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"Boston Bank Agrees to Precedent-Setting Settlement to Aid Victims of Home Improvement Loan Scams"

May 1992 issue of Poverty & Race

Beginning in the spring and summer of 1991 the Boston Lawyers' Committee for Civil Rights Under Law of the Boston Bar Association became actively involved in issues relating to what has come to be known as the "mortgage and home improvement scams" in Boston. It was revealed that many low-income homeowners in Boston's communities of color had been taken advantage of by unscrupulous mortgage and home improvement companies. These companies solicited people in their homes, pressuring them to take out high interest loans or enter into contracts for home improvements they could not afford or did not want; failed to disclose the retired finance terms of loans; made bans at outrageously high interest rates, often with balloon payments; at times unlawfully obtained deeds to people's homes; forged people's signatures on loan documents or falsified information on their loan applications. The result of these activities was that people incurred debt they simply could not afford, which in many cases caused them to lose their homes. Because of well-documented evidence of "redlining" by the major banks (as evidenced by a 1989 Federal Reserve Bank study) people in Boston's communities of color had little access to mortgage money at conventional interest rates. They therefore became easy targets for unscrupulous high-interest rate private mortgage companies and sleazy home improvement contractors.

The Boston Lawyers' Committee, along with two community organizations - the Greater Roxbury Neighborhood Authority (GRNA) and the Boston Branch of the NAACP - participated in community meetings where hundreds of victims came forward to tell their stories. The Lawyers' Committee, in conjunction with the NAACP and GRNA, undertook an intake process to identify victims, and over 250 people contacted us. As a result of our intake efforts, we began to identify patterns of unlawful activity. We undertook investigation of loan records at the Registry of Deeds and Secretary of State's office and began to develop legal theories with which to establish liability against banks, mortgage companies, and home improvement companies. It is this research component of our work that was funded with our PRRAC grant.

Moving against BayBank

The fast major action we initiated was against BayBank, a large Massachusetts bank which, according to the 1989 Federal Reserve Bank study, had a poor lending record in Boston's communities of color. Through our intake and research efforts we discovered that many low-income homeowners had high-interest home improvement loans from BayBank that they got indirectly through contractors who solicited them in their homes. The contractors preyed on poor, elderly homeowners who did not understand financing terms and were easy to take advantage of. The contractors carried BayBank's loan forms and acted on behalf of the bank in soliciting the loans. However, very often neither the contractors nor BayBank made full disclosure of the financing terms of the loans, as required by state and local laws. In fact, quite frequently consumers didn't even know they were getting bank loans that they would have to pay interest on. In many cases the work was shoddy, incomplete or grossly overpriced.

The Boston Lawyers' Committee, along with the NAACP Legal Defense Fund and the Boston law firm of Hill & Barlow, initiated legal action against BayBank through a formal demand letter required under the Massachusetts Consumer Protection Act. The letter alleged violations by BayBank, of consumer protection, truth -in lending, and civil rights laws. Shortly after sending out the demand letter we began negotiations with BayBank, and were later joined by the Massachusetts Attorney General's office. After arduous negotiations over several months, we reached a comprehensive settlement with BayBank which included an $11 million package to help victims of the home improvement scams.

The Settlement

The settlement (reported widely, including a story in the February 21, 1992 N.Y. Times) provides that BayBank will send letters to all of its 11,000 home improvement customers who received loans from November 15, 1987 to February 19, 1992, advising them of a complaint resolution process whereby they will be eligible to get their interest rate lowered to 6%, have their principal reduced, receive up to $1,000 for other truth-in-lending violations, and have any incomplete or shoddy work repaired, if they can prove specific violations to a mediation panel. We developed detailed guidelines for mediators so that if a certain harm is found, a specific remedy applies.

In addition, BayBank will make available $5 million for new below-market rate home improvement loans. Initially, the loans will be offered at 3.5 percentage points below market rate and will be marketed in the inner-city neighborhoods of Roxbury, Dorchester, Mattapan and Jamaica Plain. BayBank will relax its underwriting criteria to make it easier for people to qualify for these loans. BayBank will also provide $6 million to the Massachusetts Housing Investment Corp. for the development of new, low-income housing.

In order to avoid future abuses in its indirect lending program, BayBank has agreed to require contractors to attend training sessions and will contact each consumer directly to ensure that contractors are complying with truth-in-lending and consumer protection laws. We also obtained comprehensive relief for our named plaintiffs, in many cases getting large portions of their loans forgiven.

This case is noteworthy in that BayBank accepted responsibility for the misdeeds of its contractors who arranged the financing. To our knowledge, this is one of the fast cases where a bank has accepted liability for its indirect loan program. It is also significant in that it provides much needed financial relief to victims, as well as providing new money for low-interest home improvement loans and affordable housing. It is anticipated that the BayBank agreement will serve as a model for settlements with other banks, both in Boston and in other parts of the country.

A similar agreement has been reached with Shawmut Bank, establishing a claims resolution process. In addition, Shawmut will make $7 million in loan money available, including $5 million for refinancing and debt consolidation at 1 % below market rate, with no closing costs, and $2 million for 3% below market rate home improvement loans -- both programs to be targeted to low-income inner-city neighborhoods.

The Lawyers Committee is continuing to investigate other cases against banks, mortgage companies, and contractors, and will develop legal strategies based on their investigation and research.

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