POSITION PAPER 2: HOUSING FRAUD, PREDATORY SMALL BUSINESS LENDING AND LANDLORD ABUSE

Executive Summary

Housing fraud, predatory lending, and violations of tenants’ rights remain far too common across our entire City, but Queens is facing some of the most troubling levels of these crimes, and residents need a District Attorney who will protect them from these crimes.

As DA, Melinda Katz will maintain a strong policy of prosecuting white collar crime with the aggressiveness it deserves, a principle which was laid out in her initial policy paper on worker protections. Theft is theft, whether the robber wears a mask or a three-piece suit; whether it’s stealing a car or robbing a family of their financial security through housing fraud.  

To combat this problem, Melinda will create a new bureau within the DA’s office, the Bureau of Housing and Loan Fraud, which will educate the public about these crimes, enlist the public’s help in the gathering of evidence against fraudsters, aggressively prosecute white collar criminals who prey on our communities, and advocate for better laws to further protect consumers and hold those who violate the law accountable. 

Specifically, the Katz Administration will:

  • Create the Bureau of Housing and Loan Fraud so that real investigative tools are available to catch these predators

  • Partner with local community groups and leaders to increase awareness of financial literacy programs

  • Create a hotline and online portal to track, investigate, and prosecute predatory lenders and allow residents to report housing fraud, predatory lending, or any suspicious solicitation

  • Aggressively prosecute white collar crimes like housing fraud

  • Advocate for strong laws to protect borrowers, including stricter licensing standards for online lenders

  • Connect with small businesses to identify loan fraud and predator loan behavior

  • Advocate for legislation banning “confessions of judgement” and requiring loan-like financial products to follow the same regulations as loans.

  • Protecting renters by prosecuting tenant harassment and fraudulent behavior by landlords

Introduction

Ten years ago, our country and the entire world was brought to the brink of economic disaster by a financial crisis that was based on a deceptive and abusive practice of housing fraud and unethical lending practices. Unscrupulous white collar criminals lured countless families, especially in communities of color, into a financial trap by falsifying documents and misrepresenting loan terms, then pushing borrowers into loans they never could afford and falsely inflating the values of houses that were being purchased. When the bubble burst, Southeast Queens became “foreclosure central,” leaving a trail of bankruptcies and financial ruin that destroyed lives and deeply undermined our entire economy.

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Now, as memories of the real estate collapse fade further into the past for most of the country and the Trump administration continues to roll back important consumer protections, families in Southeast Queens are still struggling with the aftermath of a decade-old foreclosure crisis that shows no sign of abating.  Even at the end of 2018, foreclosure rates in Southeast Queens continue to rise while they have stabilized or declined in other parts of the city. 

New York’s small businesses are also being targeting for a particularly pernicious form of predatory lending. These shameful and sometimes illegal practices are particularly focused on low-income communities, seniors, and newly-arrived immigrants, many of who do not have access to traditional banking services.

As homebuyers and small businesses are being preyed upon by unscrupulous lenders, renters – especially in rent-regulated apartments – are finding themselves facing increasing harassment and rent law violations. With market rate rents rising, landlords are seeking to force tenants out so they take apartments out of rent regulation and increase their profits. Yet Queens is already the most rent-burdened Borough in the city, and tenants here on average spend over half their income on rent. Due to the complexity of the rent laws, combined with Albany’s traditional underfunding of enforcement, landlords are generally not held accountable for their actions. And with the increasing popularity of Queens as a tourism destination, further loss of affordable housing due to illegal Airbnb rentals give landlords additional incentives to violate the law to force rent-regulated tenants out.

In this environment, it is vital that that next District Attorney aggressively work to use the full powers of her office, both prosecutorial and educational, to protect homeowners, borrowers and renters, and to hold those who violate the law accountable for their actions. 

Educating the public about housing and loan fraud 

Education is one of the strongest tools to prevent homebuyers and small business owners from falling victim to fraud. Lenders go in armed with deep experience in the lending process: knowledge of the laws, loopholes, and deceptive or fraudulent practices to get around those laws; and a real understanding of the longer-term financial implications of every borrowing instrument they can market to a potential borrower. Borrowers or current homeowners however, often go in with little experience or knowledge, just a need for financing and a hope that the lender, with their financial expertise, will not lead them down the wrong path. Because fraudsters are, by definition, willing to be dishonest and deceptive, it is critical that individuals are better informed of their rights and the risks of certain lending practices before they even sit down for an initial consultation. 

