All the Devils Are Here [83]
In 2003, Ameriquest tried to tighten up its lending standards. Among other things, it changed its compensation guidelines so that loan officers were no longer rewarded for tacking on additional fees, and it implemented new software designed to prevent fraud. But the relentless pressure for loan volume never changed, and in the branches there always seemed to be ways of getting around the new policies. “It is absurd to suggest that their 2003 changes ‘solved’ the problems,” says one longtime critic.
Ameriquest’s core product was something called a 2/28 loan, meaning it had a low fixed rate for two years, and then converted to a higher adjustable rate for the remaining twenty-eight years. What made a 2/28 loan particularly pernicious is it often came with a three-year prepayment penalty. That meant that the borrower either had to refinance at year two—and pay a hefty fee— or pay the higher rate for a year before refinancing without having to pay a penalty.
Then there were the points and fees Ameriquest charged. In theory, borrowers pay up-front points to reduce the interest rate on their loan. And in theory, risk-based pricing—or charging consumers based on the risk they represent—means that riskier borrowers should pay more. Indeed, that’s the essential justification for subprime lending.
It would be hard to call what went on at Ameriquest risk-based pricing. Ameriquest had a rule capping the points and fees on any one loan at 5.5 percent. (This was to avoid running afoul of several state laws with similar caps.) But, according to a former loan officer, the goal in the branches was to charge as close to that limit as possible. The creditworthiness of the borrowers mattered a lot less than whatever the loan officer thought he could get away with.
A spreadsheet of all the loans Ameriquest made in the month of February 2005 offers a vivid illustration. One customer with a midgrade credit score got a loan of $750,000—and paid the maximum in points and fees. The revenue to Ameriquest was $41,226. Another customer with a $750,000 loan paid so little in fees and points that the loan generated only $1,830 for Ameriquest. Yet that second customer was far less creditworthy than the first. Another example from that same spreadsheet: Two borrowers, both with the same credit score, took out 2/28 loans of roughly the same amount. One of them paid over 3 percent in points to get a 6.5 percent interest rate (revenue to Ameriquest: $31,320). The other paid almost no points for the same rate (revenue to Ameriquest: $2,559). Ameriquest’s total revenue for just that one month was $87.5 million on $2.5 billion in loans.
Ameriquest also had special “portfolio retention” branches, whose job it was to prevent Ameriquest borrowers from refinancing with competitors. They would pay fees to the big credit bureaus and get alerts whenever an Ameriquest customer requested a credit check. That was standard practice in the industry, according to former loan officers. But they also sometimes did something far sleazier. Bob says that certain Ameriquest employees would hack into the system and print out a sheet with everything about a borrower: the size of their loan, their social security number, birth date, and contact information. The loan officer would then call borrowers who hadn’t even voiced an interest in a refinancing, offering a new loan with a reduced interest rate—and hefty new fees for