Mortgage Mess: Why Quicken Loans May Not Be as Squeaky Clean as It Claims

Last Updated Feb 8, 2011 7:45 PM EST

Quicken Loans' lending practices may not be as exemplary as the company contends. A federal lawsuit starting in Detroit today and other legal action against the nation's largest online mortgage lender paint a decidedly less flattering picture of Quicken, reports Michael Hudson, a staff writer with the Center for Public Integrity.

Quicken founder and chairman Dan Gilbert, owner of the NBA's Cleveland Cavaliers, has sought to distance his company from the actions of notorious predatory lenders such as Ameriquest and Countrywide. Quicken has also capitalized on that image, touting its high ranking in consumer surveys, top grade from the Better Business Bureau and repeated listing by Fortune as one of the "100 Best Companies to Work For." Yet allegations by former employees and customers bear a disturbing resemblance to the reckless, often illegal lending that marked the years leading up the housing crash. Hudson writes:
They accuse the company of using high-pressure salesmanship to target elderly and vulnerable homeowners, as well as misleading borrowers about their loans, and falsifying property appraisals and other information to push through bad deals....

A group of ex-employees, meanwhile, have gone to federal court to accuse Quicken of abusing workers and customers alike. In court papers, former salespeople claim Quicken executives managed by bullying and intimidation, pressuring them to falsify borrowers' incomes on loan applications and to push overpriced deals on desperate or unwary homeowners.
In the Michigan suit, former employees are seeking overtime pay they say Quicken owes them. Documents in the case also claim that the company encouraged some borrowers to overstate their income. [Note: Business software maker Intuit (INTU) bought Quicken, then called Rock Financial, from Gilbert in 1999. He and other investors repurchased the company from Intuit in 2002. Quicken is today privately held, while Intuit continues to market Quicken personal finance tools.]

Mortgage monsters
As Hudson recently documented in his book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America -- and Spawned a Global Crisis, aggressive sales tactics were a hallmark of the abusive lending that led to the housing crash. Quicken uses similar methods, said a former loan salesman at the company in a sworn statement. He claimed managers pressured salespeople to boost their commissions by "locking the customer into a higher interest rate, even if they qualified for a lower rate, and rolling hidden fees into the loan."

Another feature of the subprime bubble was lenders' widespread use of adjustable rate mortgages, often pressed on financially gullible borrowers who were unaware of the risks. Gilbert has stated that Quicken avoided riskier lending, telling The Plain Dealer in 2009 that "We never did these kinds of loans that really started this mess, the subprime loans."

But at least one court ruling and litigation by homeowners against Quicken cast doubt on whether the company has been as responsible in its lending as Gilbert maintains. Last year, a West Virginia court found Quicken guilty of fraud for misleading a mortgage borrower, gouging her on fees and wrongly inflating the value of her home. Hudson notes that the judge overseeing the case described the company's conduct in the case as "unconscionable."

ARMs self-destruct
Meanwhile, multiple borrower lawsuits against the company center on its issuance of ARMs. One Ohio County, W.Va., resident, Janyce Duncan, filed a complaint after Quicken in 2005 put her into a $109,000 interest-only loan and a $27,000 home equity credit line. (On its Web site, Quicken says it doesn't currently offer interest-only products because of "market conditions.") The company and a third-party appraisal firm inflated the value of her house by nearly $40,000, she alleged. Duncan's lawyer said she later tried to sell the home, but failed because the property's value was worth less than what she owed on her loans.

Another borrower accused Quicken of not explaining the terms of a balloon loan, which she couldn't afford. Although the homeowner claimed to have expressed concern about the cost of the mortgage, a Quicken loan officer allegedly told her that "the affordability of the monthly payment was not an important consideration" because the company could refinance the loan in a few months at a lower interest rate. As in the Duncan case, the company was also accused of arranging a bogus appraisal on her home, overstating its worth by more than $135,000.

A former Quicken loan consultant supports the sense that such borrowers were ill-served, claiming that supervisors pressured her to sell ARMs to customers who would have been better off using another product. Hudson says:
She recalled selling a loan to a customer who had cancer and needed cash to pay medical bills: "I could have offered him a home equity line of credit to pay these bills but, instead, I sold him an interest-only ARM that re-financed his entire mortgage. This was not the best Quicken loan product for him, but this was the one that made the company the most money."
Quicken: Overtime case a "farce"
In a statement, Quicken vice president of communications Paula Silver said the overtime suit kicking off in Michigan this week has "no merit." She added:
This lawsuit was initiated by an out-of-state law firm from Minnesota which has filed hundreds of these suits threatening they will convince a court to rely on a 1930s wage law intended to protect blue-collar factory workers, to also apply to highly compensated white-collar professionals in an effort to coerce settlements from job-producing companies....

Detroiters and the rest of the country will see through this farce during this case. We look forward to righting this wrong.
In a voicemail, Silver further sought to discredit Hudson's story by dismissing the Center for Public Integrity as a "not very credible source." (Without turning this into a pissing contest, it's worth noting that Hudson, a former WSJ reporter who has covered the lending industry for nearly two decades, is a decorated investigative journalist. His credentials are impeccable, and within media circles the CPI is highly respected as a nonpartisan source of investigative reportage.)

The bigger issue is whether Quicken deserves its sterling reputation, or whether this standing masks questionable activities by the company. The West Virginia suits are several years old -- it's possible the company has since cleaned up its act. But the company's blanket dismissal of the CPI story doesn't exactly suggest a company pushing to confront internal problems or improve its lending standards. Rather, Quicken has said such allegations are isolated and sought to pin the blame on rogue employees.

As Hudson notes, it's fair to say that Quicken is no Ameriquest, Countrywide or FAMCO. Complaints against Quicken are far less numerous than they were against these other players, firms that helped write the book on predatory lending. But neither does its conduct seem as irreproachable as the company contends.

Thumbnail from Flickr user Joka2000; image from Wikimedia Commons, CC 2.5

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    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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