Travis Bumpers of Knightdale, N.C., wishes he had never opened the flier in the mail that fall day in 1999, proclaiming he had been "pre-approved" for a loan of $42,950 "or more." But he wanted to consolidate his monthly debts into one payment, so he took out a second mortgage, borrowing $28,450 at 16.99 percent interest for 15 years from the Community Bank of Northern Virginia.
He was charged closing costs of $4,852 -- about 17 percent of the loan amount. That's well above the 2 percent fee considered normal in the mortgage refinancing business and the 8 percent that is supposed to trigger special disclosures for individuals with less-than-pristine credit ratings.
Bumpers said last week that he was still making $437.65 monthly payments on the loan, much to his regret. "It was my first time [getting a home equity loan], and I didn't really know what I was doing," he recalled in an interview. "I ended up spending more money to consolidate my bills than I would have if I had just paid them off. Now I can't refinance, I'm underwater in my house. It ended up being a disaster, financially, and I feel cheated out of my money."
Bumpers stumbled into the complex world of high-risk loans, one that has raised the ire of consumer advocates and some regulators but continues to flourish because of the enormous fees it has produced for brokers and banks.
He is one of several borrowers who have filed suits in state and federal court over the past few years against the Virginia bank, a Florida bank that offered similar loans and a financing arm of General Motors Corp. that bought many of the loans. The suits accused the banks of predatory, or abusive, lending by using deceptive and high-pressure tactics to market high-price loans to people without regard for their ability to repay.
The main class-action case was settled out of court late last year, with $33 million set aside for borrowers, who would receive a few hundred to several hundred dollars each, according to the settlement papers. No payments have been made yet because some homeowners have filed appeals, protesting the terms as inadequate.
The Florida bank, Guaranty National Bank of Tallahassee, was closed this March by bank regulators who cited violations of consumer laws in its home equity loan program. That operation used consulting companies in Virginia run by David B. Shumway and Randy A. Bapst to originate 28,000 loans between 2000 and early 2002. Two years earlier, the two men ran a similar operation for Bumpers's lender, the Community Bank of Northern Virginia.
Records indicate that Shumway and Bapst made $20 million each between 1998 and 2001. Their companies were named as defendants in at least one suit, but not in the class-action case that was settled.
A successor company to the early Shumway-Bapst companies, Calusa Investments LLC, operates from the same Chantilly office and already markets loans in 30 states, but not in Virginia. It has attracted criticism from E.J. Face Jr., commissioner of the Virginia Bureau of Financial Institutions. He has twice rejected a mortgage lender license for Calusa, writing June 30 that its principals have "an attitude of utter disdain" for compliance with lending rules and regulations. The company has appealed and the State Corporation Commission has set a hearing for July 20.
In prefiled testimony, Shumway said that Bapst left Calusa in mid-2002 and that his brother DeVan Shumway became president. David Shumway told state regulators that Calusa was "entirely different" from earlier companies he had run. He wrote last year, for example, that Calusa had discontinued its brokerage business and acted exclusively as a direct lender.
Shumway added that the company had taken "substantial steps" to make sure "the compliance problems that occurred in the past do not repeat themselves" and asked the state to consider that many of the cited violations of Virginia law were not against the law where the loans originated.
Calusa attorney D. Kyle Deak of Richmond declined a request last week to interview Shumway. Deak said in a letter that Calusa "believes that it would be inadvisable to comment" on matters that may come up in the hearing appealing Face's license denial.
Efforts to reach Bapst, including a letter requesting an interview, were unsuccessful.
Legal documents from the licensing proceedings and lawsuits, as well as interviews with former employees, shed light on how the earlier Shumway-Bapst companies operated in soliciting homeowners who might be vulnerable to taking out high-cost loans.
Federal law requires certain protections and disclosures for borrowers of so-called high-rate, high-risk loans, a category that includes those with interest rates more than 8 percentage points higher than the rate on Treasury securities and those whose closing costs exceed $499 or 8 percent of the loan amount. Federal law also requires that lenders document that they have taken into account a borrower's ability to repay the loan.
