Curbing the Second Mortgage Racket

...Charles Sweeny, director of the Bureau of Deceptive Practices of the Federal Trade Commission, labels Philadelphia as the center of the second mortgage debt-consolidation loan business in this country...

...One typical couple wound up receiving $2,961.49 and paying back $102.41 a month...

...If anything happens to upset his budget...

...chairman of the House Banking and Currency Committee, who is eager to consider any legislation that might lower interest rates...

...If stiff penalties were to come out of the ftc and Post Office investigations, they would seriously hinder existing devious operations...

...would require disclosure of the type of security involved in credit transactions as well as the implications of any mortgage included...

...Mutual Home Dealers' hearing before the New Jersey Banking and Insurance Department on charges of fraud and numerous violations of state law, for example, was recently postponed because the company lawyer, State Senator Sido L. Ridolfi, was serving as acting governor while Richard Hughes underwent eye surgery...

...The New Jersey State Attorney General's office has intervened in support of three civil suits filed by private attorneys on behalf of borrowers seeking to void loans...

...The package contained a chart listing how much the homeowner could get and how much he would have to pay back each month...

...This extra money is listed on the closing statement of the loan as proceeds going to the borrower, yet it probably never even reaches his pocket...

...The loan mortgages, too, may be different in form than the homeowner's original house-purchase mortgage and be called an indenture, a legal word the borrower might not understand which means virtually the same as mortgage...

...Although the Senate originally passed the Truth-in-Lending Bill without any amendments related to the mortgage loan business, the Cahill provisions have aroused considerable support in the joint legislative conference and are expected to emerge in the near future pretty much as they were written...

...Other provisions call for a three-day cooling off period so that homeowners with second thoughts can back out of mortgage deals signed on the sly...

...Meanwhile, under the administrative provisions of the act, the New Jersey Department of Banking and Insurance has recently revoked the license of one large company for fraud and violation of the statute, and it is currently investigating five others...

...In a hearing on a show-cause order to withdraw the loan license of First Mercantile's New Jersey subsidiary, a state banking examiner with nine years on the job was found to have made mathematical errors in his calculations of alleged overcharges...

...Will they really effect the operations of a great many finance companies across the nation...

...Given the phoney purchases and "special" charges, loans bear little resemblance to the contracts people initially apply for...

...or a cheap Japanese-made stereo set, for which he signs to pay more than $600...

...At this point, the homeowner was introduced to a lawyer who promised to see that everything was proper and legal...

...Rarely does a person notice in the pile of papers a purchase order agreeing to buy the television for as much as $450...

...The answer to both questions is Yes...

...Some brokers offer borrowers a "free gift" in return for their business, usually a 12-inch Japanese television set...

...The whole overstuffed package, subject to the maximum legal interest rate (including money the borrower never received), is subsequently assigned to one of the big finance companies in the Phila-delphia-Pennsauken area...

...Our "over-credited" economy provides all the pidgeons the fast-buck hucksters could ever want...

...Other big companies in the field?First Mercantile Company, Oxford Finance Company, and Peoples Consumer Discount Company, all of Philadelphia, for example—sign loans in their own name but rely on brokers to advertise for customers and negotiate details of transactions...

...NATIONAL REPORTS Curbing the Second Mortgage Racket By Jonathan Kwitny The flurry of amendments that beefed up the Truth-in-Lending Bill before it passed the House of Representatives last February 1 included a four-point package offered by Congressman William T. Cahill (R.-N.J...

...Now under study by a joint Senate-House conference committee, the Cahill Amendments would sew up the legal loopholes the lenders so lucratively exploit...

...and would expand the law to cover the company whose name goes on the mortgage plus any brokerage firms that may arrange the terms of the loan under a different name...

...This status, as the law clearly states, was designed to protect persons who buy debts on the open market in good faith...

...With a few variations to accord with different state laws, the system is nationwide...

...The Cahill Amendments seek to end current practices in issuing these consolidated loans by depriving many of the multi-million dollar Jonathan Kwitny is a reporter for the Perth Amboy Evening News...

