers seemed con- the true owners of Preferred Cash nected, each op- Loans and Cash Advance. The next Loans and Cash erating exactly day, the company based at the mys- Advance. the same way. terious Carson City address said in Even more tell- court documents that it had nothing, they shared a common address ing to do with Preferred Cash Loans at a strip mall in Carson City, Nev. or Cash Advance. But investigators couldn’t tell who It seemed almost comical. After was behind these lenders. all, the woman’s contracts had the The Colorado attorney general address in big, bold letters: 2533 N. dashed off letters, ordering Cash Carson St., Carson City, Nev. Yet

the tribes swore that they had no to settle. But the company officer offices there. who signed the settlement papers How could that be? One of the for Cash Advance was from a Car- lenders had already forgiven the son City company called C.B. Ser- loan. Besides, the attorney general vices. Only two months earlier in asked, how did the tribes even know Colorado, C.B. Services claimed it about this petty legal tussle? Why had no connection to Cash Advance. were they getting involved when The discrepancy is irreconcilable. they faced no legal sanctions them- And while the Miami tribe had selves? Why would they defend total already claimed in Colorado that strangers? it was the true owner of Cash Ad- As absurd is it seemed, the tribes’ vance, the tribe made no such claim involvement erected a powerful le- in Kansas. gal shield: Tribes cannot be sued in Something wasn’t right. state court. As a result, the case has been Enter the shell player bogged down in court for seven years now. The complicated legal James Fontano of Carson City was issues have also stymied efforts the answer to the riddle. In Kan- by other states to halt the lending sas, Fontano swore in an affidavit abuses. Amid the confusion, a con- that he was the president of Cash troversial industry keeps thriving. Advance. But in Colorado, Fontano At the same time in the neighbor- swore in an affidavit that he had no ing state of Kansas, the bank com- connection to Cash Advance. missioner had been trying to stop the It would take perplexed attor- online payday lender Cash Advance neys in Colorado another two years from making illegal loans for more to finally confront Fontano face-to- than two years. By 2005, the Colo- face for a day of closed-doors inter- rado and Kansas cases against Cash rogation. Advance were on parallel tracks. Fontano revealed that his true But paradoxically, Cash Advance trade was being an imposter. For was making claims in a Kansas court a small fee, Fontano would cre- that contradicted statements it was ate a shell company and pose as making in a Colorado court. its chief executive officer. It was a In Kansas, Cash Advance decided way, Fontano acknowledged, that

“clients could conceal themselves from public view.” He did this for Compare the signatures hundreds of companies. Two court affidavits in different Setting up shell companies and states make contradictory claims posing as officers is a legal and about a payday lending business. thriving business in Nevada, al- One (top) is signed by James Fon- though in 2006 Fontano landed in tano. Fontano says the other (bot- federal prison after pleading guilty tom) is forged. A handwriting expert agrees and says the signature prob- to charges that he and others pro- ably came from Scott Tucker, who vided clients with a tax evasion started the business and whose scheme. Today, the IRS claims that signature is in the middle. Fontano, who now works at a Utah gift shop, still owes it $3.5 million. Fontano was not the mastermind behind the payday lenders. In fact, he was only one layer of a multilay- ered façade. While Fontano listed himself as the officer of a shell company called C.B. Services, the payday loans were offered on the Internet with trade names such as Cash Ad- vance. In addition, the address in Carson City on the loan documents was only a mail drop. When asked who really ran the payday lenders, both Fontano and the company managing the mail drop pointed to the same man: Scott Tucker. All mail was being forwarded to Tucker’s business in Overland Park, Kan. The layers of deception were so thick that Fontano knew nothing about the Indian tribes and very

little about Tucker, whom he never The Kansas affidavit was submit- recalls meeting. “I did not have a lot ted by the same Kansas City law firm of knowledge of what he was do- that submitted the one in Colorado. ing,” Fontano said. Fontano said those attorneys also The two affidavits were different never told him that he had been sub- for a simple reason. Fontano said poenaed and cited for contempt by attorneys paid by Tucker—though a Colorado court, which made him listed in court as representing Fon- upset when he learned the truth. tano—wrote the affidavit in Colo- In June 2006, Tucker’s company rado, where Fontano claimed ig- sent an email to Fontano: “Please norance of Cash Advance. Fontano forward any and all records for cor- said he signed it, assuming it was porations organized by Mr. Scott true. Tucker.” As for the affidavit in Kansas Fontano said that he complied, where Fontano claimed he was not knowing that the Colorado Attor- president of Cash Advance? Fonta- ney General had issued subpoenas to no said he never signed it. He called obtain those same records and that it a forgery. he might be breaking the law. But a iWatch News asked a handwrit- search of Fontano’s computer turned ing expert at Applied Forensics to up the records, which Fontano gave compare the signature to samples of to the attorney general’s office. Fontano’s signature. Dennis Ryan, a For his cooperation, Fontano former forensic supervisor for the was off the hook. The state of Colo- Nassau County Police in New York, rado turned its attention to Scott concluded “with a reasonable degree Tucker. n of certainty” that Fontano’s signature on the Kansas affidavit was forged. CORRECTION: The payday/tribal Ryan also compared the affidavit connection attributed to Frank Cot- signature with documents signed by ton was incorrect in the original Tucker. Although he couldn’t be cer- story. The correct sentence reads, tain, Ryan said that Tucker “prob- “Frank Cotton, an industry analyst ably” signed the affidavit. Ryan said in Atlanta, estimates at least 30 he had only 11 samples of Tucker’s payday lenders and possibly double signature, too few comparisons un- that number are affiliated with In- der forensic standards to be certain. dian tribes.”

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Loose Lending ©2011 Center for Public Integrity 53 Race car driver Scott Tucker drew elaborate facade around his payday loan businesses By David Heath Published Online | September 28, 2011

deputy sheriff in Olathe, Kan., ticketed race A car driver Scott Tucker late one night in October 2008 after clocking Tucker’s Mercedes-Benz CLS63 going 86 mph in a stretch of Interstate 35 posted at 60 mph. Two days later, Tucker’s wife, brother and sister-in-law as well as LOOSE LENDING several businesses with ties to the payday loan mogul suddenly donat- Whether or not the contributions ed a total of $4,000 to the campaign played a role in ticket being re- of a candidate for local district at- duced, the episode shows a strange torney — the office that prosecutes commingling of the interests of traffic tickets. Tucker and the Indian tribe. Regu- Among the businesses that do- lators in Colorado and California nated $1,000 to the campaign were are investigating whether Tucker is two payday loan companies that the merely using the tribes to circum- Miami Tribe of Oklahoma claims to vent state laws. own. Tucker started a controversial Weeks later, the ticket was re- online payday lending business duced to improper parking, to the that several states have tried to surprise of the deputy who ticketed shut down. Tucker now says Indi- Tucker. The change kept Tucker’s an tribes own the business and he driving record clean. is just an employee. That arrange-

Level 5 Motorsports/Flickr Scott Tucker’s Level 5 Motorsports racing team. From left, the three drivers are: Christophe Bouchut, Scott Tucker and Joao Barbosa.

ment gives the payday lending busi- piece of the revenue from the business the cloak of sovereign immu- ness. nity and has stymied the efforts of The tactic of affiliating with In- state regulators to stop the com- dian tribes has been widely copied pany from making illegal loans in among online payday lenders, frus- their states. trating state regulators and drawing Yet an iWatch News investiga- the condemnation of payday lend- tion found that Tucker is living the ing’s storefront brethren. life of luxury and spending a for- Storefront lenders generally tune on his racing hobby, while the don’t do business in 18 states that tribes may only be getting a small restrict payday lending. And those

that have ventured into the online Tucker, who lives in the upscale market usually get licensed and Kansas City suburb of Leawood, obey state laws, said Jean Ann Fox told a judge that he no longer con- of the nonprofit Consumer Federa- trols the payday lending business. tion of America. But iWatch News found evidence The head of the payday lending in court and public records that trade group Community Financial Tucker still pulls the strings on the Services Association of America, D. business he founded. The evidence Lynn DeVault, said that using tribes includes: to avoid state laws violates the as- • Among the companies that sociation’s standards “and would gave $500 campaign dona- lead to the automatic expulsion of tions to the prosecutor on the a company in violation.” same day as several of Tuck- Critics call the tactic “rent-a- er’s relatives were two tribal tribe.” businesses, AMG Services and Tucker acknowledged Friday for MNE Services. the first time that he works for AMG • AMG Services operates out Services, the paydaylending busi- of an office complex in Over- ness that the Miami Tribe of Okla- land Park, the same office that homa says it owns and operates. Tucker lists as his own in Se- He says a confidentiality agreement curities and Exchange Com- prevents him from talking about it. mission filings. The chief of the Miami tribe, • AMG Services pays the prop- Thomas E. Gamble, defended the erty tax on Tucker’s $8 mil- business, saying the tribe owns and lion vacation retreat in Aspen, operates it. Gamble says the busi- Colo., according to county re- ness obeys tribal and federal laws cords. but he didn’t say whether it obeys state laws. At least five states have • One of AMG Services biggest tried through legal proceedings to vendors said in a lawsuit that shut down the business for violat- Scott Tucker in 2009 was the ing state laws. Several other states owner and chief officer of have either instructed the business AMG Services. to stop making loans or warned Most revealing of all, bank re- consumers about it. cords show Tucker and his brother

Blaine were the only the two people commercial loans, Tucker posed as able to sign for four payday lending the president of a seemingly high- businesses of one tribe. The tribes powered investment bank in Over- may only receive a sliver of the rev- land Park called Chase, Morgan, enue from the payday lending busi- Stearns & Lloyd. The operation ness. was a fraud, collecting more than $100,000 in “advance fees” from at least 15 borrowers without provid- Rags to riches story ing any loans. Scott Tucker’s life is both a rags- Tucker ultimately pleaded guilty to-riches and get-rich-quick story. in federal court to two felony He grew up in the Kansas City charges of mail fraud and making area, graduating from a Jesuit high a false statement to a bank. A Mis- school and attending Kansas State souri state judge found him guilty University for two years, where he of a felony charge of passing a studied business administration. bad check. He was sentenced for Tucker has a criminal past. In April all three crimes to serve a year in 1988, at the age of 26, he borrowed Leavenworth federal penitentiary, $50,000 from American Bank of followed by three years of proba- Kansas City, offering a new Porsche tion. He got out of prison on June as collateral. Court records show 8, 1992. that Tucker lied on the application; Then Tucker went into the short- he had sold the sports car months term lending business. In 1997, earlier. he met Philadelphia businessman A year later, Tucker wrote a bad Charles Hallinan, who offered the check for $1,200 to a moving com- following account in a lawsuit he pany hired to transfer two loads of would eventually bring against used furniture for a business, ac- Tucker. cording to court records. Hallinan was already in the pay- In the meantime, Tucker partici- day lending business. The two hit pated in a bogus loan scheme to bilk it off. Hallinan viewed Tucker as a money out of businesses, court re- protégé and decided to bankroll an- cords reveal. While a partner in Or- other payday lending company with egon ran newspaper and magazine him, making Tucker president of ads throughout the country offering the company and letting him run it

from Overland Park. Tucker agreed the payday lenders out of Overland in writing not to open any compet- Park. ing businesses. CLK Management was becoming On Sept. 19, 1997, Hallinan a major business. By 2006, it took agreed to loan Tucker $500,000. up two floors of an office complex Tucker signed the revolving loan in Overland Park, and eventually note. employed as many as 400 workers, A month later, Tucker filed for according to former employees and Chapter 7 bankruptcy. In the bank- court records. One of its web sites ruptcy records, Tucker did not dis- claimed that it was making thou- close his new business as president sands of loans each day. of a payday lending company. Tuck- One former employee who er listed a total debt of $583,000, worked there at the time swore in including more than $220,000 owed a court statement that the business to the IRS. was using addresses on tribal land The court cleared Tucker of his for “protection.” William James said debts. Though Tucker had prom- no one was allowed to reveal where ised Hallinan he would not open the company was actually located any competing businesses, Tucker and that his boss once said, “They started a new company in 2001 don’t touch us on Indian reserva- called CLK Management, listing tions.” himself as the owner. Soon, Tucker Borrowers complained to state was setting up dummy companies regulators about the loans’ high in- in Carson City, Nev., using them terest rates and the lenders’ aggres- as mail drops for payday lenders sive collection tactics. Regulators in he called Cash Advance, Preferred California suffered a major setback Cash Loans and UnitedCashLoans. when an appeals court ruled that Starting in 2004, Tucker regis- because of the tribal affiliation, the tered new trade names for pay- lenders had sovereign immunity. day lenders, including AmeriIoan, With the corporate shell games and UnitedCashLoans, US FastCash, the tribes’ involvement, states were 500Fastcash and OneClickCash. finding it difficult to even prove who Court documents show that by was doing the lending. 2005, Tucker had teamed up with Some companies locate off shore Indian tribes, continuing to run to try to hide from authorities. With

scant effort, Tucker was able to no limitations on your power,” CLK hide CLK Management at an office lawyer Thomas Bath wrote back. park in suburban Kansas City. “We will continue to ignore subpoenas and orders improperly and un- lawfully obtained.” Colorado AG’s seven-year chase The attorney general wasn’t giv- The Colorado attorney general, ing up. In March 2008, his office John Suthers, had been trying to asked a Denver judge to cite Tuck- stop Tucker’s lending businesses er for contempt of court. Tucker since 2004. At first, consumers himself didn’t respond in court, but complained about a lender called oddly attorneys for the tribes did. Cash Advance based in Carson This puzzled Denver District Judge City. But in a surprise move, two In- Morris Hoffman because the tribes dian tribes—the Miami and Santee had never mentioned any connec- Sioux—appeared in court to claim tion to Tucker or anyone else. that they were the true owners of “Are you representing Mr. Tuck- the payday lenders. The tribes said er?” Hoffman asked tribal attorney the lending business had no connec- Conly Schulte. tion to Carson City, though there is “No, your honor,” Schulte re- irrefutable evidence that Tucker set plied. up those shell companies. “Is Mr. Tucker part of the tribal By the end of 2007, the investi- entities, or connected to them in gation in Colorado was continuing any way?” the judge asked. to unfold, where complaints about Schulte stumbled a bit for words, new online payday lenders poured arguing that because any questions in. Investigators suspected Tucker challenged the tribes’ sovereign was behind these new lenders. The immunity, “I feel obligated to my Colorado attorney general subpoe- client to respectfully decline to an- naed CLK Management and Tucker. swer that.” CLK’s lawyer responded with Hoffman cited Tucker for con- defiance. He argued derisively that tempt and two months later or- Colorado’s subpoenas had no pow- dered a warrant for Tucker’s arrest. er in the state of Kansas. In the meantime, the tribes finally “I can only conclude in your zeal acknowledged in a court filing, to pursue CLK you believe there are without ever elaborating on the de-

tails, that they had a relationship breaking the law. His own business with CLK. partner, the man who had bank- Because Tucker was cited on a rolled him, accused Tucker of being civil — not criminal — contempt a thief. charge, he can only be arrested if he Charles Hallinan had put up the sets foot in Colorado. Three weeks cash for Tucker to run the payday later, he did just that. Tucker, who by lending business. For years, Tucker now was starting his racing career, had called Hallinan each Saturday set a track record in a Ferrari 360 at at his home in Boca Raton, Fla., to the La Junta Raceway in Colorado. give an update on their company The state, not paying attention called National Money Service. to Tucker’s racing schedule, missed According to a lawsuit Hallinan its chance to arrest him. later filed in Las Vegas, Tucker ac- With CLK Management now knowledged to Hallinan that he had in Colorado’s crosshairs, Tucker created a new company in Overland would make the situation even Park called CLK Management and more confusing. He filed corpo- that Indian tribes were involved. rate papers in Kansas claiming that But Hallinan said Tucker led him to CLK no longer existed, that it had believe that CLK Management was merged with a new company owned just part of their company and that, by the Indian tribes. The new com- in truth, they still owned the payday pany was called AMG Services. lending business. Tucker said he had no control over By 2006, the weekly calls were the company’s books. replaced by sporadic emails. Hal- Based on Tucker’s word alone, linan had become suspicious and a Kansas judge ruled that CLK sent an accountant in May 2008 to merged with AMG on June 24, 2008. look at the books of their company. The target of Colorado’s investiga- According to Hallinan’s lawsuit, the tion — first Cash Advance, then accountant discovered the compa- CLK Management—kept moving. ny “had essentially been ransacked and substantially all of its assets, cash and profits diverted.” Partner turns on Tucker Hallinan accused Tucker of By then, state authorities were not stealing the business by moving ev- the only ones accusing Tucker of erything over to CLK Management.

