CUOMO ANNOUNCES HOMEOWNER PROTECTION INITIATIVE TO END
CONTRACTOR RIPOFFS IN HUD'S HOME IMPROVEMENT LOAN PROGRAM

To end the scam, Cuomo said the Department of Housing and Urban Development has initiated rule-making to shut down the contractor-originated portion of the Title I home improvement loan program.

HUD insures loans under Title I to help finance home renovations and repairs. More than half of the homeowners are low-income families.

HUD's rule would prevent contractors from working directly with homeowners to provide HUD-insured financing for home improvement loans through approved lenders. Instead, homeowners would deal directly with lenders. Loans originated by lenders would not be affected by the new rule.

Cuomo said a four-month HUD review of the 63-year-old Title I home loan program found that unscrupulous contractors are performing shoddy work, falsifying documents, overcharging homeowners, and circulating deceptive advertising.

Cuomo said HUD is taking complaints from the public about contractor fraud under the Title I program on a toll-free telephone line: 1-888-466-3487.

"These people are not legitimate contractors," Cuomo said. "They are moneychangers. They have led homeowners down a path of deception. They promised beautiful homes, but instead delivered shoddy work and overpriced materials. They literally ripped up homes and then ripped off homeowners and the public."

Problems with the Title I program are not new. A 1986 Inspector General�s audit raised problems with the program. In 1989, HUD recommended terminating the program, but Congress suggested more mandatory and tougher sanctions. The problems have persisted.

There are two types of Title I loans. Dealer loans are originated by contractors who act as middle-men between homeowners and lenders. Lender loans are made directly to homeowners.

Because HUD insures Title I loans, it loses money every time a homeowner defaults. From 1987 to 1996, HUD paid $114 million in claims on contractor-originated loans.

"We want to eliminate the fraud but protect the service to homeowners," Cuomo said.

"Elimination of contractor loans will not impact the ability of homeowners to get their services," Cuomo said. "Homeowners still will be able to obtain home improvement loans directly from Title I lenders -- loans that are not often available to working, low-income families in the conventional market. However, these families will be protected from unscrupulous contractors; there will be greater accountability, and the cost to taxpayers will be reduced."

Title I loans range in amounts from under $5,000 to a maximum of $25,000.

The Secretary also announced enforcement action against 16 contractors as part of a crackdown on Title I ripoffs.

HUD barred these four Texas contractors from doing any business with the federal government for a year: National Homes Services, American Applicators and Texas Remodelers of Houston, and American Eagle of Hockley.

In addition, HUD barred these 10 contractors from participating in the Title I program for a year and levied civil penalties of up to $5,500 against each: Landmark Building and Remodeling, Inc. of Little Rock, AR; Fort Bend Builders and Supplies, Inc., of Stafford, TX; Modern Exteriors of Houston, TX; Classic Siding, a division of G.R.B.D., Inc, of Beaumont, TX; Lane's Home Improvement Co., Inc., of North Kansas City, MO; Lone Star Remodeling of Texas of Friendswood, TX; First Capital Home Improvements of Memphis, TN; Five Star Ventures of Houston, TX; All Town Construction of Manahawkin, NJ; and First Choice Siding and Windows, Inc., of Kansas City, MO.

Two more contractors -- Classic Exterior Designs of Mobile AL, and A&W Siding & Window of Denver, CO -- were barred from Title I participation for a year.

Cuomo said additional enforcement actions will be taken against contractors after HUD's review is completed in other states with high contractor/dealer activity, such as California, Pennsylvania and Illinois.

"This scam is really three crimes in one," Cuomo said. "Homeowners get suckered, scam contractors get off scott-free, and taxpayers get stuck with the bill. Since at least 1989, Congress and HUD have tried to correct these problems through various laws and regulations, to no avail. Enough is enough. We want to end this."

Joining Cuomo in today's announcement was Bernice Shepard, a member of the Board of Directors of the American Association of Retired Persons. Many borrowers under the Title I program are older Americans.

"AARP supports the regulatory reforms being announced today by Secretary Cuomo to end the potential of abuse by dealer/contractors and to increase the responsibility of lenders to ensure that Title I funds are made available for proper purposes," Shepard said.

Typical contractor abuses include:

• False advertising by contractors and their implication that loans had been pre-approved.

• Contractor failures to complete work, falsifying work as completed, and contractor coercion of borrowers to get them to claim work was completed.

• Contractors working with borrowers to falsify financial information -- such as income, assets, and liabilities.

• Contractor-originated loans to borrowers who didn't earn enough to repay loans.

• Contractor falsification of loan documents to allow borrowers to exceed their borrowing limits.

This "path of deception" costs taxpayers millions of dollars because the claim rates for loans originated by contractors are consistently higher than for lender loans.

HUD's analysis of the loans originated from 1987-1994 shows a claim rate for contractor loans of 6 percent, compared with 3.5 percent for lender loans. This rate means borrowers failed to pay on 6 percent of the loans originated by contractors. Most of the contractors that HUD is acting against are based and work primarily in Texas, the state with the largest number of contractor-initiated loans, also known as "dealer" loans.

Contractor loans are made by contractors that advertise their services through newspaper ads or door-to-door marketing. The loans provide HUD-insured financing through the use of an installment sales contract, which is purchased by approved Title I lenders.

FHA first began offering home improvement loans in 1934 in an effort to assist low-income families with home repairs and renovations. Since that time, almost 35 million loans have been made to homeowners. From 1987, 790,000 loans have been made -- 43 percent by contractors, and 57 percent by lenders -- totalling $2.9 billion in contractor loans and $5.1 billion in lender loans.