Lender Deal May Bring Big Reforms

Ameriquest Capital Corp.’s pending settlement with a large coalition of states over its mortgage lending practices is expected to provide stronger protections for homeowners, with measures to ensure accurate appraisals and to prevent customers from being pressured into taking out loans, according to records and interviews.

California Atty. Gen. Bill Lockyer said the $325-million deal with Orange-based Ameriquest probably would exceed reforms required of lender Household Finance, which settled a 50-state probe in 2002 by changing its practices and paying $484 million. That deal set new standards for lenders in the higher-cost “sub-prime” market.

The Ameriquest agreement is likely to address “alleged pressure placed on appraisers to inflate property values” so that loans could be sold to borrowers who might not be qualified, Lockyer said in a statement.

“It also would target other practices,” he said, “such as agents telling customers not to worry about formal disclosure upfront about loan prices and making misleading representations about penalties for early payoff of loan balances.”

Ameriquest has set aside $325 million to cover penalties and restitution to customers, but the settlement with 33 states and the District of Columbia has been delayed amid wrangling over specific terms.

The lack of an agreement has emerged as a stumbling block to the confirmation of Ameriquest founder Roland E. Arnall as ambassador to the Netherlands, with Democrats on the Senate Foreign Relations Committee saying Arnall should not take the post until the case is settled.

Arnall’s nomination was passed out of the committee on a disputed vote last week after its chairman, Sen. Richard G. Lugar (R-Ind.), ruled that absent Democrats couldn’t cast votes by proxy, as is usually allowed. A vote by the full Senate has not been scheduled.

Arnall told the panel that he expected the matter to be resolved by the end of the year. In an Oct. 31 letter to Lugar, Arnall said that he had resigned from “all officer and director positions” at Ameriquest and that the company was now being run by its senior management team. Dawn Arnall, the founder’s wife and previously co-chairwoman, now heads the board, a company spokesman said.

One sticking point to reaching a deal has been Ameriquest’s efforts to avoid having an independent monitor check its compliance, according to one state official involved in the talks, who spoke on condition of anonymity. Household agreed to have such a monitor for five years.

Iowa Atty. Gen. Thomas J. Miller, whose office spearheaded the states’ efforts, said the issue of an independent monitor was under discussion but wouldn’t elaborate.

Ameriquest spokesman Christopher Orlando declined to comment on the negotiations.

Ameriquest Mortgage, a unit of Arnall’s privately held Ameriquest Capital, makes higher-cost sub-prime loans for borrowers with credit problems, lack of steady income or other issues.

Among other things, the company has been accused of bait-and-switch tactics that inflate costs to borrowers -- a complaint leveled at other sub-prime lenders in recent years.

In 2002, sub-prime specialist Household International Inc., the parent of Household Finance and Beneficial Finance that is now part of giant London bank HSBC Holdings, agreed to a series of reforms that New Mexico Atty. Gen. Patricia Madrid has called “the current standard for the sub-prime lending industry.”

Because the issues raised with Ameriquest go well beyond those with Household, its changes are expected to be more sweeping, Miller said. “Since additional issues are being investigated,” Miller said, “the relief will go beyond what is in Household.”

Ameriquest has disclosed limited details about the states’ efforts in Securities and Exchange Commission filings since February. These include an expanding number of states involved in the investigation, up from 25 initially to the current 33 and the District of Columbia.

In written material for the Senate Foreign Relations Committee, Arnall provided the most detailed accounting yet of the allegations he said were under review by the states:

* Pressuring appraisers to inflate property values.

* Charging upfront fees known as discount points without a corresponding decrease in the interest rate.

* Telling borrowers at the time of the application to ignore the company’s written information regarding the interest rate and dollar value of points because these would be lower for the actual loan.

* Assuring borrowers their loans would have no prepayment penalty, then inserting one in the final loan.

* Making “stated income” loans -- loans in which borrowers don’t prove their income with documents -- based on information that was “unreasonable on its face.”

* Refusing to lend on Indian reservations because of laws preventing foreclosures.

* Having extended delays between loan close and funding.

* Misrepresenting fees and costs.

In his statements to the Senate, Arnall said his company had begun addressing certain problems by centralizing its appraisals and using third parties to close loans “so that the company’s sales personnel have no opportunity to pressure a customer at closing into taking a loan about which they are having second thoughts.”

Connecticut Atty. Gen. Richard Blumenthal said the settlement would be “very far-reaching and global.” But he added that it wouldn’t so much break new ground as require Ameriquest to follow the law.

“This conduct should have been standard operating procedure from the beginning,” Blumenthal said.