Now, it looked as though Tucker Bank disclosed the only two people might be moving the business again able to sign checks on four tribal to a new company, Hallinan alleged. accounts were Scott Tucker and The lawsuit revealed interest- his brother Blaine Tucker. Scott ing details about Tucker’s relation- Tucker identifies himself on the ac- ship with the tribes. Hallinan al- counts as the “treasurer” of the Mo- leged that Tucker held “significant doc tribe’s corporation. An attor- influence” over the Indian tribes. ney for the tribe said recently that He released a letter from Tucker Tucker is no longer the company’s that showed that on July 31, 2008, treasurer. Tucker had completed new “man- The Miami and Santee Sioux agement” and “power of attorney” tribes are still fighting in a separate agreements with the tribes. class-action lawsuit to keep their fi- What’s more, Tucker’s letter nancial details secret. revealed a proposal, as part of a Tucker’s biggest break came settlement, to share with Hallinan from the Colorado Supreme Court all money from the tribal accounts last November. The court made it after an undisclosed amount was easy for anyone to conspire with an paid to the tribes. The lawsuit was Indian tribe to break state law. settled. The justices may have had no Two companies working for the idea who Scott Tucker was. His Modoc tribe recently revealed what name never came up during the the tribe gets paid from the pay- hearing. One of the justices asked day lending business. Answering what the tribes’ connection was to questions in a class-action lawsuit Cash Advance of Carson City, Nev., from borrowers in California, the the name and address given on the companies said the tribe received original loan documents. But the between 1 percent and 2 percent tribes’ attorney, Conly Schulte, said of revenues from the loans, even the confusion was a case of mistak- though borrowers pay nearly 800 en identity. percent in interest. “We submit that there is no con- But no one from the tribe is nection other than the fact that the even able to sign for several of the Nevada corporations used the same tribe’s bank accounts used for pay- unregistered trade names,” Schulte day lending. In the same suit, US told the justices. “Quite frankly, the

name ‘Cash Advance’ is quite com- it found new evidence from a law- mon in this industry.” suit filed in Las Vegas. The attorney for Colorado knew Though Tucker says he has no that there was a connection. It was control over AMG Services, Tucker Scott Tucker, who had at first made went to a company that sells leads the loans through a shell company to online payday lenders in the in Carson City to hide his owner- summer of 2009 and complained ship. When that didn’t work, he cut that someone was stealing AMG a deal with the tribes. The lawyer Services’ leads. The owner of the from the attorney general’s office lead company identified Tucker in didn’t mention Tucker in court be- a lawsuit as the owner and chief cause his role wasn’t yet identified officer of AMG Services. In 2008, in the court record. AMG Services paid the vender $80 At the hearing, the justices de- million for its leads. scribed their feelings of being Colorado is continuing to inves- hemmed in by federal law. On Nov. tigate Tucker. While the tribes can 30, the court announced its deci- claim sovereign immunity, Tucker sion. The court put the burden on himself cannot. Since 2008, the the state to prove whether a busi- state of Colorado has been trying to ness claiming to be an arm of a tribe enforce a subpoena ordering Tuck- was lying. State attorneys general er to appear in a Denver court. read the ruling as a major defeat. The biggest obstacle has been a In a partial lone dissent, Justice local judge in Kansas. Tucker went Nathan Coats argued that the deci- to Johnson County District Judge sion opens the door for “criminally Charles Droege to block Colorado’s unscrupulous predators, especially subpoena. The judge agreed to do in the current technological envi- it without even asking the Colorado ronment,” and makes it “virtually attorney general for a response. impossible for the state to protect But when the attorney general its own citizens against even the showed up in Droege’s court, the most blatant acts of fraud.” judge changed his mind. He would Despite the Colorado Supreme enforce the subpoena, but only af- Court ruling, the attorney general ter giving Tucker six months to go there is still trying to shut down to Denver and resolve the matter Tucker’s operation in his state. And in court there. Tucker chose not to

go to the Denver court, which had unlawful acts in [other states] with already cited him for contempt and impunity, as long as all condemning issued an arrest warrant. evidence is kept elsewhere.’’ That, After the six months were up, the brief said, “renders states inca- Tucker’s attorneys continued to pable of enforcing laws meant to plead with Droege that Colorado’s protect their citizens.” subpoena had no power in Kansas. Tucker’s story exposes a myriad In a stunning reversal of his earlier of challenges for state regulators reversal, Droege agreed and ruled and the courts in trying to enforce that the attorney general of Colo- laws against companies operating rado had no jurisdiction to issue over the Internet and hiding behind a subpoena in Kansas. He ordered shell companies. Colorado to stop trying to enforce The simple act of setting up shell the subpoena or to take any action companies can delay enforcement that would cause any “further an- actions for months. And merely noyance, embarrassment, oppres- changing a company’s name can sion or undue burden” on Tucker. make settlement agreements or The judge also blocked an order court orders moot. by the Denver judge that instructs Kansas was the first state to go Tucker to stop making loans in Col- after Scott Tucker. But Danny Vopat, orado. the lead attorney in the case for the Kansas Bank Commissioner, says he never knew that Tucker, living States band together and working in the same state, was Colorado appealed the decision. actually behind the payday lenders Last month the attorneys general of he battled for more than two years. 22 states, led by Kansas, filed a brief Vopat settled with one of Tucker’s in the Kansas appeals court blasting shell companies in Nevada, a shell Droege’s decision. They pointed out that no longer exists. Tucker quick- that the U.S. Constitution requires ly abandoned the trade name Cash states to honor the laws and court Advance. For those reasons, Vopat decisions of every other state. says it’s unclear that Tucker would The states argued that unless violate the settlement agreement if Droege’s decision is overturned, he started lending in Kansas again. “Businesses will be able to commit Now with the tribal immunity

shield, some states say they don’t ta, estimates at least 30 payday lend- have the resources or legal expertise ers are affiliated with Indian tribes. to fight people like Tucker. Deborah He said the number may even be as Bortner of the Washington Depart- high as 60. ment of Financial Institutions said she Meanwhile, Tucker has a heavy consulted with attorneys about tribal schedule of racing ahead. He recent- payday lenders, who told her “we re- ly made the unusual and costly deci- ally don’t have a leg to stand on.” sion to switch in mid-season to a new There is hope of federal action. custom-built vehicle for the Le Mans Tribal immunity cannot stop federal series. regulators, who have the right to His publicity machine continues investigate and take action against to promote Tucker as the next su- tribes. And in the financial reform act perstar of the racing world, recently passed last year, Congress gave the describing him as “a real-life action new Consumer Financial Protection figure [who] can be found working Bureau the explicit power to regulate his magic at racetracks all over the payday loans. world.” Without a confirmed director, the “With all of his recent success, fans new consumer agency is limited in its of the three-time champion may have powers. Still, the agency is expected a hard time picturing Tucker in any- to make oversight of payday loans thing other than a driver’s suit, but he a top priority. Consumer lawyers was a successful businessman long who’ve talked to the bureau officials before he was a race car driver,” Tuck- say that the agency is especially con- er’s publicist said in a press release in cerned about lenders who flout the July. “Give that man a cape.” n law, including payday lenders who claim to be affiliated with tribes. CORRECTION: The original story The bureau can’t enforce state incorrectly quoted Frank Cotton laws. But it can subpoena tribal re- about estimates of tribal/payday cords and then share those docu- connections. The sentence now ments with state regulators. reads, “Frank Cotton, an industry Yet industry analysts say that In- analyst in Atlanta, estimates at least dian tribes are now clamoring to get 30 payday lenders are affiliated involved in payday lending. Frank with Indian tribes. He said the Cotton, an industry analyst in Atlan- number may even be as high as 60.”

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Loose Lending ©2011 Center for Public Integrity 64 Credit unions remake themselves in image of payday lenders Some short-term loans carry equivalent of 876% interest rate By Ben Hallman Published Online | May 27, 2011

o millions of member- customers, credit unions are Tthe financial equivalent of a trusted uncle, dispensing prudent loans for cars, homes, and education without the profit motive of traditional banks. The National Credit Union Ad- ministration (NCUA), which super- LOOSE LENDING vises and insures about 4,600 fed- erally-chartered credit unions, says Last September, the National they operate with a “not for profit Credit Union Administration raised but for service” philosophy, provid- the annual interest rate cap to 28 ing “an alternative to the oppres- percent from 18 percent for credit sive loan rates charged by preda- unions that offer payday loans that tory lenders.” follow certain guidelines. But encouraged by federal regu- Under this voluntary program, lators, an increasing number of credit unions must allow at least credit unions are competing di- one month to repay, and cannot rectly with traditional payday lend- make more than three of these ers, selling small loans at prices far loans to a single borrower in a six- higher than they are permitted to month period. Credit unions are charge for any other product. not allowed to roll over the loans, a

Ross D. Franklin/The Associated Press A growing number of credit unions around the country are offering payday loans and competing with traditional payday loan businesses, like those shown here in Phoenix in this file photo.

practice that typical payday lenders charge significantly more in fees. use to make big profits. At Mountain America Federal But because these firms can Credit Union in Utah, a five-day charge a $20 application fee for $100 “ MyInstaCash” loan costs each new loan, the cost to borrow $12, which works out to an 876 per- $200 for two months often trans- cent annual interest rate. That rate lates into an annual interest rate of rivals traditional storefront payday more than 100 percent. lenders. What’s more, many credit unions An iWatch News investigation prefer to sell loans outside the found 15 credit unions like Moun- federal program, allowing them to tain America that continue to offer

high-cost loans that closely resem- Chairman Debbie Matz said, were ble the payday loans they are meant afraid to make small-dollar loans to replace. for fear of losing money. Short-term “They are promoting these loans loans are risky because there isn’t as payday alternatives, but they a credit check, and that higher in- are not really alternatives, they are terest costs are necessary for credit egregious payday products,” said unions to recoup the costs from the Linda Hilton, a community activist larger proportion of customers who in Salt Lake City. “We look at it as a will default, she said. moral lapse of credit unions.” “We spent a long time trying to All told, more than 500 credit do this in a way that would work for unions are making payday loans members and for the credit unions with widely varying interest rates and not be predatory,” Matz said. — from a modest 12 percent with no fees at State Employees’ Credit New revenue stream Union in North Carolina to the high triple-digits loans sold by Mountain Credit unions date to the mid-1800s America. It has become a fast-grow- when mill and bakery workers in ing trend in an industry struggling Germany created democratic co- to remake itself after the financial operatives to loan money to each crisis. other at reasonable rates. The co- Consumer groups typically warn operative approach to lending mon- against borrowing at interest rates ey to members for home and auto higher than 36 percent per year. purchases flourished in the United That’s the maximum allowed by States throughout much of the mid- many states and by the U.S. Defense 20thcentury, but some critics say Department for loans to active-duty the business model has outlived its members of the military. usefulness. The top U.S. regulator of credit Most U.S. credit unions have unions told iWatch News she hopes struggled in the wake of the 2008- more will adopt payday-style lend- 09 financial crisis with many of the ing with new rules that came out of same problems as banks — a surge her own experience working at a in loan defaults and a drop in cus- credit union. tomers looking for loans on big tick- Many credit unions, NCUA et items like homes and cars. Unlike

banks, credit unions operate as not- mated $40 billion in credit in 2009, for-profits. Their assets are primar- according to Consumers Union. ily member deposits. They need to Profits were about $7 billion. make loans in order to pay interest Many of the credit unions that of- and insurance on those deposits. fer high-cost loans declined to dis- And, unlike banks, they can’t raise cuss their profitability, but NCUA investor capital when times are lean. filings show that Mountain America At the end of 2010, the NCUA had Financial Services — which admin- designated 368 credit unions as ei- isters the Mountain America credit ther a serious supervisory concern union payday program — reported or at high risk of failure. Forty-one profits of $2.4 million in 2010. That credit unions have closed since 2009. includes profits from its insurance Thomas Glatt, an industry con- business, which the subsidiary op- sultant in North Carolina, said that erates. his analysis of financial reports Still, several that offer low or suggests that 700 mostly small moderate-priced loans said they ei- credit unions are in financial dis- ther broke even or lost a little mon- tress. While most credit unions of- ey on their programs. fering payday loans do so to give members a better alternative to Fast cash for car loans storefront payday lenders, Glatt said some appear to see the loans On a recent Saturday morning, Sam as a new revenue stream to shore Heredia, a 29-year-old producer for up crumbling finances. a Spanish language morning radio “Not every credit union is as show, stopped in at a Nix Check pure as they could be,” he said. “If Cashing branch in Highland Park, they are offering something similar a middle-class Mexican-American to what is sold on the street cor- neighborhood just north of down- ner, you have to wonder if that is in town Los Angeles. keeping with the credit union phi- Heredia had come for the Nix losophy.” standard payday loan offer: a $400, It isn’t clear how profitable pay- 14-day loan, for $42.25. He wrote a day lending is for credit unions. But postdated check for the full amount there is potential for big profits. and pocketed the cash. Payday lenders extended an esti- Heredia, who was wearing sun-

glasses and a bright red and blue Howard Hughes, the aviator, engi- soccer jersey, said in an interview neer and Hollywood producer, for in the parking lot that he needed permission to start a credit union at fast cash to help stay current on the plant. bills. “Just keep my name clean. I The biggest drain on his finances don’t want anything funny going is his car, a 2007 Toyota Tundra. He on,” Hughes replied, according to said that the car was his pride and credit union founder Lou Merandi. joy — “I love it,” he said — but that In the early days, membership in he took out a loan to pay for itunder the Hughes credit union cost just his father-in-law’s name because he 25 cents and members could bor- has bad credit. He is having trouble row up to $200. keeping up with the payments and Today, Kinecta has grown to $3.5 other accrued debt. billion in assets, 227,000 members Every two weeks or so for the and ranks as the 27 th largest U.S. past year, Heredia has made the credit union. It maintains the tra- trip to Nix, borrowing $400 each dition of sponsoring little league time. That means he has paid about baseball teams, neighborhood $1,000 in interest on his borrowing, street fairs, college scholarships which works out to a 362 percent for high school students and bud- annual interest rate. geting classes for the community. “I think it’s a high percent,” he Kinecta also directly finances said. the payday loans offered by Nix With 48 branches in mostly low- to customers like Heredia through income neighborhoods, Nix Check a service company called Kinecta Cashing is one of the largest payday Alternative Financial Solutions. lenders in the Los Angeles area. The interest rate cap for loans that The Nix chain was acquired four don’t follow the new federal pay- years ago by Kinecta Federal Credit day guidelines is still 18 percent. So Union, a major player in the credit how is Kinecta allowed to charge a union industry founded in 1940 by rate that tops 350 percent? employees of Hughes Aircraft Co. In calculating Heredia’s $42 Workers at the California company charge, Kinecta says that just $3, or were tired of driving into town to 15 percent, is interest. The rest of do their banking and asked owner the charge comes from a $39.95 ap-

plication fee. The application fee is An NCUA spokesman said that charged each time, even for repeat Kinecta must comply with the borrowers. truth-in-lending law, but declined to Kinecta Alternative Financial So- comment on whether Kinecta was lutions president Randy Dotemoto doing so. told iWatch News that the federal truth-in-lending law known as Reg- Payday history ulation Z permits financial institutions to calculate the interest on a Payday loans are a product of the loan without including the applica- deregulation trend of the 1990s, tion fee. when many states rolled back laws Consumer advocates say that that limited how much a lender credit unions are using inflated ap- could charge for a loan. plication fees to get around the in- In a typical loan, a customer bor- terest rate cap. rows a small sum, usually less than Regulation Z says that applica- $500, for a week or so, until their tion fees are to “recover the costs next paycheck. Lenders assess flat associated with processing applica- “fees” for these loans, rather than tions for credit,” such as credit re- typical interest charges. At Advance ports, credit investigations and ap- America, the nation’s biggest pay- praisals, notes Lauren Saunders, the day lender, a borrower in Texas pays managing attorney of the National $40.91 to borrow $200 for two weeks Consumer Law Center’s Washing- — a 533 percent annual interest rate. ton, D.C. office. She has been press- Lenders say they provide short- ing the NCUA to use its regulatory term cash to people in need. They authority to crack down on credit say they have to charge high fees unions like Kinecta since 2009. because they loan to borrowers The whole idea of payday lend- with bad or no credit. ing, promoted for being fast and Dotemoto said that payday lend- needing no credit check, is to offer ers like Nix perform a vital commu- a speedy loan without any under- nity service. Before payday lending writing, Saunders said. was legalized in California in 1997, “The NCUA is not being aggres- payday customers bounced checks, sive enough in defending its own paid high bank overdraft fees, or statute,” she said. pawned their possessions when in

a financial crunch, he said. In Ohio and Michigan, about 50 Critics say the loans can trap cus- credit unions have banded together tomers in a cycle of debt. Many pay- and collect annual fees from sub- day borrowers juggle multiple loans prime borrowers of $35 or $70, de- at any given time. “Borrowing more pending on whether they want a money at triple-digit interest rates is $250 or $500 credit line. Those fees never the right solution for people in go to a central fund, with current debt,” the Consumers Union says in assets of $633,000, used to back- its payday lending factsheet. stop losses at participating credit Credit unions are still new to the unions. Once a customer has paid payday business. Most started mak- the annual fee, loans are made at 18 ing small dollar loans in the past percent interest. five years. Some go out of their A customer who took two loans way to offer small loans, even if it in a year under these terms would means losing money. pay an effective annual interest rate Campus Federal Credit Union, of more than 100 percent. But the which serves mostly students and architect of the loan program, Doug- employees of Louisiana State Uni- las Fecher, the president of Wright- versity, offers a “Money-Wise” loan. Patt Credit Union in Dayton, Ohio Loans from $100 to $345 are avail- said that annualized interest rates able, at an 18 percent interest rate, are not the best way to gauge short- with six months to repay. There are term, small-dollar loans. no additional fees. Without the annual fee, he said, John Milazzo, the president of credit unions couldn’t afford to Campus Federal Credit Union, said make the loans. it loses about $30 on each payday- A lender earns just $3 on a $250, style loan. But with just a handful 30-day loan offered at 18 percent of borrowers — 63 as of mid-April interest, he said. “If one person — the credit union can afford a doesn’t pay that back we would small loss. “We understand that this need to make 80 more loans to is part of the business of helping,” make up for it,” he said. he said. “And hopefully we can es- Fecher said he opposes any type tablish a good customer.” of lending that preys on vulnerable More typically, credit unions aim customers. to at least break even on their loans. His loan, “doesn’t save the world,”

he said. “But it’s cheaper than what ing wrong, saying “I accept airfare they can get somewhere else.” from various groups when I fly out to speak to them.” The fight got personal last sum- ‘Wild West of financial services’ mer, when Hilton learned that her Consumer advocate Linda Hilton credit union, America First, was has been battling payday lenders in selling high-cost loans online and her home state of Utah for nearly at a kiosk in one of its branches. A 20 years. $4.7 billion credit union, America “It’s the Wild West of financial ser- First grew from modest beginnings vices out here,” Hilton, the director in 1939 when a group of civilian em- of the Coalition of Religious Commu- ployees at an Army base in Salt Lake nities, said in a recent interview in City used a tobacco can to store the her Salt Lake City office. A two-mile nascent credit union’s funds. stretch of State Street, which de- “They are supposed to be stores scends from the state capitol build- of the people owned and operated ing into a working-class neighbor- by shareholders,” Hilton said. “I hood, boasts three payday lending expected more of them than to sell outlets, a pawn shop that also offers their members on a product that payday loans, and a branch of Moun- can lead to a payday loan trap.” tain America Credit Union. Public of- She and religious leaders staged ficials in the state have mostly sided a protest outside an America First with the payday lenders. branch, which drew local press at- Utah Attorney General Mark tention. Under public and private Shurtleff, for example, has said that pressure — the NCUA was also in- banning payday loans could hurt the vestigating America First, iWatch poor more than it would help them. News has learned — the credit union In 2007, Shurtleff accepted free dropped payday loans altogether. round-trip airfare to the Bahamas America First, like most credit from the Community Financial unions offering high cost loans, was Services Association of America, a partnering with an existing payday payday-lending trade group, which lender. had invited him to speak at its an- That company, called Capital nual convention. Shurtlefftold told Finance LLC, still funds loans at a the Deseret News he did noth- handful of credit unions, including

