California Takes Action (But Not Very Much Action) Against Mortgage Fraud

With great fanfare, California Attorney General Jerry Brown and local prosecutors in San Bernardino and Los Angeles counties announced yesterday that they had shut down subprime mortgage fraud schemes that had victimized thousands of homeowners.

The San Bernardino County district attorney’s office arrested five people and were waiting for two more to surrender to face charges of conspiracy, grand theft and elder abuse, and a related lawsuit was filed in Los Angeles County Superior Court accusing six companies — Lifetime Financial Inc., Nations Mortgage Inc., Greenleaf Lending Inc., Virtual Escrow Inc., Olympic Escrow and Direct Credit Solutions Inc. — of using predatory lending practices to trap homeowners in illegal and expensive loans.

All of the companies participating in the fraud were allegedly operated by one family.

According to prosecutors, the schemes operated by promising borrowers unrealistically low interest rates of less than 6% a year and then having them sign contracts that carried higher rates. The companies are also alleged to have charged hidden loan fees of as much as $20,000 per transaction.

“As the mortgage crisis worsens, a growing number of fly-by-night companies are employing utterly brazen tactics to push homeowners into illegal and unconscionable loans,” California Atty. Gen. Jerry Brown said. “The illegal sales practices of these companies . . . included psychological pressure, forgery and outright lies.”

The predatory practices that were alleged included:

“Offering thousands of dollars in cash back without disclosing that the money would be used to cover high fees;

Falsely promising to reimburse prepayment penalties from the victim’s current lender;

Pressuring victims to sign inaccurate loan documents by promising to correct excessive fees;

Failing to provide copies of signed documents;

Forging victims names and signatures on loan documents;

Falsifying income information on loan applications and creating fake references;

Refusing to honor written demands to cancel loans.

If a consumer tries to back out of the transaction, the companies promise to waive thousands of dollars in various processing, application, origination and underwriting fees. If the consumers agree, sales representatives provide a new statement but then resubmit the original forms, ultimately charging the same excessive fees.”

Brown’s office is seeking civil penalties of $2,500 for each violation of law and full restitution as well as a permanent injunction against operation these businesses. Penalties and restitution are estimated by prosecutors to exceed $20 million.

Although the announcement of the prosecutions was staged for maximum political effect, the response from the local media and consumer groups probably hasn’t been what Jerry Brown expected.

Rather than congratulating Brown on his prosecution of mortgage fraud, the commentary has criticised Brown for taking so long to do so little.

Paul Leonard, director of the California office of the Center for Responsible Lending, said that while the prosecution would help “to rid the marketplace of the most egregious illegal practices,” the real problems in the subprime market are caused by practices that are still legal.  “The illegal practices are only the tip of the iceberg,” Leonard said. “The vast proportion of the problems in the sub-prime market were caused by perfectly legal but systematic failures.”

Los Angeles Times real estate blogger Peter Viles was even more skeptical.  Viles noted that “The companies accused in the crackdown are not exactly household names and were operated by a single family in Tarzana.”

More caustic still was John Gittelsohn at the Orange County Register.

Gittelsohn observed that this appears to be Brown’s first attempt to prosecute mortgage fraud since he took office. 

“Since early 2007,” Gittelsohn wrote, “federal authorities have initiated civil and criminal probes of lenders such as New Century Financial Corp., a bankrupt subprime lender in Irvine. Attorneys general in New York, Ohio and other states have announced investigations into mortgage writing, financing and other industry players.”

“Brown’s predecessor, Bill Lockyer, in cooperation with other prosecutors won multi-million dollar settlements in predatory lending cases against Orange-based Ameriquest Mortgage Co., Illinois-based Household Finance Corp. and Irvine-based First Alliance Mortgage Corp. among other companies.”

“As the birthplace of America’s subprime lending boom and bust, you’d expect California’s Attorney General to be a national leader in policing the mortgage industry.”

Gittelsohn then asked: “So what’s taken Brown so long?” 

Brown says that he intends to bring additional legal actions, both civil and criminal, against other mortgage lenders and foreclosure consultants who are taking advantage of homeowners in California.

We hope he does. 

But we also agree with Paul Leonard that illegal practices are only the tip of the iceberg in the current mortgage crisis, and that the vast proportion of the problems in the sub-prime market are the result of perfectly legal but systematic failures in the mortage industry and credit market.

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