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Colorado Tackles Mortgage Fraud Schemes

Marketers barred from selling risky loans

November 25, 2008
With mounting foreclosures and rising unemployment, the State of Colorado has taken a number of actions against deceptive mortgage brokers and foreclosure rescue firms.

Colorado Attorney General John Suthers said his office began investigating numerous mortgage brokers and foreclosure rescue firms in late 2006 and early 2007, as the foreclosure crises reached its tipping point. Several of those investigations have recently concluded, the results of which are summarized below.

The state has reached settlements with several local mortgage firms, setting a new, statewide standard for truthful advertising of mortgage loans. The companies, Denver's Arbor Financial, Inc. and 5280 Financial Group, and Centennial-based Mortgage Toolbox, have agreed to settlements that will eliminate the deceptive use of teaser rates in mortgage loan advertisements.

Each of the three companies ran ads in the "Mortgage Marketplace" sections of the Denver Post and Rocky Mountain News, advertising low teaser rates and/or low minimum monthly payments associated with option ARM loans. Disclosures of true interest rates and other loan terms were buried in agate footnotes, if included at all. Several of the brokers interviewed during the course of these investigations remarked that these advertisements "made the phones ring."

As part of the settlements, each of the brokers has agreed to advertise only traditional fixed rate loans or traditional ARMs, not option ARMs. The firms also have agreed to include certain disclosures about material loan terms in readable print. Finally, the brokers must ensure that at least 24-hours prior to closing, each borrower will be provided with a copy of the Consumer Handbook on Adjustable Rate Mortgages.

The attorney general has filed civil claims under the Colorado Consumer Protection Act in Arapahoe County District Court against Englewood-based Home Mortgage Solutions, Inc., and three associated individuals: owners Toan Le (aka James Le) and An Nguyen, and general manager Leonard Smith.

Home Mortgage Solutions allegedly used direct mail to market risky option ARM loans to borrowers without disclosing the associated risks. The complaint alleges that Home Mortgage Solutions misrepresented the low introductory rate as a permanent interest rate, and made refinancing nearly impossible with prepayment penalties, facts which Home Mortgage Solutions failed to disclose to borrowers.

In another action, Suthers said he has reached a settlement with Englewood's Encore Lending, LLC, and one of its owners, Paul Baker, for depositing money into borrowers' accounts and inflating their incomes to qualify them for larger loans. Baker has agreed to surrender his mortgage broker license.

The Attorney General has also reached a settlement with Sacramento, California-based mortgage broker Tri-Point Realty, which sent letters to Colorado homeowners that appeared to be from a homeowner's bank. The letters urged the homeowner to refinance to take advantage of his home's increased value. Tri-Point, however, had no affiliation with the lender and did not conduct any research to determine if the home had actually increased in value.

Mail that appears to come from the government or a homeowner's bank is more likely to be opened and considered by the homeowner, and thus places honest advertisers at a disadvantage. The settlement prohibits Tri-Point from further misrepresentations in its advertisements.

The Attorney General's Office has also taken action to protect homeowners who are in foreclosure from "rescue" firms who are not following Colorado's Foreclosure Protection Act, which passed during the 2006 legislative session. To date, the Attorney General's Office has reached Cease & Desist agreements with 15 companies to prevent them from operating in Colorado until they follow this law.

Many distressed homeowners in foreclosure are bombarded with solicitations from companies that offer to help save their homes. Under the Foreclosure Protection Act, homeowners enjoy many protections against abusive tactics. Rescue firms cannot accept an upfront fee and must provide the homeowner with a contract that specifies the services to be performed. Rescue firms are also prohibited from taking a lien or interest in the title to the home unless they provide certain disclosures.

Under the Cease & Desist agreements, seven rescue firms have agreed to cease operations in Colorado until they comes into compliance with the Foreclosure Protection Act. Companies that have agreed to cease & desist during 2008 include:

• Crisis Management, LLC, located in Glendale, Arizona

• Davis Foreclosure Assistance, located in Englewood, New Jersey

• The Debt Advocacy Center, located in Cleveland, Ohio

• Franklin Equity, located in Santa Ana, California

• HomeAssure, located in New York, New York

• National Foreclosure Counseling Services, located in Jacksonville, Florida

• New Hope Modifications, located in Bellmawr, New Jersey

An additional eight companies have previously reached Cease & Desist agreements with the Attorney General since the Foreclosure Protection Act was enacted, including one Colorado company, Denver Home Rescue.

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