James Hogan’s problems started in 1989 when he borrowed and then paid $6,200 to a home-repair contractor in Atlanta to fix his roof and do other work. His attorney says an independent appraiser later asses the value of the work at $3,474. Fleet Finance tried to evict Hogan from his home. Photo by APF Fellow Michael Hudson
James Hogan (left) stands in front of his home with William Brennan Jr., a Legal Aid Lawyer who directs DeKalb County’s Home Protection Program. Photo by APF Fellow Michael Hudson
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Some days it seems like the phone at Annie Ruth Bennett’s house in southwest Atlanta won’t ever stop ringing. The callers want to sell her storm windows, debt–consolidation loans, burial plots. Her attorney says it’s all a scheme: They want to steal a piece of her home by getting her to take out a loan against its value.

But now she knows better. She and her husband Frank, 73, are already struggling to pay $469 a month of their tiny incomes to pay off a loan from Fleet Finance, a giant national mortgage company. The Bennetts say they took out the loan after a home repair contractor knocked on their door and offered to fix up their small frame house. He arranged an 18.5-percent second mortgage. Then he took nearly $10,000 to pay himself for work that an appraiser later valued at $1,245.

Now a sheet of plastic covers a gaping hole where the drop-ceiling the contractor installed in their living room fell in. The Bennetts say they can't afford to buy shoes anymore, let alone fix the damage.

William Brennan Jr., their Legal Aid Attorney, charges that the Bennetts were victims of new twist on an old scam - one that has been given new life by mainstream banks hungry for profits. Advocates for the poor claim that respectable banks and savings and loans are using home-repair contractors and second mortgage companies as front operations to prey on the poor.

The Bennett's loan was made by Home Equity Centers, of Marietta, Georgia, which in turn sold it to Fleet Finance. Fleet is an Atlanta-based subsidiary of Fleet Financial Group, New England's largest bank. Court records show Fleet Finance has had connections with Home Equity Centers dating back to a 1983 brokers agreement and a 1985 business loan it made to the smaller company. From 1985 to early 1991, Fleet purchased more than 90 percent of the loans made by Home Equity Centers in Atlanta's DeKalb County. Attorneys for homeowners in Atlanta have filed a lawsuit accusing the two companies of taking their property 'by deceitful means and artful practices.' Both deny any wrongdoing.

'Tin men' peddling shady home-repair loans have been around for decades, but they're no longer just small-time operators, They are part of a national epidemic of second-mortgage abuses. Interviews with Legal Aid attorneys, private lawyers and attorney general's offices across the nation show that hundreds of thousands of low-income homeowners have been victimized in the past decade. Many have lost their homes outright. Others have had the equity sucked out of their property.

Thanks to the free-wheeling brand of capitalism that emerged during the Reagan era and lax regulation by state and federal governments, home equity ripoffs have become big business: well organized, demographically targeted and nationally franchised.

Tin men and mortgage brokers prowl minority neighborhoods and offer poor, working-class or elderly homeowners loans to repair old rowhouses, pay off hospital bills, or avoid foreclosure. Interest rates often reach 20 percent a year, sometimes beyond 30 percent. Tacked-on service fees raise the price of borrowing even higher.

The banking industry makes this sort of lending possible by starving low-income and minority neighborhoods of mainstream credit, Borrowers in these neighborhoods have nowhere to turn except to high-interest mortgage companies. Meanwhile, some banks and savings and loans have profited from these same second mortgage companies' questionable practices by lending them money for operating expenses or by purchasing the loan contracts after they're signed.

In Boston, for example, another subsidiary of Fleet Financial Group extended a $7.5 million line of credit to one of the city's most notorious second-mortgage lenders, Resource Financial Group.The company is now bankrupt and the state has charged it with fraud. A study by Union Neighborhood Assistance Corp., a Boston community group, found that more than 80 percent of the homeowners who took out mortgages from Resource either lost their homes or were facing foreclosure. Better than 90 percent of the loans were in minority neighborhoods where, studies have shown, mainstream banks seldom loan money.

