Gerard F. Holcomb, a prominent banker and influential Republican Party financier in Prince George's County, has lent money at a rate of 104 percent a year to businessmen and developers who had difficulty obtaining credit from banks and other conventional lending institutions.
Many of the borrowers agreed to the loans at the interest rate Holcomb set--2 percent a week--to avoid going out of business. Some borrowers were customers of Holcomb's financial institution, John Hanson Savings and Loan, or hoped at some point to borrow money there. One of the loans went to the developers of Bates Street, a prime District of Columbia urban renewal project.
Holcomb, a longtime political confidant of County Executive Lawrence J. Hogan, has lent at least $432,000 at high interest rates since 1979. This private lending, Holcomb said, is a service to businessmen and is separate from his work for John Hanson. He said the interest rate--which financial experts said is at least three times as high as that charged by area banks and lending companies--is a fair balance between his borrowers' needs and his risks as a lender.
"Money is a commodity like apples and potatoes or anything else," Holcomb said. "As long as you don't use force to collect, you can charge whatever you want. Usury is a moral question. I'm a financier. Lending money is my business. I make a few commercial loans at whatever price the borrower and lender agree on."
Charging high interest rates is legal on almost all commercial loans. Federal and Maryland laws exempt commercial and business loans from usury ceilings, following a principle that businessmen will be able to negotiate equitable interest rates for themselves. During the last few years, banks and lending companies have charged interest rates ranging from 15 to 35 percent a year for business loans, officials said. They said that 104 percent a year--or 2 percent a week--is an exceptionally high rate.
"It strikes me as very, very rare," said Luther H. Hodges, Jr., chairman of National Bank of Washington, "I certainly don't think you'll find it at any established banks."
Holcomb, 45, is a director of John Hanson, one of the largest savings and loans in Maryland, and president of its investment subsidiary, the John Hanson Service Corporation. He has been active in Republican politics since the late 1960s when Hogan, one of his closest friends, was in Congress, and he has been the Republican member of the powerful County Liquor Board since 1968. In that latter capacity he has recently come under investigation by the county prosecutor for a business relationship he had with a pizza parlor licensed by the liquor board.
Holcomb said his high interest loans were intended to last only a few months. If a borrower held the loan for a year and paid 104 percent interest it was because he or she requested an extension of the loan and not, Holcomb said, because he wanted it.
"It's not in your interest to take advantage of the guy," he said. "The interest can destroy the borrower." Noting that his borrowers often lack the viability or collateral to obtain conventional loans, Holcomb added: "It's the lender who's at risk, not the borrower. He the lender could lose the principal."
Among the loans Holcomb made: $200,000 to the developers of Bates Street, a District rehabilitation project that is the centerpiece of Mayor Marion Barry's housing program; $40,000 to the owners of the now-defunct Vesuvius restaurant near Annapolis and $5,000 to the owner of a small, Alexandria funeral parlor for a used hearse, according to loan documents, court records and interviews.
Holcomb, who runs the private lending business primarily from his John Hanson office, said he makes the high interest loans from personal funds, including loans he obtains at standard interest rates from a variety of financial institutions and private investors. He is connected to several area banks.
Holcomb would not comment on his relationship with investors or borrowers or on the specifics of his loans, saying he was not interested in discussing his private lending business in public. "It isn't the kind of advertisement I need," Holcomb said. He also declined to specify how much money he has lent or his income from the private lending except to say that it has not been very profitable and he has written several off as business losses. Last August, Holcomb formed a commercial lending company with two other Washington area men.
One of his early money sources was Hallie H. Stone, an independently wealthy Northwest Washington woman. Stone confirmed that she provided financing for some of Holcomb's private loans, but she did not remember how many. She said she began making private loans through Holcomb in the late 1970s after he persuaded her to deposit between $350,000 and $400,000 in John Hanson.
"Jerry brought various loans to me," Stone said, and she agreed to finance some of them. Stone said she supplied the loan money and Holcomb handled the mechanics of the transactions, including screening prospective borrowers and keeping track of interest payments. In return, Stone said, she and Holcomb split the interest payments.
Stone said the largest loan she financed was $200,000 for the Bates Street project, an eight-block urban renewal area that the D.C. government was helping finance with $4 million in interest-free loans.
Despite government assistance, the Bates Street project had encountered financial difficulties. According to Jack W. White, one of the developers, the project needed some quick working capital. "A lot of people didn't have confidence that Bates Street was going to get built," White said. After several unsuccessful efforts to arrange conventional financing at banks and other financial institutions, the developers went to Holcomb.
"We had done some other projects with John Hanson Savings and Loan" and knew Holcomb, White said. "He did step forward when no one else did," and gave them a private loan, White said. In January 1980 the developers borrowed $200,000 from Holcomb and Stone and promised to pay $4,000 a week in interest, or 2 percent of the loan. Holcomb received half the interest, $2,000 a week, for arranging the loan, Stone said.
When the loan was paid off about six months later, the developers had paid a total of $40,000 to $45,000 in interest, according to White.
Later, the Bates Street group received two other loans from Holcomb at a weekly interest rate of 2 percent--one for $40,000 for other real estate ventures and another for about $15,000 to meet the payroll, said White. "When things are tight," he said, "people lenders can get what they want. If you need money that's the type of interest you have to pay. I know of people who charge four percentage points a week."
