WASHINGTON STATE

1. WASHINGTON STATE FINANCIAL INSTITUTIONS DEPARTMENT OF

2. OVERVIEW OFPREDATORY LENDING James R. Brusselback Enforcement Chief Division of Consumer Services AARMR October 2005

3. DISCLAIMERS The comments and opinions expressed today are solely my comments and opinions and do not necessarily reflect those of the Department of Financial Institutions, its management, or anyone associated with the Department of Financial Institutions. DFI cannot give legal or financial advice, and we do not endorse or recommend any person, product or institution.

4. DISCLAIMERS The comments and opinions expressed today are solely my comments and opinions and do not necessarily reflect those of the Department of Financial Institutions, its management, or anyone associated with the Department of Financial Institutions. The Department cannot give legal or financial advice, and we do not endorse or recommend any person, product or institution.

5. OUTLINE • Predatory Lending • What is it? Where is it? Who’s involved? • How does it happen? How is it done? • Combating Predatory Lending • Enforcement – Administrative & Criminal • Research, Education and Outreach • Lender Accountability? Impose agency?

6. WHAT IS PREDATORY LENDING?

7. Mortgage Fraud Practiced Against Consumers

8. The words “mortgage” and “fraud” may be too narrow. Lending and mortgage origination practices become “predatory” when the borrower is led into a transaction that is not what they expected.

9. Predatory Home Lending – Moving Toward Legal & Policy Decisions “Transactions specifically crafted to result in net-losses for the borrower.” Susan M. WachterSeptember 10, 2005 Chicago, Illinois

10. Chuck’s Definition Surreptitiously employing an artifice or subterfuge in a financial transaction such that the chicanery has the result of bamboozling the consumer into accepting a spurious deal.

11. HOODWINKING DECEIT SUBTERFUGE DOUBLEDEALING LIES AND DAMN LIES HOCUS-POCUS CHICANERY CHEATING FALSEHOODS SKULLDUGGERY Blackmail TRICKERY MISREPRESENTATION

12. GENERAL BELIEFS: • Products themselves are not predatory. • However, certain products or volume of products may indicate bad practices. • Certain types of lenders are more likely to employ predatory lending practices. • Certain types of consumers are more likely to become victims of predatory lending practices.

13. WE ARE ALSO UNDERSTANDING THAT . . . • Predatory servicing may be as big a harm as predatory lending. • Enforcement is still the best deterrent. • Prison sentences may be the silver bullet. • Education must be targeted to be effective.

14. WHERE IS IT TAKING PLACE?

15. THE MAJORITY OF PREDATORY LENDING TAKES PLACE WITHIN THE SUBPRIME MORTGAGE REFINANCE MARKET

16. WHY REFINANCES? • More equity to convert from the borrower. • Less transaction overhead. • Larger market of debt ridden borrowers. • Fewer eyes on the deal.

17. WHO’S INVOLVED? • Predatory lending practices may involve: • Lenders, Mortgage Brokers, Real Estate Professionals, Appraisers, Attorneys, Escrow Agents, and Home Improvement Contractors. • Schemes commonly target: • People who have small incomes - but substantial equities in their homes and minority communities.

18. HOW DOES THIS HAPPEN? Consumers can be lured into dealing with predatory lenders by: aggressive mail, telephone, TV and door-to-door sales tactics. Advertisements promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer.

19. HOW IS IT DONE? • Equity Stripping • Bait and Switch • Loan Flipping • Property Flipping & Appraisal Fraud • Packing • Hidden Loan Terms • Discrimination • Home Improvement Scams • Discount Point Deception • Predatory Servicing

20. EQUITY STRIPPING

21. BAIT AND SWITCH

22. BAIT AND SWITCH EXAMPLES • Loan Type • Loan Amount • Loan Fees • Payment Amount

23. LOAN FLIPPING

24. PROPERTY FLIPPING AND APPRAISAL FRAUD

25. Straw Buyers

26. PACKING

27. HIDING LOAN TERMS

28. DISCRIMINATION

29. HOME IMPROVEMENT SCAMS

30. DISCOUNT POINT DECEPTION

31. MORTGAGE BROKERS Should never charge discount points or a discount fee that is payable to themselves. Discount Point Deception