There is no shortage of financial literacy programs available to people, yet far too many first-time borrowers do not take advantage of them before obtaining a loan or other form of credit, leading to sometimes disastrous outcomes. Rather than re-create programs already provided by City and State agencies and non-profit credit counseling services, as District Attorney, Melinda will partner with local communities to increase awareness of these services; ensure that potential borrowers know their rights; and aggressively work with community leaders and borrowers to find those committing housing fraud and shut them down. 

Frequently, these schemes target seniors, immigrants, and communities of color, knowing that consumers frequently underestimate the risks of mortgage loans. The DA’s office will take a proactive role in providing resources to the public, focused on these communities and constituencies, to promote education about and tools for reporting potential fraud or predatory lending schemes that target first-time homebuyers and small businesses with aggressive and deceptive lending practices. Using seized asset funds, the DA’s office will partner with community and faith leaders to conduct multiple workshops and information sessions about how to avoid and report predatory lending, and create an online portal for people to report potential predatory schemes and provide information about courses of action. 

Protecting homeowners and buyers from housing fraud

Even with a better educated public, it is still necessary to change the practices of the DA’s office to better identify and gather evidence against those committing housing fraud.  When an individual is committing housing fraud, whether luring someone into a loan illegally or packaging a fraudulent service as a refinancing or other similar product for an existing home, they will troll neighborhoods looking for potential victims.  Going from home to home, they will seek the most vulnerable victims while those who know enough to avoid this trap simply shut the door and move on. Those who do know enough, however, need to be engaged to be a part of gathering evidence against these criminals.  

Creating a Bureau of Housing and Loan Fraud

As DA, Melinda will create a Bureau of Housing and Loan Fraud to better protect Queens residents from these practices. Beyond prosecuting, she will set up a specific hotline, and aggressively advertise it, so that anyone who encounters a potential fraudster can have their story taken down and held for use in any subsequent criminal case.  While an individual lie between two people can be hard to use as evidence in court, a track record of someone telling the same lie to multiple individuals in the same neighborhood has much more strength as evidence to bring fraudsters to justice. 

Beyond reducing the incidence of housing fraud, educating the public on identifying and reporting this activity will be an increased opportunity for investigation and prosecution (or referral to the Attorney General) of predatory lenders.  

As victims are identified, the DA’s office will work with them throughout the investigation, gathering further evidence and assessing misrepresentation, unduly aggressive sales tactics, or fraud by the lenders. Based on this information, the DA will either prosecute offenders or refer cases to the Attorney General where jurisdictional issues require it. These prosecutions will not only bring those committing fraud to justice, but will hopefully also have a deterrent effect on others who would seek to victimize our Queens neighbors in this fashion.

Advocating for stronger laws 

Melinda will also work with the State Legislature and the State Department of Financial Services to advocate for expanded laws and oversight to better protect consumers from predatory lending and housing fraud. DFS has proposed a change in State Law to specifically require online lenders to adhere to a stricter licensing standard, in which non-depository lenders would be required to be licensed if they are charging higher than 7% interest, rather than the 16% as currently required by law. Stronger tools like this would create additional opportunities for consumer protection against unscrupulous lenders.

Protecting Small Businesses from Predatory Lending

While consumer loans and home loans are the best known targets for predatory lenders, there is a growing array of unfair loan practices targeted toward small businesses that are equally as damaging to our community. As detailed in Bloomberg News’ “Sign Here to Lose Everything” investigative series, the small business predatory lending industry has gone through explosive growth in recent years, fueled by inexperienced small business borrowers and a lax legal/regulatory environment in New York State. By calling these financial instruments “merchant cash advances” rather than “loans” lenders can get around the baseline regulatory protections provided to other small business borrowers. And by using a tool called a “confession of judgement”, these lenders can go to court and seize assets and bank accounts without the borrower ever having a chance to defend themselves.

