Ford Unit on Defensive Once Again Over Its Payments to Loan Brokers

Ford Motor Co.'s home loan division, which appeared to have resolved charges of paying kickbacks to mortgage brokers, is suddenly back in the fray.

Lawyers representing some 80,000 borrowers are no longer content with a $4 billion settlement that was tentatively reached last summer. And a prominent community activist, Bruce Marks, is urging Ford's foes to fight hard.

"It's going to be a war for years," declared Mr. Marks, executive director of Neighborhood Assistance Corporation of America.

The rekindling of this dispute highlights a mounting controversy over the types of fees that lenders can-and cannot-pay to mortgage brokers.

As lenders' use of brokers has mushroomed in recent years, the fees paid to broker have increasingly come under attack by consumers. At least a dozen class actions against lenders are pending in courts around the country.

The Ford case, involving consumers from 36 states, has been one of the most prominent.

The borrowers have accused Ford Consumer Finance-a unit of the automaker's Associates First Capital Corp.-of fraudulently inducing them to take loans at above-market rates, by paying higher fees to brokers who could secure such loans.

The lawyers for the borrowers announced last week that they were moving to scrap last summer's agreement.

Federal Judge George A. O'Toole in Boston, who preliminarily approved the settlement, is reexamining it. He has asked both sides to submit briefs stating their case, and a fairness hearing is tentatively scheduled for March 25.

Edward K. O'Brien, one of the lawyers for the borrowers, said the group changed its mind after studying a recent court order in Virginia. A federal judge there said that payment of fees to brokers for securing higher rate loans was flatly illegal.

And, Mr. O'Brien said, the lawyers learned through the activities of Mr. Marks that the Ford consumers were willing to take a risk and seek more money. Mr. Mark's group dismisses the preliminary $4 million settlement as "a sellout."

Fred Stern, an Associates spokesman, maintained that the summer's agreement would be the final word on the broker controversy. "We think it's fair, and we're going to proceed with it," he said.

Associates, meanwhile, is under attack in the credit card market by another high-profile activist group. Inner City Press/Community on the Move is assaulting the unit for the rates it charges on cards.

Mr. Marks, for his part, contends that Ford's commission system for mortgage brokers leads borrowers to refinance often, each time tacking thousands of dollars in fees onto a loan. The loans are a "ticking time bomb," he said, because of their high interest rates-up to 18%-and balloon payments. He adds that a large number of the loans wind up in foreclosure; Ford said it could not provide foreclosure data. Mr. Marks and his group rose to national prominence in the early 1990s by pressuring Fleet Financial Group to boost low-income lending. The group's bare-knuckles campaign against Fleet heralded a new wave of consumer activism against banks. Last year, First Union Corp. boosted its low-income lending after a year of protests by Mr. Mark's group.

The Ford case could well come under a harsh spotlight from the media. A team from ABC's "Prime Time Live" television show was on hand last week as the lawyers for borrowers announced their move on the steps of a Boston courthouse. A producer for the show said a story on the Associates loans was in the works.

Homeowner Shirley Turner of Roxbury, Mass., is typical of dissatisfied Associates borrowers. She told American Banker that she did not qualify for a Bank of Boston mortgage, so she turned to a broker who secured a 14% mortgage from Ford for $58,000 in 1994.

The home, which she bought from an aunt, had $20,000 in equity remaining. Since then, she has refinanced twice with Ford, and each time the lender has rolled in $5,000 to $6,000 in origination fees.

Her monthly payment has increased from $762 to $839, and her total mortgage balance is now more than $76,000, Ms. Turner said.

Ford declined to comment on Ms. Turner's complaint.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER