The Get-Rich Pitch, Then the Letdown

By Michelle Singletary
Sunday, October 14, 2007

Watching my grandmother, Big Mama, struggle to make ends meet, I've come to understand the desire that many people have in finding a way to build wealth.

Unfortunately, people sometimes become mesmerized by smooth operators who promise to help them reach their financial dreams. In some cases, these operators use religion to entice people into their schemes. In others, they use a community or professional connection. And then sometimes, they use race.

Frederick C. Lee Jr., founder of Financial Independence Group, markets himself as a self-made black man trying to help other blacks make it rich. However, he has only enriched some top lieutenants while using a network of associates to feed a mortgage-loan scheme that has recently run afoul of regulators in two states, according to former salespeople.

Since I began investigating and writing columns on his operations two months ago, Lee and Financial Independence Group have been ordered to stop all mortgage-related activity in Maryland. He had already been ordered to stop originating loans in Georgia.

My reports have prompted a dozen former associates to come forward with their stories. They provide an inside look into how Lee has fashioned his mortgage brokering scheme. It's a tale of suspect business activities, multiple company names and false relationships with other financial institutions. Former associates say Lee promised them vast wealth. To reach their goals, they mainly focus on getting fellow blacks to refinance into a specific type of mortgage laden with exorbitant fees.

These former salespeople, who paid $100 to join the company, said they wound up disillusioned by Lee and disappointed at their own blindness -- and in some cases at their own greed.

Neither Lee nor his attorney would respond to telephone calls or e-mails requesting comment for this column.

The men and women I interviewed said they didn't at first question Lee and his behavior because they were transfixed by the potential prosperity he offered them. They said they believed that Lee wanted to help blacks achieve financial security.

Now they feel deceived.

During recruitment presentations, prospects are pumped up with stories of how others have made lots of money. Top performers are rewarded in front of the audience. Financial Independence Group's Web site, which has been taken down since my columns began appearing, boasted that top salespeople received luxury cars -- Range Rovers and Jaguars -- and expensive Breitling and Tag Heuer watches.

Former associates said they realized soon that the road to riches meant getting as many borrowers as possible to agree to refinance into high-fee mortgages. During a Financial Independence Group presentation, I was told I could earn $500 if two homeowners I referred closed on loans through the company. All I needed to do was provide the referrals.

Although not commenting specifically about what I heard at the presentation or on Financial Independence Group, Brian Sullivan, a spokesman for the Department of Housing and Urban Development, said that the payment of referral fees for mortgages is prohibited under the federal Real Estate Settlement Procedures Act.

"RESPA is clear that giving or receiving anything of value in exchange for the referral of business is against the law," Sullivan said.

In their quest for borrowers, Lee's troops are deployed into black communities to sell a particular type of mortgage that some real estate experts say is inappropriate for most people. These salespeople -- many of whom have little if any experience as loan originators -- are sent out to meet borrowers in their homes to conduct what they call kitchen table presentations.

The product they tout is a payment option, adjustable-rate mortgage. It allows homeowners to choose the kind of payment to make each month -- either a minimum payment, principal and interest, or interest-only. With a minimum payment, a borrower could face "negative amortization," which means that the unpaid interest is added to the mortgage balance. With negative amortization you end up owing more on your mortgage than you originally borrowed. That's a bad position to be in if you need to sell or refinance because you could end up owing more than the home is worth.

Under Lee's direction, borrowers are encouraged to make the minimum payment and put the difference into investments, such as individual stocks or mutual funds, rather than pay interest or pay down the principal on their loans. Homeowners are left to figure out for themselves how to invest the money.

David Reed, a veteran mortgage banker and author of "Mortgage Confidential," says Lee is putting people in a dangerous financial situation. What he is preaching to borrowers is "irresponsible at best, inhumane at worst," Reed said.

Lee, of course, sees it otherwise. In a brief interview last month, he said his mission is to teach blacks "money movement strategies."

The secret to financial salvation according to Lee's business model is the payment-option ARM because it's supposed to free up cash to invest.

But Lee doesn't just lead black borrowers astray by pushing unsuitable mortgages. He attaches fees and prepayment penalties to the loans that would be classified as predatory by many consumer advocacy groups.

I asked Reed about the fees Lee charges. Although the total fees a loan originator earns varies based on the loan size, the industry standard is 1 to 2 percent of the loan. A 2 percent fee is high for someone with credit issues and definitely excessive for a typical, no-fuss refinancing, Reed said. Lee is charging many borrowers fees that ranged from more than 3 percent to as much as 5 percent of their loans, according to company documents that Reed and I reviewed.

