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U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to notice, at 2:16 p.m., in room 2128, Rayburn House Office Building, Hon. Rick A. Lazio, [chairman of the subcommittee], presiding.

    Present: Chairman Lazio; Representatives Ehrlich, Kelly, Bentsen, J. Maloney of Connecticut, and Weygand.

    Chairman LAZIO. The hearing will come to order.

    I want to welcome the audience to this hearing. I know we have quite a few Members trying to juggle schedules. I know my two colleagues will understand that challenge.

    The subcommittee meets today to hear testimony regarding consumer abuses in home improvement financing. In particular, we will focus on work done at the request of the subcommittee by GAO concerning HUD's oversight of the Title I Home Improvement Loan Program, as well as HUD's Office of Inspector General investigation of the program.
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    At the request of Congressman Jon Fox, we are also pleased to welcome the Attorney General of the Commonwealth of Pennsylvania who will be testifying to his work to combat consumer abuses in home improvement financing in Pennsylvania.

    By way of background, the Title I program was created in 1934 to help families to prepare, modernize, maintain, and preserve their homes. Title I loans are originated either directly between lenders and homeowners or through dealer contractors where the contractor acts as an intermediary between the lender and consumer.

    While the program is not targeted to certain income categories, evidence shows that more than half of borrowers have incomes under 115 percent of the area median income. So, this is a program that is particularly useful for people of modest means.

    Recently, investigations by HUD, the HUD Inspector General, GAO, and the news media have uncovered potentially widespread fraud and abuse in the Title I Home Improvement Loan Program. Among the allegations are false advertising, incomplete work, falsifying loan applications, high claims rates, and strong-arm tactics that force homeowners into greater debt. Of great concern to the subcommittee, in addition to the cases of fraud and abuse, is what appears to be HUD's alarming lack of oversight of the program.

    I should mention that although invited to appear before the subcommittee, HUD was unable to testify at this time. A letter was sent to HUD, and we know that the Department is working on these issues. I hope to hear from them very soon.

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    Ms. Margo Saunders of the National Consumer Law Center was also invited to testify based on her work in the Mortgage Review Working Group, but was unable to appear due to scheduling conflicts.

    In response to reports of program fraud in the media last year, HUD, in an elaborate press conference, imposed civil money penalties on a number of dealer-contractors involved in the program. It was the first time HUD has ever used such enforcement authority, even though they have had the authority for years.

    HUD also proposed to eliminate the dealer contractor portion of the program, which accounts for almost 50 percent of the loan activity due to higher default rates.

    GAO will testify today that the Department has little, if any, concrete data on which to justify their proposal. In fact, HUD's own report on the program, completed by Price Waterhouse, concluded that terminating the Title I program would ''remove the most viable cost-effective mechanism for financing home improvements for many borrowers.''

    Both Republican and Democratic Members of the committee, including my friend and colleague, Mr. Kennedy, and Mr. Frank have urged the Department to proceed with caution to guard against any knee-jerk reaction that would affect the thousands of homeowners that benefit from the program. Instead, we have suggested that HUD be more vigilant in their monitoring and enforcement of the program. Testimony from the industry today will elaborate on potential enhancements to safeguard against program fraud and abuse, and I want to acknowledge the fact that the industry has been very forthcoming in terms of suggestions on how to improve enforcement.

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    Importantly, we will also hear from a Pennsylvania homeowner, Ms. Christine Harris, who has been victimized in this process. I have read her written testimony. I have to say, in reading the testimony, I find myself filled with anger that families, any of whom could be our neighbors, suffer such calculating deception and abuse by certain contractors in the name of a Federal program designed to improve the quality of life, particularly for those people of modest means. The subcommittee is most grateful to have her appear today to tell her story.

    I know Mr. Kennedy is tied up right now and possibly on his way over to the subcommittee. When he gets here, we are going to be hearing from him. I want to thank him for his efforts and support of this hearing.

    Now I will turn it over and acknowledge the great work of Mrs. Kelly.

    Mrs. KELLY. Thank you very much.

    Mr. Chairman, I do not have a long statement. I would just like to take this opportunity to briefly thank you, Chairman Lazio, and Ranking Member Kennedy for agreeing to hold the hearing today on the recent abuses of the Federal Housing Administration's Title I Home Improvement Loan Program.