The second-mortage scandal has taken on added urgency in the aftermath of this spring's riots in Los Angeles. After a long period of neglect, news outlets and governments have been forced to look at the economic exploitation of America's inner cities.

South Central Los Angeles, which was at the center of the unrest that claimed 60 lives, has been one of the most fertile grounds in the nation for home-equity fraud. Lawyers say that con artists cruise South Central neighborhoods, spot likely houses, and then use car phones to call their offices, which tap into real estate databases to see whether the homeowner is a promising mark. Troy Smith, a Legal Aid lawyer in Los Angeles Who specializes in housing cases, says con artists often pump their cash flow by using the house they've stolen as collateral for more, bank loans. Too often, the house sits vacant until it is taken over by gangs and drug dealers who terrorize the neighborhood. Smith believes tens of thousands of homeowners have been victims of equity fraud throughout the city's minority neighborhoods.

The story is much the same in Atlanta, which also endured rioting this spring. Second mortgage scams are so bad there that the DeKalb County government has funded a Home Defense Office. Brennan, who heads the program, started representing poor people as a Legal Aid lawyer in Atlanta in 1968. Back then, his biggest worry was making sure his clients weren't unfairly denied public housing or welfare. Sure, there were corner grocers who price-gouged in poor neighborhoods, slippery door-to-door salesman and, of course, tin men. The poor have always paid more for goods and services. But, Brennan contends, businesses that prey on the poor simply weren't as organized and vicious as they are today.Trade schools, easy-credit, used-car dealers, rent-to-own stores, check-cashing outlets, pawn shops, tin men and second-mortgage companies all target people with low incomes.

During the Reagan era, Brennan says, blaming the poor for their problems became fashionable again at the same that the free-enterprise ethic was reinvigorated. Profiting from low-income people's misfortunes suddenly became more acceptable - even if it meant taking the homes of longtime residents who have provided stability to deteriorating neighborhoods. In Los Angeles, Smith sees that attitude all the time: "I can't tell you how many times I've gone into court with a deal that was fraudulent and the judge says: It's just business. It was a business deal that your client didn't get the best of."

In Atlanta, Brennan says that scam artists see older black homeowners as easy marks because they are usually less educated and financially unsophisticated. These homeowners often have large chunks of equity built up in their homes, because they've spent decades paying their house notes and because real estate values have inflated rapidly in past two decades. That equity, Brennan says, makes a tantalizing target for loan brokers, tin men, second-mortgage companies and banks.

"It's like finding a ten-dollar bill in the street and saying: This is mine, I'm gonna take it. Their attitude is: It's there for the taking."

One day recently, Brennan had office visits from three older black women who came in for wills and other legal work not related to home-equity loans.

As an experiment, he asked each if they owned their homes. All three said yes.

Were the houses paid for, or almost paid for? They were.

Were they getting calls from people who wanted to loan them money on their houses?

"All three of them, we got the same answer: I get calls every day of the week, Monday through Friday, two and three times a day."

In their defense, Fleet and other banks say the home-repair and second-mortgage dealers they do business with are completely separate companies.There may have been abuses in a few cases, bankers say, but they had no way of knowing. "These people may be poor and illiterate, but no one puts a gun to their head and tells them to sign," Fleet Financial Group vice president Robert W. Lougee told the Boston Globe. "This idea that Fleet should regulate the world is preposterous." Fleet and two other big Massachusetts banks, Baybanks and Shawmut, have reached settlements with the state promising to put up $35 million to repay victims of home equity scams. The money also will be used to make loans to first-time home buyers.

Second mortgages are an American growth industry. Duff and Phelps Credit Rating Company says home equity lending jumped from $l billion in 1982 to $100 billion in 1988.

