By Jared Chausow
By Katie Toth
By Elizabeth Flock
By Albert Samaha
By Anna Merlan
By Jon Campbell
By Jon Campbell
By Albert Samaha
For years, according to current state attorney general Eliot Spitzer, Delta Funding has been luring minority homeowners on fixed and low incomes into mortgages they could not afford, then foreclosing on and auctioning off their homes. But while the company has been milking equity out of communities in Brooklyn, Queens, and elsewhere, it has also been building strong ties to the state's Democratic Party establishment.
Last week, the Woodbury, Long Island firm and its politically connected negotiators made a deal with state regulators investigating the firm. The multimillion-dollar settlement with the state banking department would reduce the payments of some borrowers but leave most of Delta Funding's lending practices untouched and allow it to deny any wrongdoing. On Wednesday, Delta announced that Spitzer's office, which has also been investigating the company, was a party to the deal. Its announcement was premature.
Ironically, the company was more successful extracting a deal from the Pataki administration than Abrams, Lynch, and their colleagues were from fellow Democrat Spitzer. Describing Delta Funding's practices as "blatantly illegal and onerous," Spitzer filed suit Friday in federal district court in Brooklyn, charging the company with civil rights violations for targeting primarily African American neighborhoods.
Spitzer's lawsuit asks the court to appoint a receiver to take control of Delta. Delta had arranged a tentative settlement with Spitzer two months ago including restitution for victimized borrowers and a federal monitor to oversee the company but the deal didn't hold because of a political turf war between the A.G.'s office and the Pataki administration.
Sources say the banking department threatened Delta with revocation of its lending license if it made a deal with the attorney general rather than the administration. Officials did not comment on the charge. For his part, Spitzer says the administration's settlement is full of loopholes and includes insufficient outside monitoring of the firm's business.
Meanwhile, critics from the affected communities say the banking department's deal with Delta Funding is so toothless that unscrupulous lending could easily continue under the eye of the regulators.
Delta Funding's business reveals a dark facet of the current boom on Wall Street and in the real estate market. The company is part of a fast-growing $120 billion industry that deals in high-interest loans to homeowners who cannot obtain financing from mainstream banks. Since 1991, its parent company, Delta Financial Corp., has sold more than $5 billion worth of home equity loans to Wall Street investors with the help of major firms including Bankers Trust (now Deutsches Bank), Lehman Brothers, NationsBanc, Credit Suisse First Boston, and First Union.
High-interest home equity lenders maneuver the margins of banking laws in many black and Latino neighborhoods, offering loans with extraordinarily high fees. They often work hand in hand with home repair companies and loan brokers who paper neighborhoods such as Bedford-Stuyvesant and Jamaica, Queens, with leaflets advertising their services and "100 percent financing, no money down." Many of their borrowers are elderly and unschooled in the machinations of mortgage finance.
Several months ago, the Neighborhood Economic Development Advocacy Project (NEDAP), a research organization promoting community reinvestment, determined that the majority of Delta Funding's loans in New York City are made in neighborhoods that are at least 80 percent minority. The discovery illustrated the flip side of traditional bank redlining: because residents of such communities can't usually obtain standard loans, they must go to high-interest lenders for cash.
Delta chief executive Hugh Miller says his company is providing a desperately needed service in credit-hungry communities, and that criticisms have been leveled about only a handful of its mortgages.
Yet borrowers who take out Delta mortgages routinely pay out as much as 10 percent of the loan's value in brokers' fees, plus thousands of dollars in other fees that go directly back to Delta. Interest rates range from 11 percent to as high as 14.9 percent and often shoot up to 24 percent when the borrower defaults. Hundreds of Delta loans have gone into foreclosure in Brooklyn alone in the last three years. Nationwide, 5 percent of the company's loans are in foreclosure, about double the industry standard. The New York Times reports that in Brooklyn, Delta's foreclosure rate is between 10 and 13 percent annually.
Why are Lynch and Abrams representing such a company? Abrams, a partner at Stroock & Stroock & Lavan, says his law firm has worked with Delta since before he left public office, and his involvement was simply expedient. He says he has encouraged Delta to "undertake reforms which would provide stronger protections for consumers." Lynch didn't return calls seeking an explanation, although last week Delta's public relations agency called to say he was "probably too busy with the negotiations" to talk.
