Loan Firms Accused of Bilking Poor Out of Homes : Banking: Property holders are talked into borrowing on their equity to pay bills. But the payments are more than they can afford--and the lenders foreclose on them.

As banks and thrifts tighten credit amid the slumping economy, some homeowners have become the targets of unscrupulous real estate operators who swindle them out of thousands of dollars in home equity or snatch their houses outright, authorities say.

Politicians, public interest lawyers and law enforcement officials from across the country say they have been inundated with complaints about unscrupulous lenders mostly targeting elderly residents in black neighborhoods who are often unaware how much their homes have increased in value as a result of the 1980s housing boom.

They say the problem has mushroomed in recent months as banks and other financial institutions have tightened credit and as the recession has forced residents of poor communities to borrow from alternative lenders to tide them over the hard times.

Although many banks and thrifts eschew originating home equity loans in some minority and lower-income communities, they often buy such loans from other lenders, attracted by high interest rates of 14% or more.

Last week, the House and Senate banking committees held joint hearings in Boston on the problems of home equity swindles and fraudulent foreclosures, which have victimized thousands of homeowners nationwide and cost title insurers more than $200 million a year in claims.

“This is a significant problem that needs to be addressed,” said Sen. John F. Kerry (D-Mass), a member of the Senate banking committee who attended the May 23 hearings.

The Boston City Council last week approved a resolution calling for a six-month moratorium on foreclosures by banks and lenders to allow officials to investigate whether as many as 4,000 residents of the city’s mostly black Roxbury, Mattapan and Dorchester neighborhoods have been victims of mortgage fraud.

The Home Defense Program of the Atlanta Legal Aid Society says it will launch an investigation into unscrupulous lenders Monday after receiving dozens of calls from elderly black homeowners in the Atlanta area who said they were unfairly lured into taking out expensive home equity loans.

“People have built up a lot of equity in their homes over the last decade,” said William J. Brennan Jr., director of the program, “and these unscrupulous companies see these homes as gold mines sitting there to be plucked.”

In Los Angeles, the Homeowners Outreach Center says it has received 211 complaints about equity swindles and fraudulent foreclosures in the first quarter of this year. That’s more than triple the number received during the same period in the early 1980s.

Los Angeles Deputy Dist. Atty. Robert M. Youngdahl said complaints to his office about home equity swindles have more than doubled in the past five years.

One lender whom Youngdahl has investigated, Kevin S. Merritt, 31, of Palos Verdes, is to be arraigned Friday in Los Angeles Municipal Court on 32 felony counts. Prosecutors allege that he induced dozens of mostly black, poor and elderly homeowners to borrow on their homes at high rates, then foreclosed on the properties, often using false or forged documents to establish for potential buyers that he held title to the properties.

Merritt, who headed a firm called Univest Home Loan Corp., could not be reached for comment. In interviews, he has defended his lending practices, saying on one occasion, “You default on a loan, you lose your house.”

“Because banks and savings and loans are not making the loans they should be making, they are opening the flood gates for unethical and unscrupulous money lenders to commit fraud on homeowners,” said Troy Smith, director of the Homeowners Outreach Center of the Legal Aid Foundation of Los Angeles. “It’s good that Kevin Merritt is finally getting prosecuted. But there are lots of Kevin Merritts out there . . . making unconscionable profits on the backs of poor people.”

Real estate swindles were common in Southern California and a few other parts of the country in the late 1970s after a run-up in prices. Despite new consumer protection laws aimed at curbing abuses, the problem has grown because unscrupulous operators now target unsophisticated homeowners whose financial environment is a world apart from the traditional arena of commerce.

Some residents of low-income neighborhoods use check cashing services instead of banks or thrifts because financial institutions often don’t focus their marketing efforts on them and may not have branches where they live. Also contributing to the problem are unethical lenders and home improvement companies that persuade some homeowners to pay for work by taking out costly home equity loans whose written terms are at odds with the contractors’ oral promise of easy and affordable payments.