The 'secondary market' for second mortgages - where banks buy home equity loan contracts from other lenders - was virtually non-existent when the

Federal National Mortgage Association, a quasi-government agency, started buying them in the early 1980s. Since then, second-mortgage speculation has boomed: Surveys by the Consumer Bankers Association show that the number of big banks buying home equity loans on the secondary market grew from 12.5 percent in 1990 to 20.9 percent in 1991. Fleet Finance, for example, said last year that about 60 percent of its 71,000 mortgages hall been purchased from other lenders. The company made profits of $60 million in 1990.

The vast majority of equity loans involve middle- to upper-income borrowers. It's unfair to suggest that every tin man or second mortgage company is a fraud, or that every bank that buys second mortgages from them is exploiting poor people.But a sample of court cases across the country indicates that second mortgage abuses are widespread:

In Chicago, Community Bank of Greater Peoria agreed in 1991 to pay as much as $4 million to settle a class-action lawsuit involving more than 6,275 homeowners. The borrowers said they were victimized by deceptive loans arranged by 40 tin men who had working relationships with the bank. The bank denied working with shady contractors but acknowledged some “technical violations.”

In New York, the attorney general charged a mortgage company named Dartmouth Plan in 1990 with defrauding as many as 20,000 borrowers and then siphoning $25 million out of the corporation via a phony employee stock plan. ‘Me state also sued a dozen banks that bought mortgages from the company. Dartmouth has agreed to pay as much as $4 million to settle a criminal investigation of fraud charges involving 7,000 homeowners in Connecticut. State officials there said the company made mortgages in at least 38 states before going out of business in 1990.

To increase its volume, Dartmouth dangled the offer of trips to Hawaii, Monte Carlo, Rome and Spain as incentives to sales people who brought in lots of loans or got customers to sign up for high interest rates.

  • In Chicago, Community Bank of Greater Peoria agreed in 1991 to pay as much as $4 million to settle a class-action lawsuit involving more than 6,275 homeowners. The borrowers said they were victimized by deceptive loans arranged by 40 tin men who had working relationships with the bank. The bank denied working with shady contractors but acknowledged some “technical violations.”
  • In New York, the attorney general charged a mortgage company named Dartmouth Plan in 1990 with defrauding as many as 20,000 borrowers and then siphoning $25 million out of the corporation via a phony employee stock plan. ‘Me state also sued a dozen banks that bought mortgages from the company. Dartmouth has agreed to pay as much as $4 million to settle a criminal investigation of fraud charges involving 7,000 homeowners in Connecticut. State officials there said the company made mortgages in at least 38 states before going out of business in 1990. To increase its volume, Dartmouth dangled the offer of trips to Hawaii, Monte Carlo, Rome and Spain as incentives to sales people who brought in lots of loans or got customers to sign up for high interest rates.
  • In Virginia, Landbank Equity and Freedlander Inc. operated as giant fraud schemes - stealing from borrowers and investors alike - until the companies’ top executives were arrested and put in prison. Landbank made 10,000 loans in five states. Freedlander, once the nation’s fourth largest mortgage company, expanded into 33 states and made 37,000 loans totaling $675 million before its collapse in 1988. Williams Runnells, an ex-Bible salesman who got a 40-year sentence for masterminding the Landbank scheme, said making money off down-on-their-luck borrowers was easy. “When you’re broke, you’ll borrow money at any price,” he said. “It’s like buying tomatoes. Everything’s got a price.”
  • In Alabama, three juries hit Union Mortgage of Dallas with more than $57 million in fraud verdicts in 1991. In one case, five families won $45 million after being swindled by a tin man that the company had recruited despite a record of 14 lawsuits, liens and court. judgments against him. Attorneys for the victims say Union made 40,000 predatory loans across the United States. A former Union branch manager in Alabama testified that there’s a catch phrase sometimes used in the industry to describe how borrowers can be hoodwinked with fast talk and confusing paperwork: “Cash out the deal before the customer comes out from under the ether.”
  • In Los Angeles, prosecutors charged real estate entrepreneur Kevin Merritt with 32 felonies in 1991, alleging the theft of equity and homes from low income people. Merritt, who denies the charges, has been sued at least 175 times by homeowners and businesses.