The Bates Street developers also received $1.5 million in conventional loans from John Hanson Savings and Loan, money that was used for Bates Street and another D.C. urban renewal project. Around this time, Holcomb, White and Bates Street developer George Holmes Jr. became partners in the purchase of three rental properties in the Bates Street project.
In addition to the Bates Street loan, Stone financed a $72,000 loan through Holcomb to Northern Virginia Businessman Jerry H. Sills, according to loan documents. Like the others, the loan had an interest rate of 2 percent a week, or $1,440. Stone and Holcomb split the interest each week, Stone said. Sills never fully repaid the principal--the $72,000 she put up--and shortly thereafter, Stone said, she stopped investing her money in the private loans.
Holcomb, without another investor, made two loans totalling $15,000 to Phillip Bell, director of the Lewis Funeral Home in Alexandria. Bell said he met Holcomb in late 1980 through John Hanson after buying some property in Prince George's for another funeral parlor. He said he went to the nearest John Hanson branch, in Oxon Hill, to open an account and mistook Holcomb's second floor office there for the mortgage department of the savings and loan.
"I thought the whole thing was the bank," Bell said. "I was thinking he was president of the savings and loan."
During an initial conversation with Holcomb, Bell said, he discussed his expansion plans and needs for future loans. He said Holcomb expressed an interest in helping and at the end of the discussion took Bell downstairs to the savings and loan office where the funeral parlor director opened an account by making a $7,000 deposit.
Bell said that on several other occasions he met with Holcomb to discuss a variety of projects and got the impression Holcomb would eventually help him get a loan through John Hanson. Bell said Holcomb told him to fill out some conventional loan forms, but that he never got around to doing that. During this time, Bell said, he ran into a severe cash-flow problem. He turned to Holcomb, having tried without success in the past to obtain conventional loans at banks.
"I came in all of a sudden and said I have to have some working capital," Bell said. "He Holcomb said he could get me some money," and explained that a $10,000 loan would cost $200, or 2 percent a week, in interest.
Bell said he willingly accepted the loan terms, signed a loan agreement and took Holcomb's personal check for $10,000. He did not ask whether the money was personal or bank money. "Of course when he let me have the money I didn't question where it was coming from," Bell said. Bell said he began making interest payments--$200 in cash--the next week. "I think I realized it wasn't a bank loan because I was making payments to him, in his name," said Bell, who later switched to checks.
Shortly after the first loan, in December 1980, Bell returned to Holcomb for another loan--just over $5,000 for a used hearse. The 2 percent a week interest on this second loan brought his weekly payments to Holcomb to $312.
Last fall, Bell said, he found that he was unable to keep up on the interest payments. He said he had already paid $10,000 in interest but still had the entire $15,000 loan to pay off and the financial difficulties that brought him to Holcomb had not abated.
When Bell stopped making the interest payments, Holcomb immediately called, Bell said. Holcomb followed up his calls with visits, all friendly. "He said I was behind and what was I going to do about it," Bell said. "He always has been very nice. He kept telling me to try to work it out."
Bell said the loan helped him at first, allowing him to pay some bills and stay afloat. But the high interest payments--in effect a weekly rental fee for use of the money--left him with a bigger debt than when he began, Bell said. "The clock is running all the time," he said, adding that in retrospect, "I'd rather have the other creditors after me . . . because the debt won't grow like this."
In November, with Bell still unable to pay, Holcomb filed suit for the money in Prince George's Circuit Court, claiming he was owed over $29,000 in interest and principal. Holcomb immediately obtained a court judgment for the money because Bell, like other borrowers from Holcomb, had signed a statement giving Holcomb the legal right to an immediate, uncontested judgment. Holcomb said the loans to Bell were "a big mistake on my part. He is a nice guy. He just charmed the hell out of me."
Rudolph Pettaway had a similar experience with rapidly accumulating interest payments. In 1980, Pettaway, the operator of six Washington gasoline stations, was going through difficult financial times and had been unable to get help from a bank. He needed money to cover business expenses and to hire a lawyer, Kenneth Michael Robinson, a well-known criminal lawyer in town, for an unrelated legal matter. Robinson required $25,000 in advance for his services and, when Pettaway said he didn't have enough money, Robinson said he directed the gas station operator to Holcomb.
"I told him Jerry does loan money out," said Robinson, a neighbor and friend of Holcomb. In a court statement related to the loan, Robinson said he told Pettaway: "I think the interest rate is outrageous." Robinson later said he made the remark kiddingly.
According to loan documents, Pettaway obtained a $50,000, three-month loan from Holcomb in January 1981. Pettaway's weekly interest payments were $1,000 -- 2 percent of the loan. According to persons familiar with the loan, when Pettaway obtained the money it was solely for his business. Holcomb said, "I made no loans for legal reasons."
A year later Pettaway still had the entire $50,000 loan outstanding, according to persons familiar with the loan and had paid about $52,000 in interest, an amount that comes to an annual rate of 104 percent. Recently, Pettaway sold one of his gas stations and transferred responsibility for his $50,000 debt to the new owner, according to persons familiar with the loan.
In another case, Holcomb lent $40,000 to John J. McBurney Jr. and Sharon Lynn Cassady for Vesuvius restaurant near Annapolis. According to loan documents, McBurney and Cassady borrowed the money in May 1980 and agreed to pay $800 a week in interest: 2 percent of the loan. They were to repay the loan in three months. However, Holcomb said the two defaulted on the loan and he filed suit in Anne Arundel Circuit Court and obtained a judgment against them for $71,000.