$325 Million Settlement with Ameriquest Mortgage Company

What It Means for New York Homeowners

December 1, 2006

Author: Kirsten E. Keefe

Gabriel Malseptic

Subprime mortgage lending, or lending to borrowers with damaged credit, has faced increased regulatory scrutiny in the last three to five years as the government has tried to prevent lenders from preying on borrowers.  This sector of the lending industry, which mushroomed in the early 1990s with investment money from Wall Street, has allowed many borrowers to get loans that would not have been possible twenty years ago.  However, it has also created opportunities for abusive lending practices.

Overview of Settlement

On January 23, 2006, after a two-year long investigation, Attorney General Eliot Spitzer announced a $325 million nationwide settlement with ACC Holdings Corporation and its subsidiary companies Ameriquest Mortgage Company, Town & Country Credit Corporation, and AMC Mortgage Services d/b/a Bedford Home Loans.  Of the award money, $295 million will be distributed to class members and $30 million will be paid to states involved in the investigation.  The agreement resolves  allegations of widespread fraud by the company during the period between January 1999 and December 2005, as part of a high-pressure scheme to sell mortgages, which trapped consumers into debt and put them at risk of losing their homes.

The States (forty-eight in total) investigated complaints that Ameriquest was using a variety of unlawful lending practices, such as: giving borrowers inaccurate information about interest rates; discount points and other mortgage loan terms; inflating property appraisals; fabricating income; failing to follow-up promises to mail terms of the agreement; misleading customers in interviews (for example, applicants were misled about the true costs of refinancing or were counseled to refinance even when refinancing didn’t offer any real benefit).  Borrowers also complained that Ameriquest pressured them to close loans on terms that were different from those originally proposed, and failed to complete funding of loans on time. 

The enormity of this settlement, ranked as the second largest state or federal consumer protection settlement in history, serves as a signifier of the gross injustices that Ameriquest committed.  At least 240,000 of Ameriquest’s approximately 750,000 customers from 1999 to 2005 will receive restitution.  However, it should be noted that this seemingly exorbitant amount ($325M) of money is only about 2.54 percent of the $106 billion in loans made nationally during the period in question.

Similar to the settlement achieved by the States’ Attorney Generals in 2003 against Household Finance Corporation, the Ameriquest settlement, though consequential in its national focus and its size (the large award and the injunctive relief obtained to reform Ameriquest’s worst practices) is less significant in relieving individual homeowners.  The unfortunate reality is that without any mechanism to restructure or rescind the current loans, the settlement offers little relief to those trying to save their homes.

Restitution for New York Ameriquest Borrowers

New York’s Attorney General Eliot Spitzer and Assistant Attorneys General Mark Fleischer and Amy Schallop of the Consumer Frauds and Protection Bureau were integrally involved in negotiating the settlement along with attorneys general from Iowa, Illinois, California and Washington.  New Yorkers will receive approximately $22 million in restitution.  Over 26,000 New York State residents may be eligible to participate in the restitution fund.

In addition to the predatory practices addressed in the settlement, the majority of Ameriquest loans have onerous adjustable interest rate terms that allow the “teaser rate” to increase significantly two to three years into the loan term.  For example, an Ameriquest borrower in Albany started with a fixed rate for two years of 10.95%.  Thereafter, the rate increased 6.5 points over the “current index”, recalculated every six months.  The first trigger caused the interest rate to increase to 13.65% which meant a change in the monthly principal and interest payment from $739.87 to $902.64.  As the current index increases, the monthly payment will increase, with a cap of 16.95%.  An inflated appraisal on the property along with a declining housing market make it unlikely that the borrower will be able to refinance out of these egregious terms.  Even though the homeowner is a class member of the settlement entitled to compensation, she still cannot afford the underlying loan.

The restitution money will be distributed through two separate funds.  “Fund A” includes a total of $175 million that will be distributed nationally to Ameriquest borrowers who obtained mortgages between January 1, 1999 and April 1, 2003.  There are approximately 14,000 New Yorkers entitled to benefits from this fund.  The amount of the restitution for each consumer will be based on a formula developed by the settling states.  (The total amount that New York will receive out of Fund A depends on the number of people who opt-in to the settlement.)  The minimum individual recovery from this fund is estimated to be about $600 and the average award amount will be between $900 and $1,000, although as stated above, this will depend on the participation level. 

A second fund of $295 million (“Fund B”) will be distributed to a second class of Ameriquest borrowers.  New York’s portion of this fund is $8.7 million, based on the percentage of total dollar volume of Ameriquest loans held by consumers in New York.  The State has discretion to determine how this money will be distribted to victimized Ameriquest customers.  There are potentially 26,000 New York borrowers who may be entitled to benefits from this fund, however, this class may be narrowed to ensure more substantive relief to homeowners with the worst loans. 1

Notices are scheduled to be sent to Ameriquest borrowers in early 2007.  Class members will have between thirty and sixty days to respond and will be required to send in a claims form to opt-in to the settlement to obtain relief.  If a borrower fails to send in a claims form, they will not be bound by the release.  Class members who opt-in to the settlement will be bound by the release from bringing additional affirmative action against Ameriquest.  Class members will still be able to allege all claims as affirmative defenses if they are sued in foreclosure or raise them in a recoupment action through a bankruptcy proceeding. 

New York State received an additional $2.5 million for costs for their  involvement in reaching the settlement.  The NYS Banking Department and the Attorney General’s office each received $1.25 million.  The Attorney General’s portion went into the State treasury.

Injunctive Relief

One of the strongest parts of the settlement is the injunctive relief achieved.  According to Attorney General Spitzer’s website, as of March 15, 2006, the date the settlement took effect, Ameriquest must:

• Provide the same interest rates and discount points for similarly situated consumers;
• Provide full written and oral disclosures regarding interest rates, discount points and prepayment penalties, and provide important information regarding consumers' pricing options;
• Overhaul its appraisal practices by prohibiting sales personnel from selecting, contacting, or attempting to influence appraisers;
• Provide accurate good faith estimates;
• Refrain from soliciting borrowers for refinancing within two years of the original loan, except under limited circumstances;
  Use independent loan closers; and
• Adopt policies to protect whistle-blowers and facilitate reporting of improper conduct.2

An independent monitor will oversee Ameriquest's on-going compliance with the settlement.  The monitor will be able to access Ameriquest’s records and will have broad authority to examine Ameriquest's lending practices.

Conclusion

More information about the settlement can be obtained from the class action administrator’s website at http://tinyurl.com/scgrh.  Empire Justice will continue to track the settlement and will attempt to provide information on its website as more details become known.  If you have questions or would like more information or updates regarding the settlement, contact Kirsten Keefe.

Footnotes

1.   Some New York Ameriquest borrowers may be entitled to recovery from both funds.
2.  Office of New York State Attorney General Eliot Spitzer, “Ameriquest to Pay $325 Million and Reform Lending Practices,” (January 23, 2006).