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Testimony Before the United States House of Representatives
Subcommittee on Housing and Community Opportunity
"Consumer Abuses in Home Improvement Financing"

Mike Fisher

Attorney General
Commonwealth of Pennsylvania

April 30, 1998


Good afternoon Chairman Lazio, Congressmen Kennedy and distinguished members of the Subcommittee on Housing and Community Opportunity. Thank you for providing me the opportunity to comment on home improvement fraud and recent abuses within the United States Department of Housing and Urban Development’s Title I Home Improvement Loan Program.

The testimony I present today will be in four parts: one, the general problem of home improvement fraud in the Commonwealth of Pennsylvania; two, recent home improvement fraud cases my office prosecuted, including one which contained significant numbers of Title I loans; three, specific actions my office has undertaken to combat home improvement fraud; and, four, some recommended changes to the Title I program.

One: Home Improvement Fraud in Pennsylvania

As Pennsylvania’s Attorney General, I am all too familiar with thousands of cases in which Pennsylvanians have been victimized by home improvement and home improvement financing scams. I am also well aware that the overwhelming majority of home improvement contractors in Pennsylvania and across the nation are honest and hard working. I believe, however, that changes should be made to the Title I Home Improvement Loan Program to protect legitimate contractors and unwary consumers.

Allow me to share with the Committee statistics that demonstrate how bad the problem of home improvement fraud is. In the years 1992 through 1997, home improvement complaints have consistently ranked within the top five of the 53 complaint categories kept by my Bureau of Consumer Protection. We received an average of 2,430 home improvement repair complaints per year over that period. In almost every year there has been an increase in the actual number of complaints filed with my office. In fact, there has been a 37% increase in home improvement contracts between 1992 and 1997.

As you know, the problem is not isolated to Pennsylvania. Each year, the National Association of Consumer Agency Administrators conducts a survey of its 160 members, most of which are state, county and local consumer protection agencies from across the country. Home improvement was second only to fraud associated with automobile sales and repair in both the 1996 and 1997 national survey. In the 1996 survey, 71% of the agencies had home improvement in their "top five" complaint categories.

Even more disconcerting is the number of complaints filed by Pennsylvania’s senior citizens, many of whom are in the moderate to lower income brackets and participate in the Title I program. Over the last six years, home improvement fraud has been the number one complaint among senior citizens in Pennsylvania. As I am sure Congressmen Fox is aware, Pennsylvania has more senior citizens than any other state except Florida. In fact, home improvement complaints have been the most common problem noted by Pennsylvania seniors since the Bureau of Consumer Protection started keeping statistics in 1989.

The reasons behind this remarkable statistic are numerous. For one, many seniors own homes. As we all know, homes require constant upkeep and repair. Many seniors no longer do the necessary repairs or improvements themselves. Widows are particularly vulnerable to home improvement scams — often because their husbands made the home repair decisions for them. Seniors are also susceptible to the scare and high pressure sales tactics, which are the hallmark of home improvement scam artists. In short, senior citizens and lower income home owners are easy targets for scam artists because many of them are "house rich but cash poor," making them vulnerable to expensive home improvement contracts which they cannot afford.

Two: Recent Home Improvement Fraud Cases My Office Prosecuted

To further illustrate this problem, I will share with you two recent cases that have come before my Office. On Tuesday of this week, my Bureau of Consumer Protection filed a lawsuit against a home improvement contractor and a loan company who we allege defrauded 45 Pennsylvania consumers of more than $850,000 by means of shoddy and overvalued repairs, intimidation and the failure to perform services contracted for. We allege that the defendants in that suit:

-obscured closing documents and coerced consumers who had concerns about the home improvement loan;

-failed to inform consumers of their right to cancel their contracts and threatened legal action against those consumers who considered doing so;

-charged consumers a price four and five times higher than the value of the work performed;

-inflated home appraisals;

-improperly installed equipment and used unskilled laborers; and

-exploited the elderly, the disabled and the economically distressed.

Now I should point out that none of the money loaned to consumers in this scheme originated from the Title I program. Nonetheless, I use this case to illustrate a point. My office is concerned when any consumer is victimized, but we are all the more concerned when the contractor attempts to entice the consumer by offering a Title I loan. Some contractors will misrepresent the nature of the loan in order to secure contracts with unwary consumers.

