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The Charlotte Observer Date: Sunday, January 10, 1993
By James Greiff, Staff Writer


Edward and Shirley Reynolds, an elderly black couple in East Orange, N.J., didn't know what they were getting into. They just wanted to borrow about $5,000 to paint their house and make a few repairs. He's blind and on Social Security. She has a 10th grade education and earns $50 a week baby-sitting. Their combined income is $800 a month. Now they owe more than $80,000 at 18.8% interest to a company that misled them and tried to foreclose on their $140,000 house, they claim in a lawsuit. Their monthly payment on that loan is $1,222. All our earnings and life's pursuits are tied up in this house," Edward Reynolds said last week. "If we lose it, where are we going to end up?" The couple's lender is Chrysler First Inc., a consumer-finance and second-mortgage company based in Allentown, Pa. In November, Charlotte-based NationsBank Corp. agreed to buy Chrysler First for $2,1 billion from Chrysler Corp. Chrysler First, most of its 2,200 employees, 175 offices and $4 billion in loans will be the core of a new division, NationsCredit. NationsBank expects to complete the deal by midyear if federal regulators approve. The Reynolds case is one of dozens described in similar lawsuits filed against Chrysler First.

NationsBank, asked about the suits last week, said that if "there have been problems with prior business practices, this acquisition may well be the most effective way to fix them." NationsBank "will deal with existing (Chrysler First) customers in a reasonable and fair manner," the bank said in a statement. "If we discover customers who are dissatisfied with their relationship with (Chrysler First), NationsCredit will work with each of them on a case-by-case basis, attempting to remove or resolve the source of dissatisfaction." Chrysler First wouldn't discuss specific suits, but said there are just 189 consumer lawsuits pending against it, out of 370,000 loans. "Chrysler First's policy is to follow to the letter all federal and state law applicable to the consumer finance business," the company said in a statement. All the suits make the same or similar claims about Chrysler First and some of the companies it buys loans from: that customer signatures are forged on loan applications; that high interest and fees aren't disclosed; that homeowners aren't told they are mortgaging their property; and that some contractors financed by Chrysler First overcharge or do shoddy work. In nearly every case, the plaintiffs are black, poor and uneducated, with little access to standard bank loans, according to their attorneys.

About half of the suits are pending. In one that went to trial, a jury ordered Chrysler First to pay $2.15 million in damages. Chrysler First has settled others out of court, reducing interest rates and penalty charges and paying legal fees.

Other settlements are confidential. NationsBank's deal seems sure to bring a closer look at how Chrysler First and similar lenders operate. Spurring that scrutiny are federal government statistics showing that black people are rejected for mortgages twice as often as white people, regardless of income. Banks say the disparity reflects credit records, debt levels and job stability, not racism. The U.S. Senate Banking Committee is considering hearings to decide if new mortgage laws are needed. While Chrysler First operates in the Carolinas, state officials and the Better Business Bureau of the Southern Piedmont in Charlotte said complaints against Chrysler First were minor. The company has 13 offices in North Carolina, including two in Charlotte and one each in Concord and Gastonia. It has five S.C. offices.

Chrysler First comes with more than the normal business risks for NationsBank, the country's fourth-biggest bank: The finance company could pose a public relations problem for NationsBank's efforts to be seen as a leader in lending to minorities and the poor. Last year, NationsBank launched a program to lend $10 billion to such borrowers during the next 10 years. In recent months, attention has focused on Providence, R.I.-based Fleet Financial Group Inc., the country's 14th biggest bank. It has been the subject of dozens of newspaper articles and a segment on CBS's 60 Minutes. During the past two years, a half-dozen lawsuits in Georgia have accused a Fleet mortgage subsidiary of racial discrimination, loansharking, fraud, violations of usury limits and breaking truth-in-lending laws. Fleet has denied the allegations, claiming it was victimized by unscrupulous lenders whose loans it purchased. To counter the publicity, Fleet devoted $30 million to refinance loans at lower rates, even though the suits were pending. Some lawyers suing Fleet have estimated its liability approaches $1 billion. Chrysler First has not had Fleet's visibility. But suits against in Alabama, Georgia, New Jersey and Maryland parallel some of the claims in the Fleet suits.

"I think Chrysler First is the next Fleet," said Howard Rothbloom, a Marietta, Ga., lawyer who filed one of the Fleet suits. Firm dates from 1933 Chrysler First is one of the country's oldest and best-known finance companies, originally called General Acceptance Corp. (GAC), it was founded in 1933, when most banks did little consumer lending. It grew rapidly, buying other financial companies, and in the process became the nation's biggest raw-land development company, operating mainly in Florida. Promising Frost Belters that they could retire to the Sunshine State, it sold tens of thousands of vacant lots to people who never saw what they were buying. Many of the sales pitches were accompanied by the promise of increasing land values, which prompted repeated warnings from federal officials, according to a front-page Wall Street Journal article in 1972. Among GAC's projects was Florida's second-biggest city in land mass, Cape Coral, with 114 square miles. To this day, 200,000 of its 265,000 building lots are empty. In 1974, as land values fell and customers stopped paying on their contracts, GAC sold its finance division to BankAmerica Corp. for $80 million, according to press reports at the time. A year later, the land division filed for bankruptcy, and the properties were sold to other developers. Chrysler bought the company from BankAmerica in 1985.

