Margot Saunders, a lawyer with the National Consumer Law Center, said the growth of predatory lending has led to higher household debt, lower homeowner equity and an alarming increase in home foreclosures. "What we have essentially is a system that encourages people to spend their savings and put their homes on the line to pay off what should be incidental debt," she said.
Shumway, 47, and Bapst, 45, both worked as mortgage brokers. In 1997, the two established Equityplus Financial in Reston, which Shumway described as a mortgage consulting firm. They also set up their own title company, which brought in additional fees. The related companies were owned by the partners and housed under the same roof, according to former employees and court papers.
In March, federal regulators closed Guaranty National Bank in Tallahassee, which, with the Community Bank of Northern Virginia, was accused in lawsuits of predatory lending.
(Takumi Harada - Tallahassee Democrat)
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The group originated loans for the Community Bank of Northern Virginia between 1998 and 2000 and then, using the name Equity Guaranty, did the same for the Florida bank between 2000 and early 2002.
Michael Morin, a former employee subpoenaed by state regulators to appear at the licensing hearing, described in prefiled testimony how the lending solicitation and closing process worked at Equity Guaranty: Using data purchased from the three major credit bureaus on potential customers' credit scores, debt and mortgage liabilities, the company hired direct-mail vendors to send out several million pieces a month. The mailers included a pitch that the recipient had been "pre-approved" for a specific loan amount and that "no equity" in their home was required and a toll-free number to call to talk to a loan officer.
Loan officers using a script tried to walk callers through the process in 10 minutes or less, keeping the homeowner focused on the lower monthly payment. To speed the closing process, paperwork that was missing signatures was completed by tracing the applicant's name.
For applicants who balked at the last minute, a separate "sweeper group" would negotiate to find a lower rate that was acceptable. Morin quoted Shumway as saying: "Who cares what rate is on the loan? . . . We're going to get our fees, we're going to get our origination points and everything else, so get it closed at a lower rate."
Company lawyers have filed a motion to block Morin's testimony, saying it is "replete with hearsay, non-responsive answers, [and] leading questions."
Almost as soon as the loans were made, they were packaged and sold to consolidators, principally to GMAC Residential Funding Corp., which in turn resold the loans to Wall Street investors. Those investors then received the loan payments from the borrowers. Residential Funding said it agreed to settle the class-action suit "to avoid the burden and expense" of continuing the litigation.
A Profitable Business
Shumway told regulators during his recent licensing effort that Equity Guaranty had closed 28,000 loans worth $1 billion during its two-year consulting relationship with Guaranty National in Florida.
An internal accounting shows how lucrative that business was. Between March and September 2001, Equity Guaranty closed $335 million in loans at an average value of just under $37,500 each. Fees charged to homeowners averaged nearly $4,700 per loan -- roughly 12.5 percent of the loan amount, the document showed. The $42 million in fees was nearly $8 million more than expenses.
