The last thing in the world Barbara O'Donnell wanted when she marched into the office of a California-based mortgage company in July 1997 was a mortgage.
She went in to complain about the company's relentless telemarketing campaign that had been interrupting her dinner with nightly telephone calls for about a year.
But by the time she emerged from the office three hours later, she was a customer. What she didn't realize until much later, however, was that she had agreed to pay the company $21,950 for a $140,000 mortgage and was now at substantial risk of losing her house to foreclosure in a few years. In effect, she was in much worse financial shape coming out than when she went in.
Ms. O'Donnell is one of tens of thousands of unsuspecting borrowers who fall victim to high-pressure sales pitches - and sometimes outright fraud - from a growing number of finance companies that use fast-talking salesmen and a confusing pile of paperwork to sell expensive and inappropriate loans.
They're pedaling high-cost mortgages under the guise of offering credit to high-risk borrowers. But in reality, the majority of such loans are secured with the hard-earned equity of homeowners, who are talked into exchanging their fixed-rate, low-interest mortgages for high, variable-rate mortgages carrying hefty loan-origination and other fees. They do it most often because they are confused and dazzled by ruthless loan officers.
In many cases these loan officers are using the federal Truth in Lending Act - which was intended to prevent such abuses - as an integral part of their deception, consumer advocates say.
"They are soliciting people who don't want loans, who don't need loans, and who shouldn't have loans," says Nina Simon, a lawyer with the American Association of Retired Persons.
AARP has issued warnings to its 30 million members about what it calls predatory lending scams, because elderly homeowners are often preyed on.
One industry insider testified recently before Congress about the kind of people who are typical targets. "My perfect customer would be an uneducated widow who is on a fixed income - hopefully from her deceased husband's pension and Social Security - who has her house paid off, is living off of credit cards, but having a difficult time keeping up her payments," he said.
The idea is to persuade the trusting widow she can solve any cash problems (such as a roof repair or credit-card bills) by refinancing her mortgage. The deal often includes a variable interest rate that increases automatically over time. As her mortgage bills mount, they consume more and more of her income.
Then the firm pretends to ride to the rescue by offering to refinance her loan to reduce her monthly payments. But that just means the loan is spread over a longer period, and the company tacks on hefty fees that the now-frightened widow doesn't detect.
If she recognizes what's happening and refuses to refinance, she faces foreclosure and loss of her home. In either scenario the finance company and the salesman stand to reap big profits.
The Truth in Lending Act was designed to disclose to borrowers exactly what they're paying and enable them to shop around for the best deal. It should prevent people from falling prey to unscrupulous salesmen. But consumer advocates say it often doesn't.
Beware the hidden fees
"Some people don't really know how much they've borrowed, as strange as that seems," says David Hofman, a lawyer in San Jose, Calif., who is suing a mortgage company for fraud and elder abuse. Under the Truth in Lending Act, finance companies must exclude any loan-origination fees from the information box that discloses "amount financed." It is excluded even when the loan fee is part of the total loan amount.
This is what confuses many borrowers, Mr. Hofman says. Unless they're aware of this loophole, they may be not know the actual size of their loan, and unless they closely examine their papers they may be unaware of how much they are paying in fees.
This topic is of great interest in Washington right now.
The Federal Reserve Board and the Department of Housing and Urban Development will soon release a major study on whether Congress should rewrite the Truth in Lending Act.
In another positive development, Congress passed a bill Tuesday to stiffen penalties for those who defraud the elderly through telemarketing. It forces scammers to forfeit money they made fraudulently and allows them to be prosecuted on conspiracy charges. President Clinton is expected to sign the bill.
O'Donnell's big fee
In O'Donnell's case she was charged $21,950 for what she thought was a $140,000 mortgage. She says her loan officer never told her about the fee. She assumed it would be similar to fees charged in her earlier mortgages, about 2 percent of the loan (about $2,800). "If they had told me, 'We are going to charge you $20,000 for this loan,' who would do that?" she says. O'Donnell says she would have walked away.
Also she says, her loan officer never told her the $21,950 was being added to her loan amount, which according to the Truth in Lending statement was $140,000. But the actual amount being financed was $161,088.
O'Donnell says she also didn't realize her 7 percent variable interest rate was set to automatically increase by one percentage point every six months until it reached 12 percent. She says she would have been priced out of her own home within two years.
"They come in and take whatever they can, and they're smooth-talking," she says. "It's like when you go to a used car lot," she says. "You don't usually think about that when you go to a mortgage lender, but I do now."
Tips to avoid a loan scam
* Never sign a document you don't understand.
* Have a trusted lawyer, accountant, friend, or family member review any documents before they are signed.
* If a salesperson pressures you to close a deal within a deadline, walk away and don't do business with that firm.
* Under federal law, you have the right to back out of a signed deal for three days after closing.
* Never seek a loan by responding to a mailed flier or a telephone solicitation.
* Learn the basic terms of the loan industry. Decide the type of deal you want, and find a reputable firm that offers you a good deal. Then shop around to see if you can get an even better one.
* If you believe you have been victimized, contact an attorney or legal-aid office immediately. Also call the state attorney's office, the local consumer-affairs office, or an elder-abuse hot line.