Downpayment Fraud

Consumers should be skeptical of low downpayment deals because the down payment is usually a significant indicator to lenders that a family is financially ready to take on a home loan. In our review, 27 families (or about 6.5 percent of all the cases we reviewed) reported what appeared to be violations of lender downpayment requirements. Dealers offering low downpayment deals sometimes paid the additional down payment money out of other funds or borrowed funds, and loan contracts show an incorrect down payment amount.

Ms. C. of San Antonio wanted her mobile home loan refinanced after she found several problems in her paperwork, including the falsification of a down payment and "buy-for" fraud. She and her grandmother had answered an ad to rent a manufactured home from Oakwood. The salesperson offered instead a "zero down" purchase that would cost her only $269 a month. Ms. C's grandmother agreed only to co-sign the loan, not to actually take a loan in her own name.

After running a credit check, the dealer called the two back in to settle the terms, but this time asked for $1,600 down. Since they had planned to rent rather than buy, they had no downpayment money and reminded the salesperson that it was to be a "zero down" deal. Eventually, the salesperson called them in again, and showed them the $1,600 listed as a down payment but said he had "found a loophole." He asked Ms. C. to sign one set of papers, her grandmother to sign another and gave copies to neither, according to Ms. C. She did not actually leave any down payment, and in the end, all the contracts were actually in her grandmother's name.

"When I went to pick up the paperwork from Oakwood Mobile Homes office, there was only my grandmother's paperwork," she wrote to the AG. "I asked where my paperwork was and no one remembered that I had signed a set of papers, and Mr. C------ was no longer there. He had been transferred to another office, they said." The Attorney General made repeated attempts to solicit a response from the dealership to these accusations, but after waiting four months they closed the file and recommended that Ms. C. might pursue her claim in small claims court.(1)

Even if the offer is not a "zero down" offer, consumers must be careful that their paperwork is the same as the deal they made. A consumer from Weir, Texas reported that he put $1,000 down on the home, but the down payment shown on his loan documents was actually $3,060.(2) A couple from Alamo, Texas reported that they could no longer pay for a home purchased on their grandfather's credit, and wanted help getting out of the deal. Without comment, the couple circled the down payment on their contracts ($6,038.25) and provided a copy of their downpayment reciept ($1,000). According to the company response, the couple kept the home and the dealership offered payment assistance for 12 months.(3) A consumer from Huffman, Texas reported using a wedding ring as a down payment because she had "no money." The loan documents report a $5,000 down payment.(4)

Land/home deals have resulted in different forms of creative financing for the down payment. In response to a query from the Attorney General, a San Antonio developer reported loaning one couple $8,000 towards their down payment in a separate loan agreement, and then wrapped the home and land together in a "contract for deed." The final loan document shows a $10,000 downpayment rather than the $2,000 the couple actually paid.(5)

A Houston consumer reported that she backed out of a land/home deal when she realized that she was told different down payment and closing cost amounts by the lender and the dealer, and the dealer had suddenly changed the cost of the land by $2,500.(6) To try and curb dealer fraud in land/home transactions, the 77th Texas Legislature last year passed a law designed to prohibit dealers from using money from the sale of land to fund a consumer's down payment, points, or fees.(7)

Most consumers who report their stories to regulators appear to have been aware that the down payment on the documentation was not the same as the down payment they actually paid, and some try to back out if they realize that the deal actually will require them to lie.

A Hearne, Texas consumer reported that the dealer wrote a check to his brother for "lot clearing" to cover the down payment. "Doug, the general managed, drove me in his corvette to the bank where I cashed a check written to me for services I did not do, and instructed me to hand him the cash money," the brother wrote in a sworn affidavit to the Attorney General. When the brothers questioned this part of the transaction, the dealer assured them it was a common practice, "done all the time...nothing to worry about."
After moving in, the two brothers discovered that they had indeed perpetrated a fraud and wanted the dealer to come get the house. "I am a retired Military Veteran and take stringent exception to involuntarily and unknowingly being made part of any such activity," he wrote to the AG.(9)

Consumers who sign contracts where there is some difference between the deal presented on paper and the deal they think they negotiated may place themselves in a position of collusion with fraud. On the other hand, dealers are quick to say its "done all the time" or allowed under some "loophole" and are ultimately responsible for convincing vulnerable families to do something wrong.

Buying a home is among the most complex and confusing financial decisions most families ever make, even if everything is above board. For low-income families and those with imperfect credit, the process can be overwhelming. Dealers take advantage of this difficult time when they present "creative" solutions to credit or financial problems.

Finding Solutions to Fraud

Last year, the Oregonian produced a major two part expose of fraud issues in the sale of manufactured housing in Oregon. The paper found that dealers and lenders routinely circumvent the minimum 5 percent down payment standard for manufactured home loans, and failure to enforce down payment standards leads to increased default.(9)

In response, the state Attorney General led a Task Force in the development of new fraud deterrents in state law, and proposed them in March, 2001. In general, the Oregon Attorney General recommended better, standardized itemization of all costs, including costs not part of the financing, a "cooling off" period, and information about housing counseling agencies for consumers to get a second opinion about their deal.(10)

We also believe consumer complaints to state agency regulators should more frequently result in investigation and enforcement. In our review of complaints to the AG and OCCC we found no cases where the regulatory agency did more than send letters. Sometimes the dealer responded with a satisfactory solution for the consumer (usually a simple refund of deposit). But if the letters were ignored, the agency closed the file. Current law already makes most down payment fraud illegal. But without enforcement, unethical dealers can expect to play fast and loose with the rules indefinitely.

Footnotes, p. 35.