Loan Rangers

By David F. Carr  |  Posted 2005-09-09 Print this article Print

No mortgage loan gets made without a processor; and no processor makes a loan without running the applicant's personal and financial background through software that can—in theory, if not in practice—reject those borrowers who can't legitimately

Former Ameriquest employees such as Bomchill; Joseph Khaliq, a former loan agent in the company's San Mateo, Calif., office; Lisa Taylor, a former loan agent at a Sacramento, Calif., branch; and Brien Hanley, who used to write loans at an Ameriquest branch in Kansas City, Kan., say heavy use of direct mail pitches, intensive cold-calling sessions from telephone banks, and even door-to-door canvassing for customers in minority and low-income neighborhoods helped vault Ameriquest to the top rank of home-loan originators.

According to Friedman Billings Ramsey & Co., an investment banking firm based in Arlington, Va., Ameriquest Mortgage last year accounted for almost a third of the $83 billion in loans generated by Ameriquest Capital Corp., its parent company.

Ameriquest is unusually profitable at it. According to the Mortgage Industry Directory, Ameriquest Capital earned $1 billion on $41 billion of loans it produced in 2003.

By comparison, Countrywide Financial Corp., based in Calabasas, Calif., generated $2.3 billion in the same period—on $434 billion in loans.

Ameriquest Mortgage's specialty? Focusing on the "sub-prime" borrower—Americans with less than perfect credit ratings, but dreams of moving into a new or bigger home. The benefit? It can charge 2 or 3 percent more than normal rates. That bolsters profits, but stretches borrowers to their limits.

For example, a standard 30-year loan for a $250,000 home at an interest rate of 5.75 percent would leave the borrower with a monthly payment of $1,458.93. At the end, a typical borrower will have paid $525,216.75 for the home, of which $275,216.75 was interest.

The sub-prime borrower paying Ameriquest 7.75 percent, by contrast, would have a monthly payment of $1,791.03. By the time the loan was paid off, the borrower would have paid $394,771.19 in interest—more than $129,000 extra.

Managed well, lending to riskier customers can be a difficult but legitimate way of making more money than the next outfit in a booming business. And it gives more people chances to own homes.

But according to former loan processors for Ameriquest, as well as Massachusetts Attorney General Thomas Reilly and Connecticut Attorney General Richard Blumenthal, Ameriquest's business practices indicate that individual loan agents routinely circumvented the company's loan processing system to approve loans and inflate the fees and interest rates charged.

One loan officer who worked from 2002 to 2004 at Ameriquest's branch in Lincoln, R.I., says large bonuses went to salespeople who pushed interest rates as high as possible. The loan origination system put few constraints on the games a salesperson could play, according to this loan officer. "To price a loan higher, you could tweak it literally all day," he says.

Documents, he adds, were altered to show higher incomes for applicants, and appraisers were encouraged to raise valuations on properties to make loans go through.

New safeguards, such as standardized pricing and automated checks of appraisals, were deployed by the end of 2004, according to the loan officer—but only because of the threat of lawsuits and regulatory action. "They did it, essentially, with a gun to their head," he says, a year later.

But it's not just former employees who have expressed concern with Ameriquest's aggressiveness. Attorneys general in 30 states and thousands of Ameriquest customers say volume often was a product of unethical and, they contend, illegal practices.

According to statements from a class-action lawsuit filed in U.S. District Court in San Francisco early this year, loan agents routinely witnessed or participated in falsifying data that was then entered into the Ameriquest loan processing system.

Joseph Khaliq, who worked in the San Mateo branch from late 2001 to late 2003, said in a sworn affidavit that some Ameriquest loan agents would "ask borrowers to sign blank documents. After the borrowers would leave, employees would fill out the loan documents as they saw fit ... I [also] witnessed employees at the San Mateo branch forge borrowers' signatures on loan documents."

Khaliq added that on several occasions, Ameriquest loan agents would tell borrowers to write a much higher income than they truly earned in the "stated income" field on the application to ensure the loan would be approved.

"Borrowers were not asked to be nor encouraged to be truthful in this," Khaliq said in his statement.

In one 2004 case, Idanel Bonaparte got a loan for $108,000 from an Ameriquest branch in Tampa, Fla. Her financial assets included a 401(k) account worth $25,456.53.

A month later, Linda Hubbard refinanced her home with a $211,000 loan from Ameriquest. Her application also included a 401(k) account with the exact same $25,456.53 balance. And two months later, Romy Hodge refinanced her house with a $75,000 loan and, much to her surprise, she, too, was credited with a 401(k) account that had a balance of exactly $25,456.53.

Hubbard and Hodge say they did not provide this information. According to attorneys representing the borrowers in a class-action suit filed in Florida, this was an example of how loan agents were recycling legitimate financial documents to get loans approved and processed through the Empower system, which Ameriquest installed in April 2001; software that is used by other mortgage companies as well.

Story Guide:

  • Ameriquest Home Loans: Cracking Under Pressure: Even in a fertile market, it's possible to set your sales goals too high.
  • Loan Rangers: Ameriquest became unusually successful digging up loan candidates others may have overlooked.
  • Settling Up: Ameriquest's hard-sell tactics worked but, say investigators, violated a series of consumer-protection laws.
  • Riding the Sub-Prime Wave: As the house market heated up, borrowers stretched themselves to foreclosure-threatening lengths; and lenders helped them.
  • No-Touch Funding: Believing in your applicants can go too far, and get you both in trouble.
  • Who's to Say: Automation was supposed to make loan approvals faster, easier and more accurate; did the system fail, or did the officers handling the loans?
  • Tighter Controls: Making requirements stiffer only works if enforcement gets tighter as well.
  • Penalties for Abuse: Ameriquest denies wrongdoing, relies on IT for process improvements, and may face penalties in the hundreds of millions from class-action suits.
  • Avoiding the New Restrictions: It's one thing to let borrowers overextend themselves; it's something else to deceive them into doing it.
  • Ameriquest's Business, By the Numbers

    Next page: Settling up.

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    David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.

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