32. HOUSEHOLD FINANCE Disclosed ranges of discount points. For example: GFE disclosure of $0 to $10,000 with the HUD1 always charging the maximum. Discount Point Deception

33. EXAMPLE #2: “ABC” MORTGAGE COMPANY No par rate so that a borrower never knows the starting point the rate is bought down from. Also, discount points hold very different results for like borrowers. Discount Point Deception

34. EXAMPLE #3: Another “ABC” FINANCIAL COMPANY Disclosure of loan origination fees as discount points, thereby giving impression that rate has been bought down when it has not been bought down. Discount Point Deception

35. PREDATORY SERVICING

36. SOME HARMFUL SERVICING PRACTICES • Accounting Practices • Force Placed Insurance • Junk Fees • Loan Transfers • Customer Service Accountability • Customer Service Locations

37. ENFORCEMENT

38. IS ENFORCEMENT NEEDED? FBI’s caseload for mortgage fraud is up 500% over 3 years ago “ ..loan frauds account for almost 40 percent of all financial institution losses.” “Mortgage fraud is becoming epidemic” As of Sept 2004 – 12,100 instances of suspicious activity have been reported to the FBI. (Chris Swecker, FBI assistant director for criminal investigations) (2004 – Associated Press)

39. Sept, 17 2004 Department of Justice • “Operation Continued Action” - The largest operation in FBI history, directed against financial fraud • 5,000 cases targeting financial institution fraud • Action against 205 individuals • 2000 – 2004: • 11,466 indictments • 11,362 convictions • $ 8.1 Billion in restitution orders • In 45 days during August/September: • Identified 245 subjects • 158 investigations • 151 indictments • 144 arrests • Potential loss of $3 Billion dollars

40. 5 Bloomberg News – 12\2004 • FNMA required First Beneficial Mortgage to buy back Millions in fraudulent loans from the Charlotte area • FNMA - Fails to notify the “Feds” • Later, GNMA “unknowingly” buys the loans from First Beneficial Mortgage • Loans go into default • $38 Million loss to date

41. ENFORCEMENT TOOLS • Administrative authorities. • Civil actions. • Criminal prosecution. The will and the skill.

45. It’s possible that more than 1,000 fraudulent appraisals were created between 1997 - 2000 Spokane Population - 195,629 98 Foreclosures in a single month Same foreclosure rate for multiple months All from the same mortgage company and three appraisers Original sales: 1997 – 2001 Foreclosures: 2002 -- today Same ratio in Seattle would result in 300 foreclosures a month from a single mortgage company

46. On July 29, 2004: Owner Dale Gibbons was found guilty of 15 separate counts of conspiracy and wire fraud. Gibbons testifies that: “[He] didn’t intentionally break the law, but was only doing what he was told by the lenders.”

47. ADMINISTRATIVE ACTION Ronald Burger Banned from working in the mortgage industry for 25 years Fine: $17,685.00 Restitution to victims: $14,589.66 Dale Sage Gibbons Banned from working in the mortgage industry for 25 years Fine: $17,685.00 Restitution to victims: $14,589.66

48. Agent - Sally Gibson Defended herself in the state licensing action, she blamed [lender] WMC for promoting predatory lending practices. Agent Sally Gibson, trying to act as her own attorney, was found guilty of 11 separate counts of conspiracy and wire fraud.

49. Sentencing - 2005

50. In court documents and interviews, 32 former employees…witnessed or participated in improper practices, mostly in 2003 and 2004. This behavior was said to have included: • deceiving borrowers about the terms of their loans, • forging documents, • falsifying appraisals, • fabricating borrowers' income to qualify them for loans they couldn't afford • (LA Times Feb 2005)