...Very likely, he will simply be so eager to get rid of a collection agency that he will not question anyone who offers to pull him out of debt...

...Or the mortgage itself may be hidden away in the stack of papers, so that by the time a person comes to it he may be signing each document with the idea that all loans are alike and all documents confusing...

...But a reputable department store tells him there is no interest for its revolving charge account, just a 1.5 per cent service charge, and he never realizes it adds up to 18 per cent a year...

...In one scheme, hundreds of indebted homeowners in New Jersey received a flyer mailed from Philadelphia, advertising a company in Camden: "You have a friend in Camden," the brochure said, "who will lend you money when you need it...

...Are there so many people who allow themselves to fall for such outrageous schemes...

...No mention was made of mortgages...

...Seldom did anyone realize a mortgage was among the papers, and the few people who inquired were assured no mortgage was involved—this was strictly a personal loan...

...Just as often he is given very little idea of whom or how much he has agreed to pay, and no inkling that his easy loan is really a second mortgage on his property...

...From the chart, it appeared the only charge the borrower had to pay was the 14 per cent actuarial interest allowed under New Jersey's second mortgage law...

...illness, a cutback in overtime, a strike, an auto accident—he cannot meet his payments...

...With the house and car payments, time payments on furniture and home repairs, etc., this average victim's paycheck is soon pre-com-mitted to an an extent that leaves very little for the weekly groceries, and nothing for emergencies...

...It also provides protection to those who innocently buy debt paper on the open market, though, since assignees would be responsible only if they did a continuing course of business with the original creditor...

...Most people trust the legal-looking printed forms used by loan outfits...

...And the very fact that he is sitting in a loan company office means he probably cannot afford a lawyer of his own...

...He was given a stack of papers to sign—papers that would take an hour to read even in the unlikely event that the homeowner could understand them all...

...Borrowers are left repaying the finance company, seemingly without legal recourse...

...In any event, hardly anyone without special training is capable of reading and absorbing every word of fine print in the documents modern commerce calls upon him to sign...

...This provision is aimed directly at artificially created holders in due course...

...STEPHEN STEPANCHEV Act in 1965 that, in theory, is stronger than Cahill's amendments, it is first being tested legally this summer...

...to halt one of the most abusive swindles in the consumer credit field: the secondary mortgage loan racket...

...mortgage loan financing companies of the "holder in due course" privilege...

...The "friend in Camden" advertisement, for instance, offered a loan with "proceeds" of $3,500 for payments of $79.09 a month...

...The Cahill Amendments recognize that many of the huge mortgage loan companies do not in fact buy in good faith on the open market, but deal through brokers and frequently have their own attorneys or representatives present at closings...

...Many of these mortgage loan plans, finally, are so complex that lawyers and bankers themselves cannot figure the interest and fees accurately...

...These brokers may also deceive and defraud the borrower and then simply go out of business or disappear...

...The companies are a formidable foe, for they are tough, crafty, worth millions, and enjoy considerable political pull...

...Specifically, the amendments would make all further assignees (purchasers) of a credit note secured by a mortgage legally responsible for the deceptive practices of the original creditor, broker, or agent who negotiated the note if the assignee has reason to be aware of those practices...

...When he made the drive to Pennsylvania, he learned that the five-year loans advertised in the flyer were unavailable, but that he could get a four-year loan with slightly higher monthly payments...

...The prime victim is a family man living in a development, paying off the first 10 years of his original mortgage and probably car installments as well...

...But it is the Cahill Amendments to the Truth-in-Lending Bill that strike at the heart of the finance companies' regular legal dodge: their status as holders in due course...

...The discrepancy rarely hits home until a payment book arrives in the mail from the big finance company that has taken over the mortgage, and is invulnerable behind its holder in due course status...

...In addition, assignees would be clear of responsibility if they could prove they took adequate measures to investigate the methods of the original creditor and had no reason to believe they were deceptive...

...Should anyone ask this homeowner—who is paying less than 12 per cent on his first mortgage—if he would take out an 18 per cent bank loan to buy clothes for his kids, obviously he would say No...

...A few days after a deal is completed, the broker legally assigns the debt to the finance company, which is not liable for any deceptive practices...