those made by Mountain America, comment, referring questions to the second-biggest credit union in Scott Simpson, the head of the Utah Utah after America First, under the Credit Union Association, a trade “MyInstaCash” brand. group. Simpson said that he didn’t Hilton was surprised when she know how much Mountain America learned from a reporter that Moun- or other credit unions make from tain America, which has $2.8 billion their payday lending partnerships. in assets, was still in the payday busi- He said he was surprised that there ness. “That’s just terrible,” she said. was opposition to the loans. Sometimes, it is a state-chartered “They are creating an alterna- credit union that doesn’t have to fol- tive in the marketplace,” he said of low federal lending rules that is fi- credit unions like Mountain Ameri- nancing the payday loans. ca, which was founded in 1934 for For example, Orlando Federal Salt Lake City telephone workers. Credit Union offers an XtraCash loan “The demand doesn’t stop if these that tops out at 266 percent interest loans go away.” per year. Those payday loans are fi- Mountain America Financial Ser- nanced by Mazuma Credit Union, a vices, which administers the Moun- state-chartered credit union in Kan- tain America credit union payday sas City. program, reported profits of $1.8 mil- Saunders, the consumer lawyer, lion in 2009 and $2.4 million in 2010. said that regulators should stop But that number also includes profits these relationships. from the credit union insurance busi- “They should prohibit any fed- ness, which the subsidiary operates. eral credit union from partnering America First also declined to with payday lenders or marketing discuss its payday programs, or to anything that they would be pre- say how much it makes from re- vented from offering themselves,” ferral fees paid back to the credit she said. unions from the third-party payday An NCUA spokesman said cred- vendor. it unions are permitted to direct Orlando credit union president customers to payday lenders from John Neusaenger said that his cred- their web sites in exchange for a it union makes “very little” in refer- commission fee. ral fees that come back to the credit Mountain America declined to union for each XtraCash loan. Gate-

way declined to disclose how much Some credit union executives it earns in referral fees. have decided they shouldn’t be in Nix Check Cashing, likely the the payday business at all. biggest credit union payday lending American Southwest Credit operation in the country, has actu- Union in Arizona for years offered a ally been operating at a loss. Nix short-term loan with an 18 percent lost $4 million in 2010 and $2 mil- annual percentage rate and a $25 lion in 2009. quarterly fee. As a goodwill gesture Dotemoto attributed the losses to struggling customers, America to a down economy. Much of Nix’s Southwest offered to waive the fee business comes from people who if payday borrowers came in for a pay a fee to cash work checks, he financial counseling session, even said, and that business is off 30 per- though the credit union was losing cent from a few years ago. money on the overall program. “Not a single person took us up on it,” said Brian Barkdull, the chief How much is too much? executive. The NCUA says that 244 credit Meanwhile, customers with unions as of December 31, 2010 had short-term loans from the credit $14 million in outstanding loans un- union were also usually juggling der the new federal short-term loan several payday loans from more guidelines. traditional lenders. They wouldn’t Borrowers who take those loans take the counseling, and they didn’t typically pay less than the high-cost stop borrowing. credit union lenders. Those bor- Barkdull eventually pulled the rowers, in turn, typically pay less plug on American Southwest Credit than at a storefront payday lender. Union’s short-term loan program. So how much is too much? “The payday loan is a highly ad- Pentagon rules prohibit loans to dictive product conditioning bor- active-duty service members for rowers to live beyond their means,” more than 36 percent annual inter- he said. “This is a product that est, all inclusive. That is also how should never have been created.” n much a recent Federal Deposit In- surance Corp. pilot program for Bethany Firnhaber contributed banks allows. information used in this story.

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Loose Lending ©2011 Center for Public Integrity 74 F ights over tribal payday lenders show challenges of financial reform By Michael Hudson and David Heath Published Online | February 7, 2011

n the battle to shield themselves from lawsuits and Igovernment oversight, some high-interest payday lenders have found unlikely allies: Native Ameri- can tribes. In legal fights in California, New Mexico, West Virginia and Colora- do, a group of Internet-based pay- LOOSE LENDING day lenders have argued they are immune from lawsuits and regula- An ex-employee of one tribal- tion because they are “tribal enter- affiliated lender testified the com- prises.” They claim they enjoy trib- pany secured post office boxes on al-nation sovereignty, which allows tribal land to protect itself from them to operate outside state over- attacks by consumer lawyers and sight — even when they’re making government regulators. He claimed loans to non-Native Americans liv- a manager told him: “They don’t ing far from Indian lands. touch us on Indian reservations.” State regulators and consumer Affiliating with tribes is just one lawyers say that the lender-tribe method some payday lenders have marriages are ruses designed to used to skirt existing laws and over- allow non-Native American com- sight. Others have operated online panies to skirt consumer-lending payday lending sites from offshore laws. The tribes, they claim, are be- headquarters. And still others have ing used as fronts for the lenders. claimed that borrowers are actu-

ally paying for Internet access with that’s scheduled to be paid back in a rebate. In Texas, payday lenders two weeks, when his next payday get around state interest-rate limits comes around. by calling themselves credit ser- Payday lenders say they provide vice organizations set up to help reasonably priced, short-term cash consumers repair their credit re- to people in need. The industry’s cords. trade association says its custom- “This industry is so good at ers are “the heart of America’s finding loopholes or gaps it can middle class. They are typical hard exploit,” Jean Ann Fox of the Con- working adults who may not have sumer Federation of America says. savings or disposable income to So good that the new federal use as a safety net when unexpect- Consumer Financial Protection ed expenses occur.” Bureau will be challenged to bring Critics say many customers some order to the chaos. Experts can’t cover the quick repayment, say the new bureau will likely have so they’re forced to roll over their rulemaking authority over tribal loans many times and pay still more payday lenders. But it’s also likely fees. that any effort by the agency to take enforcement action against them Interest Rate Over 1,200 Percent would spark drawn-out court battles that would delve into the legal A payday loan customer in Califor- intricacies of tribal immunity. nia, Amy Baillie, claims that after The broad financial reform law she borrowed $300 from a tribal- passed by Congress last summer affiliated lender, the company deb- gives the consumer bureau the ited a total of $977 from her bank power to regulate payday lenders, account over the next five months, which extended an estimated $42 then told her she still owed $430. billion in credit and took in more The lender disclosed an annual in- than $7 billion in revenues in 2008, terest rate on the loan of over 1,200 according to investment bankers at percent, according to her lawsuit in Stephens, Inc. federal court in Oakland. In a typical payday loan trans- Andrea Felts, an assistant high action, a borrower might pay a school principal in Albuquerque, $50 finance charge to borrow $300 N.M., says she had a similar expe-

rience with three tribal-affiliated group of tribal-affiliated lenders lenders. said in an e-mail: “We decline to While going through a divorce, comment on matters in litigation.” Felts says, she went online to get some quick cash to help “reestab- ‘Revolving Door of Debt’ lish” herself and her daughter. But the price ended up being steeper The federal government has mostly than she expected. On the final left oversight of payday lenders up transaction, for example, her law- to the states, producing a regula- suit says she paid an annual inter- tory patchwork. est rate of 521 percent on a cash Seventeen states ban or discour- advance from Ameriloan, which age payday lending. In the rest, the claims a relationship with the Mi- rules often allow them to charge ami Nation of Oklahoma. annual interest rates of 400 percent When she found she couldn’t or more. keep up with the payments on the The new Consumer Financial loans, Felts claims, collectors be- Protection Bureau won’t be able gan calling her at home and at work, to regulate interest rates, but Fox with one even threatening to have and other activists say they want her arrested on a bad-check charge. the agency to write rules that will “It ends up being one big trap,” make it harder for payday lenders Felts says. “You take out one loan to trap borrowers in cycles of debt and before long you need to get an- by defining frequent, costly loan other one to pay the first one and rollovers as an unfair practice. it will just continue. It’s a vicious Elizabeth Warren, the presiden- cycle.” tial aide who is overseeing the bu- Felts’ and Baillie’s cases are reau’s launch on July 21, says pay- among three private lawsuits filed day lending will be a “high priority” in New Mexico and California for the agency. During a recent fact- against tribal-affiliated lenders. All finding trip to Ohio, Warren said seek class action status. families need access to small-dollar The lenders and tribes involved loans for emergencies, but “a model in these cases could not be reached that is designed to keep those fami- by the Center for Public Integrity lies in a revolving door of debt is for comment. An attorney for one not good for families — and ulti-

mately not good for the economy.” pose anything the payday lending If the agency does seek tighter companies do, whatever product rules on payday loans, it will tangle they offer.” with an industry that isn’t shy about As for the possibility that the spending money to influence voters new federal agency will get tough and lawmakers. In 2008 in Arizona with payday lenders, Schlein says and Ohio, the industry invested $30 he’s confident that, if they look at million pushing unsuccessful ballot the facts, the agency’s architects measures that would have wiped will see that consumers need ready out laws banning payday lending, access to the kinds of loans that the outspending opponents by more industry provides. than 60 to 1. “They’re not there to deny con- Payday lenders say they’re not sumers credit,” he says. “They’re against sensible regulation, but there to make sure that credit is they’re against laws that cut off ac- done in a very simple, straight-for- cess to consumers who need credit. ward way.’’ These laws, the lenders say, are the work of critics who’ve spread mis- ‘Rent-a-Bank, Rent-a-Tribe’ information about the industry. They say their customers seldom Not much is simple about the bat- get caught in cycles of debt and tles that have been waged over the that quoting annual interest rates is past decade and a half over how misleading, since most loans are for payday lenders do business. two weeks. In the 1990s, as some states be- Steven Schlein, a spokesman for gan enforcing limits on what they the Consumer Financial Services could charge, many payday lenders Association, an industry group for teamed with out-of-state banks to payday lenders, says it’s ridicu- evade interest-rate caps in states lous to suggest that payday lend- with strict limits on finance charges. ers go to great lengths to avoid Under federal law, a state-char- regulation. “We’re highly regulated tered bank could “export” interest by the states. We adhere to all the rates allowed in its home state to state laws.” Consumer activists, he another state — using one state’s added, have “just got into this blind loose interest-rate rules to make spot where they’re just going to op- loans in a state where interest rates

were capped. The payday lenders various websites under names such structured the deals so that they as Ameriloan and One Click Cash. acted, on paper, as loan brokers, After months of silence from the and the out-of-state banks were the Nevada-based companies, state of- lenders of record. ficials were surprised when two In- Consumer advocates dubbed the dian tribes, the Santee Sioux Nation arrangement “rent-a-bank.” of Nebraska and the Miami Nation That approach worked well for of Oklahoma, in- payday lenders until federal bank- The “rent-a- tervened in the ing regulators enacted rules dis- tribe” model case, claiming couraging banks from working with built on more that they actu- payday lenders. than two ally owned the By 2005, with the “rent-a-bank” businesses. The model essentially shut down, pay- centuries of same scenario day lenders began searching for legal precedent. played out in new ways of doing business. It was Court decisions California in around that time that a group of have decreed 2007, when the online payday lenders began using that state state Depart- what consumer attorneys now call governments ment of Corpo- the “rent-a-tribe” model. rations went to It was a model built on more have little court to try to than two centuries of legal prece- authority over stop Ameriloan, dent. Court decisions have decreed tribes. US Fast Cash, that state governments have little One Click Cash, authority over tribes. and other online lenders from do- State authorities first became ing business in the state. aware of the tribal lending model A company called Miami Nation after they began investigating unli- Enterprises explained to a Califor- censed operations that were offer- nia judge that it was an “economic ing loans over the Internet. subdivision” of the Miami Tribe of In 2005, Colorado’s attorney Oklahoma and that it used Amer- general obtained a court order for iloan and US Fast Cash as trade production of documents from two names in its payday lending busi- payday lenders, Cash Advance and ness. Another company, SFS Inc., Preferred Cash Loans, which ran explained that it was owned by the

Santee Sioux Nation of Nebraska but promised to have an official and that it made loans under the from the tribe call the Center. trade names One Click Cash and No one from the tribe responded Preferred Cash. to repeated requests for informa- Both said that, as arms of feder- tion from the Center over the fol- ally recognized tribes, they were lowing weeks. immune from state enforcement Across the street is an empty actions. Both added, too, that the warehouse that the tribe lists as profits from payday lending were the address for several businesses, vital to the welfare of the tribes. including a rural Internet provider More than a century ago, their and an attorney’s office. lawyers say, the tribes were But nowhere does the tribe list “stripped of their economic vital- an address for its most controver- ity and forced to relocate to remote sial business, a collection of web- wastelands” incapable of support- sites offering quick, small loans to ing their populations. The Miami cash-strapped borrowers. tribe says profits from payday lend- The tribe, which has about 800 ing are used to pay for such items members in Oklahoma, is best as “tribal law enforcement, poverty known in the area for its casino, assistance, housing, nutrition, pre- The Stables, one of 13 Indian casi- school, elder care programs, school nos around the Bible-belt town of supplies and scholarships.” Miami, Okla. Locals appear unaware of the Mi- ami Nation’s online payday lending Address Unknown for Tribe’s business, or its legal battles with Lending Arm states such as Colorado, California Surrounded by flat farmland in and West Virginia. The head of the northeastern Oklahoma sits a mod- local Chamber of Commerce knew ern brick and stone building where nothing about it. And the websites the Miami Nation conducts its busi- themselves reveal nothing about ness. When a reporter from the who owns them. Center for Public Integrity visited Authorities in Colorado and Cali- in December, the front door was fornia have tried to build the case locked. A receptionist said no one that the relationships between the was available to answer questions, lenders and the tribes are marriag-

es of convenience. California au- extremely secure, and the environ- thorities have called the affiliations ment was very luxurious and posh, a “sham.” including multiple 37-inch LCD Colorado authorities contend televisions for the employees.” that Miami Nation Enterprises and Though James was making lots SFS weren’t created until the spring of money, he fretted that One Click of 2005 — as many as two years af- Cash and its sister companies were ter they say the lenders had begun taking advantage of people, “bank- doing business. Colorado’s attorney ing on the fact that a person will be general says that it was only after unable to repay their loan on time, the state took enforcement actions thus accruing exorbitant interest, against the lenders in late 2004 and extension and late fees.” He saw early 2005 that the tribes customer loans of $300 quickly turn incorporated the tribal enter- into $900 debts, he said. prises and enacted payday loan or- The lenders’ websites don’t give dinances. details about fees or interest rates The California Department of charged. Money is deposited in a Corporations supported its case checking account, and payment is with a statement from a whistle- later automatically withdrawn from blower who had worked for One the same account. If there are insuf- Click Cash. William James said his ficient funds, the loan is automati- former employer was part of a web cally renewed, with additional fees. of companies — as many as 500 in The Better Business Bureau, all — that were headquartered in an which lists addresses in Nevada, office complex in Overland Park, Kansas, Colorado and Oklahoma for Kan., a suburb of Kansas City. Oth- Ameriloan, reports that the lender er than mailboxes on Indian land, has received hundreds of com- James said, there was nothing to plaints and gives it an “F” rating. suggest the companies were owned or run by Native American tribes. Bank Overdraft Fees Also Costly The companies kept their location top secret, barring employees In the Colorado case, lawyers for from telling anyone where it was, the lenders and tribes deny the al- James said. The third floor where legations tossed at them by their he worked “was very private and critics. They suggest, for example,

that interest rates charged by pay- borrowers. The attorney general’s day lenders are a bargain compared office had claimed that Internet- to the 3,500 percent annual interest based lenders associated with the rate that bank customers can shell tribes had violated West Virginia’s out for a two-week, $20 overdraft. limits on payday lending. The tribal The Santee Sioux Nation said in companies didn’t admit any wrong- a court filing that all its loans are doing. approved on tribal land. Despite ev- Richard Guest, an attorney with idence that the tribes are engaging the Native American Rights Fund in legitimate lending, the tribes say, in Washington, D.C., says that the the state of Colorado has pursued a tribes want to reach a settlement “protracted, caustic assault on the in Colorado, too, but state officials Tribal Entities’ status, replete with have shown no interest in working false allegations and innuendo.” things out. After years of litigation, the trib- Guest notes that “I personally al lenders’ battles with California am not a big fan of payday lend- and Colorado show no end in sight. ing,” Still, he says, the tribes have On Nov. 30, the Colorado Supreme to raise money somehow to pay for Court ruled that tribal enterprises programs that the federal govern- can use tribal immunity to block ment has failed to cover. state investigations, but then sent “Tribes are the ones who’ve got- the case back to the trial court so ten screwed over,” he says. “They that the judge could determine are not looking to screw others whether the lenders were truly over.” n owned and operated by the tribes. One case involving tribal lenders This project was supported in part has been resolved. West Virginia’s by the former Huffington Post In- attorney general reached a $128,000 vestigative Fund, which recently settlement in 2008 with companies became part of the Center for Pub- associated with the Miami and San- lic Integrity. tee Sioux tribes as well as a third Native American group involved in payday lending, the Modoc Tribe of Oklahoma. The deal cancelled debts and provided refunds for 946

Buyer beware Car dealers adopt outlawed mortgage tactics, new consumer agency powerless against them By David Heath Published Online | April 11, 2011

fter the financial crisis exposed the devasta- Ation caused by predatory lending, state and federal authorities vowed to protect consumers from practices that lured them into debt they couldn’t afford. But Congress kept most auto loans — the second largest source LOOSE LENDING of debt for Americans — out of the reach of the fledgling U.S. Con- and later tell them their financing sumer Financial Protection Bureau. fell through. The tactic can lure buy- And now many of the same tactics ers to accept a higher interest rate. that led to the mortgage meltdown And while the financial crisis — like fudging facts on the loan rendered subprime mortgages ex- application or charging consumers tinct, Wall Street is once again hidden fees — continue to plague buying up bundled subprime auto auto loans, an investigation by the loans, fueling a market aimed at the Center for Public Integrity found. most vulnerable consumers and re- The politically powerful industry lieving dealers of the risks of mak- has also mastered a few high-pres- ing bad loans. sure tactics of its own. Chief among The end result is that financial them is the “yo-yo,” where dealers incentives to take advantage of let buyers drive a new car home in auto shoppers remain unchanged hopes of locking them into a deal while the agency charged with pro-