For instance, we have learned that some contractors will imply that consumers are somehow eligible for free or subsidized federal money. Often the consumer is attracted by the idea that they somehow will not have to pay or will be paying below market interest rates because the money "comes from the government." In fact, in a case I will discuss later, some consumers who were defrauded by a home improvement contractor alleged they thought they were getting "low interest" loans. In some cases, consumers have claimed they had no idea they were taking a loan or that they believed the money was a government grant. These are the types of advertising and solicitation techniques that my consumer protection agents look for when investigating home improvement fraud. When my Office learns that contractors are claiming to consumers that government money is involved, we become suspicious.

The Fredmont Case

On May 1, 1997, my Office brought eight separate charges against Fredmont Builders, Inc., of 1034 Franklin Avenue, Pittsburgh, PA for violating the Unfair Trade Practices and Consumer Protection Law and the Home Improvement Finance Act. We allege Fredmont defrauded twenty-one (21) Pennsylvania consumers of more than $230,000. We believe at least ten (10) of these consumers had financed their home improvement contract through Fredmont’s offering of the Title I loan program. In total, Fredmont participated in over 700 Title I loans.

A Review of Pennsylvania’s case against Fredmont.

In Count I of the Complaint, we alleged that Fredmont Builders had consumers sign home improvement contracts with a specific price, and then failed to complete the work and/or did not complete or even begin the work in a timely manner. Fredmont Builders also provided materials that were substandard, in violation of their own home improvement contracts. All of these acts by Fredmont Builders violated the Consumer Protection Law.

In Count II of the Complaint, we alleged that Fredmont Builders represented, both orally and in its advertisements and leaflets, that it was affiliated with a government program. Although Title I was not mentioned in the advertisements, it appears that this is what Fredmont Builders meant. This misrepresentation was a violation of the Consumer Protection Law.

In Count III of the Complaint, we alleged specific problems with the home improvement work that was actually done on houses. Of the consumer complaints received, those about shoddy workmanship were by far the most prevalent. Repairs and/or home improvements performed in an unworkmanlike manner constitute violations of the Consumer Protection Law.

In Count IV of the Complaint, we alleged that Fredmont Builders has failed to refund the money paid by consumers for repairs that were never performed or completed. This behavior violates the Consumer Protection Law.

In Count V of the Complaint, we alleged that Fredmont Builders failed to provide the notice of a three-day right to cancel that is required by the Consumer Protection Law. This right can be waived only when repairs are needed to meet a bonafide immediate personal emergency. We believe this failure to provide the three-day notice was part of a larger scheme.

Not only did Fredmont Builders fail to provide the proper three day notice, but they were known to begin the work immediately after the homeowner’s credit was approved — before the three-day "cooling-off" period had ended. This had the effect of forcing homeowners to accept the work right away because homeowners were unlikely to stop Fredmont from continuing to work when the house was in the midst of being pulled apart.

In Count VI of the Complaint, we alleged that Fredmont Builders failed to include in its contracts the term "Home Improvement Installment Contract," or the "Notice to Buyer," provisions required by the Home Improvement Finance Act. This omission on the part of Fredmont Builders had the effect of concealing from consumers their full rights under Pennsylvania law. This is a violation of not only the Home Improvement Finance Act, but also the Consumer Protection Law.

In Count VII of the Complaint, we alleged that Fredmont Builders failed to express in its home improvement contracts the amount of the finance charge in dollar terms for the home improvement loan. This omission resulted in the consumers not knowing the true amount of the home improvement loan and is a violation of the Home Improvement Finance Act and the Consumer Protection Law.

In Count VIII of the Complaint, we alleged that Fredmont Builders failed to include in its home improvement contracts the time balance and time sale price. This omission, like the one in Count VII of our Complaint, misled consumers because it had the effect of preventing consumers from knowing the true price of the contract. This is a violation of the Consumer Protection Law.

