Julio Bonilla just wanted to borrow $4,000 to pay for some improvements to his split-level home on Ferber Drive in southeast Colorado Springs.
By the time he walked out of the loan office, the 47-year-old Bonilla -- who speaks limited English -- had been talked into refinancing both of his mortgages, consolidating various credit-card debts and purchasing thousands of dollars worth of insurance, all rolled into one new loan totaling $164,000.
Now, Bonilla, who has a wife and three children living at home, is afraid he'll lose his house. His wife, Lilia, recently got laid off from her job at a cleaning company, and he's struggling to meet his loan payments on a machine-shop worker's wages. Bonilla can't sell his house, because his debt now exceeds its value. And he can't refinance, due to prepayment penalties built into the loan.
The family's financial situation is "crumbling a little by little," Bonilla said through an interpreter. "I'm feeling the noose around my neck."
Colorado Springs resident Al Slavik, 64, is in a similar predicament, though for different reasons. Slavik, who suffers from dementia caused by alcoholism, forgot to open his mail and pay his mortgage bills, so the bank foreclosed on his home, a townhouse on Villa Rosa Drive in the northwest part of town, last summer. Before Slavik's family could help him straighten things out, a foreclosure investor talked him into signing over his house to her for just $10,000, which was approximately $60,000 less than his equity.
Slavik is incapable of handling his own affairs and doesn't even recall the transaction, according to his brother, Ray. The Slaviks have subsequently sued the investor, Joanne Colodny, seeking to have the transaction invalidated.
"She took advantage of my brother," Ray Slavik said. "He doesn't remember a thing."
Al Slavik and Julio Bonilla both stand to be among the many people who lose their homes every year in El Paso County, and throughout Colorado and the nation, after being talked into bad deals by lenders, mortgage brokers and foreclosure investors who take advantage of lax or nonexistent regulations. Consumers, who are understandably baffled by the complex world of real estate finance, often lack the education to keep these predators at bay. Victims of such schemes are disproportionately people of color, the elderly, and low-income earners. Many -- if not most -- of the people and corporations that prey upon them operate legally.
"There's no laws against it," said Charlie Helms, president of Consumer Credit Counseling Service of Southern Colorado, a nonprofit organization that educates and counsels people on financial matters. "It's just legalized robbery."
Like most states, Colorado has no laws regulating loans with unusually high interest rates, fees and penalties, such as Bonilla's -- what consumer advocates label "predatory loans." Meanwhile, Colorado is the only state besides Wyoming that doesn't require mortgage brokers, who arrange many predatory loans, to be licensed and face regulatory scrutiny.
Efforts are now under way to tighten state regulations regarding lending and foreclosures, thanks to lobbying by consumer groups and increased media attention. However, the outcome of those efforts is still uncertain, as industry groups are fighting key regulatory proposals.
Meanwhile, the current economic recession is placing more homeowners at risk. Last year in El Paso County, 1,172 homes went into foreclosure, 16 percent more than the previous year. And the worst has yet to come. Because foreclosures typically don't begin until several months after a homeowner falls behind in mortgage payments, the effect of layoffs in the wake of the recent economic downturn is just beginning to be felt, according to Marian Grier of the Pikes Peak Foreclosure Prevention Partnership, a local organization that helps people who are in danger of losing their homes.
"This year is going to be a busy year for our group," Grier predicted.
A way of life
For many Americans, especially those of low or moderate income, owning a home is the principal way to accumulate wealth. That has been the case for Bonilla and his wife, Lilia.
"It's the only thing we have for our children," Lilia Bonilla said.
The Bonillas moved to Colorado Springs from Los Angeles in 1995, when Julio took a job transfer. They bought their four-bedroom house on Ferber Drive with a $91,000 loan from a major mortgage company.
"It was close to my job, it was big enough, and I wanted a room for each one of the children," Julio Bonilla said. However, the house needed a lot of work. "The windows were ugly and old, and in the wintertime, with the draft, the utility bills were $200 and $300."
Julio Bonilla painted the house, landscaped the yard, redid the kitchen floor and built a deck. In 1997, he took out a second mortgage of $23,000 from another major lender to pay for new siding and windows. He also bought furniture on credit, and the furniture store arranged the financing through Beneficial Mortgage Co. of Colorado, a major lender that is a branch of Household International.