"It's extremely high," said Reed, who has closed more than 1,000 loans as a loan officer. "It's dumbfounding to me that he can get that much money on a loan. It's sad and it's taking advantage of people."

The loans Lee and his associates push carry what is called a yield-spread premium, or YSP. A yield-spread premium is a fee a lender pays a mortgage broker for placing a borrower into a home loan with a higher interest rate. It's a back-end way for the broker to earn more money. In some cases the borrower could qualify for a less expensive loan.

Though not illegal, this practice can land lenders in trouble as it did subprime lender NovaStar Mortgage. Without admitting wrongdoing, the company settled a class-action lawsuit for $5.1 million in June after borrowers accused it of either not disclosing the yield-spread premium or only telling them about it the day of their loan closings.

"Not all loans with YSPs are abusive, but because they are permitted and easy to hide, unscrupulous brokers can make excessive profits without adding value to borrowers," according to a report by the nonprofit Center for Responsible Lending.

Is it a coincidence that when Lee finds himself accused of operating outside the law, he is quick to begin operating under a different name?

I don't think so.

Lee began operating as Financial Independence Group shortly after the Georgia Department of Banking and Finance issued a series of final cease-and-desist orders for several of his Duluth-based mortgage loan businesses.

Over the years, he has operated as Debt Elimination Group, Debt Management Consultants and the Processing Center.

Six days after the Maryland Division of Financial Regulation ordered Lee and Financial Independence Group to stop all mortgage-related business in the state, a new company called CashFlo Strategies was registered in Delaware.

Lee's business is now operating as CashFlo Strategies, according to company documents I saw.

Questions also surround the way Lee deals with licensing of his members to originate loans in Maryland. The state's Department of Labor, Licensing and Regulation's Division of Financial Regulation Enforcement Unit had been investigating whether Lee and his associates were licensed to originate loans. Over the course of nine months, Lee originated and closed 42 loans in Maryland without a license, the state alleges. As a result, Lee and his business were ordered to cease and desist from engaging in the business of mortgage lending in Maryland.

Investigators found that a dilapidated building in Baltimore was the business address that members listed on their license applications.

"It was a small single-family house in total disrepair," said Stephen Prozeralik, director of enforcement for Maryland's financial regulation division. "From the outside you would think it was an abandoned building."

Salespeople living in Maryland who applied for originator licenses claimed they would be working from Florida for 1st Continental Mortgage, a lender in Fort Lauderdale, Fla., investigators said the applications indicated.

When Maryland investigators contacted 1st Continental's president, Raymond L. Moatz III, he claimed he was not aware that a contract he signed with Lee meant that members of Financial Independence Group would be representing themselves as employees of his company to get licensed in the state. Moatz did not return my telephone calls for comment.

Maryland records show that at least 27 people working for Lee's organization applied for originator licenses indicating that Key Financial, which is in Clearwater, Fla., was their employer. Information received by the state, however, indicates that Key Financial is not the employer or prospective employer of these applicants, said Sarah Bloom Raskin, Maryland's commissioner of financial regulation. Bloom Raskin said she personally called Key Financial to tell the company of Lee's operation and possible actions to circumvent state law.

Under Maryland Law, people seeking a mortgage-originator license must be employees or prospectively employed by a mortgage lender licensed in the state.

"Mr. Lee's attempts to license his associates in Maryland by using misleading tactics are not welcome in Maryland," Raskin said.

After I began reporting on Lee and his company, I received an anonymous e-mail questioning my commitment to the black community, as if reporting on the shady practices of a company that is black-owned made me a puppet for the white establishment.

"How could U not want black America 2 learn how 2 (build) wealth the same way as white America," the e-mail said. "Shame on U."

Shame on me?

What I found was a suspect company pushing loans with unjustified high fees that put African Americans deeper in debt while making only a few select black folks wealthy.

Building wealth in the black community, or any community, should come with integrity. It should come without harming anyone. It should come by being straight up with people.

It should come by following the law.

I don't see race in this story. It's about the color red.

This series has been about how people, whatever their color, shouldn't ignore red flags because they're too focused on green lucre.

What's shameful is Lee's behavior -- and those who go along with him.

¿ On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.She also has a new personal finance call-in show that airs Sundays on XM Satellite Radio, Channel 169 "The Power," at 8 to 10 p.m.

¿ By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

¿ By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.