When the Federal Reserve issued regulations on the high-risk loan law, it noted, "Some abusive practices are clearly unlawful, but others involved loan terms that are legitimate in many instances and abusive in others, and thus are difficult to regulate."
In the past few years, regulators and prosecutors have cracked down on some predatory lending practices. In 2002, Household International Inc. agreed to pay borrowers $484 million, a few weeks after a division of Citigroup Corp. settled a case with the Federal Trade Commission for $215 million.
State laws to restrict predatory lending have been challenged by banks with headquarters outside the state that argue the rules do not apply to them.
William Brennan, an expert on predatory lending at the Atlanta Legal Aid Society, said predatory lending has proved difficult to police because federal laws governing mortgage lending place no limits on the interest rates and closing fees that can be charged to borrowers and because state laws vary widely. "The laws are sometimes contradictory, and regulators are often reluctant to get involved," he said.
Lenders also argue that they must be compensated for the risks they take in lending money to high-risk borrowers and that far from being coerced, borrowers sign up for high-cost loans voluntarily and in droves.
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.
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.
The first company, Equityplus Financial, distributed almost $6 million each to principals Shumway and Bapst in 1998 and 1999, according to documents made available for a suit brought by a former employee.
When they filed for a mortgage lender license under the Calusa name in 2001, Shumway and Bapst each reported income of more than $9 million the year before. Shumway said he expected to make nearly $10 million in 2001. Bapst estimated his income would be more than $5 million that year.
In addition, Shumway estimated that his holdings in Equity Guaranty and a related company were worth $3.2 million, and he owned a home worth nearly $2 million. He noted that he had filed for bankruptcy in 1996.
Bapst listed his interest in Equity Guaranty at $1.4 million, two Mercedes-Benzes and a Lincoln Navigator, and a $1.7 million home. He now lives in a McLean home his wife purchased for $3.2 million in 2002.
Virginia banking regulator Face said in prefiled testimony for the licensing hearing that he first learned about a Shumway-related company in 1998, when his office required another state bank to terminate a relationship with Equityplus Financial because it was brokering mortgage loans without a license. The Shumway-Bapst company then went to work with the Community Bank of Northern Virginia. State regulators objected, Face said, and finally persuaded the bank's board to end the relationship.
David P. Summers, president of Community Bank, did not return several calls last week seeking comment. The bank has 13 branches and more than 120 employees in Northern Virginia.
The Office of the Comptroller of the Currency, which regulates national banks, issued an enforcement action against the Florida bank in early 2002, charging it with poor oversight of its operations. The action caused a commotion in the Shumway-Bapst camp because GMAC Residential Funding stopped buying the loans, Shumway said in a letter filed in the Virginia license proceeding.
In May of last year, the comptroller's office disciplined the Florida bank again, requiring it to cease arrangements with third parties "in which the bank receives fees in return for the use of its name." It also called on the bank to identify borrowers who never received disclosures when they were turned down for loans by the bank's office in Chantilly. The announcement of the bank's closing this March said Guaranty National failed to correct its violations of consumer laws.
Among the documents Calusa submitted to Virginia regulators as part of its license appeal were examiners' reports from four states. One from Kentucky last August criticized the company for using a title company at the same location that "may be gouging" consumers by charging fees that in some cases were twice the going rate. Shumway responded by telling the state that an internal audit had found the problem and that refunds were given to the borrowers.
There are indications the refunds were not made until after the examiner cited them. The letters referring to audits were undated, and the refunds were dated the same day as Shumway's reply to the state.
Scott Borison, a Frederick lawyer who represents several homeowners with loans generated by the Shumway-Bapst operation, said loan officers from their companies are now working across the region. On one bank's Web site, a loan officer notes that he worked for both the Community Bank of Northern Virginia and for Guaranty National Bank of Tallahassee.
Staff writer Sandra Fleishman and staff researcher Richard Drezen contributed to this story.