The Housing and Urban Development Department has decided to end a fraud-plagued program that insures home improvement loans arranged by construction contractors.
Housing Secretary Andrew Cuomo said Thursday that attempts to reform the Title I program had failed and that the agency is proposing a rule to terminate it.
"The contractor program is by design a crime waiting to be perpetrated," Mr. Cuomo told reporters at the agency's headquarters.
"The contractor is a financial middleman waiting to obtain financing to pay his own bill," he added. "The program ... provides the incentives to defraud the lender, the borrower, and the taxpayer." Homeowners may currently obtain the loans-up to $25,000-either directly from lenders or through contractors who do the renovations. The federal government insures the loans under its FHA loan program. It insured about 100,000 Title I loans in 1996; roughly half were made through contractors.
But defaults on the contractor-originated Title I loans have been twice as high as on similar loans originated by lenders, Mr. Cuomo said. From 1987 to 1994, the federal government, which insures the loans under its FHA loan program, paid claims totaling $114 million on Title I loans obtained through contractors.
Unscrupulous contractors often target low- and moderate-income people, he said, who make up half of all Title I borrowers. They lure homeowners into renovation projects with promises of easy financing, then arrange a Title I loan.
With the loan in hand, contractors may overbill for shoddy work, Mr. Cuomo said.
Flanked by a Greenville, Miss., couple, Sandra and Paul Griffin, who said they'd been victimized in such a scam, Mr. Cuomo said Americans take out Title I loans to pursue the American dream of a better home.
"They want to make (their homes) a little better, a little sweeter, a little more comfortable," he said. "To then be subjected to a fraud, and for the federal government to have anything to do with it, is inexcusable, and it won't be tolerated."
The proposed rule to end contractor-originated Title I loans is now open for public comment.
One powerful lobby gave its support Thursday. Appearing with Mr. Cuomo, Bernice Shepard, a board member of the American Association of Retired Persons, said termination "is a prudent action to protect the taxpayer and innocent homeowners."
But Rep. Rick Lazio, R-N.Y., chairman of the housing subcommittee of the House Banking Committee, is opposing the plan.
Ending contractor-originated Title I loans, he said, would only "cover up HUD's own failure to enforce the rules on the books."
"Corrupt contractors ... will still prey on the same (elderly and low- income) populations but with different loan scams," Rep. Lazio said in a press release.