Midwest Mortgage Lender Agrees to Settle Illegal Lending Charges Brought by FTC, HUD, and State of Illinois

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.

HUD

Since taking office, Secretary Martinez has made enforcement a top priority in his Administration. For example, HUD is working closely with the Department of Justice (DOJ) in enforcing the nation's housing discrimination laws. HUD is also partnering with the Environment Protection Agency and DOJ in protecting children from the dangers of lead poisoning.

Under Secretary Martinez's leadership, HUD is proposing to strengthen the regulatory requirements of the RESPA that would make the process of buying and refinancing a home significantly simpler and potentially less expensive, and would protect consumers from unscrupulous lending practices. In addition, Martinez recently announced five major settlement agreements with mortgage lenders and service providers with payments of nearly $2.3 million. HUD will spend $1.5 million to investigate RESPA violations, a six-fold increase over current funding, and is more than doubling its investigative staff to further bolster its RESPA enforcement activities. HUD also is increasing its effort to educate homebuyers in ways to avoid predatory lending practices in the first place.

Consumer Education

The Commission has published a series of free publications specifically for homeowners and potential home buyers. As part of its consumer education program, the FTC offers these tips to help consumers protect their home and their equity:

• Shop around. Costs vary greatly. Comparing loan plans will help you get a better deal.
  
  
• Be cautious about lenders who are pushy and insistent.
  
  
• Ask questions. If you don't understand any loan terms and conditions, ask to have them explained to you until you can explain them comfortably to another person.
  
  
• Carefully read all the documents and ask someone you trust to look at them for you.
  
  
• Don't sign any documents that have wrong or false information, or have blank lines.
  
  
• Never feel pressured into signing a loan. If the loan isn't what you expected or wanted, don't sign. Either negotiate changes or walk away.

The complaint against Diamond and OSI was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division, in Chicago, earlier today. The Commission vote to file the complaint was 5-0.

Approval by the court and have the force of law when signed by the judge.

NOTE: The Commission files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.

The complaint and stipulated final judgment and order in the Mercantile Mortgage case were filed in the U.S. District Court for the Northern District of Illinois, Eastern Division, in Chicago, earlier today. The Commission vote to file the complaint and settlement was 5-0.

NOTE: A stipulated final judgment is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Stipulated final judgments are subject to ap

Copies of the complaint and stipulated final judgment in the Mercantile Mortgage case, and the complaint against Mark Diamond, as well as the consumer education materials are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

Howard Shapiro,
Office of Public Affairs
202-326-2176

Joel Winston or Peggy Twohig,
Bureau of Consumer Protection
202-326-3224

Brian Sullivan,
Office of Public Affairs
U.S. Department of Housing and Urban Development
202-708-0685 x7527

Lori Bolas, Deputy Press Secretary
Illinois Attorney General's Office
312-814-2518

(Civil Action No.: Mercantile Mortgage - 02C 5079 (Judge Guzman))
(Civil Action No.: Mark Diamond - 02C 5078 (Judge Zagel))
(FTC File No.: 002-3321)