    I want to thank my friend and fellow New Yorker, Chairman Lazio, for his leadership on the oversight of the FHA loan insurance programs. It is this type of program that we must keep a very close eye on to ensure that such programs are not abused and used to victimize vulnerable consumers, and he is doing just that with this sort of hearing.

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    I especially want to thank all of the witnesses for joining us here today to share their insights with us, so that we can better understand the problems within this FHA Loan Insurance Program and look forward to working with my colleagues on both sides of the aisle on these issues as we move forward.

    Thank you very much, Mr. Chairman.

    Chairman LAZIO. I thank the gentlelady.

    When Mr. Kennedy gets here, with unanimous consent, I would like to turn to him and recognize him for a statement, if he has one. Otherwise, he will submit it for the record, and with unanimous consent, that will be done.

    I want to begin by thanking my two colleagues who have agreed to testify before this subcommittee; not just for agreeing to testify, but for the work they have done on the enforcement issues involving the Title I program. Fraud and abuse clearly have been issues that the subcommittee has focused on, and without the work of these two Members I doubt we would have been able to seriously consider some of the proposals.

    Today's hearing is being held at the request of Congressman Jon Fox. He has been among the most active of our Members, following the investigations of alleged abuses in the Title I program. I am looking forward to your remarks, Congressman.

    I also want to also acknowledge the very fine work of Congressman Ken Bentsen who, together with Mr. Fox, is one of the finest Members of not just this subcommittee, but this House. He has pursued allegations of the Title I program, and he and I have worked closely with HUD to examine the alleged program abuse in the Houston, Texas area.
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    We have also jointly requested a GAO assessment of HUD's management and oversight of the Title I program, and I want to welcome you both before the subcommittee.

    I would ask, Congressman Fox, if you would first deliver your remarks.


    Mr. FOX. Thank you, Mr. Chairman.

    Mr. Chairman, you should be applauded for your efforts in holding a hearing on consumer abuses in the area of home improvement financing. Millions of homeowners nationwide invest in and finance home repairs and improvements each year, and thousands leave the process bitter or disappointed. Congressional attention to this matter is fully warranted and timely, as the home improvement industry continues to grow at a rapid pace.

    Historically high housing prices, despite falling values in some markets, are leading many families to decide to remodel, then to move to a new home. Homeowners across the country are recognizing that a product better suited to their needs might be more economically obtained by modernizing their current home rather than relocating.

    The outlook for continued growth is strong. According to the U.S. Department of Commerce, American households in recent years have invested in home repairs and improvements at an annual rate exceeding $125 billion. Approximately 40 percent of that amount, or $50 billion, is estimated to be financed. Title I finances $1.3 billion of that amount.
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    As many of you know, over the past few months, my homestate newspaper, the Pulitzer Prize-winning Philadelphia Inquirer, has reported in depth on the alleged abuses in the home improvement or home repair industry. According to an Inquirer article on January 1998 by Mark Fasola and B.J. Phillips, the Inquirer reviewed 240 Title I loans and found that some contractors charged inflated prices for improvements, at times double or triple prevailing costs for materials and labor.

    Two, the home repair companies or their subcontractors often do shoddy work, using low-quality materials and unskilled labor.

    And, three, the sales personnel who were so friendly when pitching the improvement suddenly become unreachable when the roof springs a leak or the windows crack. Company offices sometimes turn out to be no more than a mailbox and an answering machine.

    Many homeowners make it easy for unscrupulous contractors by failing to read loan papers closely at all. However, in the end, consumers are left with long-term debt and home improvements that need repair.

    Thankfully, on the State level, Attorney General Mike Fisher has taken steps to help Pennsylvania, but we still need a reform package that will help all 50 States.

    The Title I Property Improvement Loan Insurance Program was established by Title I of the National Housing Act in 1934. Under the program, lending institutions make loans from their own funds to eligible borrowers to finance property improvements. HUD ensures the lender against loss if the borrower defaults on the loan.
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    Over the 64-year history of the Title I HUD program through the Federal Housing Administration, it has insured more than approximately $35-million property improvement loans valued at approximately $40.1 billion. Loans are made for a wide variety of alterations and repairs to improve the basic liveability or utility of the property, including structural additions and alterations. Lending institutions that participate in the program include national and State banks, savings banks, savings and loans associations, Federal and State credit unions, mortgage companies, and finance companies. The program is also widely used by State and local housing assistance and neighborhood revitalization programs. More than 80 percent of the 306,000 property improvement loans, now insured, were originated by or in conjunction with State and local housing agencies.