Lending money at high interest to risky borrowers is an old business. So are foreclosures or obtaining judgments against people who don't repay. What is new is the way financial powerhouses figure in the $300 billion second-mortgage market. Many of those loans are made by reputable lenders at rates comparable to those on first mortgages. But some are not. William Brennan, a lawyer with the nonprofit Atlanta Legal Aid Society, Inc., said some high-interest mortgage lenders take advantage of "reverse redlining." Redlining occurs if banks refuse to make loans in poor or minority neighborhoods. It is illegal, and banks dispute its existence. Brennan maintains that lack of credit from standard lenders "creates opportunities for unscrupulous lenders who target areas that are credit-starved." What makes lending attractive in such areas, he said, is the increase in home values, even in poor neighborhoods. Older homeowners who've paid their mortgages down, or off altogether have the most equity in their houses. "There's a piggy bank of equity in each of these homes and the owners don't know it," he said. "But these lenders know it, and they target these homes to strip-mine the equity out of them." By pushing properties with lots of equity into foreclosure, Brennan said lenders can make hefty recoveries. When the house is sold, the mortgage company has its money back to lend again for big up-front fees and at high interest."

A high-interest loan often starts with a home-improvement contractor canvassing a neighborhood. A homeowner signs a work contract along with an application for a loan. The loan, once granted, often is secured by the property, making it a second mortgage.

Usually, the contractor quickly sells the loan to a big company like Chrysler First, giving the contractor the money to do the work and make a profit. Trouble can start if the contractor fails to disclose the loan terms or does shoddy work. This is what happened with L.C. and Maudie Hobdy, a black couple in their 50s in Louisville, Ala. In June 1990, they had MidSouth Siding and Trim put a new roof on their house. The roof cost $7,500, which they borrowed at 17% interest from MidSouth. MidSouth sold the loan to Chrysler First. The roof leaked and damaged their house, according to the couple's lawsuit, filed in May 1991 in Barbour County, Ala. Their suit also claims that the contractor forged L.C. Hobdy's name on loan documents and that Chrysler First aggressively tried to collect the loan and placed a lien on the Hobdy's property. Chrysler First's defense was that it wasn't responsible for MidSouth's actions, that all it did was buy the loan from the contractor. But company records convinced a jury that MidSouth was a Chrysler First agent, which in legal terms is close to being an employee. In other words, the lender was Chrysler First-not MidSouth.

"The loan was disguised to try to insulate Chrysler First," said Thomas Methvin, one of the Hobdy's attorneys. "They made it look like the contractor is the lender." Last June, a jury awarded the Hobdys $2.15 million from Chrysler First. MidSouth settled out of court for $1 million. Postrial motions by Chrysler First are pending, and the Hobdys' attorneys advised them not to comment.

The Edward and Shirley Reynolds case was slightly different. In July 1988, they applied for a loan from First Central Mortgage Service Inc., a New Jersey company. According to a suit filed against First Central and Chrysler First in U.S. Bankruptcy Court in Newark, N.J., the Reynolds were told they needed to borrow $27,000, which would pay off their old mortgage, loan fees and consolidate other debts. Among their bills was $795 for a lawyer who represented not them, but the lender, the lawsuit claims. After the fees and bills, the couple received about $5,000 of the $27,000 they had borrowed, according to the couple's attorney, Lessie Hill. The suit claims that the Reynolds' signatures were forged on loan documents, their income was inflated on the loan application, and as a condition of receiving the loan they were forced to pay $2,811 for an insurance policy. The loan, which Chrysler First bought in September 1988, doubled their monthly mortgage payment to $400. A year later, Shirley Reynolds learned for the first time that their loan was a balloon mortgage and that they had to pay the entire remaining balance in 1993, said the couple's attorney, Lessie Hill. In a balloon mortgage, the borrower makes regularly monthly payments, then one larger lump-sum payment at a specific time, paying off the loan. To push back the balloon payment date, Hill said, Chrysler First urged the Reynolds to refinance the loan in September 1989. The new balloon loan wound up being $55,000 to cover new debts and refinancing costs. It was due in five years. At that time, after making 59 monthly payments of $840-$40 more than the couple's monthly income - they would have to pay off the loan. Because the interest was so high, they would actually owe more than they had borrowed - $55,484, according to their lawsuit. In May 1990, Chrysler First refinanced the mortgage again, this time for $80,000, due in five years. The monthly payment was $1,222. Again, when the loan was due, the Reynolds would owe more than they had borrowed, or $80,707, their suit states. Chrysler First threatened the Reynolds with foreclosure before they sought bankruptcy protection in June 1991, the suit says. Chrysler First has denied the couple's claims and tried unsuccessfully to have their suit thrown out. First Central Mortgage last week referred questions to its attorney, who could not be reached Friday. The case is pending. Other suits against Chrysler First are similar to these two, including a class-action suit filed in 1990 in Baltimore with 10 plaintiffs, all black. The class of plaintiffs wound up with about 90 people, almost all of them black, said Elizabeth Renuart, one of the plaintiffs' attorneys. This suit sought $27.5 million. Chrysler First and another lender, Dallas-based Union Mortgage Co., settled the suit on confidential terms, Renuart said. Like Chrysler First, Union Mortgage lost a jury trial in Alabama and in July 1991 was ordered to pay five families $45 million. Chrysler First said last week that it makes loans without regard to race. It also pointed out that it has never been cited for consumer-lending violations by state or federal agencies. In the purchase agreement, NationsBank took what it described as normal steps to protect itself against Chrysler First legal costs. The contract says NationsBank is covered for the next three years against losses on lawsuits stemming from loans made by Chrysler First. Those losses will be picked up by Chrysler First's parent, Chrysler Corp.