What’s more, California’s old usury laws--which had set limits on mortgage interest rates--were largely removed in the early 1980s, when inflation briefly drove mortgage rates above 14%.

In a lawsuit filed in Los Angles Superior Court last January, retiree Eleanor Dauterive, 72, alleged that she became a victim when she turned to Samuel Savage and Ronald D. Perlstein last spring after falling behind on the mortgage on her two-bedroom home on Budlong Avenue.

Dauterive--whose sole income is a monthly Social Security check and a small pension that together are less than $800 a month--alleged that Savage, Perlstein, Shelly Kingman and three other defendants persuaded her to take out a $68,000 home equity loan to avoid the loss of her home.

Under terms of the loan, Dauterive was to pay $1,218.33 a month in interest payments for a year, with a balloon payment of $68,000 due in April, 1991. Dauterive’s suit alleges that the defendants intended to “mislead, induce or trick (her) into transferring” her home to them.

Critics say some financial institutions share as much blame for the questionable lending activity as unethical mortgage brokers. Although not all lenders who charge high interest rates engage in illegal or unethical practices, critics say the purchase of above-market mortgages by big banks such as Security Pacific in Los Angeles and Providence-based Fleet/Norstar helps sustain unscrupulous operators.

A lender can either hold a loan to maturity and make money off the interest and loan fees he charges or can sell the loan to another institution or investor on the secondary market.

Buying and selling loans on the secondary market has become more attractive in recent months, financial executives say, because federal officials have put pressure on banks and thrifts to tighten credit and increase capital. That’s because financial institutions aren’t required to keep capital on hand to back loans that they have sold. Banks and thrifts may also be attracted by the high interest rates offered on some loans on the secondary market, critics say.

“On the one hand, the banks say there is not enough business in poor and minority communities for them to serve,” said Rev. Charles R. Stith, president of the Organization for New Equality, a Boston-based group that focuses on issues of economic and social policy. “Then they turn around and buy these (mortgage) securities on the secondary market. Clearly, if it were not for the support of the major banks, this problem would not be widespread.”

“The allegation that banks aren’t doing their part in low-income and minority communities is false and not borne out by the numbers,” countered Christopher E. Chenoweth, general counsel for the California Bankers Assn. in San Francisco. “But we do have a credit crunch . . . and banks can’t help but reflect the condition of the economy.”

One indication of the scope of banks’ support of above-market loans on the secondary market surfaced last summer when Chicago attorney Daniel A. Edelman settled a massive class-action suit against Community Bank of Greater Peoria and Community Financial Services on behalf of 6,275 poor and elderly homeowners in the Chicago and St. Louis areas. The plaintiffs had obtained loans for home improvements that were secured by second mortgages on their homes.

According to a settlement agreement dated Aug. 17, the two lenders “improperly disclaimed responsibility for defective work performed by certain home improvement contractors” and “used unlawful means to induce consumers to enter into contracts.” The allegedly unlawful means included not stating the interest rate or number of payments in loan contracts, in some cases, and binding homeowners to contracts before the three-day waiting period required by law.

Some of the homeowners told lawyers that they had had trouble obtaining loans from banks and thrifts in their neighborhood. The banks that snapped up the loans on the secondary market apparently took a different view of the borrowers, even though their loans carried above-market interest rates of 14% or more, said Edelman.

The class-action suit does not allege that secondary-market buyers knew the loans were made as part of a home repair and lending swindle. But huge blocks of the loans were sold to big, reputable banks, including 1,500 purchased by Security Pacific Financial Services Inc., a unit of Security Pacific Corp. of Los Angeles.

Luke Hayden, senior vice president of consumer credit at Security Pacific, said he was not aware of the loan purchases but said that “we would generally not be a participant” in a deal to buy above-market-rate mortgage loans. Hayden conceded, however, that homeowners in minority and low-income communities might be lured into taking out above-market mortgages because some banks don’t effectively market their services to such residents.

“Security Pacific goes to great lengths to originate loans in all of its constituent neighborhoods,” he said, “but from an industry perspective, there is a problem.”