Last year, Bonilla contacted the local branch office of Beneficial, on South Academy Boulevard, asking to borrow another $4,000 to redo his bathroom. Beneficial didn't want to lend him the money, he said, but offered to refinance his house and consolidate his debts. The deal seemed attractive. "They showed me a piece of paper that said I'd be able to pay off my house in 16 years," Bonilla said.
The branch office had a Spanish-speaking account executive, Reuben Mendoza, who spoke with Bonilla over the phone. But when actually going over paperwork, Mendoza wasn't allowed by his supervisor, Debra Duckery, to speak Spanish, Bonilla said. The Beneficial staff then proceeded to go through paperwork too fast for Bonilla to understand everything, he maintains. "They just breezed through it."
Before going to Beneficial, Bonilla had about $26,000 in home equity. By refinancing, he increased his mortgage debt from $114,000 to $164,000, giving him a negative equity of about $24,000, since his home is worth about $140,000. Included in the loan was a lender's fee of 7.25 percent, or $11,895. Also included was more than $13,000 in premiums for life and disability insurance.
Bonilla says he told Beneficial he didn't need or want the insurance, but they told him it was required, he claims. He also ended up rolling in several thousand dollars of credit-card debt, thinking he would benefit from a lower interest rate than the card issuers were charging. His monthly mortgage payments totaled $1,574 for 30 years, not 16.
Having had time to understand the real terms of his loan, Bonilla later decided he'd like to refinance. But the loan also stipulated that if Bonilla were to pay off his debt within the first five years, he would have to pay a penalty equal to six months' worth of interest. "They've just blocked every way out," he complained.
Since his wife lost her job, Bonilla says, he is struggling to make payments. His own employer also owes him back pay. Now, he's looking for a second job.
"The bills are starting to pile up," he said. "We're trying to save by not buying as much food."
The breeding ground
Consumer advocates say Bonilla's experience is a classic example of predatory lending, defined as imposing unfair and abusive loan terms on borrowers, often through aggressive sales tactics, taking advantage of borrowers' lack of understanding of complicated transactions, and outright deception.
Although Bonilla sought out Beneficial, predatory lenders typically swamp homeowners with mail and phone calls, offering refinancing on terms that may sound attractive but are often bait-and-switch schemes, consumer groups say.
Predatory loans fall under the category of "subprime" loans, which are characterized by high interest rates and fees and are typically offered to consumers who lack sufficient credit to obtain "prime" loans.
"While not all subprime lenders are predatory, just about all predatory loans are subprime, and the subprime industry is a fertile breeding ground for predatory practices," assert representatives from the Association of Community Organizations for Reform Now (ACORN), a national consumer group that is fighting to regulate the industry.
Subprime lending skyrocketed in the 1990s, according to ACORN. Last year, some 900,000 subprime loans were made nationally. In Colorado, 14,146 subprime loans were originated in 2000 -- with 1,226 of those in El Paso County.
ACORN concedes that "there is a legitimate place for flexible loan products for people whose credit or other circumstances will not permit them to get loans on 'A' terms." However, subprime lending terms often cross the line into the area of abuse, ACORN argues, and the housing finance organization Fannie Mae has estimated that as many as half of all subprime borrowers could actually have qualified for traditional loans but didn't know it.
Nationally, subprime lenders account for half of all refinance loans made in predominantly black neighborhoods, compared to just 9 percent of the refinance loans made in predominantly white neighborhoods, according to an ACORN report. "Still, the vast majority of borrowers in subprime loans, and thus predatory lending victims, are white," ACORN noted.
In a recent study of subprime lending in Colorado, ACORN also found a pattern of racial disparity in El Paso County.
In 2000, African-American homeowners who refinanced in the county were almost three times as likely as whites to receive a subprime loan, and Latinos were twice as likely as whites to receive a subprime refinance loan. When buying a house, African Americans in El Paso County were 4.3 times more likely than whites to receive a subprime loan, and Latinos were 2.7 times more likely than whites to receive that type of loan.
