A Texas mortgage lender will pay $4.5 million for its role in a scheme to sign North Carolina consumers to loans they couldn't afford on overpriced modular and manufactured homes.

Mortgage lender W.R. Starkey Mortgage, L.L.P. of Plano, Texas, provided home loans for North Carolina consumers who bought homes from Phoenix Housing Group, Inc. between January 2007 and September 2008.

"A family should have the opportunity to buy a home without inflated prices and questionable financing," Attorney General Roy Cooper said. "I'm pleased that consumers who fell victim to this scheme now have a chance to get money back."

Homeowners 'under water'

Cooper claimed Starkey worked with Phoenix to qualify borrowers for loans improperly and finance the sales of manufactured homes and land at inflated prices. As a result, consumers wound up with loans that exceeded the actual value of the homes they purchased.

Specifically, the allegations contend that Starkey employees and agents failed to verify financial information provided about borrowers by Phoenix, disguised the source of the information, placed inaccurate information on consumers' credit reports to boost their ability to qualify for loans, made loans without regard to borrowers' ability to repay, and added discount points to mortgages without reducing the interest rate as required by law.

After Starkey officials were notified of the fraud, they quickly agreed to corrective actions and consumer refunds. Under a consent judgment between Starkey and the Attorney General's Office, Starkey will:

• Pay $4,446,000 to 171 families who purchased mobile or manufactured homes from Phoenix, a refund of $26,000 per family;

• Pay $125,000 for consumer education and to cover the costs of the enforcement action; and

• Pay $25,000 to the Western Piedmont Council of Government to help provide financial counseling to consumers who receive refunds under the settlements.

Additional sanctions

In addition, Starkey is permanently barred from making loans when a manufactured housing dealer is a party to the deal, collecting financial information about prospective borrowers from anyone other than the borrowers, and charging discount points unless requested and paid by a borrower to reduce the interest rate. Starkey must also make sure that its underwriters comply with all rules.

Letters will go out this week to all consumers who are eligible for refunds from Starkey. Cooper's office will send the letters to consumers at their last known addresses. Any consumer who believes he or she is eligible for a refund who does not receive a letter is encouraged to call the Consumer Protection Division at 1-877-5-NO-SCAM toll-free within North Carolina or (919) 716-6000 out of state.

Cooper filed suit in November 2009 against Starkey, Phoenix, and a third company, K&B; Homebuilders, as well as several individuals connected with the companies. The case against Phoenix and K&B; remains active, and the AG is asking the court to ban them permanently from engaging in deceptive activities and to order refunds and civil penalties. A preliminary injunction remains in place against K&B;, its owners and other employees.

Other judgments

The court has also approved a consent judgment against one former Phoenix and K&B; employee, George William Varsamis, for his role in the scheme to put consumers in overvalued homes. Varsamis is banned permanently from engaging in any unfair or deceptive practices related to housing or land sales in North Carolina and must pay $500 for investigative costs. If he is found to violate the judgment, he will also owe the state $100,000 in civil penalties.

Phoenix is headquartered in Greensboro but also does business as HomesAmerica and Southern Showcase Housing. Phoenix has multiple offices across the state and at one time operated in Asheboro, Asheville, Burlington, Granite Falls, Greensboro, Hendersonville and Winston-Salem. K&B; was founded by a former Phoenix employee and sold stick-built homes, modular home/land packages, and foreclosed homes in Catawba, Burke and Caldwell counties.