I believe Fredmont is clearly not the kind of company in which the public can place its trust, particularly when it uses the auspices of a government program to defraud lower income Pennsylvanians out of the home repairs they have paid for and deserve. I am pleased to report to this Committee that as a result of the investigation by my Office, the Department of Housing and Urban Development has barred Fredmont from participating in the Title I program. Furthermore, the collective action of HUD and my Office has forced Fredmont out of business — out of the business of ripping-off Pennsylvania’s consumers.

But, the larger question is whether Fredmont is a typical contractor participating in the federal government’s Title I program. In January of this year, the Philadelphia Inquirer reported on abuses and shortcomings of the Title I program in the Philadelphia metropolitan area. Their review of HUD records found that 72% of Pennsylvanians obtained their Title I financing through contractors or dealers. This statistic is significant for two reasons:

1) the Pennsylvania rate for dealer/contractor originated financing is almost double the national average; and

2) the dealers and contractors are the parties misleading consumers, performing the shoddy work and exploiting the program.

Three: Action by the Pennsylvania Office of Attorney General

As a result of the kinds of problems described above, we have taken action to combat home improvement fraud and to prevent contractors who defraud the Title I program from doing business in Pennsylvania. On January 14, 1998, I wrote legislation, which was subsequently introduced into the Pennsylvania General Assembly, known as the "Home Improvement Consumer Protection Act." This legislation requires home improvement contractors to register with the Commonwealth, provides criminal penalties for home improvement fraud and prohibits any contractor who has been barred from the Title I program to do business in Pennsylvania. This legislation is a much needed tool to protect the public from unscrupulous home improvement scam artists. The legislation, itself, can be broken into three main categories: Registration, the Guaranty Fund and Criminal Penalties. Here are some of the highlights:


  • Requires home improvement contractors or salespersons to register with the Pennsylvania Department of Labor & Industry.
  • Requires payment of a $50 biennial registration fee.
  • Requires the display of the state registration number on any advertisement.
  • Permits the Department of Labor & Industry to deny registration to anyone who has an outstanding and unsatisfied civil judgment against them relating to a home improvement transaction.
  • Permits the Department of Labor & Industry to deny registration to anyone who has been suspended or barred within the last 10 years from participating in a federal, state or local program which provides funding to consumers for home improvement.
  • Requires the Department of Labor & Industry to maintain a toll-free number so consumers may check on the registration status of a contractor.
  • Requires home improvement contractors to show consumers their registration certificate upon request.
  • Permits a court of competent jurisdiction to revoke a contractor’s registration for violating the act.

Specific prohibited acts include:

  • Giving false information to get a certificate.
  • Performing home improvements without a certificate.
  • Deviating from plans without the homeowners consent.
  • Failing to perform or abandon a contract, without justification.
  • Receiving a deposit of more than 1/3 the contract price, unless the contract is less than $500.

Guaranty Fund:

This legislation also establishes a "Home Improvement Guaranty Fund" funded by a biennial fee on all contractors ($100) and all salespersons ($50). The Attorney General’s Bureau of Consumer Protection is responsible for administering the fund and must maintain a balance of at least $2 million. The legislation permits homeowners who obtain a judgment against a contractor which goes unpaid to apply to the fund for reimbursement for up to $10,000. If there is more than one consumer, they can apply for up to $50,000 for the acts or omission of one contractor. Attorneys fees, personal injury damages or punitive damages are not collectable from the fund.

When a claim is paid from the guaranty fund, the contractors registration is revoked and the Bureau is subrogated to the rights of the consumer. The contractor may get their registration back if he repays the fund. This legislation would also permit the Bureau to collect restitution from the fund if the Bureau enters into an agreement with a contractor on behalf of the consumer and the contractor fails to pay.

Criminal Penalties:

Finally, the bill provides that violations are subject to the Unfair Trade Practices and Consumer Protection law, which is enforced by my Bureau of Consumer Protection. In addition, the bill outlines criminal acts punishable as a first degree misdemeanor to a second degree felony, generally depending on the amount lost by the consumer. For example, con-artists who dupe people into home improvement contracts, which cause the victims to lose in excess of $2,000, would be subject to a third-degree felony punishable by up to seven years in prison.

