Arizona AG Pounces on Homebuilder’s Lending Practices

By BEN IKENSON

For the first time a state prosecutor has held a homebuilder accountable for illegal lending practices, as Pulte Home Corp. and Pulte Mortgage (Pulte) agreed to pay $1.18 million following an investigation into allegations that it misled consumers in Arizona. The state’s attorney general found violations of Arizona consumer protection law in Pulte’s pre-qualification practices, earnest money deposit policies, and Spanish-language marketing.

Customers complained that they were misinformed about interest rates on financing available to them, only to be told subsequently that they didn’t qualify. Others were led to believe that Pulte or a Pulte-preferred lender would qualify them to receive the same loan terms offered by outside lenders. Still others were misled to believe they were required to finance through Pulte or a Pulte preferred lender as part of their sales contract.

Furthermore, the state noted cases in which the loans that some consumers received or qualified for through Pulte were “substantially different from and costlier than those for which they had pre-qualified with outside lenders.” If consumers refused the loan, Pulte refused to return their earnest money deposits. At least 10 consumers forfeited their deposits when faced with this ultimatum, and more have since come forward with claims that they too unfairly lost their deposits.

“Certainly homeowners need to educate themselves about all of their options when buying a home,” said Arizona Attorney General Terry Goddard (D) in a news release. “But homebuilders and lenders have a legal obligation to provide their customers with complete and accurate information.”

That goes for Spanish-speaking consumers too, as Pulte was also accused of making misleading statements in their Spanish language marketing efforts.

Among other stipulations and financial arrangements made as part of the settlement, Pulte agreed to refund $81,400 to 10 Arizona consumers who wrongly forfeited their earnest money deposits after canceling their purchase agreements. The company also agreed to pay $200,000 into an escrow account which will fund any new, legitimate claims for earnest money deposit refunds within 12 months of the settlement. The largest sum stemming from the settlement — $500,000 — will fund the Attorney General’s consumer protection, education and outreach programs.

“I commend Pulte for coming forward and meeting with us and cooperating with the investigation and reimbursing consumers,” said Susan Segal, Chief Counsel for the Arizona Attorney General’s Office. “But it doesn’t stop at Pulte. This issue is not going to go away until we come up with a fair resolution that protects consumers, and we are analyzing practices of the industry in general about how affiliated lending products are pitched,”

So are others, evidently. Nevada is currently conducting its own investigation into Pulte and another homebuilding giant, Lennar. A statement from that state’s Attorney General’s Office reads as follows: “The investigation by our office results from the receipt of several complaints from Nevada residents against the companies raising serious allegations against Pulte and Lennar that they engaged in deceptive predatory lending practices against Nevada residents including falsifying and inflating income on loan applications; failure to disclose loan terms; changing agreed upon terms at the last minute without the buyer’s knowledge or consent; high interest ARM loans for people who requested and qualified for lower interest fixed rate loans; hidden balloon payments; and requiring people with good credit and down payments to take out 80/20 second mortgages at high interest rates.”

Whether or not these companies explicitly mandated that prospective buyers must use its own affiliated lender, the practice in general has been the subject of immense concern, garnering attention from federal agencies as well.

“Clearly, consumers are complaining that they are being presented offers they believe they can’t refuse and are essentially being required to use certain affiliated service providers,” said David Stevens, the US Department of Housing and Urban Development’s Assistant Secretary for Housing/Federal Housing Commissioner.

That’s why the HUD is in the process of clarifying a rule against the “required use” of affiliated settlement service providers within the Real Estate Settlement Procedures Act (RESPA). “Required use” is defined by HUD as a “situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package or (combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.”

Other dubious lending practices have been associated recently with the building industry. The Federal Trade Commission is investigating another homebuilding giant, D.R. Horton, for potential infractions of the anti-discrimination Equal Credit Opportunity Act and the Consumer Credit Protection Act, which requires complete disclosure of terms and conditions of finance charges in transactions.

Ben Ikenson of Albuquerque, N.M., is author of Patents: Ingenious Inventions and the Daredevil’s Manual. This article first appeared in BUILDERnews Magazine.

From The Progressive Populist, January 1-15, 2011