In 1989, Merritt and his assistants spotted 84-year-old Roland Henry through a foreclosure listing service. Merritt, then 29, had been working the Los Angeles real estate market since he was in high school and claimed to have accumulated a net worth that reached $15 million. Henry, who dropped out of school as a sixth grader in East Texas, had bought his home three decades before with his earnings from selling homemade tamales out of a truck on street corners in Watts. Henry, who used a wheelchair because of crippling arthritis, was facing foreclosure oil two previous home-equity loans that had been initiated when he purchased what he thought was $180 worth of carpet.

Merritt offered to help Henry save his home by giving him yet another loan to pay off the debts to other lenders. Instead, Henry claimed later, Merritt fooled him into signing away his two-bedroom house. Merritt claimed Henry knew exactly what he was signing.

A jury believed Henry. His family won a civil verdict of nearly $1.7 million from Merritt this spring. Henry didn't bear the judgement, however. He died last year.

The deregulation of the mortgage industry set the stage for second-mortgage scams against Roland Henry and other homeowners in much the same way that deregulation of savings and loans created the S&L scandal. Since the late 1970s, federal and state lawmakers have struck down almost all limits on second-mortgage interest charges or created loopholes that made it easy for creative lenders to skirt usury laws.

At the same time, the federal government does nothing to regulate second mortgage companies. It has left responsibility for policing the industry with the states, many of which take a hands-off approach. In Massachusetts, for example, second-mortgage companies have generally been able to charge whatever interest rate they want - as long as they notify the state attorney general's office if they intend to charge 20 percent or more.

Brennan traces the genesis of large scale equity ripoffs in Georgia to 1983 - when the state legislature wiped out all laws limiting mortgage interest except for a 1908 loan-sharking law. It limits interest on loans to 5 percent per month.

In Pennsylvania, one finance company used a home mortgage loophole to avoid interest caps oil used-car loans. The company was free to charge whatever rate it wanted by requiring that borrowers secure their loans against their cars and their homes (or the homes of co-signers). The company charged annual rates as high as 41 percent. According to testimony in a lawsuit, one down-on-his-luck borrower who tried to return his car was told: "We don't want your car; We want your aunt's house." The company secured one loan, on a $3,500 Buick, against the borrower's household goods, his house, and his mother-in-law's house.

More than a dozen states do not regulate second-mortgage lenders at all. In Georgia, for example, you have to have a license I o be a hairdresser, but not to work as a mortgage broker.

At the same time, housing activists, say, federal officials have been half hearted in enforcing fair lending laws, that require that banks make an effort to do business in low-income and minority neighborhoods. Study after study has shown that U.S. banks and S&Ls are reluctant to loan cash in minority neighborhoods. In 1988, a Pulitzer Prize-winning series by the Atlanta Journal and Constitution found that whites in Atlanta receive five times as many home loans from mainstream lenders as blacks with similar incomes.

Frank and Annie Ruth Bennett have owned their house on a tree-lined street in Atlanta since 1969. Over the past decade, they've made several attempts to fix it up. Each time. they've fallen a little more into debt to second-mortgage companies. Even so, they still had managed to hang onto more than half the equity in the house, which is worth nearly $50,000.

Now, with a debt of around $28,000 to Fleet plus about $7,000 left on their original house note, most of the value in their property belongs to someone else. His Social Security check and her wages as a cafeteria worker for Delta Airlines aren't enough to keep up. They have fallen behind and have had to pay delinquency charges, to Fleet. "It's just tight, I'm telling you." Annie Ruth Bennett said.

She said that when a man called recently trying to sell her storm windows, she to]d him: "When I get ready. I'll get in touch with you." He called again, arid she put him off again.Then he had a woman - his wife or secretary Bennett guessed - call yet again.

"I just tell them I'm sleepy and I don't feel like talking," Bennett said. "I'm not signing no papers. I've learned my lesson."