The uninformed borrower
The uninformed borrower
Though most victims of predatory lending aren't so lucky, Bonilla got a break on some of his loan terms after the Independent contacted Beneficial and its parent company, Household International, based in Prospect Heights, Ill.
Household has been the target of a campaign launched by ACORN, which accuses the company of engaging in predatory lending. Household denies the charge but has responded to the organization's campaign by changing some of its lending policies.
Last week, representatives from the local Beneficial branch met with the Bonillas and agreed to reduce the monthly payments on the loan to $1,000 for the next three months, due to Lilia's unemployment. They also reduced the prepayment penalty period on the loan from five years to three years. Household recently established a policy of limiting penalty periods to a maximum of three years, though that took place after Bonilla signed on his loan, said Kathleen Morrison, a company spokeswoman.
The company also helped Bonilla cancel his single-premium insurance, although customers have always had the right to cancel such insurance coverage at any time and receive a refund, Morrison said.
Morrison challenged Bonilla's assertion that the local branch hadn't made sure he understood all the loan terms. Bonilla viewed an informational video in both English and Spanish, signed and initialed all the required documents and filled out a customer satisfaction survey afterward, Morrison said.
"I have a hard time thinking that this gentleman was pushed through it," she said.
The reason Mendoza couldn't handle transactions with Bonilla in Spanish is that the branch office wasn't bilingual-certified by Household headquarters, Morrison said. Bonilla could have requested an independent interpreter but didn't, she said.
Greg Snyder, of Household's consumer care division, said the company goes to great lengths to educate its customers. "It's extremely important for us to have an informed borrower," Snyder said.
Snyder said the company is also willing to work with customers after a loan is signed, especially if there's a change in the customer's situation as was the case with Bonilla when his wife lost her job. "We work with [customers] to help them stay in the home," Snyder said.
Despite the breaks, Bonilla's loan is still what consumer advocates label as "predatory." Helms, of the Consumer Credit Counseling Service, said the 7.25-percent fee that Beneficial charged is far above the industry standard, which is just 1 percent. The interest rate is also well above going rates, and the prepayment penalty period is still greater than the industry standard of two years, he said.
"He certainly could have gotten a better deal," Helms concluded.
Moreover, Bonilla's debt still exceeds the value of his home. A "reputable" lender won't extend credit exceeding the value of your home, Helms said.
Bonilla, he said, "is a good example of why we need some limits on this stuff."
There to steal
Predatory loans cause a large number of the foreclosures in El Paso County, according to Grier, of the Foreclosure Prevention Partnership. Some predatory lenders deliberately issue loans they know homeowners can't pay, maintains Grier, who is a Realtor.
"A lot of these lenders give them these loans just so they can foreclose," she said. "Instead of helping people, they're hurting them."
Besides bad loan terms, other common factors that cause people to lose their homes include job loss, divorce or sudden health problems, Grier says.
Once a house goes into foreclosure, the homeowner faces additional predators, Grier says. A number of investors will regularly examine the list of foreclosures published by the county Public Trustee's Office and then contact the homeowners offering to help them avoid foreclosure.
Soon after a home is listed as going into foreclosure, "these homeowners get 10 to 15 letters in the mail" from lenders and investors, said Holly Williams, the El Paso County public trustee. An investor will often encourage a homeowner to sign a quit-claim deed, giving the investor the title to the house in exchange for an agreed-upon amount of money. The investor then promises to redeem the debt on the home.
Although they lose their homes, many homeowners sign such agreements because they desperately want to avoid foreclosure, which will ruin an individual's credit and can also result in a financial judgment against the homeowner. But many such agreements are bad deals for the homeowners because investors often pay them much less than their equity is worth. Grier says she's encountered homeowners with equity who signed over their homes for as little as $1.
"They're not there to help," Grier said of the foreclosure investors. "They're there to steal."
In Al Slavik's case, the Colorado Springs resident received $10,000 from investor Joanne Colodny when he signed over his townhouse to her on Aug. 27, 2001. However, the equity he held was at least $70,000. According to Ray Slavik, Al's brother, the home is estimated to be worth at least $110,000, and at the time, Al Slavik owed a little less than $40,000 on the mortgage.