But the answer may also lie in the firm's close party ties. During the last three and a half years, the company's founder and board chair, Sidney Miller, and his wife have given more than $10,000 to the campaign funds of Representative Gary Ackerman and Senator Charles Schumer, according to filings with the Federal Elections Commission. And Delta Funding board member Martin Payson, the Millers' neighbor in Great Neck, is the former vice chair of Time Warner Inc. and a contributor of tens of thousands of dollars to the Democratic National Committee and to candidates including Alan Hevesi, Bill Bradley, Schumer, Noach Dear, Ed Towns, Ruth Messinger, and Jesse Jackson Jr., and many others.
Lynch is a vice chair of the DNC. As deputy mayor in the administration of David Dinkins, he held down the progressive wing of City Hall. Abrams, who served as attorney general from 1979 to 1993, has a strong history of political support in the black community, winning 84 percent of the African American vote in his 1992 bid for the U.S. Senate.
Community leaders in Bedford-Stuyvesant are taken aback by the pairs' allegiance to Delta. "I would never have suspected that Bill Lynch and Bob Abrams would be associated with these practices," says State Senator Velmanette Montgomery, whose district includes Fort Greene and part of Bedford-Stuyvesant. "I don't know that they understand the extent to which Delta's practices have been detrimental to elderly African American and Latino people in this city."
Mary Lee Ward, a 69-year-old Bedford-Stuyvesant widow, alleges in court affidavits that she fell prey to a broker's ploy four years ago. At the time, her only income came from social security and a rental unit upstairs in her three-story brick house near the corner of Gates and Tompkins avenues. Desperate to raise $10,000 for legal help to win custody of her great-granddaughter, she called a broker with Tarheel Funding in Flatbush, Linwood Roberts. He gave Ward mortgage papers to sign that showed she would receive more than $11,000. She signed, but went home without a check, according to Ward's affidavit in the Appellate Division of state supreme court, where she is seeking to overturn the foreclosure action Delta and Bankers Trust won against her in lower court.
Ten days later, desperate for the money, she finally caught up with Roberts, who, according to court documents, handed her a check for only $1467, along with altered copies of papers Ward had already signed. Ward was bewildered. "I looked at the check and almost passed out," she recalls. Only later did she realize she had signed off on an $82,500 mortgage refinancing with Delta Funding at 14.9 percent interest. Roberts had pocketed $8250 as his fee; Delta took another $3671 for itself and several thousands more to pay various fees and taxes. Ward says she tried to back out of the loan, but was unable to do so.
In court, Delta Funding's lawyers argued they tried to cancel the loan upon receiving word that Ward was unhappy with the deal, but Ward did not follow through. They added that any malfeasance of the independent broker was irrelevant to the legitimacy of the foreclosure. Ward's attorney, and others fighting similar foreclosure actions, counter that independent brokers are clearly acting as agents of the lender i.e., Delta Funding and the lender is therefore responsible.
Two weeks ago, community groups participating in a citywide foreclosure-prevention task force thought they were on the verge of winning stiff new state banking department rules to cramp Delta Funding and similar lenders' most outrageous behavior. But within a few days, they were shocked to find the regulators announcing the Delta settlement, which excluded the most troubling practices from government control, says Josh Zinner of the Foreclosure Prevention Project at South Brooklyn Legal Services.
If the state settlement is finalized in court, Delta will devote up to $7.25 million to reducing borrowers' monthly payments. It also places 525,000 shares of the company's stock in a trust to be used for borrower counseling. But, says Zinner, "There is a loophole for everything in this settlement. I mean everything." One provision allows Delta to self-certify its compliance. "It's ridiculous. It's a joke," he says. "We're pissed."
"What do they think they are doing?" adds Sarah Ludwig of NEDAP, who had spoken strongly in favor of the banking department's proposed new regulations at the hearings two weeks ago. "If this is what they consider enforcement, I'm going to come to their next hearings and tell them they are full of it. We're going to be turning our guns in the other direction."