In cases where borrowers misrepresent the terms of a loan, there may be opportunity for prosecution, but the greater focus will have to be on education and advocacy for strong laws to protect small businesses. Working with local business associations, entrepreneur groups, and chambers of commerce, Melinda will provide small businesses with better information on how to avoid being scammed by these bad loans, and what businesses’ options are if they have fallen victim to this trap.

More importantly, she will work with the Legislature and DFS to support legislation banning so-called “confessions of judgement” and requiring that all loan-like instruments be treated as loans for legal and regulatory purposes.

As noted earlier, many times businesses are forced to use these types of loan services because there are not enough safer options available.  Working with policymakers at the city and state level as well as responsible members of the financial community, Melinda will drive a dialogue on bringing better financial services of individuals and small businesses to lower income neighborhoods and communities of color.

Protecting Renters from Unscrupulous Landlords

While many longtime residents have good relationships with their landlords, the recent growth in Queens’ popularity, a rising housing market, and increased demand have driven rents up and led to some landlords, especially those with rent-regulated tenants, to engage in harassment and other illegal activities designed to drive tenants out. With nearly 200,000 rent-stabilized apartments in the Borough, it is imperative that the next DA use all tools at her disposal to protect renting families.

Any illegal act by a landlord that falls under criminal statute can be grounds for prosecution by the District Attorney. The most obvious is tenant harassment, especially if it involves threats of violence or other acts which jeopardize a tenant’s safety, as well as forms of fraud that unfairly deprive a tenant of their legal rights. These are occasionally prosecuted, but often only with the most egregious circumstances. Beyond harassment however, any landlord who files a false instrument with the state in an attempt to wrongfully delist a rent unit from rent regulations and thus defraud a tenant may be subject to prosecution.

Home & Small Business Protection 

To protect homeowners, small business owners, and renters, Melinda will use her new Bureau of Housing and Loan Fraud to actively investigate and prosecute cases where lenders or landlords have apparently violated the law in an attempt to either engage in housing fraud, predatory lending, or illegally deny a tenant their right to a rent-regulated home.

The fact is that no one goes to a loan shark because they have other, better options available to them. The communities most frequently victimized are also those where traditional banking services are hardest to come by. It is this exact dynamic that creates opportunities for wrongdoers, and these communities need the strongest protections from the DA.

Using seized assets, she will also partner with communities across Queens, especially those hardest hit by these crimes, to better educate local residents about their rights under the law, how to avoid getting scammed, and how they can report fraud and fight back if they have been victimized.

It will be a fundamental precept in the DA’s office that crime is crime, whether or not it is so-called “white collar crime.” Stealing from tenants, defrauding first-time homebuyers, or preying on a small business will all be treated as the crimes that they are and prosecuted appropriately.

Housing fraud and predatory lending harm all of us, and it is imperative that all levels of government take actions to protect vulnerable communities from falling victim to these crimes. Until that happens, Melinda will ensure that the Queens District Attorney’s office is equipped to support victims, educate the community, and investigate and prosecute housing fraud, predatory lending, and landlord abuse. 

Sources:

https://www.aclu.org/blog/racial-justice/race-and-economic-justice/predatory-lending-wall-street-profited-minority

https://www.crainsnewyork.com/article/20101003/REAL_ESTATE/310039983/southeast-queens-is-foreclosure-central

https://www.dnainfo.com/new-york/20160226/jamaica/housing-crisis-never-ended-for-black-home-owners-queens-data-shows/

https://www.propertyshark.com/Real-Estate-Reports/NYC-Foreclosure-Report

https://www1.nyc.gov/office-of-the-mayor/news/395-05/mayor-bloomberg-innovative-initiative-combat-predatory-lending-prevent-mortgage

http://gothamist.com/2015/11/13/queens_rent_burden.php

https://ny.curbed.com/2016/4/21/11477788/this-year-new-yorkers-will-spend-two-thirds-of-their-income-on-rent

http://gothamist.com/2015/11/20/airbnb_queens_affordable_ha.php

http://www.jchs.harvard.edu/sites/default/files/goldstein_w99-11.pdf

https://www.dfs.ny.gov/reportpub/online_lending_survey_rpt_07112018.pdf

https://www.bloomberg.com/graphics/2018-confessions-of-judgment/

http://furmancenter.org/files/FurmanCenter_FactBrief_RentStabilization_June2014.pdf



Marc Lapidus