Story summarized from American Banker
Ameriquest
Capital Corp. is the nation's top subprime mortgage lender. In the three years
from 2001 to 2004, the company’s mortgage business grew more than twelve fold
to $82.7 billion. This was much higher than the most positive estimate for the
subprime industry's growth in that period.
Ameriquest’s
headquarters is a 12-story high-rise in southern California that blends in with
many others that provide the scenery along Orange County's freeways. The company
has one shareholder—Roland Arnall, a Los Angeles billionaire—rumored to be
on a short list for the U.S. ambassadorship to the Netherlands.
When
the company’s marketing strategy changed a couple of years back to include TV
ads, millions of new customers responded. Despite the newly spawned
name-recognition, little was known about the company itself and how it operates.
Until
recently Arnall's nephew, Adam J. Bass, was the only executive to give
interviews. Ameriquest’s senior executive vice president, Bass talked mostly
about his company’s agreement in 2000 with the Association of Community
Organizations for Reform Now, the consumer advocacy group whose actions were
instrumental in Ameriquest’s adoption of a set of "best practices."
Recently,
Ameriquest has been getting attention it wants even less. In March 2005, American
Banker published a story about 25 state attorneys general who are
investigating Ameriquest's retail lending operations. Since then, several more
attorneys general have signed on. Ameriquest prefers settlements to lawsuits,
and recent interviews by American Banker discovered that a settlement amount in
the current investigation might exceed the $484 million Household International
Inc. paid in 2002—in response to allegations of predatory lending by all 50
states.
To
counter the new allegations, several of the company's executives agreed to grant
American Banker interviews on
regulatory issues, business strategy, and the possibility of the company going
public.
Last
February, two days before the 2005 Super Bowl—during which Ameriquest
advertised extensively—the Los Angeles Times ran a story about employees in
Ameriquest’s branches and call centers who had falsified the incomes of
borrowers and had also used bait-and-switch tactics with potential customers.
Ameriquest
had revealed the investigation by the state attorneys general in a bond filing a
year ago, but the disclosure went virtually noticed until it was reported by American
Banker.
The
Attorney General for the state of Iowa, Tom Miller, heads the subprime lending
task force of the attorneys general across the nation, and is also leading the
investigation of Ameriquest. This week his view was that his group would either
settle “soon” or sue.
Miller
said he didn’t "want to make any reference to where we might be on a
number," but the Attorney General for Connecticut, Richard Blumenthal,
thought the Household settlement of $484 million—along with major changes in
lending practices—"could be a model" for a settlement with
Ameriquest.
The
article in the Los Angeles Times
along with news of the investigation by the attorney’s general prompted the
Greenlining Institute, an active consumer organization, to send back a $100,000
donation from Ameriquest.
More
regulatory problems
In
Connecticut a few years ago the state’s banking department discovered that
Ameriquest had conducted repeated solicitations of their customers for
refinancing after too short an interval. In their settlement on Jan. 22, 2004,
the company agreed to pay $603,552 in refunds, plus $500 to each borrower
(totaling $62,000), and a civil penalty of $5,000 to the state. Connecticut
Banking Commissioner John Burke oversaw the settlement.
But
similar problems arose again, motivating a threat from the Connecticut
Department of Banking to retract Ameriquest's license. The case is still
pending.
Georgia
and Delaware, and some other state agencies, said they have not had many
complaints from consumers about Ameriquest, but Chuck Cross, a director at
Washington's Department of Financial Institutions, said the allegations made by
the Los Angeles Times, and the
problems under investigation by the attorneys general, were similar to those he
and other financial regulators have observed nationwide.
Cross
said that although his office has not issued an official report on Ameriquest,
the findings in its last examination have been given to the department's
enforcement division.
Cross’s
office had gotten 87 complaints against Ameriquest up to March 24, 2005. Some
went back to 1997, but most of them were more recent. Only 69 complaints were
received against Household prior to the settlement. Cross did not say whether
Washington was also a part of the multi-state investigation by the attorneys
general.
Ameriquest
also has a four-state class action suit in progress for approximately $50
million in California, and a case pending in Florida concerning loans from
Florida and Illinois.
