HUD Archives: News Releases
July 18, 2002
MIDWEST MORTGAGE LENDER AGREES TO SETTLE ILLEGAL LENDING CHARGES
BROUGHT BY FTC, HUD, AND STATE OF ILLINOIS
FTC, Illinois Also File Suit Against Mortgage Broker
The Federal Trade Commission, the U.S. Department of Housing and Urban Development
(HUD), and the State of Illinois today announced that subprime lender Mercantile
Mortgage Company, Inc. (Mercantile) has agreed to settle charges that the company
deceived borrowers about the terms of their loans in violation of the Federal
Trade Commission Act (FTC Act) and the Illinois Consumer Fraud and Deceptive
Business Practices Act, and also violated the Real Estate Settlement Procedures
Act (RESPA). According to the FTC, the alleged deception resulted in many borrowers
not knowing that their loans required large balloon payments at the end of their
terms. The proposed settlement would require the company to make a $250,000
payment for consumer redress and create a program to offer refinanced loans
on favorable terms to certain borrowers with balloon loans.
In a separate matter, the FTC and the State of Illinois have filed suit in
federal district court against mortgage broker Mark Diamond and OSI Financial
Services, Inc., a company owned and controlled by Diamond, charging them with
deceiving borrowers about the terms of their loans. Diamond referred many of
the loans he brokered to Mercantile.
"These cases demonstrate that the FTC, acting with other federal and state
law enforcers, will continue to aggressively pursue deceptive practices in the
subprime mortgage lending industry," said FTC Chairman Timothy J. Muris.
"In the last four years, the Commission has brought 17 law enforcement
actions against subprime lenders allegedly engaged in deception or other unlawful
While the enormous growth of the subprime mortgage industry has opened the
door to consumers who had limited access to the credit market, consumers often
confront unlawful lending practices in the subprime mortgage market, according
to the federal authorities.
"Today, we come together with the Federal Trade Commission with one common
purpose to protect vulnerable people from those who would prey upon them,"
said HUD Secretary Mel Martinez. "By pooling the resources of HUD and the
FTC, we are continuing to curb the deceptive practices of lenders and other
service providers and, in the process, be a more forceful voice for preserving
the American Dream."
Although subprime lenders may expand access to credit to individuals who otherwise
would be shut out of the market, the government said, unethical lenders use
deceptive practices to hide from consumers essential information they need to
make decisions about their single greatest asset B their home.
"This type of fraud has such a devastating impact on victims because for
many people, the equity in their homes has taken a lifetime to build and represents
their life savings," Illinois Attorney General Jim Ryan said. "We
will continue to work with the FTC and other law enforcement agencies to protect
consumers from predatory lending."
Mercantile, headquartered in Westerville, Ohio, offers mortgage loans to consumers
in 23 states. Its business is primarily in the subprime market, which includes
consumers who are considered greater credit risks. Many of the loans originated
by Mercantile were covered by the Home Ownership and Equity Protection Act (HOEPA),
which covers certain high-cost loans secured by the borrower's home. For these
loans, the lender is required to provide certain key disclosures (HOEPA Disclosures)
three business days before closing the loan.
Mercantile solicits loans through its own employee loan officers, as well as
third-party mortgage brokers. The complaint alleges that one of those brokers,
Mark Diamond, acted as Mercantile's agent in soliciting and closing loans on
its behalf. This case is the first in which the FTC has charged a mortgage lender
for the actions of a third-party broker.
The complaint names as defendants Mercantile and two of its officers, Bran
Silveous and Ronald Noble. The complaint charges that the defendants, through
Mercantile loan officers and Diamond, engaged in numerous deceptive and other
illegal practices to induce consumers to borrow from Mercantile. A significant
number of Mercantile's loans were 15-year loans requiring a large lump-sum balloon
payment at the end of the term, usually 80 percent of the loan amount. According
to the complaint, Mercantile misled borrowers by misrepresenting or concealing
the balloon payment. In addition, the complaint alleges that, in many instances,
Mercantile failed to disclose the balloon payment on the HOEPA Disclosures,
as required by HOEPA, or to provide the HOEPA Disclosures at all.
The complaint also charges that Mercantile made a number of other misrepresentations
about the key terms and costs of its loans, including the interest rate, monthly
payment, and prepayment penalty, and that Mercantile violated both the Truth
in Lending Act (TILA) and the FTC's Credit Practices Rule. The complaint also
contains HUD's allegation that Mercantile violated RESPA by giving and receiving
illegal kickbacks for the referral of loans. According to the complaint, during
a nearly three-year period, Diamond referred virtually every one of his loan
customers to Mercantile in exchange for a broker fee typically as high as 10
text of STIPULATED FINAL JUDGMENT AND ORDER)
The settlement order, which is subject to court approval, permanently enjoins
the defendants from misrepresenting the terms, costs, or other conditions of
any loan to consumers, and from violating HOEPA, RESPA, the TILA, and the Credit
The proposed order also provides for 1) a $250,000 payment to the FTC to be
used for consumer redress, and 2) the creation of a program enabling certain
borrowers with balloon loans to refinance into new loans with no balloon payment.
As part of the program, Mercantile will pay the closing costs for the refinance,
including its own fees as well as those imposed by third parties, such as title
insurers. (In some cases, consumers may have to pay a small amount of the closing
costs, but no more than $200.) The refinanced loans will be for terms of 30
years at a fixed interest rate, with no prepayment penalty or balloon payment.
Mercantile also must offer the lowest interest rate available for each specific
borrower, given the borrower's credit rating. In no event can the rate be more
than 0.3 percent higher than the borrower's current rate.
