Consumer Law Classic: Testimony of a Predatory Lender

by Jeff Sovern

Though many of the postings on this blog concern breaking developments, sometimes it's uesful to bring to light something that, even though not a new development, may not be well known and still bears on an issue of today.  In that spirit, let me call your attention to the testimony of "Jim Dough," (the pseudonym of a self-described former employee of a finance company) taken during a hearing before the Senate Special Committee on Aging on March 16, 1998, titled “Equity Predators: Stripping, Flipping and Packing Their Way to Profits.”  The testimony helps explain how predatory lenders persuade consumers to agree to terms that are not in their best interests.  Unfortunately, the link connects only to the prepared testimony, and interesting points were also made during "Mr. Dough's" discussion with Senator Breux.  For that reason, and fot those who don't want to read the entire statement, I'm going to paste in here some of the highlights of the testimony, drawn from both the prepared statement and the colloquoy:

Finance companies try to do business with blue-collar workers, people who haven't gone to college, older people who are on fixed incomes, non English-speaking people and people who have significant equity in their homes. In fact, my perfect customer would be an uneducated widow who is on a fixed income -- hopefully from her deceased husband's pension and social security -- who has her house paid off, is living off of credit cards, but having a difficult time keeping up her payments, and who must make a car payment in addition to her credit card payments.

* * * [W]e were trained to sell the monthly "savings," that is, how much less per month the customer would be paying if we flipped the loan. In reality, the "savings" that we were trained to sell to customers were just an illusion. The uneducated customer would jump for the "savings," thinking that he would have more money to buy other things.

What the customer wouldn't figure out and what we wouldn't tell him is that he would be paying for a longer period of time and in the end would pay a whole lot more.* * *

* * * We were instructed and expected to flip as many loans as possible. * * *

* * * Delinquent customers made good flipping candidates because we could put additional pressure on them. We were instructed to tell those customers that they could either bring their account balance current or refinance their loan. We knew that these customers would almost always agree to refinance because they didn't have the money to pay on their current loan and did not want the finance company to institute foreclosure or collection proceedings.

* * *

* * * The practice is to charge the maximum number of points legally permissible for each loan and each flip, regardless of how recently the prior loan that was being refinanced had been made. The finance companies I worked for had no limits on how frequently a loan could be flipped, and we were not required to rebate any point income on loans that were flipped.

* * *

We attempted to pack insurance during our very first pitch to a new customer. * * *The sales pitch would be substantially similar to the following: "Mr. Smith, in reviewing your loan application, I see that you have a lot of credit card payments. What if I could save you $550 a month through consolidating your debt into one loan?" I was taught that the most effective way to sell insurance was to always include insurance products in [the] quote without telling the customer that my monthly quote included insurance. * * *

* * * [I]f the customer did not express interest in my initial quote, I could eliminate one insurance product (without telling the customer that I was doing this) and give a quote for an even larger monthly savings. For example, if the customer rejected my pitch to save him $550 a month, I would eliminate one insurance product and respond "Suppose I could save you $600 per month?" Usually, the more naive the customer, the more insurance I would pack on the loan before I made the initial monthly payment quote.* * *

* * *

* * * [C]ustomers were not aware, until closing (if at all), that the loan included insurance. Once the customer indicated that we could schedule a closing regarding the loan proposed in the telephone solicitation, we merely presented the loan documents with insurance included, even though insurance had not been discussed previously. Through their training and experience, finance company employees know that customers are often desperate for the money, and usually will not object to the insurance once the loan reaches closing. If customers objected to the insurance at closing, we would add more pressure by telling them that if they wanted the loan without insurance, it would be necessary to re-do their loan documents and the closing would need to be rescheduled for a later date. That was a half-truth. We could re-do the loan documents in a few minutes. It wasn't really necessary to reschedule the closing for a later date, but we knew that customers would be more likely to cave-in and accept the insurance if they thought that they couldn't get the money that day. In my experience, this was usually enough to persuade the customers to go through with the closing and take the insurance.

* * *

* * * [T]he pressure to produce loan volume and insurance sales is so great that on many occasions, I've seen finance company employees commit forgery on a massive scale. These employees have forged everything from insurance forms, RESPA documents, income verification forms, and even entire loan files.

* * *

Our entire sale is built on confusion.  Blue-collar workers tend to be less educated.  I know I am being very stereotypical, but they are the more unsophisticated.  They can be confused in the loan closings, and they look to us as professionals * * * they are more trusting toward us.

* * *

Senator Breaux: * * * Is it not required by Federal regulation or State regulation that that information be clearly presented to the customer—that if you keep your loan, here is what you pay and what you finish with, and if you refinance with us, here is how long it is going to take you, and here is how much you are going to pay—in simple English?

Mr. Dough:  It is written in simple English, and it is on all the loan documents, but I can get around any figure on any loan sheet.

* * *

Senator Breaux:  On the packing question, requiring them to buy credit life and life insurance and other insurance in order to get the loan, is there any requirement in the law that would spell out whether insurance was needed, and if so, how much is necessary, or is pretty much an open-ended situation.

Mr. Dough:  There are requirements saying that you must tell the customer, with and without insurance, the loan payments, the total of the loan.  In the paperwork, it shows that it is optional, and you have the questionnaire, but again, that is just like all the other figures.  The customers believe what I tell them.

Senator Breaux:  Was it a common practice, in other words, to insinuate to the customer that you would not make the loan without insurance?

Mr. Dough:  Yes, you would insinuate that.  You would tell them the importance of having the insurance on there.

Senator Breaux:  Was that part of a disclosure form that was given to the customer that was lost in the pages and pages on information?

Mr. Dough:  Yes, it got lost, but if a customer is backing out of the insurance, then you just delay the loan until he agrees to take it.  There are laws saying that I have to disclose the information.  There is no law saying in what time period I have to do a loan.

Comments

[John]

Purchasing a new home to bail out on a mortgage that will soon be too expensive can often provide homeowners with additional benefits in terms of their credit, as well. With two mortgages, the late payments and foreclosure of the first house will not drag down the homeowners' credit scores as much as if they owned only one home. This can offset some of the devastating effects of foreclosure and allow foreclosure victims to obtain new credit in a much shorter time than if their only home was foreclosed. If homeowners understand the moral and financial consequences of such an action, this method of avoiding becoming a former homeowner can give families a great head start on the road to financial recovery despite a very recent foreclosure.
http://www.thejohnbeck.tv

[Jeff Sovern]

Thanks for this comment, Brian. I always wonder how worthwhile my posts are, and the feedback is useful.

[Brian]

Jeff: This is a terrific post. I worked on a packing/flipping case several years ago, in which the lenders hid behind their carefully constructed loan documents, making it difficult to make out (what seemed to me) a damning case against the lenders. It would have been nice if the plaintiffs had had a witness like Mr. Dough.