    Many homeowners rely on Title I loans to finance their home improvements. To borrowers, Title I loans offer an excellent source of funds for improving or enlarging their homes without requiring a large down payment or deep equity into the property. For lenders, the program offers the opportunity to provide, with an acceptable level of risk, loans to homeowners who would not otherwise be served by the private market for home improvement financing.

    In view of some of the past abuses in the Title I program, Mr. Chairman, and the increasing demand for home improvement loans, it is time for Congress and the subcommittee to review the Title I program, provide greater oversight, and potentially modernize the program or make it financially self-sustaining. Congress wants to ensure that the consumers are protected from petitory lenders and disreputable home improvement companies, but at the same time are able to access credit for needed home improvements.

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    A Price Waterhouse report on the Title I program, published in August 1997, concluded that terminating the Title I program would remove the most viable, cost-effective mechanism for financing home improvements for many borrowers.

    As will be discussed here today in more detail, we should strengthen the consumer protection provisions under the Title I program rather than eliminate the program. In particular, some of the following issues should be reviewed: increasing the role of lenders involved in the Title I program, timing the inspection of the improved property before funds are released to a home improvement contractor, ensuring that they do not offer the homeowner a gift or other inducement to enter into the transaction, ensuring that all the money is being used for home repair or improvement, increasing the lender approval and annual verification fees to a level that covers HUD's cost of administration of the program.

    In addition to Federal involvement, the States need to take a more active role in overseeing many of the lenders and home repair companies that they license, such as Attorney General Fisher is doing. These hearings and continued oversight will allow us to determine whether the problems of the Title I program can be fixed, with better administration and enforcement to existing laws, or whether major legislative changes are necessary to fulfill the purpose and promise of this program. We need to force this market that brings the strength of the financial marketplace to assist homeowners with repairs and improvements, while ensuring that we protect the consumers who obtain the credit.

    It is my intention, along with my colleagues, that the hearings held today will result in a bipartisan effort to bring about some of the needed reforms to better serve our constituents.
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    Thank you.

    Chairman LAZIO. I thank the gentleman for his very fine testimony.

    Mr. Bentsen.


    Mr. BENTSEN. Thank you, Mr. Chairman, and I would ask unanimous consent that my statement be included in the record, and I will do my best to summarize, if that is all right.

    Chairman LAZIO. Without objection, it is so ordered.

    Mr. BENTSEN. Mr. Chairman, I want to thank you for holding these hearings on what is a very important program, the FHA Title I Home Improvement Loan Program, but also a very troubling program.

    Last year, in my hometown of Houston, I learned firsthand about the serious problems of abuse in this program as a result of an investigative report by a local news station. These reports involved homeowners, especially the poor elderly who had been subjected to fraud by contractors ripping off the borrowers and the lenders and ultimately the taxpayers.
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    In several cases, the contractors acting as both the originator and the builder signed up vulnerable homeowners for loans exceeding not only the equity in their home, but in some cases the market value. They wrote loans backed by taxpayers that far exceeded the borrower's capacity to repay. They offered kickbacks, and upon completion of the loan fraud, they never completed the home improvement, often leaving the homeowner marred in debt and in default. In several cases, the homes were left in worst condition than before the construction commenced.

    Last April, I visited the home of one Houston resident, Gladys Rogers, who was a victim of such fraud. Though Ms. Rogers home and property have a combined value of $15,000, the contractor had her take out the maximum loan of $25,000. Instead of fixing up her longtime family home, the contractor left Ms. Rogers with leaking windows, cabinets that were falling apart, and plumbing that did not work, not to mention large debts that she cannot afford to pay on her fixed Social Security income.

    In my view, such activities are clear evidence of inadequate oversight and follow-up by HUD. As a result of the Houston report and similar reports around the country, I requested the General Accounting Office to investigate the Title I program, as did you, Mr. Chairman, and the GAO is in the process of doing so now. I look forward to hearing their testimony about their preliminary findings during today's hearing.

