Kentucky homeowners targeted in new rash of mortgage scams

Inside Subprime: May 14, 2018

By Kerry Reid

People who rent their homes are twice as likely to turn to short-term payday loans, when compared with people who own their homes. According to a 2012 study by Pew Charitable Trusts, 10 percent of renters have turned to payday loans, as opposed to just 4 percent of homeowners, and even renters in middle-income brackets are more likely to use payday loans than homeowners in lower income brackets.

But that doesn’t mean people with mortgages are home free. While payday loans in Kentucky may be less of a draw for people who own their own homes, there’s a new scam on the block that’s costing Kentucky homeowners some serious cash.

Kentucky homeowners are at risk of falling for new mortgage scam tactics

Police in Elizabethtown, Kentucky, sent warnings out to residents earlier this month about a mortgage scam postcard that’s been mailed to several homes in the area. The postcard, purportedly from JP Morgan Chase, claimed that a mortgage had recently been taken out in the homeowner’s name, and asked them to call about this “important matter.” But the 1-800 number on the card doesn’t go to Chase. Instead, it goes to an operation that, under the guise of preventing identity theft, actually gathers personal information in order to perpetrate identity theft.

Fortunately, the homeowner who tipped off police about the mailer called his local bank and verified that it was not a legitimate communication from the bank, but the incident serves as a stark reminder that homeowners can be vulnerable – especially if they’re facing difficulties making mortgage payments. When money is tight, foreclosure “rescue” schemes like these target homeowners who are looking for an easy way to lower their monthly costs.

How do these scams work? According to a fact sheet released by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), “The most common foreclosure rescue scheme unfolds when a homeowner receives a solicitation in the mail that promises short-term financing from a ‘private investor’ offering to pay off a delinquent loan.”

When a homeowner is unlucky enough to fall for a scam like this, they’ll often transfer the title to the so-called “investor” as collateral, assured that they’ll be able to stay in their home as a renter, and purchase it back later. The investor then recruits a “straw” borrower who, believing that they’re purchasing a home with an existing tenant, obtains a mortgage on the victim’s home. Ultimately, the proceeds of that mortgage pay off the existing debt, the investor pockets the equity and runs, and the homeowner and the straw borrower are left to squabble over their rights to the home.

In 2008, the Kentucky General Assembly passed the Home Ownership and Protection Act, which created the Kentucky Homeownership Protection Center. It included the Kentucky Residential Mortgage Fraud Act, which, according to an article by Kevin Hoskins for the website of law firm DBL Law, “sets out a criminal cause of action against those who intend to defraud a borrower. Intent to defraud or deceive is the only element needed to be proven for a cause of action under this section.”

Lawmakers take aim at predatory payday lenders

In addition to homeowner protections against predatory practices, Kentucky has also taken aim at unscrupulous payday lenders. According to a 2014 article by Jere Downs in the Louisville Courier Journal, the number of payday loan operations in the state fell in the three previous years from 750 stores to 539.

In Kentucky, payday lenders can charge no more than $15 per $100 in credits. State law also restricts borrowers to no more than two loans at a time, with a cumulative $500 cap.

However, as Dustin Pugel of the advocacy group Kentucky Center for Economic Policy pointed out in a 2016 article, “this still makes it possible for a single borrower to take out 52 loans a year.” He also cites an annual report by Veritec, the company that maintains the payday lending database for the Kentucky Department of Financial Institutions, indicating that the average borrower pays $591 in interest and fees for an average principal of $341.

State lawmakers created Veritec through legislation passed in 2010. It’s designed to flag suspicious transactions by logging each borrower’s Social Security number, driver’s license, address and other personal information. Previously, consumers were only required to sign an affidavit that they had no more than the legal limit of short-term loans. With Veritec, there is a tool that tracks lenders who fail to verify that their borrowers are within the legal payday loan limits. They face fines for this violation, as well as for deliberately falsifying borrower information, and the possibility of having their licenses yanked.

However, those fines may be toothless. As reported by John Cheves of the Lexington Herald Leader, the state slapped the national chain Cash Express with the smallest possible fine — $1,000 – when it was twice caught violating the law in 2010 at its Central City store. As Cheves noted, “Cash Express has since broken the law in nearly 100 additional cases involving 113 customers at 72 of its stores across Kentucky, including that store in Central City once again.” None of the stores in violation lost their state licenses.

This reporting led to attempts last year to pass even stricter oversight through Kentucky Senate Bill 169, introduced by State Sen. Alice Forgy Kerr (R-Lexington), and House Bill 321, introduced by Rep. Darryl Owens (D-Louisville). These bills didn’t make it past committee.

To learn more about predatory lending scams, check out these related pages and articles from OppLoans:

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