June 3, 2012

Class action over 2nd-mortgage debt collection

A Texas company that is aggressively trying to collect second-mortgage debt from hundreds of Californians is facing a class-action suit in Santa Clara County that contends it is carrying out an "insidious and illegal debt collection scheme."

Heritage Pacific, started by twins Chris and Ben Ganter, who once starred in the real estate reality show "PayDirt," has spent millions of dollars since 2008 to buy at least 40,000 second-mortgage notes from around the country, mostly in California. It then uses fraud allegations against former homeowners to try to get them to pay up, often accusing defendants of misstating their incomes on loan applications.

Many of these former homeowners believed their mortgage debt had been erased after their houses were taken by banks and lending companies.

And in California, in many cases it has - state law prohibits lawsuits alleging fraud on mortgages of less than $150,000.

Critics of Heritage Pacific say its central tactic is forcing settlements from people who can't afford a drawn-out legal fight and who don't know the details of state law.

San Jose resident Ahmed Abdelfattah began getting calls from Heritage Pacific in 2009, saying he owed $135,000.

"It's been a nightmare," Abdelfattah said. "It's cost me money and time, and they ruined my credit."

Another San Jose man, Oscar Trejo, was days away from exiting bankruptcy in late 2010 when he received a letter from Heritage Pacific saying it had asked a bankruptcy judge not to erase an $88,800 claim against him. Trejo had invested in properties in Merced and lost them all to foreclosure.

Neither Abdelfattah nor Trejo is party to the class-action suit.
Fraud or not?

Consumer attorneys say that while many borrowers did overstate their incomes on applications, Heritage Pacific is targeting people who filled out their forms honestly or whose mortgage brokers pumped up their information without their knowledge.

The class-action suit filed in Santa Clara County says that by demanding payments, Heritage Pacific has violated "the rights of those who have already suffered the emotional and financial distress that results from the loss of their foreclosed home." The lawsuit claims Heritage Pacific has targeted hundreds of people in California.

In response, Heritage Pacific says it's not suing "innocent homeowners who, through no fault of their own, lost their homes." Instead, the company says it goes after people who "made material misrepresentations to secure large loans upon which they soon stopped paying."

Fraud claims "are the only ones we're interested in pursuing," said Chris Ganter, the company's chief executive and main owner.

Abdelfattah said it wasn't fraud, but a steep drop in his income as a sales manager at a Honda dealership that caused him to fall behind on his monthly house payments of $5,000, leading to the foreclosure of the three-bedroom home he'd bought in 2005 for $675,000.

In May 2010, Heritage Pacific named Abdelfattah in a lawsuit that claimed he used fraud to obtain a second mortgage. But on March 19, a Santa Clara County Superior Court judge threw out the claim because the alleged fraud involved a loan for less than $150,000.

Abdelfattah was only somewhat relieved. "They are not able to sue me, but (Heritage Pacific's claim) still affects my credit." Abdelfattah's countersuit, alleging violations of debt-collection law by Heritage Pacific, is scheduled for a jury trial in July.

Heritage Pacific can ignore the prohibition on pursuing fraud claims related to loans for less than $150,000 because it still can get default judgments and out-of-court settlements from some defendants, said Will Kennedy, a lead attorney in the class-action suit, with the Law Office of William E. Kennedy.

California law gives a lender that can prove a borrower fraudulently obtained a loan for more than $150,000 the right to sue. A creditor also may allege fraud to prevent a debt from being erased in bankruptcy.
Other counties, states

Heritage Pacific's first big foray into California came in U.S. District Court in Los Angeles, where in a three-month period beginning in December 2009, the company filed three lawsuits seeking $46 million in actual and punitive damages from 158 defendants who took out 143 loans.

A review of online records in 10 of the state's largest counties found 365 lawsuits in which Heritage Pacific was a party. Heritage Pacific also has filed 226 cases in federal bankruptcy courts in California.

The company's tactics also are getting notice in other states.

Regulators in Arkansas have cracked down on the company's fundraising.

The Arkansas Securities Department found that in September 2010, four Arkansas investors paid $50,000 each to buy bundles of second mortgages from Heritage Pacific, and the buyers signed separate deals to pay Heritage Pacific to collect and distribute payments from their mortgages.

In December 2011, the securities department issued a cease-and-desist order directing Heritage Pacific to stop selling unregistered securities.

Ganter said that Heritage Pacific had not agreed to a settlement and that the case was "not finished up."

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