    Mr. Chairman, as you know, shortly after we asked for this investigation, the Department of Housing and Urban Development on May 29, 1997, announced the result of its own investigation and suspended 16 contractors from the program, including 9 from Texas, most of them from the Houston area. The specific abuses cited by HUD included false advertising by contractors and their implication that loans had been preapproved, contractor failures to complete work, falsifying work as completed and coercion of borrowers to get them to claim work was completed, falsification of financial information such as income, assets, and liabilities by contractors working with borrowers, contractor-originated loans to borrowers who did not earn enough to repay loans, and contractor falsification of loan documents to allow borrowers to exceed their borrowing limits.
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    HUD described these abuses as ''a path of deception that cost taxpayers millions of dollars.'' Mr. Chairman, such fraud and abuse are clearly unacceptable and deserve the urgent attention of both the Congress and the Department of Housing and Urban Development.

    As you know, at the same time that it suspended the 16 contractors, HUD also initiated a rulemaking to shut down the contractor-originated portion of the Title I program. While I applauded HUD's crackdown on the worst abusers, I joined you and many of our colleagues, as you mentioned, in expressing concern that HUD not take premature action in terminating part of the program before the GAO and the Congress had the opportunity to fully study the issue.

    So I am pleased that this subcommittee is doing so today, and I, again, urge HUD to delay any final decision until we have completed the review.

    Mr. Chairman, we must continue to provide this valuable assistance while stopping the fraud and abuse. However, it will be difficult to do so without the data necessary to evaluate the program's performance.

    I am disturbed to read in the GAO's testimony that such data is woefully lacking. In my request, I asked the GAO to provide the following information: a list of instances and frequencies of abuse in the Title I program; HUD procedures of identifying, preventing, and correcting abuses by contractors and lenders; concentration of abuses among the direct loan and dealer loan programs; excessive interest rates in construction costs; the Title I default rate and its impact on the safety and soundness of the FHA mutual mortgage insurance fund; and economic, environmental, and programmatic factors contributing to the default rate.
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    There are many issues for Congress to address. For instance, some consumers, as I said, have secured loans without sufficient information and safeguards, and as we have learned, some consumers have been coerced into signing contracts with exorbitant fees and charges they cannot repay.

    In fact, it is my understanding that HUD regulations do not set explicit caps on how much dealers can charge for these loans. I believe Congress may have to set these parameters to protect consumers in the absence of HUD.

    It is also unclear to me where consumers can turn when the contract dealer does not complete the work in a satisfactory manner. Is it HUD's responsibility or that of the State and local regulators? We must answer these questions to ensure that taxpayer funds are well spent and consumers are adequately protected.

    There is also the issue of the FHA-authorized dealers who commit fraud, but remain eligible to rejoin the program. While HUD is now conducting more audits, there is still too much opportunity for fraudulent lenders to rip off taxpayers and consumers without being caught. We need to examine whether HUD's personnel and enforcement authority are sufficient to discipline the lenders.

    I am disappointed that a HUD representative is not testifying today. HUD's participation would help shed new light on recent actions HUD is taking to improve this program. I would have also appreciated talking with them about their proposed regulation to eliminate the FHA Title I dealer program, as I am sure you would, Mr. Chairman.
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    It is also important that we remember that there are good contractors who have worked faithfully to help consumers rebuild their homes without committing fraud and abuse. These contractors are hurt as well by the fraud and abuse, and I know that they are working on a code of ethics to help fight such abuse. I regret that no one from the contractor community is testifying today, but I hope in future hearings, they will have an opportunity as well.

    Mr. Chairman, I want to thank you for your leadership on this issue and for giving me the opportunity to testify and work with the Members of the subcommittee, as I do not sit on this particular subcommittee, but I do believe it is important that Congress take the lead to address this problem, to not only protect the consumers, but to protect the taxpayers and their dollars that are spent on it, and I thank the Chairman for allowing me to testify.

    Chairman LAZIO. I thank my colleagues, and, again, I want to reiterate that there are so many demands on our time and we are pushed and pulled in so many directions, and for these two Members to be so focused on a program that is particularly important for people of middle and lower income and helps to provide the type of resources that people need to enjoy homeownership, I think is incredibly admirable.