Criminal acts would include:

  • Making a false or misleading statements to induce a home repair.
  • Receiving an advance payment on a home repair contract and fails to perform by the date specified in the contract unless extended and fails to return the payment.
  • Engaging in false and deceptive advertising.
  • Damaging property with the intent to cause a person to enter into a home improvement contract.

Make no mistake, these tough-minded criminal provisions will send a clear message that we will not tolerate home improvement scam artists and fly-by-nighters in Pennsylvania. Furthermore, we will not permit rip-off artists who defraud government programs to come into Pennsylvania and attempt to defraud Pennsylvanians.

Four: Recommended Changes to the Title I Home Improvement Loan Program

As you know, Title I has been in place for almost 64 years and has helped thousands of American homeowners with funding for repairs and improvements which they might otherwise not be able to afford. Unfortunately, this valuable program has in the past several years been hijacked by a new breed of tin men who pressure and lie to consumers, perform shoddy and significantly overvalued work on their homes and, most significantly, mislead them into believing that the federal Title I money they are receiving was some sort of a grant or otherwise guaranteed the quality of the work or the integrity of the workers.

In fact, a sad irony occurs when the consumer receives substandard or overpriced home repairs, finds him or herself unable or unwilling to pay the loan and then faces the prospect of a default. If such a default occurs, the lender receives 90% of the principal from the federal government and that same government, which the consumer was led to believe would guarantee the integrity of the process, now is demanding repayment of the loan from the consumer.

To its credit, the Department of Housing and Urban Development has recognized and attempted to address the deficiencies of the Title I program. More than ten years ago the Inspector General recommended that some safeguards be enacted to ensure that the repairs performed were workmanlike and that the prices charged were reasonable. Secretary Cuomo has encouraged changes that would eliminate the dealer or the contractor from the financing "loop." I am here today to urge Congress to take the necessary steps to eliminate the fraud and abuse within the Title I program.

Adequate checks and balances must be devised to protect our citizens from the abuses I have described. For instance, the administration of the Title I program by the Philadelphia Redevelopment Authority offers a good model for possible reforms. The Redevelopment Authority requires that homeowners have an inspection of their property conducted before, during and after the completion of the work financed with Title I funds. These measures have had a positive impact on the control or elimination of some of the abuses we have encountered.

However, neither contractors nor consumers are required to go through the Philadelphia Redevelopment Authority in order to participate in the Title I program. Furthermore, Title I currently only requires lenders to check the credentials of the contractors and obtain certificates of completion from homeowners. These requirements although necessary are not doing enough to prevent fraud.

Congress or the Department of Housing and Urban Development should consider placing new restrictions on the Title I program at the national level:

1) require strict participation criteria for dealers/contractors, including registration with the state and creating either a guaranteed fund or bonding requirements;

2) require an inspection process to be performed upon completion of the home repair by HUD or a third party government representative, perhaps the local building inspector;

3) require all contractors to provide consumers with a written guarantee on labor and materials of at least one year, this will give law enforcement more leverage in pursuing legal action against those who attempt to commit fraud;

4) require criminal background checks on contractors and their employees as well as screening of contractors through local better business bureaus, consumer protection agencies or state attorneys general;

5) require a system by which HUD checks with state attorneys general to determine whether they have brought action against a contractor before allowing that contractor to participate in the Title I program.

In conclusion, the greatest single asset of lower income Americans is their home and all homes age and at some time are in need of repair. The Title I program is of great value to lower income Americans who might otherwise be unable to keep a roof over their heads. We must ensure that the Title I program is there for them. But, we also must ensure that this program is not abused by unscrupulous contractors and dealers who borrow the legitimacy of the federal government, cheat the very people the program was designed to help and line their pockets in the process.

Since 1986, the United States Inspector General has made the public aware that there are significant problems with fraud in the Title I dealer loan program. We are taking action at the state level to curtail home improvement fraud and prevent contractors who defraud Title I from doing business in Pennsylvania. But, clearly action is required at the federal level to combat what has become a national problem. I respectfully submit to this Committee recommendations that address this problem at the national level.

Thank you again for inviting me to testify before this distinguished Committee, and I pledge that I will work with you to help protect consumers from home improvement fraud not only in my home state of Pennsylvania, but across the country as well.


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