PHOENIX (By Elvia Díaz, Arizona Republic) November 20, 2004 - An alarming number of unsuspecting Arizona residents are paying excessive amounts for their mortgages, prompting Attorney General Terry Goddard to launch a legislative battle against the practice.

Complaints about unscrupulous lenders who take advantage primarily of the elderly and Spanish-speaking residents have skyrocketed, Goddard said. Many people have been trapped into high-cost mortgages, in some cases paying 15 to 20 percent interest when most rates for a 30-year fixed loan remain under 6 percent.

"It's formal fraud," Goddard said.

Goddard and consumer advocacy groups say no existing laws can stop some lenders from charging exorbitant fees and high interest rates, or from adding huge prepayment penalties to high-risk loans. So he will push for legislation in 2004 to curb the practice. The pitches usually come by mail, phone or door-to-door solicitations.

For the first time, mortgage loan problems are among the top 10 consumer grievances in Arizona, said Goddard, whose office receives roughly 15,000 overall complaints a year.

His bill will address high-risk mortgages normally offered to Arizonans with no credit or bad credit. He is proposing restrictions on such scams as exorbitant prepayment penalties and unexpected balloon payments. And he hopes to ensure that companies provide a detailed comparison of the customers' old loan and the new one. He also wants loan documents to be provided in the language the loan was negotiated.

Unwelcome surprises

In the Valley, predatory lending has left a trail of victims in communities from Phoenix to Surprise.

It happened to Vynonia McGowan of Phoenix, who failed to notice the lender had tucked on nearly $17,000 in fees and other costs. After she signed the refinance papers, she walked away with a high-interest debt of $79,000 and is now on the brink of losing her home.

It happened to Angelina Alonso, who lost roughly $10,000 on a verbal deal she made to buy a mobile home in Surprise but later found out the broker never changed the mortgage papers to her name.

By limiting the proposed restrictions to subprime loans, also known as high-risk loans, Goddard hopes to get the support from the mortgage lending industry. But many companies believe it would hurt customers and hinder their ability to do business in Arizona.

At least 20 states, including North Carolina, New Mexico, Massachusetts and New Jersey, have passed some sort of predatory-lending law.

But some key Arizona state lawmakers believe there are no incentives for lenders and mortgage brokers to rally behind proposed restrictions here.

"The more regulations you put on the industry the less people get loans," said Sen. Dean Martin, a Phoenix Republican and chairman of the Senate Finance Committee.

Earlier this year the committee declined to pass an anti-predatory-lending bill, primarily because advocacy groups opposed it, saying it did little to protect consumers.

"I don't know that massive restrictions are possible," said Martin, whose committee would have to consider any predatory-lending legislation. "More efforts towards education, not regulation, is much more doable."

Any predatory lending legislative proposal would exclude banks. That's because new federal rules adopted in Februaryby the Office of the Comptroller of the Currency effectively take away states' ability to pursue banks on predatory-lending charges. But a large number of non-bank mortgage institutions and brokers would be covered, state officials said.

Trusting lenders

McGowan welcomes any law that would restrict lending companies and brokers from taking advantage of people like her, who trusted a lender with disastrous results.

"It's been one headache after another," said McGowan, 56, who this week received a letter from her mortgage company threatening to begin foreclosing on the four-bedroom home she shares with her mother.

Roughly four years ago, a mortgage broker approached McGowan offering to refinance her $62,000 loan. She needed cash and agreed. But by the time she signed the documents, McGowan ended up with only $2,300 in her pocket and a $79,000 loan, primarily in fees and other costs.

Her initial $480 monthly mortgage payment went up to $628.62 after she refinanced. She says she made all the payments, but she can't produce the receipts to prove she doesn't owe parts or all of the $15,000 in back payments.

"I have no money," said McGowan, who relies on a disability check to support herself. "Nobody seems to able to help sort this out."

Alonso, 40, of Phoenix, attributes her mortgage loan failure to her inability to understand English and the fact that the lending broker seemed like a nice guy.

"It's not like I'm stupid. I just didn't know better," said Alonso, who saw an ad in a Spanish-language publication about the chance to own a home with no credit and sought out the deal.

Alonso gave a $5,000 down payment to move into a mobile home on 1½ acres in Surprise. The agreement was for her to keep making the monthly payments of $750 directly to the bank for a year. At the end of that period, she was told she would qualify to get her own loan and put the property, valued at $117,000, in her name.

But after seven months paying the mortgage, Alonso went back to the broker to change the mortgage documents, only to find out he was denying that he made any deals with her.

"He robbed me," Alonso said. "I left the home and ended with nothing."

Federal standard

Representatives of mortgage lenders and brokers associations say there are only a few unscrupulous lenders in the state.

Bill Howe, head of the Arizona Association of Mortgage Brokers, said restrictions imposed in states such as Georgia and New Mexico have "abruptly stopped lending," and he fears the same might happen here if Goddard has his way.

"That's not good for the consumers," said Howe, adding that he could support limiting balloon payments. "What you have to understand is that every time you take away a piece of the loan you're going to cause the interest rates to go higher."

Amy Swaney, a loan officer and incoming president of the Arizona Mortgage Lenders Association, prefers a federal national standard. She argues that it could be expensive for lenders to comply with specific restrictions from states and thus they might stop offering certain loans in Arizona.

"We can all live by certain rules as long as those rules are the same," said Swaney, echoing concerns that lenders might not provide money for high-risk loans if restrictions were imposed. "It limits the options we have for borrowers that need those types of financing."

Goddard rejects claims that subprime lending would stop in Arizona if some sort of regulations were imposed. For instance, Goddard said, Household International and its subsidiaries have survived despite restrictions outlined as part of a $484 million national settlement reached in 2004.

The states, including Arizona, alleged that Household committed unfair and deceptive mortgage lending practices such as overcharging borrowers with excessive hidden fees and interest. As part of the deal, the firm agreed to implement restrictions on prepayment penalties, prohibit loan "flipping," limit up-front points and origination fees, and improve loan disclosures.

Cities and towns

Martin, who helped broker the failed legislation during the 2004 session, said the reason lending companies agreed to negotiate then was because of a threat that individual cities and towns would start approving laws regulating predatory lending. But now he believes cities and counties aren't seriously considering enacting their own laws.

Tucson, Coolidge, El Mirage, Sierra Vista and Guadalupe are among the cities formally supporting Goddard's proposed legislation. Mary Okoye, Tucson director of intergovernmental relations, said there are no formal discussions about enacting a city predatory-lending ordinance at this point.

Phoenix, meanwhile, is waiting to see the details of Goddard's bill before considering whether to endorse it.