Midwest Mortgage Lender Agrees to Settle Illegal Lending Charges

July 19, 2002

FTC, State of Illinois Also File Suit Against Mortgage Broker

The Federal Trade Commission, the U.S. Department of Housing and Urban Development (HUD), and the State of Illinois today announced that subprime lender Mercantile Mortgage Company, Inc. (Mercantile) has agreed to settle charges that the company deceived borrowers about the terms of their loans in violation of the Federal Trade Commission Act (FTC Act) and the Illinois Consumer Fraud and Deceptive Business Practices Act, and also violated the Real Estate Settlement Procedures Act (RESPA). According to the FTC, the alleged deception resulted in many borrowers' not knowing that their loans required large "balloon" payments at the end of their terms. The proposed settlement would require the company to make a $250,000 payment for consumer redress and create a program to offer refinanced loans on favorable terms to certain borrowers with balloon loans.

In a separate matter, the FTC and the State of Illinois have filed suit in federal district court against mortgage broker Mark Diamond and OSI Financial Services, Inc., a company owned and controlled by Diamond, charging them with deceiving borrowers about the terms of their loans. Diamond referred many of the loans he brokered to Mercantile.

"These cases demonstrate that the FTC, acting with other federal and state law enforcers, will continue to aggressively pursue deceptive practices in the subprime mortgage lending industry," said FTC Chairman Timothy J. Muris.

In the last four years, the Commission has brought 17 law enforcement actions against subprime lenders allegedly engaged in deception or other unlawful practices."

While the enormous growth of the subprime mortgage industry has opened the door to consumers who had limited access to the credit market, consumers often confront unlawful lending practices in the subprime mortgage market, according to the federal authorities.

"Today, we come together with the Federal Trade Commission with one common purpose - to protect vulnerable people from those who would prey upon them," said HUD Secretary Mel Martinez. "By pooling the resources of HUD and the FTC, we are continuing to curb the deceptive practices of lenders and other service providers and, in the process, be a more forceful voice for preserving the American Dream."

Although subprime lenders may expand access to credit to individuals who otherwise would be shut out of the market, the government said, unethical lenders use deceptive practices to hide from consumers essential information they need to make decisions about their single greatest asset - their home.

"This type of fraud has such a devastating impact on victims because for many people, the equity in their homes has taken a lifetime to build and represents their life savings," Illinois Attorney General Jim Ryan said. "We will continue to work with the FTC and other law enforcement agencies to protect consumers from predatory lending."

Mercantile Complaint

Mercantile, headquartered in Westerville, Ohio, offers mortgage loans to consumers in 23 states. Its business is primarily in the "subprime" market, which includes consumers who are considered greater credit risks. Many of the loans originated by Mercantile were covered by the Home Ownership and Equity Protection Act (HOEPA), which covers certain high-cost loans secured by the borrower's home. For these loans, the lender is required to provide certain key disclosures (HOEPA Disclosures) three business days before closing the loan.

Mercantile solicits loans through its own employee loan officers, as well as third-party mortgage brokers. The complaint alleges that one of those brokers, Mark Diamond, acted as Mercantile's agent in soliciting and closing loans on its behalf. This case is the first in which the FTC has charged a mortgage lender for the actions of a third-party broker.

The complaint names as defendants Mercantile and two of its officers, Bran Silveous and Ronald Noble. The complaint charges that the defendants, through Mercantile loan officers and Diamond, engaged in numerous deceptive and other illegal practices to induce consumers to borrow from Mercantile. A significant number of Mercantile's loans were 15-year loans requiring a large lump-sum "balloon" payment at the end of the term, usually 80 percent of the loan amount. According to the complaint, Mercantile misled borrowers by misrepresenting or concealing the balloon payment. In addition, the complaint alleges that, in many instances, Mercantile failed to disclose the balloon payment on the HOEPA Disclosures, as required by HOEPA, or to provide the HOEPA Disclosures at all.

The complaint also charges that Mercantile made a number of other misrepresentations about the key terms and costs of its loans, including the interest rate, monthly payment, and prepayment penalty, and that Mercantile violated both the Truth in Lending Act (TILA) and the FTC's Credit Practices Rule. The complaint also contains HUD's allegation that Mercantile violated RESPA by giving and receiving illegal kickbacks for the referral of loans. According to the complaint, during a nearly three-year period, Diamond referred virtually every one of his loan customers to Mercantile in exchange for a broker fee typically as high as 10 percent.

Mercantile Order

The settlement order, which is subject to court approval, permanently enjoins the defendants from misrepresenting the terms, costs, or other conditions of any loan to consumers, and from violating HOEPA, RESPA, the TILA, and the Credit Practices Rule.

The proposed order also provides for 1) a $250,000 payment to the FTC to be used for consumer redress, and 2) the creation of a program enabling certain borrowers with balloon loans to refinance into new loans with no balloon payment.

As part of the program, Mercantile will pay the closing costs for the refinance, including its own fees as well as those imposed by third parties, such as title insurers. (In some cases, consumers may have to pay a small amount of the closing costs, but no more than $200.) The refinanced loans will be for terms of 30 years at a fixed interest rate, with no prepayment penalty or balloon payment. Mercantile also must offer the lowest interest rate available for each specific borrower, given the borrower's credit rating. In no event can the rate be more than 0.3 percent higher than the borrower's current rate.

A borrower is eligible for the Refinancing Program if the borrower:

  • obtained a residential mortgage loan (other than for property containing more than two units) between January 1, 1998 and December 31, 2001, directly from Mercantile in Ohio or Indiana, or through broker Diamond in Illinois;
  • has a balloon loan and certifies that he either believed or was told that there was no balloon payment;
  • has not paid off or refinanced the note;
  • is not a debtor in a bankruptcy proceeding; and
  • does not have the property listed for sale with a real estate agent.

The FTC will notify potentially eligible borrowers by mail over the next few months about how to apply for the program.

The Complaint against Mark Diamond and OSI

According to the FTC/Illinois complaint, Diamond targets homeowners with poor credit who might have trouble obtaining conventional home equity financing, and offers to arrange mortgage loans for them. Diamond routinely solicits low-income individuals, including elderly persons and individuals who have significant equity in their homes and who may not otherwise be considering a home equity loan, according to the complaint.

The complaint alleges that Diamond and OSI have engaged in numerous deceptive practices and other law violations to induce consumers to take out mortgage loans. A significant number of these loans were 15-year balloon loans. The complaint alleges that these defendants, in many instances, misrepresented:

  • the existence of the balloon payment;
  • the specific monthly payment amount, interest rate, and/or term of repayment;
  • that the loan did not have a prepayment penalty;
  • the amount of cash disbursed to the borrower; and
  • that the monthly payment amount includes the payment into an escrow account for property taxes and insurance.

According to the complaint, in many instances, Diamond has presented consumers with incomplete closing documents for signature in which the terms of the loan - such as the annual percentage rate, monthly payment amount, and balloon payment amount - were left blank. He also has required borrowers to sign loan brokerage agreements in which the broker fee was left blank. The complaint alleges that Diamond later filled in the amount of the broker fee after the loan closing. This fee, which was financed by the borrower and paid out of the loan proceeds, was often 10 percent of the loan amount.

The Commission and the State of Illinois have asked the court permanently to enjoin Diamond and OSI from violating the FTC Act and the Illinois Consumer Fraud and Deceptive Practices Act, and order them to pay redress to consumers.

Source: FTC, HUD

Contact ALTA at 202-296-3671 or communications@alta.org.

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