...Furthermore, the business atmosphere of a loan office is particularly awesome to the average man, while the reassuring words of the company lawyer only make him hesitate about disputing what is happening...

...A favorable decision wouid open the door to similar suits to void an estimated $ 100 million in debts held by a score of Philadelphia finance companies, plus other millions in debts held by New Jersey corporations...

...To get the amendments through the House, Congressman Cahill made an ally of his fellow legislator, Wright Patman (D.-Tex...

...Large second mortgage loan outfits, such as the Mutual Home Dealers Corporation of Pennsauken, New Jersey, set up the status of holder in due course for themselves by using brokers to sign loans for money they supply...

...A court test is set for the section of the act specifying that obligations from mortgage loans made in violation of the law are legally unenforceable...

...Then they offer to consolidate his debt into one tidy monthly package and get the creditors—with their harassing phone calls and threats of wage garnishment that can endanger employment—off his back...

...The amendments would apply not only to debt consolidation loans but to home repair transactions as well, for many of these similarly involve unfair or fraudulent terms laid down by huckster salesman who create an undeserved holder in due course status for finance companies...

...Patman sees the second mortgage loan racket as a prime example of what happens when legitimate money gets tight...

...This says that if you buy debt paper in good faith on the open market, you have a right to collect on it regardless of complaints filed against the person who arranged for the debt to be created...

...Often a check is among the papers to be signed, so he winds up endorsing the sum right back to the lenders...

...State authorities in Pennsylvania and New Jersey have been trying for years to curb their deceptive and usurious practices, but with little success...

...He may even think the extra charges are the same as interest and try to claim them as a deduction on his Federal income tax returns, but in that case the Internal Revenue Service will quickly inform him he is wrong...

...The quick cash advertised by the loan agents then begins to sound like the answer to his prayers...

...The homeowner who telephoned his application was called back a few days later and told to pick up his money at an office in Philadelphia...

...Similarly, he will pay 14-20 per cent interest on his car loan without recognizing the actual terms of the arrangement...

...Living like vultures off homeowners, the mortgage loan men wait until the consumer is deep in debt to a bank, a department store, a home repair financer, or a small loan company...

...In the past two years, tens of millions of dollars have been lent under these conditions to New Jersey homeowners alone...

...But the lender avoids accusations of usury by contending that his extra return is simply the purchase price of merchandise ordered by the customer...

...Even though New Jersey passed a Secondary Mortgage Loan Next Issue Spring Books Essays and Reviews By DANIEL BELL ROBERT BLY MARTIN ESSLIN JEAN GARRIGUE STANLEY EDGAR HYMAN MICHAEL JANEWAY ISA KAPP MURRAY KEMPTON MITCHEL LEVITAS JOHN P. ROCHE JOHN D. ROSENBERG ARTHUR SCHLESINGER JR...

...But often that tidy package turns out to be twice the amount the borrower owed in the first place...

...Cahill himself entered the Federal amendments only after he became outraged at conditions in his home state...

...Nor is the average borrower aware of charges such as search and appraisal fees of $50 each, attorney's fees of about $200, a credit investigation fee of $15, and premiums for unrequested insurance...

...You don't have to be stupid to get sucked in...

...At the same time Congressman Cahill has called the overall problem to the attention of the Federal Trade Commission and the Post Office Department, both of which have quietly begun probes to see whether already existing Federal laws are being violated...

...Hopefully, such a move would restore a premium on cash purchases and put stores out of the banking business and back into retailing...

...He might also be told he could not borrow as much as he had requested...

...If the big fiance companies are finally made responsible for the deceptive actions of the con men who broke their paper, the "easy money" game will be a lot tougher to play...

...New Jersey State Senator Norman Tanzman has also introduced a new state bill to cut the maximum interest rate on revolving charge accounts from 18 to 12 per cent...

...Occasionally there are other "gifts": a dinette set listed in a catalogue at $89, for which a borrower unwittingly contracts to pay around $500...

...Thus, a borrower may never discover he has a second mortgage until he tries to sell his house or renegotiate his first mortgage...