    There is going to be some testimony, I think, and there has been some discussion about improvements in the program aimed particularly at the allegations of fraud and abuse involving the dealer-contractor provisions. Some of the improvements involve, for example, a mandatory telephone call to the consumer to assure that the work has been done between borrower and lender before the disbursement of funds. It also requires an inspection as a condition of disbursement of the funds to the contractor, possibly even making adjustments in the premiums to ensure that the program is self-financing.
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    I ask if it is your sense, as it is mine, if there is a strong possibility that we could make adjustments to this program to ensure its continued availability and vitality, particularly on the dealer contractor side without undermining enforcement, but, in fact enhancing enforcement.

    Mr. FOX. I am sure both of us would like to respond to it.

    Frankly, I think we have a pretty clear indication from this subcommittee and in this Congress that the Title I program must be maintained, but not in its present form. I think you hit the nail on the head, Mr. Chairman, that we are going to need the kind of reforms that will come forth from HUD, from the industry, from the consumer, and from GAO. I think we need to get the best of the recommendations from all those constituent groups and those who are stakeholders to come forward and say here is what we think, and then we as a subcommittee have to recommend to the full Banking Committee and, therefore, the full House and Senate, what can best be done to make a program which was certainly with good intentions when it first started, but it does need the oversight that you have called for.

    Mr. BENTSEN. If I might just add, Mr. Chairman, I think what the GAO is going to say today is somewhat startling, the lack of information in the files that any loan officer in any bank would be appalled at and any regulator would be even more appalled at.

    I think that one of the biggest problems we found in the Houston area, and this is true around the country, it is really that HUD has not done a particularly good job of regulating this program, and while there has been, I believe, a greater amount of abuse with the dealer loan program rather than the direct loan program, it is not overwhelming, and I think it is throwing the baby out with the bath water to just automatically eliminate it without looking at all the facts.
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    So I am glad that you are starting this process today and having the GAO look at this, and we may come back and say HUD might be on the right track, but we just do not know that yet. And we may also come back and say, as you had talked about, that HUD is going to have to do a little more work on their own in order to maintain this program.

    I would just say as one who believes strongly in the program, it is abuses like this that give good Federal programs a bad name and make them very hard to defend. So I think it is incumbent upon us as members who support this program to do everything we can to clean it up.

    Chairman LAZIO. Thank you very much.

    Great tie, by the way, Mr. Fox.

    Well, thank you very much. I want to thank our colleagues for all their work and for agreeing to testify here. We will be working closely with you to try and develop some measured and reasonable responses to the problems with a mind of looking for ways in which we can continue to serve this same population. Thank you very much.

    Mr. FOX. Mr. Chairman, what is your pleasure on the House floor?

    Chairman LAZIO. I think what we are going to do at this point, since we have two votes, is to probably recess now, and we will hear from the first panel as soon as we get back. Let us figure on 3:00 that we will be back, possibly 3:05. So the hearing will be in recess until about 3:05.
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    Chairman LAZIO. The hearing is back in order.

    In an effort to move this along, I am going to quickly move to——

    Mr. FOX. Introduction?

    Chairman LAZIO. Yes, of course.

    As we begin our first panel, I would like to turn to my friend and colleague from Pennsylvania to introduce our first witness, the Pennsylvania Attorney General, Mike Fisher.

    Mr. FOX. Thank you, Mr. Chairman.

    It is rare that I have the opportunity to introduce the individual who has done so much for Pennsylvania. Attorney General Mike Fisher has truly been an advocate for the people of my State in more ways than one.

    As a Pittsburgh native, Mr. Fisher was able to advocate for his friends and neighbors by representing them in the Commonwealth of Pennsylvania House of Representative for 6 years and then later in the Commonwealth Senate for 16. Working for the people of suburban Pittsburgh is just one way he has served his community. Then, as a Member of the Senate, he served the State and his party's majority whip. In this position, he was able to help pass laws protecting the rights of Pennsylvanians. He was actually in charge of a special legislative session in 1995 that was convened to deal with crime issues. The result of this session produced a number of laws protecting Pennsylvanians, including those laws to protect seniors from those who would defraud them in telemarketing and otherwise.
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    Now, as Attorney General Mike Fisher has the distinct honor of representing the State and enforcing its laws, he has argued before the Supreme Court of the United States on behalf of the people of Pennsylvania. He has worked to shorten the length of death-penalty appeals process. He has fought for greater responsibility from tobacco companies. He has truly been an advocate for all Pennsylvanians, not only with senior citizens and the issues with telemarketing fraud, but also in protecting citizens with their complaints dealing with housing as we have today.

