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Mrs. Mason, although unclear about what she was signing, signed all the documents provided by the agent because she trusted him. She believed he was trying to help.
At the time she signed the loan documents, Mrs. Mason was in a disoriented state due to her severe illness. At the time she signed the loan documents, Mrs. Mason's vision was impaired because of a cataract on one of her eyes. At no time was Mr. Mason, co-owner of the home, asked to sign any of the loan documents. Nonetheless, Mr. Mason's forged signature appears on the mortgage agreement. The documents that were ``signed'' created a 30-year loan agreement, with a principle of $70,000.
Under the terms of the loan, Mr. and Mrs. Mason's monthly mortgage payment was to start at $601.41 and adjust upward to $697.
Remember, this is an elderly couple retired with their home all paid for, and to get $15,000 worth of repairs on their home, they signed on to a mortgage that cost them about $700 a month.
Under the terms of the loan, Mr. and Mrs. Mason were charged at least $7,343 in prepaid finance charges.
The home contractor received $35,000.
The Masons received no money.
Work was barely started and never completed.
A suit was filed against the home repair company, broker, and two lenders.
After the suit, the home was severely damaged by a suspicious fire.
Mr. President, I ask unanimous consent that this US News & World Report article be printed in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
Sometimes a Deal Is too Good To Be True
CHICAGO.--One day in March 1999, mortgage broker Mark Diamond arrived on Goldie Johnson's west-side doorstep, his portable photocopier in tow. Here's the 72-year-old retiree's version--from court papers and interviews--of how Diamond's promise to save her thousands of dollars may end up costing Johnson her home: He told her that if she refinanced her mortgage, he could cut her debts and get her up to $8,000 in cash. With the money, she could fix her rotting kitchen floors and replace the rickety basement beams. But to get the cash, she had to act fast. (She believed him. He said he was ``in the business of helping senior citizens.'') He handed her a thick stack of loan papers. Johnson, who suffers from glaucoma, says she could barely read them. ``Don't worry about it,'' he said. So she signed, 13 times.
Johnson says she never saw any cash. The loan she signed saddled her with monthly payments of $994.57--about $200 more than she had been paying--and consumed about 80 percent of her fixed income. A balloon payment of $80,000 would be due the year Johnson turns 86. Meanwhile, Diamond's company fee for selling the loan came to $9,010. ``I've heard of sticking people up with guns, not with pens,'' says Johnson, who cannot pay the mortgage and is fighting to save her home from foreclosure in court. Diamond disputed her account and denied wrongdoing through his lawyer.
What's unusual about the case of Goldie Johnson is that she wasn't simply the alleged victim of a fast-talking predator. Her loan was sold to a company called EquiCredit, a subsidiary of the Bank of America, a prestigious institution not often linked to inner-city evictions. But Bank of America is one of a number of the nation's top commercial banks, including Citigroup and J. P. Morgan Chase, that have recently inked deals with subprime lenders--companies that offer loans to people with less than perfect credit. Subprime loans promise profit margins far greater than do low-interest conventional mortgages.
This foray by the big banks coincides with a surge in the number of subprime loan defaults. Certainly not all subprime loans are predatory . But foreclosures in the Chicago area by subprimes have risen from 131 in 1993 to 4,958 in 1999, according to the National Training and Information Center, a watchdog group. Consumers in other areas are also complaining about lending abuses, causing more than 30 states and dozens of cities to consider curbs on predatory lending .
The upswing in defaults poses a double challenge for the big banks: They must fend off hundreds of lawsuits brought against their subsidiaries. As they do so, they will be asked to bring better practices to an industry derided as ``legalized loan sharking'' by detractors.
The tactics are all too familiar. Critics call one the ``bait'' scam: In Philadelphia, where the 3,226 foreclosures last year were almost double the number in 1997, a poor veteran named Leroy Howard says in bankruptcy papers that he was lured into refinancing his mortgage with an offer of $4,000 in cash and debt relief. When he accepted, his mortgage doubled in size to $40,000, including $9,040 in new fees and charges. Howard's attorney charges the lender made the loan even though it was aware Howard could not repay it; a notation in his file says he would use the cash for food. Citigroup, which acquired the loan's servicing rights, settled the case.
There's the hard sell: In Chicago, it is alleged in court that a home improvement contractor, along with a mortgage broker, went to a local hospital and persuaded a woman admitted there to refinance on unfavorable terms. ``You couldn't tell him no that day,'' says Valerie Mason, daughter of the woman, who has died.
The banks don't condone these tactics. ``Small, unscrupulous lenders don't have to follow the rules,'' says Howard Glaser, chief lobbyist for the Mortgage Bankers Association. The responsible lenders ``get tainted by what the bad actors do.'' The major lenders--including Citigroup and Bank of America--argue that subprime lending doesn't bilk the innocent or gut neighborhoods. Far from it, they say: The vast majority of the loans help people with bad credit to repair their homes and settle their debts. A decade ago, homeowners with imperfect credit would have paid 5 to 10 percentage points more for loans, they say, if they could get a loan at all. The banks also claim that the number of predatory lending cases is minuscule, though consumer advocates disagree. (There are no national data to resolve that dispute.)