A borrower is eligible for the Refinancing Program if the borrower:
- Obtained a residential mortgage loan (other than for property containing
more than two units) between January 1, 1998 and December 31, 2001, directly
from Mercantile in Ohio or Indiana, or through broker Diamond in Illinois;
- Has a balloon loan and certifies that he either believed or was told that
there was no balloon payment;
- Has not paid off or refinanced the note;
- Is not a debtor in a bankruptcy proceeding; and
- Does not have the property listed for sale with a real estate agent.
The FTC will notify potentially eligible borrowers by mail over the next few
months about how to apply for the program.
The Complaint against Mark Diamond and OSI
According to the FTC/Illinois complaint, Diamond targets homeowners with poor
credit who might have trouble obtaining conventional home equity financing,
and offers to arrange mortgage loans for them. Diamond routinely solicits low-income
individuals, including elderly persons and individuals who have significant
equity in their homes and who may not otherwise be considering a home equity
loan, according to the complaint.
The complaint alleges that Diamond and OSI have engaged in numerous deceptive
practices and other law violations to induce consumers to take out mortgage
loans. A significant number of these loans were 15-year balloon loans. The complaint
alleges that these defendants, in many instances, misrepresented:
- The existence of the balloon payment;
- The specific monthly payment amount, interest rate, and/or term of repayment;
- That the loan did not have a prepayment penalty;
- The amount of cash disbursed to the borrower; and,
- That the monthly payment amount includes the payment into an escrow account
for property taxes and insurance.
According to the complaint, in many instances, Diamond has presented consumers
with incomplete closing documents for signature in which the terms of the loan
B such as the annual percentage rate, monthly payment amount, and balloon payment
amount B were left blank. He also has required borrowers to sign loan brokerage
agreements in which the broker fee was left blank. The complaint alleges that
Diamond later filled in the amount of the broker fee after the loan closing.
This fee, which was financed by the borrower and paid out of the loan proceeds,
was often 10 percent of the loan amount.
The Commission and the State of Illinois have asked the court permanently to
enjoin Diamond and OSI from violating the FTC Act and the Illinois Consumer
Fraud and Deceptive Practices Act, and order them to pay redress to consumers.
Since taking office, Secretary Martinez has made enforcement a top priority
in his Administration. For example, HUD is working closely with the Department
of Justice (DOJ) in enforcing the nation's housing discrimination laws. HUD
is also partnering with the Environment Protection Agency and DOJ in protecting
children from the dangers of lead poisoning.
Under Secretary Martinez's leadership, HUD is proposing to strengthen the regulatory
requirements of the RESPA that would make the process of buying and refinancing
a home significantly simpler and potentially less expensive, and would protect
consumers from unscrupulous lending practices. In addition, Martinez recently
announced five major settlement agreements with mortgage lenders and service
providers with payments of nearly $2.3 million. HUD will spend $1.5 million
to investigate RESPA violations, a six-fold increase over current funding, and
is more than doubling its investigative staff to further bolster its RESPA enforcement
activities. HUD also is increasing its effort to educate homebuyers in ways
to avoid predatory lending practices in the first place.
The Commission has published a series of free publications specifically for
homeowners and potential homebuyers. As part of its consumer education program,
the FTC offers these tips to help consumers protect their home and their equity:
- Shop around. Costs vary greatly. Comparing loan plans will help you get
a better deal.
- Be cautious about lenders who are pushy and insistent.
- Ask questions. If you don't understand any loan terms and conditions, ask
to have them explained to you until you can explain them comfortably to another
- Carefully read all the documents and ask someone you trust to look at them
- Don't sign any documents that have wrong or false information, or have
- Never feel pressured into signing a loan. If the loan isn't what you expected
or wanted, don't sign. Either negotiate changes or walk away.
The complaint against Diamond and OSI was filed in the U.S. District Court
for the Northern District of Illinois, Eastern Division, in Chicago, earlier
today. The Commission vote to file the complaint was 5-0.
NOTE: The Commission files a complaint when it has reason to believe
that the law has been or is being violated, and it appears to the Commission
that a proceeding is in the public interest. The complaint is not a finding
or ruling that the defendant has actually violated the law. The case will be
decided by the court.
The complaint and stipulated final judgment and order in the Mercantile Mortgage
case were filed in the U.S. District Court for the Northern District of Illinois,
Eastern Division, in Chicago, earlier today. The Commission vote to file the
complaint and settlement was 5-0.
NOTE: A stipulated final judgment is for settlement purposes only and
does not constitute an admission by the defendant of a law violation. Stipulated
final judgments are subject to approval by the court and have the force of law
when signed by the judge.
Copies of the complaint and stipulated final judgment in the Mercantile Mortgage
case, and the complaint against Mark Diamond, as well as the consumer education
materials are available from the FTC's Web site at http://www.ftc.gov
and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania
Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent
fraudulent, deceptive and unfair business practices in the marketplace and to
provide information to help consumers spot, stop and avoid them. To file a complaint,
or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP
The FTC enters Internet, telemarketing, identity theft and other fraud-related
complaints into Consumer Sentinel, a secure, online database available to hundreds
of civil and criminal law enforcement agencies in the U.S. and abroad.
Shapiro, Office of Public Affairs
Winston or Peggy Twohig, Bureau of Consumer Protection
Sullivan, Office of Public Affairs
U.S. Department of Housing and Urban Development
(202) 708-0685, x 7527
Bolas, Deputy Press Secretary
Illinois Attorney General's Office
Content Archived: April 9, 2010