    As a former district attorney and State representative, I truly appreciate Mr. Fisher having been able to accomplish all he has. We are extremely fortunate to have him here today to address us.

    Mr. Chairman and distinguished Members of the subcommittee, I would like to introduce the Attorney General of Pennsylvania, Mike Fisher.

    Chairman LAZIO. Well, we certainly thank you. I thank the gentleman from Pennsylvania. We are graced to have you here, Mr. Attorney General. Ordinarily, we go through each of the witnesses, but I know you have some time constraints. So I am going to turn right to you, and then the subcommittee will move right to questions of the Attorney General.


    Mr. FISHER. Well, first of all, good afternoon, Mr. Chairman and Members of the subcommittee and my friend from Pennsylvania, Congressman Jon Fox. I thank Congressman Fox for the invitation and you, Mr. Chairman, for the invitation to be here with you this afternoon.
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    As Pennsylvania's Attorney General, I am all too familiar with thousands of cases in which Pennsylvanians have been victimized by home improvement fraud. The overwhelming majority of home improvement contractors are honest and hardworking. I believe, however, the changes should be made to the Title I program to protect legitimate contractors and unwary consumers.

    Allow me to share with the subcommittee just how bad the problem is. In years 1992 through 1997, home improvement complaints have consistently ranked within the top five received by my office. We received an average of 2,430 home repair complaints per year over that period. That equates to a 37 percent increase since 1992.

    Even more troubling is the number of complaints filed by senior citizens. Over the last six years, home improvement fraud has been the number-one complaint in our State from senior citizens. Senior citizens and lower-income homeowners are easy targets for scam artists because many of them are house-rich, but cash-poor, making them vulnerable to expensive home improvement contracts which they cannot afford.

    My office is concerned when any consumer is victimized, but we are all the more concerned when the contractor attempts to entice the consumer by offering a Title I loan.

    We have learned that some contractors will imply that consumers are eligible for free or subsidized Federal money. Some consumers are attracted by the idea that they somehow will be paying below market interest rates because the money comes from the Government.

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    In fact, some consumers thought they were getting low-interest loans. Others have claimed no idea they were taking a loan. They thought that they were getting a Government grant.

    These are the types of sales techniques that my agents look for when investigating home improvement fraud. When we learn that contractors are claiming to consumers that Government money is involved, we become suspicious.

    On May 1, 1997, we brought eight separate charges against Fredmont Builders of Pittsburgh for defrauding 21 consumers of more than $230,000. We alleged shoddy workmanship and failure to complete home repairs. We believe at least 10 of those consumers had financed their contracts with Fredmont through Title I loans. In total, Fredmont participated in over 700 Title I loans. I have included details of specific charges in my written testimony.

    I am pleased to report to this subcommittee that HUD has barred Fredmont from participating in the Title I program. Furthermore, a collective action of HUD in my office has forced Fredmont out of the business of ripping off Pennsylvania's consumers.

    The larger question, though, is whether Fredmont is a typical contractor participating in a Title I dealer loan program. The Philadelphia Inquirer has reported that 72 percent of Pennsylvanians obtained their Title I financing through contractors or dealers.

    This statistic is significant for two reasons. One, the Pennsylvania rate for dealer contractor-originated financing is almost double the national average, and, two, in those cases where there has been fraud, the dealers and contractors are the parties misleading the consumers, performing the shoddy work and exploiting the program.
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    We have taken action to combat home improvement fraud and to prevent contractors who defraud the Title I program from doing business in Pennsylvania. I have written legislation which was recently introduced in our General Assembly which requires contractors to register with the State, provides criminal penalties for home improvement fraud, and prohibits any contractor who has been barred from the Title I program from doing business in Pennsylvania. We have included details of this legislation in my written testimony.

    Title I has helped thousands of homeowners with funding for repairs which they might not otherwise be able to afford. Unfortunately, the program in the past several years has been hijacked by the new breed of tin men who pressure and lie to consumers, perform shoddy and overvalued work on their homes, and mislead them into believing that Title I money is a Government subsidy.

    I am here today to urge Congress to consider placing new restrictions on the Title I program. For instance, Congress should require: an inspection process upon completion of home repair by HUD or a third-party Government representative, perhaps a local building inspector or perhaps a lender themselves; require all contractors to provide a written guarantee on labor and materials for at least one year, as this will give law enforcement more leverage in pursuing legal action against those who attempt to commit fraud; require a system by which HUD checks with the State Attorneys General to determine whether they have brought action against the contractor before allowing a contractor to participate in a Title I program.