Aseem
Mital recently became the CEO of ACC Capital Holdings, the umbrella company for
Ameriquest Mortgage Co., and Argent Mortgage, the company’s wholesale unit.
Mital is frustrated by the lumps his company is taking.
"There
were instances [of abuse], and we dealt with those right away," he said.
“[If somebody] bends the rules, we get rid of those people and immediately go
back and … [find out] if there was any customer [who had been treated
unfairly]. We're not about … having an aggressive sales culture."
Mital
admitted that Ameriquest's lending practices might not be above criticism.
"We can't design the perfect system in a human-oriented process."
Ameriquest's
general counsel, Tom Noto, said the company would rather settle cases when it
finds problems it might have caused, and sometimes it identifies problems before
anyone else.
"We
prefer informal resolutions," Noto said. "Basically, if you see a
problem, what's the point of going to the mat in court? You try to reach a
reasonable resolution."
He
says his company's philosophy is "to look at the merits of the case and, if
things didn't go according to our procedure, step up to the plate and address
it. You try to run a zero-defect business. Not everybody can do that, and when
you don't, you step up."
Ameriquest
began making interest-only loans in March 2005 after "looking very hard at
the product," said Renne Deane, executive vice president at Ameriquest'.
Loans are made with interest-only periods of only five-year, with a required
minimum FICO score of 620 or 700, based on the loan. Interest only loans are
limited to 20% of total production.
Two
of the areas the attorneys general are investigating involve “stated-income
loans” and appraisals.
Regarding
the former, applicants fill in their incomes on a 1003 form, then "write a
letter in their own handwriting stating that they make X amount of dollars per
month or per year, and whatever specific job that is."
A
"reasonability test" is then applied to see if the income stated fits
the job and the area where the applicant resides, Deane said.
In
2004, according to figures provided by Ameriquest, stated-income loans dropped
to 11% of retail production, from 19% in 2003, the company’s peak year for
this type of product. Limited-documentation loans increased 4 %, to 13% of
retail originations; “full-doc” loans also increased by 4% to 76%.
The
trend at Argent has been in the other direction. Stated-income loans doubled
since 2001 to more than one third of wholesale production in 2004.
In
regard to appraisals, Deane said her company makes use of a "preferred
panel" of licensed appraisers each of whom has a minimum of five years'
experience. Appraisals are submitted electronically in a format that does not
allow any manipulation of data. The appraisals are "run through a series of
rules” to make sure comparable sales are used. In-house appraisers look over
about 30% of the appraisals prior to granting the loans.
Salespeople
have "no influence" on who is on the appraisal panel, Deane said.
After
funding, a quality assurance team audits "up to 10% of Ameriquest
production", she said. Less than 5% of the loans are excluded from pools
because of appraisal problems.
Mital
said, "Growth [at Ameriquest] is not just about volume, but growing in
customer satisfaction, how we serve communities, and keep our employees engaged
and happy."
A
spokesman said that Ameriquest is looking at its compensation structure for
originators to make sure it provides "incentives that support our best
practices."
According
to Mital, the company will not only expand its "best practices"
guidelines and try to further automate the mortgage process, but it also will
focus more on customer service and keeping its employees happy.
Ameriquest
is also changing the types of loans it offers in the direction of being more
consumer friendly. The company began making prime loans in December in a pilot
test with Freddie Mac; Argent will follow eventually.
It’s
expected that one result will be to increase the percentage of applications that
get funded, Deane said.
"…we're
taking many more applications than we're actually pulling through,” she said.
The company's pull-through rate is only 10%. “…we don't have products to
offer them, so our goal is to be able to offer all products to all
borrowers,"
Deane
said that so far about $48 million of loans have been made through the pilot
test, including approximately $10 million in April (2005). It sells them to
Freddie on a servicing-released basis, because it cannot yet service them
profitably.
In
addition to lower rates — the consumer-friendly aspect — Mital said that the
prime loans would help Ameriquest generate more home purchase loans, which are
more plentiful than refis when rates are rising.
Noto
said that in fall, 2004, Ameriquest put in place an anonymous whistle-blower
policy to help the company spot employees who are not doing the right thing.
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Original
story for American Banker by Erick Bergquist