Paul Sancya/The Associated Press The floor of the North American International Auto Show is shown in Detroit on Jan. 11, 2011.

tecting borrowers will be powerless The National Automobile Dealers against an industry polling shows is Association says that its members the most distrusted in America. face lots of regulation already and “I think that’s a problem be- didn’t need any further government cause a lot of fairly unsophisti- oversight, which it argued would cated people buy cars from auto only end up costing consumers. dealers,” said Rep. Barney Frank, But don’t try to convince Tammy a Massachusetts Democrat who co- Moses of that. authored the 2010 financial reform The dental hygienist from Okla- law. “We felt that consumers need homa City trusted her car sales- protection in this.” man, a family acquaintance who

joined hands with her and prayed problems reminiscent of the days for her troubled son. of mortgage mania. The income He found creative ways to fi- reported on her loan application nance a 12.25 percent loan in 2007 was bogus, three times the actual despite Moses’ lousy credit rating. amount. And dubious fees meant But for some reason he limited her that she was charged $22,000 for a choice to only two cars on the lot. $15,000 car. A jury recently award- She fell in love with a sleek, new ed Moses $400,000, concluding the Hyundai Elantra, despite her fa- dealer committed fraud. The deal- ther’s warning that the car looked ership didn’t appeal and hasn’t re- a little askew. sponded to requests for comment. On a trip to Dallas two months It’s the sort of lending horror sto- later, Moses lost control of the El- ry that now sounds familiar. antra as she veered to avoid a car But car dealers will continue to swerving into her lane. When a me- live by the old rules under a last- chanic suspended the car on the minute political deal in Congress rack, he immediately spotted rust- last year that freed the industry ed damage from an earlier wreck. from the Dodd-Frank financial re- Punching the car’s ID into the form law. computer turned up a previous Elizabeth Warren, the Harvard owner from Georgia, according to professor now advising President an interview with Moses and court Barack Obama on setting up the documents. She learned through new consumer agency, said at the court proceedings that the dealer, time. that dealers were sending a Automax Hyundai South, routinely cynical message: “We still want to got duplicate “certificates of origin” be able to do the old contracts that from the automaker to sell used nobody can read and nobody can cars as new. understand and still have all the tricks and traps.” Frank told the Center in an in- Similarities to mortgage crisis terview that most lawmakers don’t Lying about the car’s true value know the same sort of tactics used mirrors the inflated appraisals that during the mortgage crisis are be- contributed to the mortgage crisis. ing used in auto loans and that Moses’s case exposed other dealers’ exemption to the Dodd-

Frank law was a “mistake.” high-fiving the salesman. “’You just Dealers mounted a political of- destroyed her. That’s awesome,’” fensive in lawmakers’ home dis- Callahan recalls his colleagues say- tricts that ultimately prevailed. ing. “And the management would “Auto dealers are an example of laugh about it.” the most effective lobbying force, a The pressure to squeeze each built-in grass roots network... There customer can be intense, said Ray are auto dealers in everybody’s dis- Lopez, a car salesman for 33 years. trict,” he said. One major dealership in Southern California, he says, automatically fires the bottom three salespeople “You don’t belong here” each month. It’s not enough just to It comes as no surprise that Ameri- make a sale, Lopez said. You’re ex- cans distrust car dealers. pected to score big each time. A Gallup poll for the Better Busi- He got fed up one day after his ness Bureau in 2008 showed that boss chewed him out for selling a only 13 percent of Americans trust used car to his brother with only car dealers. No other business gar- a $500 markup. “He calls me into ners so much distrust. But industry his office and good God, I’ve nev- whistleblowers say that shoppers er heard anybody cuss up such a would still be shocked if they could storm. ‘You gave your brother a listen to some of the private con- house deal? If you can’t f--- your versations they’ve heard. own family and brag about it, you John Callahan said in his three don’t belong here.’” years selling cars on dealer Web sites he was troubled by the sales Profit made in finance techniques he saw taught. “They manager’s office were teaching you how to steal money from the consumer and hide Consumers are much more savvy to- the fact.” day about how to negotiate the price He remembers a case where a of a car, but industry insiders say salesman overcharged an elderly shoppers remain largely ignorant woman $2,500 on a car and cheated about what to do when they walk her $5,000 on her trade in. As she into the finance manager’s office. drove off the lot, everyone was While the consumer thinks the

negotiations are over at that point, sequences if the borrower can’t af- dealers know that a lot more profit ford the payments. And while Wall can be made off the financing. Street investors won’t touch mort- For starters, dealers routinely gages, they continue to buy bundled jack up the interest rate on a loan auto loans from finance companies, and split the profit with the lender. even risky subprime car loans. So if you qualify for a 4 percent Loans to subprime customers — loan, the dealer will say the best those who have low credit scores he can do is 7 percent. Half of the because they may have a history extra profit goes to the dealer as a of missed or late “markup.” Subprime payments — have Buyers never know they’ve been loans now been on the rise. charged more because the markup account for Subprime loans usually isn’t disclosed. The Center more than now account for for Responsible Lending calls these more than one- “kickbacks” and calculates that one-third of third of the new they cost car buyers $20 billion a the new and and used auto- year. used auto- loan market, ac- “Auto lending is the only major loan market, cording to the lending where this still occurs,” according credit rating said Chris Kukla, the group’s senior to the credit agency Experian. counsel. “It’s time for an end to it.” General Mo- A similar practice was also rou- rating agency tors last year tine in the mortgage business, Experian. bought the sub- where brokers would earn higher prime lender commissions for inflating the inter- AmeriCredit Inc. to expand sales est rate. This help put borrowers to financially troubled borrowers. into loans they couldn’t afford, and That lender reports that 9.2 percent the Federal Reserve has now out- of its loans went into default last lawed the practice. fiscal year, the same rate as before Strong incentives remain that the crisis in 2006 and during it in may tempt dealers to gouge car 2008. buyers. The explosion of consumer debt Most dealers don’t keep loans on has compounded the risks for bor- their books, so they face few con- rowers. Most car shoppers now

owe more than their trade-ins are a poor person and you are taking worth, limiting their borrowing op- away things they really need.” tions and making them especially Losing your car can be more vulnerable when negotiating a car devastating than losing your house, loan. contends consumer advocate Rose- Deals today routinely include mary Shahen, who started the non- costly GAP insurance, which in the profit Consumers for Auto Reliabil- event of a catastrophe covers the ity and Safety. difference between what the car is “People do lose jobs because worth and what is owed. And with they’ve lost a car,” she said. “Your lending companies willing to fi- life just falls apart.” nance up to 125 percent of the car’s value, dealers have room to sell Police involved in financing costly and often dubious extras, yo-yo such as duplicative extended war- ranties or service contracts. One controversial but common David Stivers, a former auto fi- technique is called the “yo-yo.” nance manager who now works That’s when a buyer drives a car as an expert witness for consumer home with a signed contract, but lawyers, said that subprime car the dealer calls days or weeks loans often bury the consumer in later to say that the financing fell debt. through. The amount still owned on the Yo-yos give the dealer tremen- trade-in is added to other extras dous leverage to coerce the buyer and hidden fees, so that the buyer into paying a higher price or in- will never have any equity in the terest rate even after the deal has car and may be unable to afford been inked. Consumer lawyers say the loan, he said. There are even yo-yos violate the terms of the sales worst schemes, such as charging contract as well as Truth in Lending for equipment not on the car, lying laws. on the loan application or not being But Bob Balderston, owner of honest about the car’s history. Blue Springs Ford near Kansas City, For desperate customers, Stivers Mo., told the Center that a yo-yo said, these practices are “like taking is necessary as a convenience for food off the table… You overcharge the customer, so they can close a

deal on a Saturday night when the banks are closed. Yo-yos are good for dealers, too, Balderston said, because it keeps the buyer from shopping around once an offer has been made. Research by the Center for Re- sponsible Lending shows that one in eight car buyers making less than $40,000 have experienced a yo-yo deal. For those making less than $25,000, the incident rate rises to one in four.

Antuane Barnes knows how it David Heath/Center for Public Integrity feels. Nearly two months after he Antuane Barnes of Norman, Okla. bought a used Dodge Ram pickup says he ended up in handcuffs when from Norman Chrysler-Jeep in Nor- he refused to go along with an auto man, Okla., Barnes was told the fi- dealer's "yo-yo" sales scheme. nancing had fallen through. Barnes was willing to return the truck, because he found one just was being conned, Barnes says he like it for a better price elsewhere. angrily decided to keep the pickup What’s more, the other dealer was and stormed out of the dealership. willing to give him $2,000 for his Days later, Oklahoma City police trade in. The Chrysler dealer had officers rang Barnes’ doorbell. paid only $800 for it. Barnes says Soon, they had him in handcuffs the finance manager agreed to have and were leading him down the the trade-in waiting for him when block to their patrol car as neigh- he got there. bors watched. The dealer had re- But when Barnes arrived, the ported the truck stolen. Barnes told finance manager claimed they the officer what had happened, and no longer had his old vehicle — a in the police incident report the of- claim Barnes says doesn’t jibe with ficer concludes that car title records. All they’d offer it was probably not a criminal him was a $800 check. Feeling he matter. Even so, Barnes says one

of the officers insisted that he al- says, “I’ve lost a little bit of faith in low his home to be searched, or else people.” Similar lawsuits involving they would have to take his wife and police being summon by dealers in 2-year-old daughter down to the sta- yo-yos have been brought in Michi- tion with him for questioning. gan and Maryland. Barnes relented, and police al- Although Norman police now lowed a repo man to drive the pick- say the initial report was incom- up truck out of his garage, back to plete, Easley said charges for filing the dealership. a false report are unlikely, saying, Norman police Capt. Tom Easley “We reserve those for very special blamed the mistake on a junior of- cases, those that are generally a ficer who didn’t ask enough ques- slam dunk.” tions. “What is not in that original report is the fact that he had a Litigation costly, penalties small trade-in that the dealer still had. Once we found that out we said, Consumer activists contend new ‘Wait a minute. This is civil.’” federal oversight is necessary be- But the initial police report in cause state and local authorities fact does mention the trade-in. And rarely take action against car deal- officers at the scene said in their re- ers, even when there’s substantial port that they didn’t arrest Barnes evidence of fraud. The lack of pros- because they concluded it might ecutions of auto dealers for fraud be a civil matter. Easley said stolen has become a lifelong obsession for vehicle reports from dealers are a Bernard Brown, a consumer lawyer common occurrence and raise red in Kansas City. flags, so police departments prob- Now a leading authority on car ably should review them carefully. fraud, Brown says it’s easy for deal- Brian Pritchard, the general ers for hide bogus charges in the fi- manager who reported the car sto- nance papers so that most consum- len, declined to respond to Center ers don’t even realize what they’ve requests for comment. In court fil- paid. But even when a fraud is dis- ings, the dealership denies the deal covered, like a rebuilt wreck, deal- was ever consummated. ers rarely get prosecuted. Brown Barnes is now suing Pritchard began representing consumers after and the dealership for fraud and a National Highway Traffic Safety

Administration investigator told him how prosecutors refused to file charges against a dealer who had sold 75 rebuilt wrecks. He himself became the victim of an odometer roll- back years ago and having once worked in a prosecutor’s office thought he had an easy criminal case against a car dealer. “I had him dead,” Brown recalls. “But the local prosecutor would not pros- David Heath/Center for Public Integrity ecute the case.” Michael and Kimberly von David, on the In his research, Brown right, won more than $1.75 million when subpoenaed records on all re- a Missouri jury decided an auto dealer built wreck complaints to the fraudulently sold the couple a rebuilt Missouri Attorney General wreck. Also pictured is the von Davids' from 1990 to 2003. It showed lawyer. that despite receiving 351 complaints against franchise dealers, the office had only brought found clues that the bolts attached two lawsuits. By keeping the wreck to the frame were all off center. secret, dealers are also defrauding A mechanic friend slid under the the lenders by inflating the value of truck and instantly reported that the car. Similar tricks were played the truck had been in a serious ac- by mortgage companies leading up cident and wasn’t safe to drive. to the financial crisis. The von Davids’ complaint be- Michael and Kimberly von David came the lawyer’s fourth case called Brown in 2002, after discov- against Blue Springs Ford for sell- ering problems with a Ford Ranger ing a rebuilt wreck. When it finally pickup they’d bought from a major went to trial last year, Brown em- dealership, Blue Springs Ford. Von phasized during the penalty phase David had popped the hood and the dealer’s long history of selling

rebuilt wrecks and the lack of regu- Kathi Rawls, the Oklahoma City latory and law enforcement against attorney who handled cases for dealers. both Moses and Barnes, says she The jury came back with one of gets about 15 to 20 calls a week the largest judgments ever for car for auto fraud and has to turn most fraud, awarding the von Davids of the potential lawsuits down. “I $170,000 and an additional $1.75 can’t afford to take them,” she la- million for punitive damages. ments. Bob Balderston, owner of Blue Cases can be extraordinarily Springs Ford, acknowledged selling complex and damages small. Said the pickup without disclosing the Jane Santoni, a consumer lawyer damage was a mistake, but he says from Maryland, “There are really no the salesman just didn’t know. penalties for these rip-offs. We’ve “We thought the jury went way tried to strengthen these statutes over the top,” Balderston said. He but the legislature is not listening.” is appealing the verdict. A U.S. Supreme Court decision underscored how paltry the penal- UPDATE: The Federal Trade ties can be when car dealers cheat Commission, which has not filed customers. an enforcement action against an Bradley Nigh was told by a deal- auto dealer for a decade, held a er in Virginia that the financing on public meeting today [April 11, his SUV had fallen through. Accord- 2011] in Detroit examining some ing to the court decision, the deal- of the auto financing problems er, Koons Buick Pontiac GMC, also spotlighted by the Center’s inves- “falsely told” Nigh that his trade- tigation. The FTC was ambiguous in had been sold, which put pres- about its plans, saying it would sure on him to sign a new contract. gather information “to assess the When he did, the dealer charged propriety of promulgating a rule Nigh $965 for an alarm system that or conducting other initiatives.” wasn’t on the SUV. With little enforcement against Nigh sued and the case went all auto dealers by state and federal the way to the Supreme Court in authorities, consumers are left to 2004. But in an 8-1 decision, the taking their cases to court. But court ruled on highly technical that’s rarely an option either. grounds that the most Congress

allowed for Truth-in-Lending vio- deceptive practices and withhold- lations in certain consumer credit ing the terms of the loan. cases was $1,000. But Jack Fitzgerald, the owner of a group of dealerships in the Washington, D.C. area, said new Arbitration another barrier rules would not make a difference In recent years, dealers have made because like the existing rules, reg- it more difficult for consumers to ulators won’t enforce them. “The go to court by burying mandatory reason things are so bad now is arbitration clauses in contracts. that regulations are being ignored,” That means consumer complaints Fitzgerald said. often have to go before a private Fitzgerald, who posts factory in- arbitrator who’s not bound by voices on his website, advises buy- court rules and whose decision ers to educate themselves. Manu- cannot be appealed. Ironically, facturers pressure dealers to make in 2002 auto dealers managed to as many sales as possible and show persuade Congress to enact a law no concern for assuring repeat barring auto manufacturers from business, Fitzgerald said. To avoid forcing disputes with dealers into getting ripped off, he advises buy- arbitration. ers to shop around and get three Duane Overholt, a former car competing offers before making a salesman who now runs a nonprof- purchase. it website called StopAutoFraud. Good advice. But Tammy Mo- com, is swamped with complaints ses’s case shows that some scams from consumers. But because of may be unavoidable. arbitration clauses and other draw- Her attorney discovered that backs, he said lawyers turn down Automax Hyundai got 51 dupli- 98 percent of his referrals. cate certificates of origin in 2007, Dealers say there are plenty of including 22 for new cars that the regulations already to protect con- dealer had yo-yoed. sumers. The National Automobile “We contacted all 22 of them, Dealers Association lists six feder- and they were all mad,” said Rawls. al laws or regulations that impose Still, none of them have filed a law- rules on auto dealers, from laws suit. Said Rawls, there just doesn’t against discrimination, unfair and seem to be much point. n

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Borrower Nightmares ©2011 Center for Public Integrity 93 Disabled homeowner alleges broker, bank sold her mortgage she could not afford By Ben Hallman Published Online | September 2, 2011

argaret Mosunic is 63 and a devout Christian, Mbut if she ever encounters her building contractor again, she has a specific, violent plan of action. “I want to choke his little Irish neck,” she said in a recent interview in her home of more than 40 years in Queens, New York. BOWERRO RS As for the mortgage broker who NIGHTMARES recommended the contractor? “[He is] a devil in the disguise of a man,” grant Mortgage Co. of New York to she said. approve, Mosunic’s lawsuit alleges. On Jan. 9, 2008, Thomas Delaney, An hour later, Mosunic claims, a broker at Home Consultants, she stood on a street corner with Inc., drove Mosunic to a law office a $20 bill that Delaney had pressed to close what she thought was a into her hand for cab fare, confused $40,000 bank loan, according to a and upset. She had just signed her lawsuit filed by Mosunic in Queens name to a $300,000 mortgage with County court. She planned to use terms she alleges she couldn’t pos- the money to pay back taxes and sibly meet. make repairs to a downstairs rental Mosunic’s loan required a month- apartment, she said. ly payment of $2,227. At the time, But that wasn’t the loan that the her only income was a $738 monthly broker had asked the lender, Emi- disability check.

Ben Hallman Margaret Mosunic in front of her Queens home.