    The greatest single asset of a lower-income American is their home. The Title I program is of great value to lower-income Americans who might otherwise be unable to keep a roof over their heads. We must ensure that the Title I program is there for them, but we must also ensure that this program is not abused by those who borrow through the legitimacy of the Federal Government, cheat the very people the program was designed to help, and line their pockets in the process.
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    Thank you, again, Mr. Chairman and Members of the subcommittee for inviting me to testify before this distinguished panel, and I pledge that we will be pleased to work with you to help protect the consumers from home improvement fraud not only in my homestate in Pennsylvania, but elsewhere across the country.

    Thank you, Mr. Chairman.

    [The prepared statement of Hon. Mike Fisher can be found on page 45 in the appendix.]

    Chairman LAZIO. I thank the Attorney General. I want to compliment you for your zero-tolerance attitude toward fraud and abuse, especially as it affects people of modest income, as you mentioned during your statement. This is very often the principal investment that people have, maybe the only real equity that they have in their life; to be ripped off by unscrupulous people is just unconscionable. I am very comforted to know that the State of Pennsylvania has such an aggressive stance and such a capable Attorney General.

    I am going to withhold my questions and, if I can, turn to Mr. Fox because I know you have a time limitation.

    Mr. FOX. Thank you, Mr. Chairman.

    Thank you, Attorney General.

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    In your written testimony, you note that home improvement fraud is among the most common complaints made to consumer protection agencies in your State. Why do you believe this has been the case?

    Mr. FISHER. Well, as I said, Congressman, we keep a record of all of the complaints. We get about 30,000 written complaints in our Bureau of Consumer Protection each year. Close to 10 percent of those complaints in the last year were about home improvement fraud, and it has been growing steadily since 1992.

    Mr. FOX. In your written statement, you described legislation you submitted before the legislature in Pennsylvania to combat home improvement fraud. To date, what do you valuate the response has been from the legislature?

    Mr. FISHER. I will tell you, it has been tremendous response. The bill which has been introduced in the State House of Representatives has already moved out of committee. The Chairman of that committee from Philadelphia, Representative Wogan, is the sponsor of the bill, and I can tell you in talking with members in both of our State legislative bodies, all of them have been feeling the heat from their constituents about home improvement contracting.

    Mr. FOX. Well, we appreciate your suggestions, and we are going to follow up on this inspection process you recommend with HUD, the written guarantee, checking with the Attorneys General.

    What do you think about certification for companies or meeting a code of ethics? What could we do about that?
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    Mr. FISHER. Well, I believe, as in our State, the first thing which we needed to do is we need to get a handle on who it is that is doing the work. I think, likewise, HUD needs to get a better handle on who it is that is eligible to work under the Title I program. I am not sure that it is adequate just to let the lenders be the policemen and check that. I think there should be some form of registration. We have proposed it for our State. Perhaps working with the various States, HUD could get a better handle of who it is on the business.

    We think if you are ineligible to do Title I work, we are not going to allow you to do home repair work in Pennsylvania. Perhaps HUD wants to have a similar reciprocal process.

    Mr. FOX. I would agree. I think the fact is that we not only want to make sure the workmanship is appropriate, but that they are creditworthy and they have a reputation for actually doing what they say they are going to do on a timely basis.

    So I thank you very much, Attorney General. We know you have to go to another hearing, and we thank you and your staff for making time to be here.

    Mr. FISHER. Thank you, Mr. Fox.

    Thank you very much, Mr. Chairman.

    Chairman LAZIO. The gentleman from Rhode Island.
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    Mr. WEYGAND. Attorney General, it was very good to hear your testimony. I am from Rhode Island, a State that has implemented a number of the issues that you have talked about.

    One of the things that you mentioned at the very end which I would like to add as a caveat to your recommendations is contractor registration so that we actually have a registration of contractors that are approved to do HUD-related work.

    In Rhode Island, we implemented about three years ago such an act because we had the same kind of fraud and abuse that you have talked about in Pennsylvania with regard to contractors, people not knowing whether they are bona fide or certified contractors, not having the available information to look at, previous records or complaints about their work. I think that is important if we are going to continue with Title I, which I sincerely hope that we will. We need to fix the problems and not to throw everything out in one fell swoop. I think you have addressed them very neatly, and I thank you for a very concise approach and really concise recommendations. I want to thank you for your testimony.