Exactly how the deal went down isn't clear, because Al Slavik claims he doesn't remember, and Colodny refused to be interviewed for this story. But documents show that Colodny redeemed the house out of foreclosure on Aug. 29, 2001, by paying the public trustee $41,600. In the end, she paid a total of $51,600 to obtain clear title to the home, or less than half the value of the house.
Not only was it a raw deal for Al Slavik, but Al didn't need to lose his house in the first place, says Ray, who has power of attorney for his brother and speaks on his behalf. Al receives a pension from serving in the Navy and had the financial means to get his house out of foreclosure without signing it over, Ray says.
Originally from Minnesota, Al Slavik had lived in his townhouse since he purchased it in 1991, around the time he got divorced and retired from his job as a meat cutter at King Soopers. Bob Elliot, a neighbor and friend, said that, while Slavik never mentioned anything to him about a foreclosure, it became obvious last summer that something was going on.
"We saw all kinds of vultures I guess there's no other word for it hanging around his house," Elliot recalled. "They would just come and hang out and wait for him to surface."
Ray Slavik says Colodny left her business card for Al at the neighborhood liquor store where Al was a regular customer. After Al signed the quit-claim deed, Colodny offered to find him an apartment. She and another person then showed up at the house with a moving truck and boxes, attempting to move him out, according to Jerry Biggs, Al's stepson. Biggs says he happened to stop by just as Colodny and her helper were packing up Al's belongings.
"He was just sitting there, totally lost," Biggs said of his stepfather. "He didn't know who they were."
Biggs called police, who prevented Colodny from throwing Slavik out. Colodny later filed a court complaint against Slavik for his refusal to vacate. Slavik has since moved in with his brother, Ray, who lives in Minnesota, but he has sued Colodny alleging that she "knowingly and intentionally duped" him into signing the deed. Ray Slavik has obtained mental-health evaluations of his brother, supporting the claim that Al wasn't legally competent to sign the document. Al Slavik "has an alcohol-induced dementia that renders him in capable [sic] of taking care of his own affairs," concluded Dr. Kurt Wever of Penrose Hospital, in one evaluation.
Ray Slavik says Colodny at one point offered to settle the lawsuit by negating the deal, but she wanted $15,000 in compensation, which the Slaviks refused. Meanwhile, the consumer division of the District Attorney's Office is investigating whether Colodny engaged in criminal conduct, confirmed David Zook, a deputy district attorney.
While Colodny has yet to be charged with doing anything illegal, there are other local cases in which foreclosure investors have outright defrauded people, Zook said.
Last year, a foreclosure investor named Paul Williams was sentenced in El Paso County District Court to 12 years in prison for equity skimming and theft. Williams persuaded a homeowner facing foreclosure to sign over the home to him with promises to redeem; however, Williams never actually intended to redeem, nor did he notify the mortgage company that he had taken title to the property. He proceeded to file fake liens on the property, which had the effect of extending the period of time that he could remain in possession of the house. He then rented out the house and pocketed the rent, which was required by law to go toward redeeming the debt on the property.
Deputy District Attorney Robyn Cafasso, who prosecuted Williams, said there are others out there perpetrating similar scams.
"People get away with this a lot," Cafasso said.
Ray Slavik said he'd like to see foreclosure investors regulated. "They just prey on the elderly," he said. "They have no souls."
Making it tougher
The Colorado Legislature has recently begun to consider regulating predatory lenders, licensing mortgage brokers and making it tougher for foreclosure investors to defraud homeowners.
On Feb. 12, a bill that would place some restrictions on subprime loans, introduced by Sen. Doug Linkhart, D-Denver, and drafted in part by ACORN, was approved by the Senate's Business, Labor and Finance Committee. While it was expected to clear the Senate, industry groups are lobbying against its approval in the House of Representatives. Among the industry groups is the Colorado Mortgage Lenders Association, representing 300 lending institutions and mortgage-broker companies.
Chris Holbert, the association's director, says part of the problem with attempting to regulate predatory loans is to define what's really "predatory." Regulations might end up prohibiting loan products that can be appropriate for some borrowers, and as a result, some borrowers might not get any credit at all, he suggested.
Moreover, if banks can't charge high-risk borrowers higher interest rates and fees, customers with good credit will end up paying more than they do now, he argued.