Flipping and packing. The taint of predatory lending hasn't deterred major banks from entering the growing subprime market. There were 856,000 subprime loans issued in 1999, six times as many as in 1994. Those loans often produce margins eight times those of conventional mortgages, although there's a greater risk of default and higher servicing costs. Banks can make more money by packaging subprime loans as mortgage-backed securities and selling them to mutual funds.
But can the major banks help curb bad practices? Citigroup will be the largest test case. In November, the company completed a $27 billion acquisition of Associates First Capital, which was spending $19 million to fight more than 700 lending lawsuits. The suits spotlight more questionable tactics. For example, Associates established quotas for refinancing loans over and over, or ``flipping'' them, with no benefit to the consumer, former company employees testified. (Its motto, according to the court papers: ``A loan a day or no pay.'')
Another common practice, employees said, was the ``packing'' of costly insurance products into the price of a loan. Consider the testimony of Rick McFadden, a branch manager in Tacoma, Wash. When he failed to tack on the insurance, the boss would crumple a piece of paper into the phone. ``You hear that?'' the boss would say. ``That's your loan. It doesn't have any insurance on it. .....'' And into the trash it would go. A Citigroup spokesman declined to comment on the testimony but said the issues ``have been addressed in the pledges we've made.'' Citi settled a Georgia class-action ``packing'' lawsuit in January for $9 million and, U.S. News has learned, a similar suit in Pennsylvania. In reforms announced last fall (including caps on fees and improved training), the company condemned the practices of ``packing'' and ``flipping.''
Still, victims seeking restitution are having a hard time figuring out who is to blame. In Goldie Johnson's case, her loan was solicited by Diamond but ended up in EquiCredit's portfolio. The Bank of America subsidiary then tried to foreclose on Johnson. The company claimed in court, however, that it was not responsible for tactics used to sell the original mortgage. (Since the lawsuit was filed, the loan has been sold again.) The insulation of the banks rankles legal-aid lawyers. ``At some point, the ostrich defense doesn't work,'' says Johnson's attorney, Ira Rheingold.
While lawyers and lenders duke it out, once stable neighborhoods in places like Maywood, Ill., a working-class Chicago suburb, are filled with boarded-up houses resulting from foreclosures. Resident Delores Rolle, 51, says gang members from the Latin Kings took over an abandoned house, put up drapes, and used it for drug dealing. ``This has been a nightmare,'' says Rolle. ``It's Beirut around here.''
Mr. DURBIN. As demonstrated in these cases, the people soliciting these loans have won their trust and confidence, and the homeowners are reluctant to believe that they have been so ruthlessly taken in.
Just this morning the Washington Post reported that the Federal Trade Commission sued the Associates, a lending unit of Citigroup, for its predatory lending practices.
This is not just an occasional storefront operation. The growth of these
[Page: S1944] GPO's PDF
``They hid essential information from consumers, misrepresented loan terms, flipped loans [repeatedly offering to consolidate debt into home loans] and packed optional fees to raise the costs of the loans,'' said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection. The practices, she said, ``primarily victimized ..... the most vulnerable--hardworking homeowners who had to borrow to meet emergency needs and often had no other access to capital.''
Mr. President, I ask unanimous consent that this article from today's Washington Post be printed in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
FTC Sues Lending Unit of Citigroup
ASSOCIATES ACCUSED OF ``ABUSIVE'' ACTS
The Federal Trade Commission yesterday sued a recently acquired arm of financial giant Citigroup Inc., accusing it of deceiving often cash-strapped home-equity borrowers through ``systematic and widespread abusive lending practices.''
The case is the largest ever brought for abusive or predatory lending by the FTC, the government's chief consumer-protection agency. If the case is proven, the FTC estimates that it could result in hundreds of millions of dollars in refunds to tens or hundreds of thousands of borrowers.
The suit filed in U.S. District Court in Atlanta names New York-based Citigroup, CitiFinancial Credit Co. and the acquired companies, Associates First Capital Corp. and Associates Corp. of North America, collectively known as Associates.
Associates, which specialized in loans to higher-risk borrowers, was one of the nation's largest home-equity lenders when Citigroup bought it in November for $31 billion. It was then wrapped into the bank's CitiFinancial unit.
Yesterday's action was sought by consumer activists, who for years labeled Associates as the worst predatory lender in the country.
The FTC has been investigating Associates since at least 1998, when the company was a subsidiary of Ford Motor Co. Ford eventually spun it off.
In a statement issued yesterday, Citigroup said, ``We regret that we have been unable to resolve the FTC claims regarding past practices of the Associates without litigation.''
The statement also said: ``From the time we announced our intent to acquire Associates, we indicated our full commitment to resolve concerns that had been raised about their business. To date, we have reached out to nearly a half-million customers including every Associates home loan customer, and we will continue these outreach efforts.''