“I was flabbergasted and I was so release contingent on repairs to a upset,” Mosunic said when she got downstairs apartment. her first bill. Emigrant Bank, the parent of The interest rate on the loan was Emigrant Mortgage, said in written 8.125 percent. But if she missed a answers to questions from iWatch single payment by more than 30 News that loan documents prove days, the rate would jump up to a Mosunic knew in advance of the “default” rate of 18 percent. If that closing the amount of her mortgage happened, her monthly bill would loan. double, to about $4,500 a month. The bank said withholding two While Mosunic was obligated times the amount estimated to com- to make payments on the full loan plete repairs is “usual practice” and amount, the bank held back half that Mosunic could have afforded — $150,000 — in escrow, with its the payments if the renovation had

been completed. Then Mosunic having to provide proof of income. would have received the rest of her The home was the collateral. loan and she could have brought in In a court filing contesting the a tenant, the bank said. foreclosure, Mosunic claims [5] the But that didn’t happen. The con- lender, broker and contractor took tractor she hired, at the broker Del- advantage of her disability — she aney’s suggestion, took $70,000 and says she is legally blind and reads left the job half-done, she alleges very slowly — and her limited edu- in her lawsuit. She says back taxes cation. and bills ate up most of the rest of She alleges she was “fraudulently the $150,000. induced” to take out the loan and She made two mortgage pay- that it was “entirely unaffordable by ments. The foreclosure notice came any industry standards, thus putting in September 2008. her at clear and obvious risk of los- In the run-up to the housing col- ing her long-time home.” lapse, millions of borrowers with At least a dozen other homeown- bad credit bought homes that they ers in the New York City area have couldn’t afford and have since lost fought an Emigrant foreclosure on to foreclosure. similar grounds. Mosunic, who moved to New These homeowners alleged that York City from Croatia when she they were deceived, or that the was a teenager, does not fit the terms of the loans were excessively usual profile of those borrowers. unfair, or both. Some, like Mosunic, She owned her house in the Asto- claim they were lied to by a mort- ria neighborhood outright. She has gage broker. lived there since the 1960s. Some of these cases have since But a low income and poor credit resolved, with the homeowners ac- history made borrowing money dif- cepting a mortgage modification, ficult. With a huge tax bill, payment according to the bank. The bank due on heating oil, and other debt, denies all allegations of wrongdoing she needed money badly. and asserts that in one case the bor- Enter Emigrant Bank, which of- rower violated the loan agreement fered a program that allowed home- and that in most others it offered owners to borrow about half of their modifications at 6 percent interest home’s appraised value without with default interest waived.

The bank said that its “no docu- they can’t afford seem likely. mentation” lending program provid- But no regulator can solve Mosu- ed struggling homeowners a needed nic’s dilemma. financial lifeline and an opportunity She may lose her only possession to improve their creditworthiness. of value: the two-family brick home “As a general matter, it is abso- on a quiet street that her immigrant lutely the case that, in addition to a parents bought soon after moving loan commitment letter, each Emi- to the United States. She has lived grant borrower was issued all of the in it since she was a teenager. documentation required under fed- She owes Emigrant about eral and state lending laws, includ- $470,000, including penalties and in- ing a Truth in Lending disclosure terest. Unable to work since a bru- statement and a HUD Good Faith tal attack more than 20 years ago, Estimate,” the bank said. she has little chance of paying that Making mortgage documents money back. She claims that the easier to understand is a top prior- contractor’s half-finished renova- ity of the new Consumer Financial tion, which she showed to a report- Protection Bureau, which formally er, has left her home uninhabitable. launched in July with a broad man- She is now staying with a friend. date to make borrowing money But a bad experience is not the fairer. The CFPB will also have same as a fraudulent one, and a loan regulatory authority over mortgage with terms that a borrower cannot brokers and it can draft new rules repay is not the same as a loan made governing loan products for banks in bad faith. like Emigrant that have more than Convincing a judge to invalidate $10 billion in assets. a contract based on allegations that The agency declined to comment it is unfair to one side is difficult, for this story, and has not yet set foreclosure lawyers say. And her forth any detailed new rules gov- claim that she didn’t know in ad- erning the home loan industry. As vance the terms of the loan faces the foreclosure crisis drags along major challenges. Among them: A — RealtyTrac estimates 2 million loan application filed months before foreclosure notices will be sent in the closing that Emigrant says bears 2011 — additional rules that seek her signature, and conflicting infor- to help keep borrowers out of loans mation in filings by her own lawyers

about how much she thought she that showed that her income was was getting. less than $1,000 a month. Mosunic alleges in her lawsuit that it wasn’t until the closing, at the office of High-stakes borrowing law firm Mattone, Mattone, Mat- In several iWatch News interviews, tone in College Point, Queens that Mosunic said she is still confused she learned that she was borrowing about how she fell into so much $300,000, not $40,000. debt. Mosunic said she asked what was But she remembers her broker going on. Delaney told her not to very well. worry about it, she said. Mosunic first met Delaney after “He said ‘Sign, sign. You can’t he called an elderly friend in the stop. You have to keep signing,’” fall of 2007, offering his services as Mosunic told iWatch News in an someone who could extract value interview elaborating on her allega- out of her home. The friend said tions in the lawsuit. that she wasn’t interested, but that She claims the broker told her she knew someone who needed that the notary public earns $250 an money badly. hour so she had to hurry. She was Mosunic owed more than $25,000 told that another closing was sched- in back taxes on her home, which uled very soon, and that she had sits on an attractive block in the rap- to hurry, Mosunic said. Everything idly gentrifying Astoria neighbor- would be fine, she said the broker hood, and thousands of dollars more told her. in other unpaid bills. The state had She signed. put a tax lien on her home and she Neither the bank’s own files, nor was worried that she might lose it. Emigrant’s attorney’s recollection Delaney, who could not be found of the closing, support any claim by Mosunic’s lawyer or by iWatch that Mosunic was confused or un- News , claimed that he could quick- aware of any of the key terms of the ly secure her a $40,000 loan using loan, Emigrant told iWatch News . her home as collateral, Mosunic al- Emigrant further said that at- leges in her lawsuit. torneys who work for the bank are She said that she gave him finan- instructed not to close on a loan if cial information, including records they sense confusion on the part of

a borrower, or if they discover that later made repeated calls to Emi- a borrower feels there has been a grant asking that the bank release misrepresentation. the $150,000 that it had held back Joseph Mattone Jr., the head of pending completion of the renova- the law firm that represented Emi- tion, Emigrant said. “Of course, as grant, said when reached by phone it turns out, if we had not held back by iWatch News that he was not these funds, the borrower’s con- familiar with the case and could tractor might have stolen the entire not comment. But he said that his $300,000,” Emigrant said. lawyers are at closings to look out Whatever Mosunic’s interactions for the interests of their client — with the broker, her allegations that Emigrant Bank — not borrowers, she didn’t know in advance how mortgage brokers, or anyone else. much she was borrowing are “abso- He said that his attorneys typically lutely false,” Emigrant said. “don’t interact” with prospective In October, months before she purchasers. closed on her mortgage, Mosunic “If that woman thought some- applied for a $257,000 loan from thing was going on, my doors are Emigrant, according to an applica- not locked,” he said. “She could tion provided by Emigrant to iWatch have walked out at any time.” News . A letter from a lawyer who Emigrant said that the govern- was representing Mosunic in 2009 ment vets brokers through its li- says that she required a loan “closer censing process and that the bank to $150,000” to pay taxes and com- ensures that those it deals with have plete repairs and asked for a waiver those licenses. The bank also said it to reflect her “original desire” to confirms that brokers are not on a close on a $150,000 loan. Freddie Mac “exclusionary list.” These two documents prove that “These brokers are not agents Mosunic knew what she was getting of the bank and we cannot be ex- into in advance, the bank said. pected to police the activities of the Mosunic’s current lawyer, Eliza- more than 2,000 brokers Emigrant beth Lynch at MFY Legal Services, works with,” the bank said. said that Mosunic’s story hasn’t wa- Delaney, whose brokerage is one vered. Mosunic claims she was told of the hundreds that failed after the by her broker that she was applying collapse of the mortgage market, for a $40,000 loan and didn’t realize

she was applying for a $300,000 loan moved into the business of lend- until the day of the closing. ing to people with bad credit in a “Based on the loan application [ big way, according to allegations iWatch News ] showed me that does in a discrimination lawsuit filed in not appear to be her signature and federal district court by a mortgage that is something we would raise as borrower in Brooklyn. an issue in court with a handwriting By 2004, more than half of all expert,” Lynch said. Emigrant mortgage loans were “no And the language in the previous income” loans according to the dis- lawyer’s letter is likely an acknowl- crimination lawsuit. edgment that Mosunic’s debt and Emigrant said this statistic is the cost of her construction would “wildly inaccurate” but did not pro- not have been fully covered by a vide a different figure. $40,000 loan, Lynch said. She said The bank said its mortgage that it was “poorly phrased.” branch has made about 9,000 no in- Mosunic didn’t realize how much come loans since 2006, and it that she owed in back taxes or how much as of June 30, it was servicing about work she needed to make the apart- 14,000 loans in total. ment habitable, the lawyer said. The expansion of Emigrant’s no On Jan. 28, 2011, Judge Janice income loan program came while Taylor denied Emigrant’s motion to Howard Milstein, a real estate ty- dismiss the case, ruling that all but coon, was chief executive officer. one of Mosunic’s claims against the Milstein, a big donor to the cam- bank—a conspiracy claim—could paign of New York Gov. Andrew go forward. Cuomo, was recently confirmed as chairman of the New York State Thruway Authority. Emigrant held onto loans Milstein did not respond to an For most of its 160-year history, iWatch News request for comment. Emigrant, a privately-held regional Emigrant, which still owes the bank that currently holds about $267 million it borrowed from tax- $11.7 billion in assets, made meat payers under the Troubled Asset and potato loans to middle class Relief Program, wasn’t alone in New Yorkers. making loans to people with bad By the early 2000s, Emigrant had credit, nor was it the only bank to

offer no income loans. But its busi- ing a bridge back into the banking ness strategy diverged from most system for borrowers who other- other banks when it came to servic- wise would have lost their homes ing the loans. or been forced to go to hard money Instead of selling the debt up lenders,” the bank said. the food chain, where loans were Under the Community Rein- pooled, sliced, diced and eventu- vestment Act, banks are required ally sold to investors as mortgage- to make loans in their entire geo- backed securities — leading to the graphic area, including low and collapse of the subprime lending moderate income borrowers. In market and very nearly the Ameri- 2006, the Federal Deposit Insur- can economy — Emigrant held on ance Corp., said that the bank to its higher-risk loans. “makes extensive use of innovative This is a point of pride for the and flexible lending products and bank. practices” for poor borrowers and “We never created products to specifically cited the no income feed the Wall Street securitization loans that the bank had made in the machine. To this day, Emigrant’s evaluation period. loans remain in our portfolio. And Four years later, in 2010, the we service all of our loans in-house, FDIC again said that the bank was so performance of these loans is of innovative and flexible, but did not the highest importance,” the bank mention no income loans in the re- said. port. How, then, to make this lending Like most of its peers, the bank strategy pay? does a “satisfactory” job of meeting The bank was willing to make its Community Reinvestment Act loans to people with bad credit, so obligations, according to the FDIC. long as the borrower already owned Mosunic claims in her lawsuit a home for collateral. that her experience was anything The bank said that 85 percent but satisfactory. She said the loan of the 9,000 no income loans it has she got was “unconscionable” — es- made since 2006 are still perform- sentially, so unfair to her as to make ing. it invalid. “For the vast majority of borrow- Her foreclosure challenge al- ers, these products work, provid- leges that the bank “knew or should

have known” that she couldn’t af- to people with bad credit without ford the loan payments. Since the checking their income, and then likelihood of default was quite high, including a trigger that could more the bank should have included the than double the interest rate if they 18 percent rate when calculating miss a payment, was a recipe for di- the “true” cost of the loan, the suit saster. alleges. “Who comes up with this stuff?” she asked. “It’s outrageous.” Eric Feinberg is a lawyer in Rock- Default rate controversial land County, N.Y. who is represent- The 18 percent default rate including an Emigrant borrower in anoth- ed in some loan contracts prior to er case. “If things go bust, then the 2009 is perhaps the most contro- bank takes the house,” he said. “It is versial aspect of the bank’s lending a win-win for them completely.” program. Even in a bad economy, a home Emigrant said that in the past a in a gentrifying New York City default rate was included in certain neighborhood can be worth quite a loan programs “to offset costs for lot. Mosunic’s home was appraised that portion of its portfolio that was in 2007 by the city for $729,000. It is delinquent, and also as an appropri- now worth $685,000, according to a ate incentive to ensure the borrow- recent New York City appraisal. er would make payment.” Emigrant said that it is “indisput- “Since Emigrant does not sell its able” that no income loans are of loans, performance is paramount, higher risk than traditional loans. and the default rate encouraged But failure is costly, not just for the borrowers to make their mortgage homeowner, the bank said. Nearly payments first. A good mortgage every foreclosure of a mortgage of payment history is often the first less than half a million dollars is a step on the path to restoring cred- money-loser for the bank, it said. it,” the bank said in a statement to As of Jan. 1, 2008, about two out iWatch News. of three loans made by Emigrant Others see it differently. did not include a default rider in the Nina Simon, the director of liti- contract, the bank said. gation at the Center for Responsi- But of those loans that have ble Lending, said that making loans failed, many included the default

rate, according to an iWatch News area. Emigrant is the only lender analysis of mortgage documents for she knows of in New York City that borrowers in foreclosure. made loans with an default interest In New York, foreclosures must rate as high as 18 percent, she said. go through state courts. iWatch “Although we can only speak spe- News randomly selected 54 Emi- cifically for Emigrant, we are aware grant residential foreclosures to ex- that other banks that have included amine out of 401 currently catego- a default rate in their loan docu- rized as “active” by the courts. Of ments,” the bank said. “In addition, those failed home loans, 44, or 81 we know that the U.S. government, percent, included a default interest [New York state] government, cred- rate of 18 percent. it cards and others, charged — and Emigrant said default rate riders still charge — a default rate of 18 were included in certain loan pro- percent or more.” Last year, in an grams offered by Emigrant because opinion issued in another Emigrant they were deemed to be of higher foreclosure case in Suffolk County, risk. N.Y., state court judge Jeffrey Spin- “So it is quite natural that a great- ner wrote that the mortgage agree- er portion of loans in foreclosure ment was “starkly revealing and would include that rider,” the bank greatly disturbing.” That loan was said. made with an initial adjustable in- The bank also said that no Emi- terest rate of 11.65 percent, and grant loan ever went in to default it included the 18 percent default because of an 18 percent interest rate. rate and that default interest is al- “It is a virtual certainty that [the ways waived as part of Emigrant’s borrowers] were not afforded the loan modification process. opportunity to freely bargain and Lynn Armentrout, who heads a negotiate in reaching the operative nonprofit project that helps people terms that are now subject to this facing foreclosure co-sponsored by Court’s scrutiny,” Judge Spinner New York’s City Bar Justice Center said. and the Federal Reserve Bank of The lawsuit later was settled for New York, said she has reviewed undisclosed terms, and the opinion hundreds of mortgages from ev- was rescinded, after what Judge ery major lender in the New York Spinner described as “continuing

good faith negotiations” by both that rate in response to the new law. Emigrant and the homeowner. Emigrant’s default interest rates in New York were reduced to 16 percent on February 1, 2009, and to 3 New rules may have helped percent above the contract rate on borrowers Oct. 1, 2010. Regulators and lawmakers have These reductions applied to loans already taken steps to address the existing in the portfolio that were type of unfair default interest rate originated prior to these dates, as allegations made by Emigrant bor- well as to new loans, Emigrant said. rowers in their court challenges. Moreover, the bank said it also The New York State Banking now waives all default interest if a Department said it cannot discuss loan is reinstated within five months lending practices at specific banks. of the first default. But in 2007, the agency warned Regulators have also moved to state banks against making nontra- make illegal a bonus system that ditional or subprime loans that in- many have said encouraged mort- clude the possibility of “significant gage brokers to convince borrow- payment shock” for a borrower ers with the worst possible credit to such as a sudden increase in the in- apply for loans. terest rate. In some instances, Emigrant, like Rholda Ricketts, Deputy Super- many other banks, paid brokers a intendent of Banks for Mortgage “yield spread premium” bonus to Banking , told iWatch News that the brokers for bringing in higher inter- regulator strongly supported a 2008 est rate loans. law that made it illegal for New York For example, a broker who banks to include triggers in loan helped Gail Greene borrow nearly documents that significantly boost $500,000 to refinance her home near interest rates on subprime loans LaGuardia Airport in Queens got a after default. That law went into ef- “yield spread premium” of $2,460 fect Sept. 1, 2008. Emigrant said that bonus for selling a loan with an in- loans made with the 18 percent de- terest rate of nearly 12 percent. fault rate were not subprime loans Emigrant says that it was not un- as defined under New York law, and usual for banks to pay yield spread that it didn’t stop making loans with premiums, and that it complies with

all regulations for mortgage broker bank, with better results than the compensation. federal [Home Affordable Modifica- The Federal Reserve recently tion Program].” outlawed these types of bonuses, Not surprisingly, Mosunic’s law- which the regulator said give bro- yer and the bank dispute whether a kers incentive to steer borrowers to fair offer was ever made. more expensive products. In early 2009, the bank offered to Consumer advocates applaud release the $150,000 it is holding in such moves, but say that the CFPB escrow, but Mosunic’s lawyer — at should move to set clear and tough the time, an attorney working pro rules governing mortgage brokers bono for the New York City Bar As- and mortgage loans that would ap- sociation — advised she reject the ply to the entire country. offer because it also called for her Future borrowers may benefit to waive most of her legal rights to from new rules that the CFPB is con- fight foreclosure. sidering that would simplify mort- In September of that year, the gage disclosure forms. The agency is bank said it presented Mosunic’s at- requesting feedback from consum- torney with an Emigrant loan modi- ers on draft versions of short, con- fication package. A few weeks later, cise forms as part of the agency’s the bank said, the “loan modifica- “know before you owe” initiative. tion offer was turned down by the borrower.” Lawyers for both sides met be- An uphill fight fore a court-appointed referee in Lawyers who have handled similar November of 2009. In a filing, that cases say Mosunic faces an uphill referee noted that Mosunic had not fight against Emigrant. appeared in person nor had submit- But “winning” for most home- ted financial information needed to owners facing foreclosure is not a evaluate her case. With no deal on court decision ruling against a bank. the table, the referee ordered the What they really want is a mortgage foreclosure case to proceed. modification on favorable terms But Lynch said no modification that lets them keep their home. “offer” was ever made and that Emigrant said it offers “the best Mosunic did not qualify under the modification program of any major bank’s own rules. The modification

application made clear near the top of a modification beyond the repair that Mosunic did not qualify for a work. The first she heard of a 6 per- modification because she had recent offer was from iWatch News , ceived more than 10 percent of the she said. loan value in cash, Lynch said. Lynch also said that waiving of A year later, Emigrant filed a mo- delinquent interest is not the same tion stating that the “loan was not as waiving all interest charged and eligible for a modification under the that many details—such as whether Emigrant guidelines as the Defen- the bank would charge interest on dant received over $90,000 cash at the entire $300,000 loan, or on just closing and did not submit any pa- the $150,000 that it had paid out— perwork to establish a hardship.” would need to be hammered out. In mid-August, after a 19-month In addition, she said, the maxi- draught, the two sides began talk- mum interest rate under a HAMP ing again. modification is currently about 4.5 The bank offered to send one of percent—a better deal than what its engineers, free of charge, to in- Emigrant said it is willing to make spect the house to see what repairs Mosunic. would be needed to make the first For now, Mosunic remains in floor apartment livable, Lynch said. limbo. From there, Emigrant would allow She borrowed money from Ms. Mosunic to use her $150,000 es- friends to continue repairs on the crow to pay for the repairs. What- downstairs rental apartment, but ever money was left over would be there is still work to be done. She applied to the principal. can’t rent it out until the foreclosure Emigrant said in an email to is resolved. iWatch News that once the repairs “My mother and father worked are complete, the loan would then too hard to buy a house when they be modified at 6 percent, with all came here,” she said of her decision default interest waived. “This is es- to continue to fight the foreclosure. sentially what we were prepared to “What’s peculiar is just the word do more than two years ago,” the ‘Emigrant’ and me being in an im- bank said . migrant, which is derived from the But Lynch said the bank declined same word,” she said. “I just want to to discuss with her specific terms keep my home.” n

