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Penalties for Abuse

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

If this keeps up, according to the American Banker, a trade publication, "a potential settlement [of class-action lawsuits by borrowers] could top the record $484 million that Household International paid in 2002 to settle predatory lending allegations by regulators from all 50 states."

Ameriquest denies any wrongdoing, but noted in court that it was looking to its systems to curb any abuse.

In the June class-action settlement, for instance, the lender said in court papers that the potential for such abuses was eliminated by a switch to a benchmarked loan pricing software system, implemented in 2003, "which substantially eliminates discretion from branch personnel to change loan terms in a pattern of bait and switch."

The software was designed, according to the statement, "to ensure systemwide use of risk-related criteria in loan pricing, and reduce the possibility of discriminatory or discretionary loan pricing at the branch level."

(Ameriquest limited the settlement offer primarily to consumers who claimed to have been misled about the terms on loans issued prior to 2003, when the pricing software was introduced.)

Ameriquest officials say this is a reference to a software "engine" for enforcing pricing rules that is integrated with both its loan origination system and its newer mortgage sales portal, SNAP.

Because the pricing rules are based on objective factors for determining risk, such as the applicant's income or the ratio of the loan amount compared with the value of the property, the software helps prevent discriminatory pricing or arbitrary price changes.

A former systems consultant to Ameriquest reviewed the pricing system while it was in development and found it to be well designed and fair.

According to the consultant, the system uses more than 80 factors to determine the risk and price of a loan, such as the ratio of the loan amount to the appraised value of the home.

It was still possible to alter the pricing recommended by the software, the consultant says, but the salesperson would need to get approval "from two levels up in management" to make that change.

While Ameriquest prefers to paint the addition of this pricing system and other antifraud measures as part of its "continuous improvement" processes, it's also easy to see it as a reaction to lawsuits and regulatory scrutiny, says Craig Focardi, a TowerGroup analyst who studies technologies for consumer lending businesses.

Meanwhile, the financial crimes unit of the Federal Bureau of Investigation told Baseline that it is investigating allegations of fraud in the mortgage industry, but the agency would not elaborate.

"We cannot identify any specific companies in our investigations," says an FBI special agent who spoke on the condition of anonymity. But, he said, "we're taking a close look at mortgage lenders throughout the country."

That itself could improve systems. "When you start thinking in terms of being caught by the FBI, it goes from a cost of doing business to being put out of business," Focardi says.

Ameriquest is not the only mortgage firm scrambling to improve its underwriting standards and fraud prevention processes, Focardi says, "but they do have a big target on their back" because they are the largest sub-prime lender.

Although systems changes did make it harder for Ameriquest agents to play games with loan terms, some of the abuses continued, according to the former Rhode Island loan officer.

For example, to comply with the Real Estate Settlement Procedures Act of 1974, Ameriquest devised a system that would trigger the automatic printing and mailing of new disclosure documents, as well as notification of a mandatory delay in the closing date if a loan was changed, for example, from a 30-year fixed-rate mortgage to an adjustable-rate mortgage.

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: Avoiding the new restrictions.

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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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