According to the FTC suit, Associates' aggressive marketing ``induced consumers to refinance existing debts into home loans with high interest rates, costs and fees and to purchase high-cost credit insurance.''
``They hid essential information from consumers, misrepresented loan terms, flipped loans [repeatedly offering to consolidate debt into home loans] and packed optional fees to raise the costs of the loans,'' said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection. The practices, she said, ``primarily victimized . . . the most vulnerable--hardworking homeowners who had to borrow to meet emergency needs and often had no other access to capital.''
The suit seeks financial redress but doesn't specify an amount, ``If all of the charges are proven [the amount] could be much more than $500 million,'' Bernstein said. That number is drawn from the Associates financial reports, which show earnings of more than $500 million from 1995 to 1999 in single-premium credit life insurance premiums alone.
Single-premium credit life insurance, which enrages consumer groups, is paid upfront through a home loan, rather than monthly.
Because such insurance was factored into the loans, it added ``hundreds or thousands of dollars to consumers' loan costs,'' and in many instances ran out years before the home loan did, the FTC said. Credit life insurance is a way to cover the borrower's loan payments in the case of death, illness or loss or employment. But the FTC said Associates employees did not always mention or explain products and discouraged consumers from refusing them.
Federal and state regulators cleared the way for the Citigroup-Associates merger last year despite consumer groups' pleas that Citigroup first be required to agree to specific steps to protect consumers.
Yesterday, consumer groups welcomed the FTC suit but sought further action.
``The FTC case backs up what we've been saying, that Associates has been ripping off homeowners across the country,'' said Maude Hurd, president of the Association of Community Organizations for Reform Now.
Citigroup's stock closed yesterday at $48.63, up 38 cents, on the New York Stock Exchange. John Wimsatt, who tracks Citigroup for Friedman, Billings, Ramsey Group Inc., said strong investor confidence in the company reflects ``consensus estimates that it will earn about $15.8 billion'' in 2001 and the belief that the company, aware of the FTC investigation, either put money into reserves to cover the litigation ``or factored it into the purchase price.''
Most of the other 14 predatory lending cases the FTC has brought since 1998 have been settled. One case still in litigation involves Washington-based Capital City Mortgage Corp.
Mr. DURBIN. The problem of predatory financial practices in the high-cost mortgage industry is relevant to bankruptcy because it is driving vulnerable people into bankruptcy. These people are not entering bankruptcy in order to abuse the system. They are filing bankruptcy because the reprehensible tactics of unscrupulous lenders have driven them into insolvency and threatens their homes, cars, and other necessities; frankly, everything they own on Earth.
My amendment prohibits a high-cost mortgage lender that extended credit in violation of the provisions of the Truth-In-Lending Act from collecting its claim in bankruptcy.
I repeat this because the credit industry which opposes this amendment, opposes the following: A suggestion by me that if you have made a high-cost mortgage loan and in doing so violated the provisions of the Truth in Lending Act, you cannot go into bankruptcy court and be protected by the laws of the United States. If you violated the law to create this mortgage, then the bankruptcy court law will not protect you. It is that simple. You wonder why these major credit companies and financial institutions oppose this amendment. They say: If you get your nose under the tent, DURBIN, we don't know where you are going next.
I suggest to them that they ought to look outside their tent for a moment at some of the scummy practices of people who say they are also their brothers and sisters in the mortgage credit industry. They should not make excuses for them and expect the American people to trust the mortgage credit industry when they tell us they have the best interest of consumers in America in their hearts.
The result of my amendment will be that when individuals like Genie McNab, Helen Ferguson, Goldie Johnson, or the Masons, goes to the bankruptcy court--seeking last-resort help for the financial distress an unscrupulous lender has caused her--the claim of the predatory home lender will not be allowed.
If the lender has failed to comply with the requirements of the Truth in Lending Act--a law created by Congress and signed by the President--for high-cost second mortgages, the lender will have absolutely no claim against the bankruptcy estate.
My amendment is not aimed at all subprime lenders or all second mortgages. Indeed, it is only aimed at the worst, most predatory scum-sucking bottom feeders in this industry. My provision is aimed only at practices that are already illegal under the law. It does not deal with technical or immaterial violations of the Truth in Lending Act. Disallowing the claims of predatory lenders in bankruptcy cases will not end these predatory practices always. But for goodness sake', why should we come to this floor and pass a law to protect these people? It is one step we can take to curb credit abuse in a situation where the lender bears primary responsibility for the deterioration of a consumer's financial situation.
AMENDMENT NO. 17
Mr. President I send my amendment to the desk.
The PRESIDING OFFICER. Is the Senator seeking consent to set aside the pending amendment?
Mr. DURBIN. Yes, I ask unanimous consent.
The PRESIDING OFFICER. Without objection, it is so ordered.
The clerk will report the amendment.
The bill clerk read as follows:
The Senator from Illinois [Mr. Durbin], proposes an amendment numbered 17.
Mr. DURBIN. Mr. President, I ask unanimous consent the reading of the amendment be dispensed.
The PRESIDING OFFICER. Without objection, it is so ordered.
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