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Borrower Nightmares ©2011 Center for Public Integrity 106 S oldiers battle car dealers over inflated prices, loan terms Lawsuits accuse some dealers near U.S. bases of aggressive tactics that drain young recruits’ bank accounts and affect mission readiness By Michael Hudson Published Online | July 25, 2011

ori Mendoza saw an ad- vertisement last year from LSouth Colorado Springs Nis- san, a dealership that promotes itself as “Proudly Serving our Mili- tary” and promises bargains for men and women in uniform. That sounded good to Mendoza, an active-duty soldier stationed at BOWERRO RS nearby Fort Carson (Colo.) Army NIGHTMARES Base. With help from her mother, who co-signed on the deal, she trad- discrepancy. Then, the suit said, it ed in an older BMW and drove away gave her a runaround about nailing with a 2010 Nissan Rogue. down the financing she said it had Then things took a wrong turn, guaranteed on the deal. according to a lawsuit Mendoza When Mendoza came back to filed in federal court in Colorado. the dealership to return the Rogue The dealership, she claimed, and cancel the transaction, anoth- boosted the cost of the transac- er snafu emerged: The dealership tion from the agreed-upon $27,000 claimed, the suit said, that it had to $35,000, admitting it had made a already auctioned away the BMW “mistake” only after she caught the trade-in. Later, when she demanded

Eugene Hoshiko/The Associated Press Marines at Camp Lejeune, N.C. have been allegedly victimized by aggressive car salesmen who offered free weekend trips to the beach but refused to bring service members back unless they bought a car; promised a free airline ticket but added the cost into financing for a new vehicle; refused to return down payments; and held trade-in vehicles hostage until a new car was purchased, according to a retired Marine lawyer.

copies of her sales contract and the said the BMW was eventually re- federal “truth-in-lending” disclo- turned to Mendoza and her mother. sures, the suit alleged, a dealership Steve Kern, the dealership’s gen- staffer refused, saying he didn’t eral manager since February, told want Mendoza using the documents iWatch News that “we work very as “ammo” against the dealership. hard to help our men and women in Wyn Taylor, an attorney for the military.” South Colorado Springs Nissan, In a written statement about the

case, Taylor asserts the dealership When it comes to dealers that fly acted properly, and that documents American flags and post signs that signed by Mendoza showed the to- say “Welcome Military,” consumer tal cost of the deal was always in advocates often joke that “the big- the $35,000 range. The statement ger the flag, the worse their prac- also says the financing was never tices are,” said Rosemary Shahan, guaranteed and Mendoza knew, president of Consumers for Auto even though she was allowed to Reliability and Safety, a California- start driving Rogue, that the deal based advocacy group. couldn’t be consummated until the The practices at some dealers loan was approved. are enough of a concern that the For Mendoza, the issue is now Federal Trade Commission has in- settled — she and dealership re- vited Archer, Shahan and other ex- solved the lawsuit on undisclosed perts to speak at a public hearing terms. Many other men and women Aug. 2 in San Antonio to focus on in uniform, though, are still vexed the problems servicemen and wom- by car financing deals gone bad. en face when they try to buy cars Consumer advocates and military on credit. Industry officials deny officials claim that some car dealers that car dealers routinely take ad- target soldiers, sailors, Marines and vantage of members of the armed other service members for preda- forces. tory financing and other tricks that “I don’t see military being tar- drain their bank accounts and, in geted. I don’t see that,” said Larry some instances, interfere with their Laskowski, executive director of ability to do their duties. the Independent Automobile Deal- “I think it happens every day of ers Association of California, which a week,” said Michael Archer, a represents some 450 used-car deal- retired Marine officer who serves ers in a state that is home to more as director of legal assistance for than two dozen military bases. Marine bases in the Carolinas and In instances where there are bad Georgia. “I think it’s at least as like- apples that “don’t adhere to a code ly as not that when a troop buys a of ethics,” Laskowski said, there car, he’s overpaying either on the are laws on the books that are de- price of the car or the price of the signed to protect service members loan.” and other consumers.

The National Automobile Deal- they borrow money or buy things ers Association didn’t address ques- on credit. Officials said they’ve set tions from iWatch News about mili- up procedures to work together on tary members who purchase cars addressing consumer complaints on credit, but it told the FTC “any and improving financial literacy for abuses which may have occurred” servicemen and women. in auto financing “are isolated and “Service members and their most assuredly are not prevalent.” families sacrifice a great deal for our country and they deserve advocates who will use every available Easy targets resource to protect them from fi- Next month’s FTC hearing is anoth- nancial threats,” said Holly Petrae- er sign of the increasing attention us, the consumer bureau’s assistant on consumer problems faced by director for the Office of Service- members of the U.S. military. member Affairs and the wife of In recent months, three of the na- Army general and newly confirmed tion’s largest financial institutions Central Intelligence Agency chief — Bank of America Corp., Morgan David Petraeus. Stanley and JPMorgan Chase & Co. “Through this partnership and — committed nearly $80 million our other efforts,” she said, “we will among them to settle claims they work to make sure that the days of improperly foreclosed on military military families being easy targets personnel or overcharged them on for predatory practices and unscru- their mortgages. pulous lenders are a thing of the The new federal Consumer Fi- past.” nancial Protection Bureau (CFPB), When it comes to policing auto which officially kicked off opera- loans, the CFPB is handicapped be- tions on Thursday, has signaled it cause of a loophole written into last will make protecting military con- year’s Dodd-Frank financial reform sumers a priority. law after intense lobbying by car On July 6, the CFPB and the dealers: The bureau has authority military’s top uniformed lawyers re- over auto lenders, but it generally leased a “ joint statement of princi- won’t have authority over car deal- ples” aimed at providing better pro- ers, which play a crucial role in the tections for service members when auto financing process. Dealers of-

ten prepare loan applications and the trigger, he needs to be focused work hand-in-hand with lenders in entirely on the front post site and hammering out loan terms. where he’s shooting, rather on ex- As part of a legislative compro- traneous personal concerns about mise, the law increased whether somebody is going to take the FTC’s rulemaking authority away his car or his house.” over car dealers. An FTC spokes- Some car dealers like to locate man told iWatch News that the near military bases because many agency has “has done extensive of the troops stationed there “are of military outreach to provide service an age when they’re probably going members with consumer education to get their first car, and they’re all about finances and avoiding fraud.” concentrated in one place,” Archer The FTC is also working to coor- said. dinate its efforts with the CFPB, A November 2009 memorandum including talks about how about by Archer sketched out several sharing access to complaints, the examples of the sales tactics and spokesman said. credit practices that car dealers used to fleece young Marines stationed at Camp Lejeune in North Battlefield promotion Carolina and at other installations For their part, military brass have in the Southeast. spent much time in recent years One bold car salesman tres- documenting the problems caused passed onto Camp Lejeune, “con- by lenders and car dealers that ca- ducting an impromptu class to our ter to men and women in uniform. most junior Marines on how car When soldiers get ensnared in bad dealers will rip them off. Yet the deals, military officials say, the fall- salesman describes how he can out can affect their “mission readi- ‘hook them up’ with a reputable ness” and, if their credit is ruined, dealer to avoid scams.” At least put their security clearances at risk. one “class,” Archer wrote, “is held “It absolutely affects their ability when the salesman sneaks into the to perform their mission,” Archer, auditorium during a break between the Marine regional legal director, legitimate orientation classes.” said. “When you have a lance cor- In another instance, the memo poral who literally has his finger on said, a dealership tricked a Ma-

rine lance corporal into buying an in good condition, his suit says, but overpriced car by promising him he soon discovered the vehicle had free round-trip airfare to visit his serious defects, including a leaking parents in a distant time zone for battery and “worn and unsafe” tires Thanksgiving. It turned out the air- and front brakes. fare wasn’t free — it had been fi- Christopher Ramey, an attorney nanced into the loan contract at 13 for Certified Auto, denied that the percent interest. dealership engaged in fraud or did Across the country in Southern anything improper. California, three Marines stationed In Simon’s case, for example, Ra- at Camp Pendleton are pressing mey said the dealership didn’t sub- lawsuits claiming that a nearby car mit any information about Simon’s dealer, Certified Auto Sales, falsi- rank or employment to the lender fied information on their credit ap- — that was Simon’s responsibility, plications. the lawyer said. “Mr. Simon signed In one of the three lawsuits in and delivered the application to the San Diego County Circuit Court, lender,” Ramey told iWatch News. Areon Simon claims the dealership He added that the dealership gave him an imaginary promotion made it clear to Splawn, Turk and on his credit application — listing Simon that the vehicles were be- him as a corporal when he was in ing sold “as is,” and that they were fact a private. welcome to take them elsewhere if Another Marine, Logan Turk, they wanted to have an independent claims Certified Auto Sales report- mechanic check them out. He said a ed on the credit application that he judge ruled in the dealership’s favor was buying a 2006 Mitsubishi even in November in a similar case of an- though he was really buying a 1997 other Marine who claimed that he’d Camaro. been sold a defective vehicle, find- A third Marine, Mark Splawn ing that the “as is” label meant just II, alleges that the dealer socked that — “as is.” him with what amounted to a hid- Certified Auto’s owner, Joseph den finance charge, increasing the Romero, “is a small-town dealer,” price of his 2006 Mazda because Ramey said. “He’s probably one of he had a poor credit history. It also the nicest guys I’ve ever met. It’s promised him that the Mazda was unfortunate that Mr. Romero has

been victimized” by consumer at- said, because they’re “bankable” torneys seeking to generate fees for — they have steady incomes and themselves. ready access to loans from military The three Marines’ lawyer, Hal- credit unions. len Rosner, says his clients’ stories “They’re a vulnerable group, like are examples of how poorly service any other group that gets exploit- members often fare when they buy ed,” Rosner said. The Navy and Ma- cars on credit. rine Corps maintain lists of off-lim- Rosner, who frequently repre- its car dealerships that sailors and sents service members in credit Marines aren’t supposed to set foot disputes, says many are young and on, he said, but “it takes an awful aren’t “future-oriented” — which lot to be put on that banned list.” n is understandable, he said, since they’re often waiting to be trans- iWatch News intern reporter ferred to overseas war zones. Car Shirley Gao contributed reporting dealers like them as customers, he to this story.

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S mall town teacher seeks help for big debt, ends up in bankruptcy Illinois, W.Virginia accuse some debt settlement companies of using legal loophole to charge high up-front fee By Shirley Gao Published Online | July 20, 2011

tired schoolteacher Mary Linville looked around the edinner table and smiled. It was an evening late in November 2008, and she was surrounded by friends who had come to unwind after the hectic Thanksgiving holiday. To her left sat her husband, and to her right were friends from church BOWERRO RS with whom she often went horse- NIGHTMARES back riding. Her son Jamie, a county sheriff’s deputy, sat across from her. The court summons alarmed Lin- The dinner at Linville’s middle- ville, who seven months earlier had class home in the rural West Vir- hired what she calls a “debt settle- ginia town of Alkol was interrupted ment firm” that promised to cut her by a knock on the door. One of her $72,000 debt in half by negotiating son’s co-workers, armed and wear- repayments to creditors. Instead, ing his badge, stood awkwardly at Linville became one of many Amer- the door and served Linville with a icans who have found themselves lawsuit filed by Discover for failing even deeper in debt after seeking to pay off her credit card. help through debt settlement ser-

Linville family photo Mary Linville, center, with her son, Jamie, and daughter, Ronna. The West Virginia attorney general sued Morgan Drexen, Inc. on behalf of the retired schoolteacher and 400 other consumers who paid up-front fees for debt relief and say they did not receive the promised services.

vices, an industry the new Con- [3]. The industry group represents sumer Financial Protection Bureau about 45 debt settlement compa- aims to regulate. nies which together handle about More than 500,000 Americans $2 billion in consumer debt. with about $15 billion of debt are “People in debt have several op- currently enrolled in debt settle- tions,” Housser said. “They can file ment programs, said Andrew bankruptcy, seek debt settlement, Housser, executive board member or do nothing. Debt settlement is of the American Fair Credit Council appropriate for those people who

have the desire to do something she said. Shortly before the Christ- about their debt, who have the abil- mas holiday in 2008, she filed for ity and willingness to slowly pay it personal bankruptcy. off.” Seven months before that mem- ‘Head over heels’ in debt orable November dinner, Linville had hired California-based Morgan “By the time I realized what was go- Drexen, Inc. when a telemarketer ing on, I was head over heels, way called to advertise the firm’s ser- over my head in debt,” Linville said. vices. “I was falling behind in payments, Linville said the company told and interest kept collecting. There her it would charge her monthly was no way I could get caught up.” installments of $771.25, and the ini- Linville, who taught elementary tial payments would be applied to- school for 36 years until she retired, ward Morgan Drexen’s engagement complained to the West Virginia fee of $4,101.53, and fees for main- state attorney general, which filed taining Linville’s checking account. a lawsuit against Morgan Drexen In return, Morgan Drexen promised two months ago on behalf of her to deal with her creditors directly and other consumers. and settle her debt for less than half The company describes itself on of the original amount, she said. its website as a software and sup- “I was so surprised, I had no idea port service provider to 35 U.S. law I was in trouble,” said Linville, 63, firms. Morgan Drexen is “NOT a debt recalling the court summons that settlement company,” wrote Raychel turned her financial world upside Harvey-Jones, vice president of me- down. “I thought they were doing dia relations, in an email to iWatch what they promised to be doing for News. “Morgan Drexen provides a me.” platform where attorneys, clients But Morgan Drexen did not de- and businesses can reach amicable liver the promised services, Linville solutions together. Clients and their claims. Instead, the firm took — attorneys use this platform in a vari- and kept — about $7,000 from her ety of situations including bankrupt- checking account but never paid a cy, personal injury and resolution of cent to Discover, Bank of America, claims by creditors.” Lowes and most other creditors, While the company may not call

itself a debt settlement company, three years about Morgan Drexen, the West Virginia attorney general gives the company an ‘F’ rating. and Linville allege that for all in- Customers complained that as Mor- tents and purposes, it is. Defining gan Drexen automatically deducted exactly what constitutes a debt set- monthly fees from their bank ac- tlement company is one of the early counts, the company failed to dis- challenges for the federal Consum- close where the funds were being er Financial Protection Bureau to held and debts remained unsettled, tackle in regulating the industry. according to the BBB. Just last month, the bureau announced debt relief services were Loophole for lawyers among a half-dozen high-priority areas it was targeting with its new The debt settlement industry is a powers under the Dodd-Frank fi- complicated one to regulate be- nancial reform law. As a first step, cause it involves so many parties the Consumer Financial Protection — the creditor, the debt settlement Bureau said it must clarify which provider, a consumer, and, in Mor- debt settlement companies are “a gan Drexen’s case, lawyers who ne- larger participant” in the industry. gotiate the debt. “Statistics on the size of [the According to Harvey-Jones’ debt counseling and debt settle- email, “1,000’s of consumers have ment] industries, as well as the used MD [Morgan Drexen] support- size of other debt relief services, ed attorneys to assist them with are not readily available. The CFPB resolving their disputes with their will need to consider carefully how creditors. MD has processed $266M to define any debt relief provider of debt for just over $100M [in] over market or markets included in an 72,000 settlements.” initial rule,” the agency said in its “The figures above speak for announcement. themselves. The attorney-based Linville is not alone in claiming debt resolution program is success- that Morgan Drexen’s work failed ful,” Harvey-Jones said. to bring results. The involvement of a lawyer in The Better Business Bureau, debt settlements is an important ad- which said it has received some 217 vantage for companies that promise customer complaints in the past to settle their clients’ debts.