Chrysler First's critics assert that this protection could give NationsBank the opportunity to be extra-tough in attempts to collect problem loans. NationsBank spokesman Ellison Clary said the agreement does not protect NationsBank should it use abusive collection tactics. Why does NationsBank want Chrysler First?

Wall Street analysts, who said the deal is a plus for the bank, gives two reasons. First, banks will grow slowly in the 1990s because of weak loan demand. Chrysler First gives NationsBank another outlet to make loans. Second, Chrysler First is very profitable. According to a research report by Jon Burke, a bank analyst with Atlanta-based Robinson-Humphrey Co., Chrysler First's nearly $4 billion in loans yield between 10.6% and 14 percent a year. That compares with 7.6% that NationsBank earned on its loans and investments as of Sept. 30, according to company reports. Chrysler First is not NationsBank's first foray into the high-interest mortgage market. In 1984, NationsBank, then known as NCNB Corp., entered a lending agreement with Richmond-based Freedlander Inc. Freedlander used money borrowed from NationsBank to make high-interest second mortgages. At one time, NationsBank had loaned Freedlander $204 million. In 1988, Freedlander collapsed into bankruptcy with unpaid debts of more than $150 million after intentionally understating its loan problems. In 1991, Eric Freedlander, the company's president, was sentenced to nine years in prison. Attorneys for Freedlander's estate sued NationsBank on grounds that it had "significant control" of Freedlander. The suit sought $367 million from NationsBank, which denied the claims. In December 1991, the bank settled the case for $2 million. Days later, NationsBank was hit with a class-action suit by a black couple, Joseph and Willie Mae Kirks, in federal court in Augusta, Ga. The suit accused NationsBank of violating civil racketeering laws for its part in Freedlander's lending operation. NationsBank also was accused of violating Georgia's usury laws through the relationship with Freedlander. Those laws limit interest rates to 5% a month. The suit cited the Kirks' loan of $18,166, which cost them $2,416 in fees. If up-front fees are considered interest under Georgia law - that's the issue the court will decide - this works out to a monthly rate of 13.3 percent. John Long, the couple's attorney, said the claims in the NationsBank parallel those of a suit in Georgia against Fleet. "It's the same issues," he said. Since the suits are so similar, he said, the court is dealing only with the Fleet case. As that one goes, he said, so could the NationsBank suit. NationsBank declined to comment on the suit. Lawyers suing both Fleet and Chrysler First said the rash of suits understates the problems of high-interest mortgage lending because many customers are wary of court fights. "These folks often are very religious and rely on having life's problems solved through religion rather than a court of law," said Howard Rothbloom, the Marietta, Ga., lawyer who is suing Fleet. One black retired Charlotte man may be typical. In September 1989, he borrowed $7,495 from Chrysler First through a Waxhaw home-improvement contractor. The contractor installed vinyl siding and new windows on the man's small house off Clanton Road. Chrysler First sued this man in October 1991 in Mecklenburg County District Court when he fell behind on his loan after having heart surgery. Chrysler First won a judgment against him, although he continues to pay his loan, he said. He asked not to be named, saying it would cause more problems for him with Chrysler First.

His story sounded familiar. His address is wrong on his loan application, which he said he never filled out. He said he only learned of the interest rate - 16% - once he received his first bill from Chrysler First. He also said that if he had been told a finance company was making his loan, and not a bank, he never would have agreed to the deal.

He is angry, he said, but doesn't plan to take any action.

Sitting in his living room in front of a wall covered with framed quotes from the Scriptures, he explained why:

"I'm praying every day for the Lord to take care of them."


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