Linkhart's bill "simply goes too far in attempting to protect a very small number of people that have been 'preyed upon,'" Holbert said.
CMLA's concerns are shared by the Colorado Association of Mortgage Brokers, which represents some 500 individual brokers. CAMB's president, Gary Broaddus, said the real problem isn't the existence of certain loan products, but fraudulent practices by a few rogue brokers. If a broker issues a loan that a customer isn't able to pay, chances are that the broker illegally manipulated data to get the loan approved, Broaddus said.
Currently, because mortgage brokers aren't required to be licensed in Colorado, even a convicted felon can be a broker. Broaddus said he knows of several examples where brokers were convicted of fraud but went right back into the business after serving their sentences. One even resumed practicing while on a prison work release program.
To address the problem, CAMB has helped draft legislation that would require mortgage brokers to be licensed. The bill is being sponsored by Rep. Rob Fairbank, R-Littleton, and Sen. Rob Hernandez, D-Denver. Under the bill, people wishing to become licensed brokers would need to pass a test demonstrating that they understand relevant laws and regulations, and they would be subject to criminal background checks. The bill would also create a board that would hear complaints about brokers.
Broaddus argues that licensing would enhance consumers' confidence in legitimate brokers. But CMLA, one-third of whose members are also brokers, disagrees with the need for licensing. Holbert says there's no evidence that licensing in other states has worked. In fact, three of the states with the strictest licensing requirements -- California, Texas and Florida -- are also among those with the most reported cases of fraud, he said.
Meanwhile, Sen. Ed Perlmutter, D-Golden, has introduced a bill that would "tighten up" the foreclosure process in the state. The bill would limit the number of liens that can be filed against a foreclosed property with the intent to extend the redemption deadline. Part of the intent is to help prevent scams like the one for which Paul Williams was convicted.
"I think it's a good bill," said Holly Williams, the El Paso County public trustee.
Whether or not regulations may prevent abuses, there is widespread agreement that the best thing consumers can do is to educate themselves and be wary. Several local agencies and organizations offer free or inexpensive counseling and courses on home buying and financial management.
Bottom line: Helms said people seeking mortgage loans should always shop around. There is intense competition among lenders to offer the best deal, he noted. He also cautioned that some lenders will offer credit that the borrower really can't afford. "Just because you qualify for something doesn't mean you can actually make the payments."
Where to Go for Help
The following are some of the resources available to consumers who are contemplating buying a home, considering refinancing, or facing problems making mortgage payments:
PIKES PEAK FORECLOSURE PREVENTION PARTNERSHIP. A local non-profit, the partnership tries to help individual homeowners who are at risk of foreclosure. If you're falling behind on mortgage payments, call the partnership's hotline, 444-8833, and leave a message. In addition, the partnership offers confidential counseling on a walk-in basis from 6 to 8 p.m. on the second Tuesday of every month at the Penrose Public Library, 20 N. Cascade Ave.
CONSUMER CREDIT COUNSELING SERVICE OF SOUTHERN COLORADO. CCCS offers free financial-management counseling sessions with accredited counselors. To sign up for a session, call 576-0909. You will receive a form to fill out before setting an appointment. Counselors spend about one hour with each client, giving advice on how to improve the client's financial situation. The CCCS also offers homebuyer's classes. An introductory class, which is offered each month, consists of two free, five-hour sessions, one on a weeknight and one on a Saturday. Longer homebuyer's classes are also offered for between $10 and $25.
THE COLORADO HOUSING ASSISTANCE CORPORATION. This nonprofit organization can help low-income earners with down payments and closing costs when buying a home. For information, call 303/572-9445.
PARTNERS IN HOUSING. This local non-profit offers home-buying workshops. For information, call 473-8890.
COLORADO HOUSING COUNSELING COALITION. The coalition maintains a Web site, www.housingcounseling.com, that offers information on where to get counseling and links to other useful Web sites.
THE COLORADO MORTGAGE LENDERS ASSOCIATION. The association offers consumer information on its Web site, www.cmla.com, and maintains a consumer help line: 800/611-4830.
THE ASSOCIATION OF COMMUNITY ORGANIZATIONS FOR REFORM NOW (ACORN). Information on ACORN's predatory-lending campaign is available at www.acorn.org