Just last fall, the U.S. Federal a debt settlement company can col- Trade Commission amended its lect advance fees. telemarketing regulations to pro- “It’s like a cat and mouse game,” hibit companies that sell debt set- Stuart Sloan, a consumer lawyer tlement services over the telephone based in North Carolina, said. “Of from collecting fees until a client’s course there are regulations, but debt is settled. However, the rules we see these debt settlement out- allow fits morph. They make a new name lawyers who perform debt settle- and a new strategy to get around ment services to collect legal fees these rules.” up front from consumers. Morgan Drexen has also taken Lawsuits in 10 states note of the FTC’s new rule. “Al- though it is unclear at this time In the past year, consumers or state whether or not the FTC has the officials have filed suit against Mor- authority to govern the practice of gan Drexen and similar businesses law, it is the intention of the law in at least 10 states, including Colo- firms as well as Morgan Drexen, to rado, Virginia, Washington, New make certain that all services and Jersey, Kansas, Ohio, Michigan, support operations comply fully New Hampshire, Illinois and West with the new rule or are exempt Virginia. The lawsuits accuse the from its application,” the company named companies of charging ille- says on its website. gal up-front fees, giving clients lit- Consumer advocates say debt tle or no contact with an attorney, settlement companies are using the and failing to settle clients’ debts. law firm exemption as a loophole to In May, West Virginia Attorney get around regulations. General Darrell McGraw accused For example, debt settlement Morgan Drexen of failing to deliver companies using this model may ad- its advertised services, failing to vertise that lawyers will serve as an disclose adverse consequences of active negotiator between a debtor debt settlement programs, and col- and creditor, critics said. Recent lecting fees that exceeded legal lim- lawsuits against these companies, its for debt pooling, among other al- however, allege that the lawyers do legations. little and are involved only so that “Morgan Drexen purports to

merely provide paralegal services defending itself. “[The] AG’s allega- to lawyers engaged in debt settle- tions relate to clients of the law firm ment activities on behalf of cli- that were engaged pre-TSR [Telemar- ents,” the West Virginia complaint keting Sales Rule] amendment. To states. “In reality, Morgan Drexen the extent that the [West Virginia At- provides all of the meaningful debt torney General] alleges that MD col- settlement services while lawyers lected fees, that allegation has been it recruits merely ‘rent’ their bar li- denied,” Harvey-Jones said. censes and company ‘letterhead’ to Another company, Legal Help- Morgan Drexen.” ers Debt Resolution which calls In return for partnering with itself one of the Morgan Drexen, the lawyers are “In reality, largest in the in- paid a monthly fee based on the Morgan Drexen dustry, faces a number of clients they supervise, provides all of similar lawsuit the lawsuit alleged. A contract one the meaningful filed in March West Virginia lawyer supplied to the debt settlement by Illinois At- attorney general’s office showed torney General she was paid a minimum of $500.00 services while Lisa Madigan. each month for the first 300 clients lawyers it That lawsuit she oversaw, plus $2.00 for each ad- recruits merely accused Legal ditional client. ‘rent’ their Helpers of col- ”The appearance of licensed bar licenses lecting exces- lawyers providing debt settlement and company sive fees from services enables Morgan Drexen more than 1,000 to evade state regulation of its ac- ‘letterhead’ Illinois clients, tivities,” the West Virginia attorney to Morgan which include general’s lawsuit said. Lawyers Drexen.” a $500 retainer, have no active role in negotiating a $49 monthly debt with creditors, communicat- charge, and 15 percent of the total ing with creditors or consumers, debts. While Legal Helpers states or billing consumers, it said. “All or implies that “consumers will be of these activities are performed by represented by a law firm … in fact Morgan Drexen,” it said. all debt negotiation and related ser- Morgan Drexen’s Harvey-Jones vices are provided by non-law firm said that the company is “vigorously” third parties and LHDR is merely a

referral source for these same third scarier than speaking with credi- parties,” the Illinois attorney gen- tors. That fear makes them easy tar- eral’s complaint said. gets for debt settlement companies. The allegations are “totally incor- Linville began receiving unsolic- rect,” Jason Searns, general counsel ited phone calls in early 2008 from for Legal Helpers, told iWatch News companies offering debt settlement . “The client’s cases are reviewed by services that claimed she could be our attorneys, and if they are sued, debt-free in less than a year. we represent them. They remain “They told me that if I paid the our clients the entire time.” minimal amount of my credit card, “We are not referring any ser- it would take me 40 years. They vices to non attorney third parties. said they could get me debt free in We work with a support group who one year,” said Linville, who lives in is under contract with us, and we a one-story home built in the late constantly supervise their work,” 1970s in the scenic West Virginia Searns said. mountains. Sloan, the consumer rights At first, she hung up on the ro- lawyer, is also suing Legal Help- bo-calls, but by April 2008, Linville ers on behalf of clients who claim figured she had nothing to lose. the company didn’t deliver what it A salesman on behalf of Morgan promised. Drexen assured her that it would “With debt, you get really desper- settle her debt for a lower amount ate and can get suckered into work- than she could find anywhere else. ing with these companies,” Sloan Her monthly payments would be said. “But here’s the dirty little se- $771.25 — “something I could live cret: you don’t need them. Credit with,” Linville said. card companies will negotiate di- The package from Morgan Drex- rectly with the debtor — you don’t en even provided Linville with a need the middle man.” script so that she knew what to say if any of her creditors phoned to ask why she had stopped making Robo-calls payments. For some consumers who have Morgan Drexen continued taking racked up thousands of dollars in payments from her on the 15th of debt, though, there are few things every month, Linville said, which

she believed went into a special over 85 percent of the debt’s prin- account that would be used to pay cipal balance, and that’s not great off creditors. Linville said she had at all,” Sloan said. “And that’s even no sense that anything was wrong before you add in the extra fees the until November when her dinner creditor is charging you.” with friends was interrupted by the While creditors have no obliga- sheriff’s deputy tion to negotiate consumer debt, Once a serving her with they are legally required to accu- consumer a lawsuit. rately report a consumer’s failure to stops paying Like many con- make monthly payments to credit the creditor, sumers, Linville reporting agencies. In some cases, he or she may was unaware that creditors may sue a consumer to re- there is no guar- cover money owed. be charged antee that credi- Harvey-Jones acknowledged that interest and tors will accept not every consumer who engages late fees, a partial payment in debt settlement sees results. as well as of a debt. In fact, “There are many factors that decide charges for once a consum- the success of a client,” her email exceeding a er stops paying said. “The attorneys representing the creditor, he the consumer cannot, nor do they credit limit — or she may be guarantee a result. The prospective all of which charged interest clients are advised of this in no less can eventually and late fees, as than three locations.” double or well as charges The morning after she received triple the for exceeding a her court summons to appear in consumer’s credit limit — court in mid-December 2008, Lin- all of which can ville said she called Morgan Drexen original debt eventually dou- and asked for a lawyer to represent amount. ble or triple the her in court. The firm referred her consumer’s origi- to Lawrence W. Williamson, Jr., an nal debt amount. attorney in Wichita, Kan. “These companies might get you “He would talk over the phone a settlement of 65 percent, but you and tell me what I should say in do the math and add in the upfront court, but he refused to show up fees. The client might be paying there with me,” Linville said.

The West Virginia attorney gen- But unable to come up with the eral identifies Williamson as a law- $7,000 demanded by Discover in its yer that Morgan Drexen assigns lawsuit, Linville said she had no op- to most of its clients in the state, tion but to file for personal bank- though he is not licensed to prac- ruptcy in early December 2008, tice there. The state’s lawsuit al- days before a scheduled court ap- leges that Williamson, Jr. is prac- pearance. “I was so scared, I didn’t ticing law in West Virginia or “is know what to knowingly misleading consumers “This was do,” she said. and creditors into believing he is.” the most “This was the Williamson told iWatch News embarrassing most embarrass- that the state accusations were un- part,” Linville ing part,” Linville founded. said. “We just “I have not provided any acts said. “We just weren’t raised that constitute the practice of law weren’t raised that way. I live in West Virginia,” he said, adding that way. I live in rural West Vir- that his law firm works with local in rural West ginia. We give our counsel to advise West Virginia Virginia. We word, and that’s consumers, a practice allowed by give our word, all you need.” the West Virginia bar rules. While Linville “Instead of taking a toothpick and that’s all and her husband, and removing all the bad cells, the you need.” Ronnie, managed attorney general is taking a huge to hang on to paper towel to wipe everything off their home and vehicles, they lost the table,” Williamson said. “They the good credit rating they had built are judging us for the things other up over several decades, which people are doing. It’s an unfair pic- meant that they could no longer ture.” finance any purchase through bor- Williamson also said that Lin- rowing. Ronnie Linville, who is also ville’s claims were false. “We never retired, receives a small payment refuse to represent someone in for preaching at a local Church of court,” he said. “They might not be Christ but says he donates most of able to afford a full-fledged repre- that to the church. sentation lawyer, but we can help Equally as painful was the dam- provide help in the courtroom.” age to her family’s reputation in the

small West Virginia town of 1,300 its doors for business on July 21, residents. will help families get the debt set- “People just sit on their porches tlement help they pay for. and gossip about you,” said Lin- The bureau has promised, along ville’s son, Jamie, who lives just 200 with the Federal yards down the road from his par- “For months Trade Commis- ents’ home. after the sion, to regulate “Nobody has to say anything to bankruptcy, my debt settlement your face, but you know when you parents were companies. The see them that they know what’s so ashamed two agencies will up,” Jamie Linville said. “For share enforce- months after the bankruptcy, my to be seen out ment and coor- parents were so ashamed to be in public that dinate on rule seen out in public that they drove they drove 40 making, but only 40 miles away to Charleston to buy miles away to the CFPB will groceries. The only time they would Charleston to have supervision leave the house would be to go to buy groceries. and examination church.” authority over The shame and embarrassment The only time debt settlement only got worse when news of the they would companies, said bankruptcy made the pages of The leave the house Betsy Lordan, Lincoln County Journal, which has would be to go an FTC spokes- a circulation of 15,000. That is when to church.” woman. Mary Linville’s elderly mother first “The CFPB learned of it. and the FTC are negotiating a “My grandma yelled at her for 20 memorandum of understanding to minutes straight,” said Jamie, 37. coordinate their rulemaking, law “And mom just cried and cried. It enforcement, consumer educa- was a tough pill for her to swallow.” tion, and other activities so that the agencies operate as efficiently as possible, apply consistent stan- What will CFPB do? dards to regulated entities, and The Linvilles say they hope that the provide consumers with useful and new Consumer Financial Protec- consistent information to make tion Bureau, which officially opens well-informed decisions,” Lordan

told iWatch News in an email. phoning Morgan Drexen. “While I State attorneys general will be was on hold, there would be a re- involved in enforcing any regula- cording of people telling me sto- tion of debt settlement companies, ries of how Morgan Drexen saved along with the CFPB and the FTC. their lives, improved their credit, “Debt settlement was identified as et cetera. ‘Without them, I wouldn’t a priority area by the states, but know what to do,’ ‘They were a life- there has not been anything more saver’ — things like that.” specific on She paused. this issue,” said Noelle Talley, a “They said they would do the spokeswoman for North Carolina’s same for me, and minutes later, I Justice Department, which has was brainwashed. I really fell for been working with the CFPB as it that.” n develops its regulatory agenda. How aggressively the CFPB will August 1, 2011 Update: After move to regulate debt settlement this story was published, Morgan companies remains unclear, espe- Drexen said the number of law cially because the agency cannot firms it supports had increased to propose new regulations until it 42, up from 35 firms cited in two has a full-time director confirmed recent corporate blog entries on by the U.S. Senate. Senate Repub- www.MorganDrexenToday.com. A licans have threatened to reject any company spokeswoman also said presidential nominee for the top that Mary Linville did not return job until the new agency is restruc- her power-of-attorney documents tured to weaken its power. until July 2008, and that result- A CFPB spokeswoman declined ed in an “unrealistic timeframe” to comment on the bureau’s plans to settle Linville’s entire $72,000 for debt settlement companies. debt. However, the attorney repre- Meanwhile, Linville is closely senting Linville did reduce one of watching the West Virginia lawsuit her debts by 50 percent despite her against Morgan Drexen. relatively short time in the pro- “You know, one thing stands out gram, the spokeswoman said. in my mind about this whole or- deal,” Linville said, recalling how she was always put on hold when

$700 dormitory fee costs family its car Auto-title loans are the credit of last resort, but are terms fair to borrowers? By Amy Biegelsen Published Online | July 15, 2011

hen Mildred Morris’s son won a coveted spot at Wthe New York drama and performing arts college that trained singer-songwriter Jason Mraz and TV actor Jessie Tyler Ferguson of “Modern Family,” she was over- joyed. The drama, however, extended beyond school. BOWERRO RS Morris started the process of se- NIGHTMARES curing a college loan to pay tuition for her son, Jonathan, to attend the the equivalent of a driver’s license. American Musical and Dramatic Although she had a steady federal Academy, but she was caught off job, Morris didn’t have any savings guard by an unexpected and sudden or credit cards, and with the tough $700 fee to hold a dormitory room economy couldn’t scrape together for him. the $700 fee from friends. A single mother of two in the She did, however, own a sporty, town of Martinsburg, W.Va., 90 min- green 2002 Pontiac Sunfire free and utes northwest of Washington, D.C., clear. Morris works in the technical sup- A friend told her about a place that port branch for the Coast Guard of- gave quick cash if borrowers put up fice that issues merchant seamen their cars as collateral. Obtaining the

Amy Biegelsen/Center for Public Integrity Mildred Morris, a single mother in West Virginia, lost her car after using it to secure a $700 title-loan to pay her son’s freshman college dorm fee.

loan took just 30 minutes, she said, over it,” she acknowledged. “When I mostly to check her references. Mor- saw how large it was, and I was like, ris signed a contract with Fast Auto wow,” she said. At first she tried to Loans, took her check for $700 and pay more than the monthly minimum, gave the company the title to her car, but with the cost of getting Jonathan which Fast Auto Loans could repos- moved and settled in New York, she sess if she fell behind in repayments. started to fall behind in payments to It wasn’t until later that she real- Fast Auto Loans. Some months she ized how high the interest rate on her could only pay $210 and $175 of that loan was — 300 percent annually. went to interest, barely lowering the “I should have taken time to go loan principal.

Many months and over $1,000 lat- ulated differently in each U.S. state, er, Morris called it quits, according to are on the list of priorities of the new a complaint she filed with the West Consumer Financial Protection Bu- Virginia attorney general. The office reau (CFPB), which officially opens is now investigating Fast Auto on be- for business on July 21. Policing non- half of Morris and other consumers . bank financial services “will be a cru- When Morris fell behind on her cial piece” of the bureau’s business, payments, Fast Auto Loans employ- Elizabeth Warren, who has been in ees began calling the references she charge of setting up the agency so had listed on the loan paperwork. far, told reporters at a June briefing. . “On the day the payment was due However, the bureau is expressly they would start calling people. It prohibited from setting limits on was ridiculous,” she said. Her sister, interest rates. And the still-leader- her adult daughter, her friends — less CFPB cannot propose any new even her supervisor at work — got regulations until the U.S. Senate repeated calls from Fast Auto Loans. confirms a presidential nominee as Frustrated, Morris finally gave up director. Senate Republicans have and told the company it could take threatened to block any nominee the car, according to a statement until the CFPB is restructured to she filed with the West Virginia at- weaken its power. torney general. One night, two men An important first step, said Ira from Fast Auto Loans drove up to Rheingold of the National Associa- her townhouse on the edge of town. tion of Consumer Advocates, is for One hopped out and drove the car the CFPB to use its research capac- away. “I felt sick,” Morris said. Kel- ity to gather facts and data about car- ley Blue Book estimates a car of the title lending. “After they determine same make and model from that year whether or not there’s a social util- would be worth at least $2,000. ity to this, or whether this is simply “I ended up losing my car over a predatory product, they then can $700,” she said. “I didn’t want to let craft rules and rulemaking based on my car go, but I didn’t have a choice.” that,” he said. Consumer protection advocates Morris is all for it. have long raised concerns about this “I know there’s a lot of single kind of credit. moms out there and how hard the Car-title loans, which are now reg- economy is,” Morris said, “but those

people are not there for you; they’re high-interest credit option that either there to rip you off.” requires the borrower to write a post- Fast Auto Loans’ parent company, dated check or to provide electronic Atlanta-based Community Loans of access to a bank account for auto- America, Inc. declined to comment, matic repayments. saying it has a policy of not issuing Title loans typically are made for speaking to the press. An attorney one month at a 300 percent annual representing Fast Auto Loans in West rate. That means a borrower who Virginia did not respond to requests needs $500 must pay $625 by the for comment. end of the month. If the borrower Defenders of car-title loans say can only afford to cover the interest they help people who have no other — $125 — the loan is rolled over for options. Title lenders advertise them- another month and the borrower will selves as providers of fast, easy cash owe another $625. even for consumers with bad credit. “The whole process from applica- A glimpse inside title industry tion to receiving the funds will take about 15 minutes,” according to the It is difficult to get a clear picture of website for Cashpoint, a large title the title-loan industry and how big lender in Virginia, whose number is it is. Only 20 states allow auto-title 1-888-EZ-BUCKS. lending, and regulation is scattered The American Association of Re- throughout different parts of each sponsible Auto Lenders, an indus- state’s government. try group, says most car-title loans The American Association of Re- are paid back in six months or less. sponsible Auto Lenders, which did Member companies “keep consum- not respond to iWatch News requests ers’ payments low enough so they are for comment, does not publish in- able to successfully pay off the loan dustry statistics on its website. It de- and get their title back,” the group scribes the average borrower as 44 says on its website. years old with a household income A key feature of the title-loan over $50,000 and an “overwhelming business is that it does not require majority have jobs.” borrowers to have bank accounts. However, a few state regulatory That distinguishes the industry from reports give a glimpse inside the in- payday lenders, another short-term, dustry

In Illinois in 2010, the average of financial literacy among some citi- auto-title borrower earned about zens is a serious concern,” the Ten- $24,000 a year, according to data nessee report concluded, “and we through November from that state’s believe it is often a root problem for Department of Financial and Profes- some of the ills we see in the finan- sional Regulation . The average title cial services sector.” loan was for $797 and took consum- Dana Wiggins operates the con- ers over 300 days to repay plus an sumer help hotline for the Virginia average additional $1,542 in fees and Poverty Law Center and hears first- interest. hand about the problems of some Tennessee found similar results. title-loan borrowers. “When they lost At the end of 2006, nearly 90 percent their car, they lost their job,” she said. of outstanding auto-title loans in the “That’s their lifeline to get health state had been renewed beyond the care, to get their kids to school. It first month, according to a report was really painful to hear that that’s from the Tennessee Department of the only remedy for the loan.” Financial Institutions. And 14 per- Auto-title industry defenders say a cent of the borrowers had renewed tough choice is better than no choice. their loans 10 times or more. Car- Todd Zywicki, a law professor at title lenders who used the state’s George Mason University, has re- maximum allowable annual rate of searched the business and says the 264 percent made a 20 percent aver- loans play an important role. Since age profit margin, but would have many title-loan borrowers have no needed to charge 211 percent to bank account, their range of options break even, the report said. is dramatically narrowed. In Virginia, title companies repos- “Maybe taking people with lim- sessed 22,394 vehicles from 2004 to ited choices and taking away some 2009, according to data that emerged of those choices make them better during a state legislature debate on off,” he said, “but I find that hard to car-title lending. In 2008 and 2009, ti- believe.” Zywicki acknowledges that tle loan repossessions accounted for people can get in over their heads more than 90 percent of all car repos- with title loans, but argues “people sessions in the state. can borrow too much on a 30-year As costly to consumers as the fixed-rate mortgage.” lenders’ practices may be, “the lack Uriah King, vice president of state

policy at the Center for Responsible peting state rules is something ad- Lending, sees car-title loans as no vocates hope the new federal Con- choice at all. “The entire business sumer Financial Protection Bureau model is loans that are made without (CFPB) can tame. the ability to pay,” he said. When Morris wanted to obtain A borrower can easily get trapped one on her Pontiac Sunfire to pay in a cycle of debt if he or she falls for her son’s dorm reservation, behind in repayments, loses the car, she had to drive 40 minutes east and can no longer get to work, King over the state line to Winchester, said. A 2007 study by his organiza- Va. Auto-title loans are prohibited tion of title-loan borrowers in Chica- in West Virginia, but along Valley go found one-fifth of the loans were Drive in Winchester three differ- used to repay a previous loan with ent title lenders dot the mix of fast the same lender, he said. food joints and strip malls. Fast The U.S. Congress has also been Auto Loans’ sign features a cartoon wary of the high-interest loans, and rocket ship logo, blasting off for in 2006, passed a law that capped the fast cash. interest rate at 30 percent for title West Virginia’s usury laws ban loans to active-duty members of the similar loans with interest rates armed services. higher than 18 percent. While the The car-title industry has state cannot block citizens from get- stepped up its federal lobbying in ting the loans in neighboring states, recent years. According to disclo- the state can regulate the debt col- sures filed with the U.S. Senate, the lection process. West Virginia’s at- American Association of Respon- torney general is investigating Fast sible Auto Lenders has spent more Auto Loans on behalf of Morris and than $1 million to hire the powerful others. lobby shop Patton Boggs since 2008 West Virginia argues that Fast to lobby on consumer credit issues Auto’s repossession of Morris’ car and the powers of the CFPB. shows that the company was doing business inside the state, and that its persistent debt collection calls Interstate loans violate the West Virginia Consumer Because title-loans are regulated at Credit and Protection Act. the state level, the tangle of com- Fast Auto Loans, meanwhile,

has flatly denied that it does busi- sumer Financial Protection Bureau, ness in West Virginia. there was no central regulator for The company’s attorney, David title lending. Barnette, did not respond to iWatch The practice itself is a by-product News requests for comment, but in of a 1978 U.S. Supreme Court deci- a court filing, he asserted that “Fast sion, says King. Before then, most Auto is not registered to transact states imposed “usury caps” on how business in West Virginia and does much interest a lender could charge. not transact business in West Vir- But the high court ruled that a bank ginia.” in one state making a loan to a bor- The state attorney general’s of- rower in another state could offer fice is trying to persuade a West Vir- whatever interest rate was allowed ginia judge to enforce a subpoena in the lender’s home state. Many to obtain company documents even states then lifted their usury caps to though the business is in another attract credit card companies, and state, a move Fast Auto’s lawyer title lending bloomed as an unin- calls a “severe and unjustified intru- tended consequence. sion of [his clients’] rights.” Jean Ann Fox, director of financial National standards and regula- services for the Consumer Federa- tion of the auto-title industry are tion of America, says that other fac- long overdue to save states the time tors contributed to the growth of the and money needed to fight the same industry, including effective lobbying issues over and over, according to from the industry to remain exempt consumer advocates. from regulations that might squash it. Wisconsin’s attorney general, for Fox says car-title loans are par- example, recently joined a 10-year- ticularly problematic because a bor- old lawsuit filed by the Legal Aid rower is deemed fit for a loan based Society of Milwaukee against Fast on the value of their car, not their Auto Loans’ parent company over ability to repay the loan. a hidden-fees issue that the parent “That’s a recipe for getting caught company had previously settled in a debt trap and not getting out,” with Florida. she said. As with many other non-bank She’d like to see the new con- lending operations, before the Wall sumer bureau require title lenders to Street reform law created the Con- take into account a borrower’s abili-

ty to repay and outline a responsible land and if they break down in Rich- small-dollar loan framework, simi- mond, they may not [have been] able lar to the one the Federal Deposit to get a loan,” said Scott Daniel, who Insurance Corp. has put forward in lobbied for Fast Auto Loans’ par- a pilot program. The FDIC program ent company, Community Loans of recommends bankers adopt a 90- America, to help extend the reach of day loan limit and cap small loans at Virginia’s title lenders. Now, “they’ll 36 percent annual interest. be able to get a loan.” The Center for Responsible Lend- Growing the business in Virginia ing’s King hopes to see the CFPB set has meant growing business for lob- limits on how often car-title loans byists, too. According to the Virginia can be renewed. They’re meant to Public Access Project, a nonprofit be short-term loans, but customers that collects Virginia’s campaign fi- often end up rolling them over for nance and lobbying records, three months, paying the interest and fees major title lenders spent more than and barely making a dent in the prin- $270,000 from 2008 to 2010 on lob- cipal. bying around title loan issues. Although Wisconsin recently re- Back in West Virginia, Jonathan is opened the door for the industry, at home with his mom for the sum- King says there’s “not a lot of appe- mer. tite” in states that currently prohibit Losing the Sunfire was a blow, the practice to let title loans grow. but Morris also had a truck — a red “They’re trying to find ways to ex- 2005 Ford pickup — that she used to port,” their business to neighboring get to work during the year. Without states that don’t allow title lending, a second vehicle, though, it’s been he says. tough for Jonathan to find work this Although West Virginia, Washing- summer to help his mom defray the ton D.C., Maryland and North Caro- costs of performing arts college in lina don’t allow title lending, Vir- New York. It’s also been a challenge ginia enacted a law effective July 1 for him to get to dance classes so he that specifically allows title-lenders can stay in shape for school in the there to offer loans on cars regis- fall. He’s still looking for work. tered in other states. “Losing the car really hurt us, but “A family may be driving from we have the truck so we’ll get by,” Maine to Florida to go to Disney- Morris said. “Not everyone will.” n

3PREVIOUS ARTICLE SHOW CONTENTS NEXT ARTICLE4 Debt Deception | Borrower Nightmares ©2011 Center for Public Integrity 132 Navy pension signed over as collateral for costly quick cash By Jason McLure Published Online | August 19, 2011

t was a run of bad luck that put Dr. Louis Kroot and his wife, IKathie, in debt in late 2005. A daughter with mental illness cost them thousands in medical and related bills for treatment in hospi- tals from London to San Antonio. An unexpected tax bill triggered by taking money out of a retirement BOWERRO RS plan led to more than $100,000 in NIGHTMARES debts to the state of Kentucky and the Internal Revenue Service. A him $91,566.37 in a “lump-sum pay- broken water pump caused $12,000 ment” in return for eight years of in damage to their home. pension payments. “We were trying to figure out, Including fees and other charges, how are you going to pay these the deal was equivalent to a loan at bills?” says Louis. “And we were an annual percentage rate of over just scratching our heads.” 30.7 percent — a rate that would But one of the Lexington, Ky., be illegal under usury laws in many couple’s most expensive moves states. That’s made the company was answering an ad in a military the subject of two class-action law- magazine from a company called suits over the past decade, and a Retired Military Financial Services frequent plaintiff and defendant that offered quick cash backed by in bankruptcy courts around the Louis’ pension from 23 years as a country. Navy doctor. Louis signed a con- “We needed the cash flow to pay tract with the company that gave for what we needed paid for at that

Lee P. Thomas for iWatch News Dr. Louis Kroot and his wife, Kathie, of Lexington, Kentucky signed over his U.S. Navy pension to Structured Investments for eight years in exchange for nearly $92,000 to pay urgent bills.

point in time,” says Kathie, 59. “To service to military retirees who us, they were a godsend. We didn’t could not otherwise monetize their even know that people were filing pension payments. lawsuits against them.” Steven P. Covey, an Army veteran Retired Military Financial Ser- who is one of the founders, defends vices, also known as Structured his company and says its business Investments, says its payments are practices are legal. “not a loan” and therefore not sub- “The position is: We’re purchas- ject to usury laws. The company ing at a discounted lump-sum, fu- also says it provides an important ture cash flow,” he said in an inter-

view with iWatch News . “We’re not would set and enforce rules to help lenders. When you’re not lenders, military families clearly understand you’re not dealing in potential usu- the costs and features of financial ry areas.” products. “One way to help is to en- The Kroots are not the only mili- force the laws that are already on tary family to run into problems the books to protect them,” Holly with what consumer advocates call Petraeus said. “Another is to write predatory lenders. More than one in new rules when needed.” five active-duty military households Heightened government over- have taken out auto title loans, tax sight may have come too late for refund “advances,” or other types the Kroots. As required by Struc- of non-bank loans in the past five tured Investments, the Kroots used years, according to an online 2010 their lump sum to help pay off near- survey by the FINRA Investor ly $60,000 in credit card debt, retire Foundation. $23,000 in tax debts and repay an- Huntington Beach, Calif.-based other nearly $13,000 in loans from Structured Investments Co., which the Navy Federal Credit Union. does business as Retired Military To do this they signed over 95 Financial Services and U.S. Pension monthly pension payments — a to- Funding., said it has given pension tal of $2,457.37 per month after tax- “buy-outs” to nearly 500 retired and es — to an account controlled by disabled service members since the Structured Investments. They also mid-1990s. agreed to pay $131.04 per month Structured Investments’ focus over six years for a $180,000 life in- on lending to veterans could draw surance policy that lists Structured the attention of the newly launched Investments as a beneficiary — an Consumer Financial Protection assurance the company would be Bureau, created by the Wall Street repaid if Louis dies and his pension reform law signed last year. The payments end. CFPB has an office devoted to helping military service members, head- ‘Taken to the cleaners’ ed by Holly Petraeus, the wife of the former top U.S. commander in The contract with Structured In- Afghanistan, Gen. David Petraeus. vestments granted the company’s She told Congress her office co-founders power of attorney over

the Kroots with authority “to take any and all necessary and lawful actions” to ensure the couple made their monthly payments. Structured Investments also prepared and provided Louis with waivers saying he had been advised to seek counsel from legal and financial advisors and declined to do so. The 25-page contract with Struc- tured Investments made no mention that the nearly $92,000 lump Kroot family photo via Lee P. Thomas sum payment carried the equiva- Dr. Lewis Kroot during his U.S. lent of an annual percentage in- Navy career. terest rate of 30.7 percent. While loans must include interest rate information under the federal Truth Including insurance premiums, in Lending Act, Structured Invest- the couple has paid $178,600.29 ments emphasized the transaction through August of 2011, according was “not a loan.” One letter told to data provided by the Kroots and the Kroots their debt load would compiled by iWatch News. They are be “decreased if you exchange the due to pay an additional $64,153.70 lump sum for pay-off of current through October of 2013. That credit card or other debts.” It even means the Kroots will wind up pay- suggested they could make tens of ing $242,753.99 over 95 months for thousands of dollars over the next the initial $91,566.37 in cash. decade by taking the lump-sum The total due can rise, however, payout and investing it. Their con- if a single monthly transfer is dis- tract with the company termed the rupted by the couple’s “failure to transaction an “Annuity Utilization take reasonable steps” to ensure the Agreement,” and acknowledged it continued payment of Dr. Kroot’s presented “novel and complex legal pension to Structured Investments. issues.” Should that occur, Structured In- The deal has proved a costly one vestments will penalize the couple for the Kroots. with an additional two years of

pension and insurance payments, couple to adopt two special-needs or $62,121.84 payable through 2015. girls from the Kentucky foster-care “We’re being taken to the clean- system in 1997. ers,” says Kathie. “I didn’t think Other military retirees have tak- about how much more we were en lump-sum payments from Struc- paying in interest.” tured Investments that make credit Indeed, the Kroots used the lump- card interest rates look good. sum from Structured Investments Kirkland Brogdon Sr., a former to pay off creditors charging much Marine from Janesville, Calif., took lower effective interest rates. Their a payout of $24,542 in 2003 in re- credit union charged 9.5 percent to turn for eight years of payments 12.5 percent for personal loans, the from his pension and the purchase state of Kentucky charges annual of a $60,000 life insurance policy as- interest rates between 5 percent signed to Structured Investments. and 10 percent on tax debts. Even Including insurance premiums, his their highest interest credit card effective annual percentage rate charged only 22.9 percent. topped 39 percent under the con- Had the couple instead consoli- tract, according to documents in dated their debts in late 2005 into a class-action lawsuit against the a single loan with an interest rate company in California that was ten- of 18 percent — slightly higher tatively settled in 2007. than their average credit card rate Daryl Henry, a disabled Navy — they could have made the same veteran from Laurel, Md., took a monthly payments and finished re- $42,131 payment from Structured paying the loan last year. Investments backed by his pension The Kroots aren’t strangers to in 2003. Including life insurance adversity. The couple has moved a premiums, his contract’s effective half dozen times to accommodate annual interest rate was 28 percent, Louis’ career at U.S. military hospi- according to data in his class-action tals in Germany, Virginia, California court filings. and Maryland. “I went in eyes wide open. I One of their sons, Joseph, died of knew they were screwing me,” says a brain aneurysm at 13. His death Gary Infinger, 48, a former Army spurred Kathie to become an advo- sergeant with multiple sclerosis. cate for organ donation and led the Infinger told iWatch News he took a

lump-sum payment from Structured investments over $50,000 for eight Investments a decade ago backed years, and were told it was an “op- by his veterans disability payments. portunity to own a cash stream of payments generated from U.S. military service persons’ government Lucrative company, legal woes pensions,” according to the Califor- Contracts such as those with the nia Department of Corporations. Kroots apparently have been lucra- Among those later hired to raise tive for Structured Investments. By capital for the company was Andre 2009, the company was no longer Fite, a southern California man whose a start-up and had added two-full- work with a collapsed Los Angeles- time and two-part-time employees based investment pool led a federal to help track its finances and its court in 1997 to issue a permanent in- agreements with veterans. junction barring him from ”cheating Although Structured Investments and defrauding” people in the sale of collects returns on its pension buy- commodities. Fite did not respond to outs that banks could only dream of, numerous calls for response. it has a history of legal woes. Found- Though the company had mar- ed in southern California in 1996, keted investments as having zero two years after Covey, one of its co- risk, Structured Investments halted founders, was convicted of felony payments to its investors in 2009, bank fraud, Structured Investments according to the California Depart- began by selling membership in- ment of Corporations. Earlier this terests to investors in companies year, the state agency barred Struc- whose purpose was to buy pensions tured from using false statements to from military veterans and retirees. sell any additional securities after “We had a pensioner come to us accusing it of failing to tell inves- who wanted to know if we could tors about a class action lawsuit it provide some lump sum amount of was facing and for failing to disclose cash for him for a military pension Covey and Fite’s prior legal issues. he had,” Covey told iWatch News. “We looked into it and essentially Cash flow purchase started purchasing these.” Investors in the company were Covey, who earned a law degree promised an 8 percent return on from the University of Southern

California, defends his company ing its investors because the matter and says its business practices are is subject to litigation legal. Covey doesn’t dispute that the The company may legally have clause in company contracts penal- control of bank accounts that Kroot izing pensioners who miss a single and other veterans direct their pen- monthly payment with an addition- sions to, but Covey said, “It’s quite al two years of payments may be clear that the pensioners have ul- viewed by critics as onerous. “That’s timate and unilateral control over something that was put in there by where the government sends those the attorneys who drafted the docu- funds,” he says. ments for us in 1996,” he said. Structured Investments’ lump- In 2005, the company was hit sum payments can be a better deal with a pair of class action lawsuits than credit cards for some pension- by retired servicemen who alleged ers, he says. “The interest rates that Structured Investments violat- credit cards charge their customers ed a California usury law capping vary significantly,” he says. “If you loan rates and violated a federal don’t pay the principal, even leav- law barring military retirees from ing aside fees, you’re talking about “assigning” their pension benefits months and months of increases in to someone else. the principal amount.” Structured Investments’ lawyers Structured Investments no lon- argued in court in 2009 that vet- ger buys veterans disability pay- erans “all across the country” are ments, Covey said. He also denied unable to access credit from con- the company requires pensioners ventional lenders. “By purchasing to pay off certain debts. When pen- portions of government-issued pay- sioners face debts, “We coordinate ment streams from retirees (includ- with them as to which accounts ing veterans), Structured provides they would be best served paying a valuable service,” wrote Justine off or down,” he said. Casey, a lawyer for the firm. Covey said he plans to contest the California ban on the sale of UPDATE: (California class ac- securities by him and his company, tion lawsuit settled) In late Au- adding that he can’t comment on gust, a state court in California the company’s decision to stop pay- found the contracts to be an ille-

gal assignment of a military pen- And though dozens of companies sion and awarded a group of for- advertise on the Internet to pur- mer service members $2.9 million chase income streams from lotter- plus attorneys’ fees. ies, court settlements, and salaries, Structured Investments is likely to An earlier class action suit face continued scrutiny for its fo- reached a tentative settlement in cus on veterans and other military 2007, with pensioners agreeing to retirees, says Christopher Peterson, receive between $1,000 and $1,200 a law professor at the University of from Structured Investments. The Utah, who has researched alleged company also agreed to drop some predatory lending to soldiers and fees and penalties from the pen- other service members. sioners’ contracts. “There are few things more cer- Both the CFPB and the Defense tain in our society than that our Department declined to comment government will pay veterans their to iWatch News about Structured pension,” he says. “To see a pension Investments’ products. loan…being made at 30 percent, es- Stuart Rossman, a lawyer with pecially to a veteran, that’s pretty the National Consumer Law Center, abusive.” which helped file the most recent The Kroots, who did not join ei- class action suit against the com- ther of the class-action lawsuits, pany, scoffs at the company’s asser- continue to send Louis’ monthly tion that its products are not loans. Navy pension payments to Struc- “If it walks like a duck and talks tured Investments. The disappear- like a duck, it’s a duck,” he says. ance of Louis’s military pension has helped stall their retirement plans and Louis, 62, continues to work as Stable and abusive an emergency room physician at a The company’s website touts Struc- Veterans Administration hospital. tured Investments as the “go-to “We can’t retire now,” says Ka- source for pension buyouts — thie. “We’ve got at least another 10 sometimes referred to as pension to 15 years.” n loans” and informs potential customers that “banks don’t recognize Reporter Shirley Gao contributed pensions as collateral.” to this report

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