    Mr. FISHER. Thank you.

    Chairman LAZIO. I thank the gentleman.

    Are there any other questions?

    The gentleman from Texas.
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    Mr. BENTSEN. Thank you, Mr. Chairman.

    General Fisher, what is your agency's experience in having HUD follow up with complaints that have been brought to your office dealing with either dealers or in the direct lending program? Have you been satisfied with HUD's follow-up in the disbarment process as it relates to the complaints you have had in Pennsylvania?

    Mr. FISHER. In the Fredmont Builders case, we think that they did respond in a timely fashion.

    I can only say that it appears from the record that there have been very few suspensions or disbarments across the country involving HUD contractors, and those numbers would certainly not be consistent with the volume of complaints which we have received in Pennsylvania, but the one case that we are familiar with in the Fredmont case, HUD did work expeditiously.

    Mr. BENTSEN. Thank you.

    Thank you, Mr. Chairman.

    Chairman LAZIO. Thank you, Mr. Attorney General. Have a safe ride back.

    Mr. FISHER. Thank you.
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    Chairman LAZIO. I thank you. You have been very cooperative and very helpful.

    Mr. FISHER. Thank you.

    Chairman LAZIO. Our second witness is Mr. Stanley Czerwinski. I want to welcome you, the Associate Director of Housing and Community Development, the General Accounting Office, which as I have mentioned before has been incredibly helpful to this subcommittee.

    Mr. Czerwinski is accompanied by Robert Procaccini, Assistant Director of Single Family Housing, who also has been very helpful. Good to see you again, Bob.

    Both gentlemen have been doing an enormous amount of work on FHA, and, as requested by the subcommittee, GAO expects to release an assessment of HUD's management and oversight on the Title I Home Improvement Loan Program early this summer.

    I welcome you here and look forward to your testimony.


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    Mr. CZERWINSKI. Thank you, Mr. Chairman.

    Before I start my statement, I want to thank you also for getting both our names right. You have been given the hardest test GAO can hand out.

    We are pleased to be here today to discuss the preliminary results of our review of HUD's Title I program. As you know, Mr. Chairman, you and Congressman Bentsen have requested this review, and we plan to issue a final report to you this summer. Our review is focussing on three issues: how HUD manages the program, how HUD oversees the lenders in the program, and what plans it may have to strengthen its management and oversight of the Title I program.

    To summarize in a key word what we are finding so far, information, or more precisely, a lack of information, HUD does not collect the information it needs to effectively manage the Title I program.

    We found the lack of information was particularly telling in three areas: describing the population and neighborhoods served by the Title I program, the performance of Title I dealers, and determining the basis for paying off lenders' claims.

    For example, HUD does not collect such basic loan information as the borrower's income, Social Security number, address of the property and the loan's interest rate. The absence of Social Security numbers and property addresses makes it difficult to determine if some borrowers are improperly obtaining multiple Title I loans. We examined the claims HUD has received over the past 3 1/2 years, and we found 247 instances where the same Social Security numbers appeared on multiple claims, worth about $5.2 million. We have referred these claims to our Office of Special Investigations and to HUD's Inspector General for further review.
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    We also found problems with the accuracy of HUD's information on dealer loans. As you know, HUD has cited dealer default rates among other reasons for proposing to eliminate the dealer loan portion of the program. However, we took a random sample of loans and found a 13 percent error rate. What we mean by this is that some loans were coded as dealer loans when they in fact were direct, and direct when they in fact were dealer. This makes it very hard to determine what the true default rate is.

    The final area that I want to highlight concerning poor management information involves paying claims on defaulted loans. We found that HUD did not keep records on why they paid claims, why they did not pay claims, or why sometimes they changed their mind from paying to not paying, not paying to paying claims. And on top of that, they did not record who made these decisions.

    This information is important for several reasons. One, you want to have good internal controls, and, two, you want to have an idea of what is going on in the program so that you can take proper actions to make sure the regulations are enforced.

    HUD told us they do not obtain much of this information because they consider Title I to be a lender-operated program. This is a reasonable approach except that it places a very high premium on after-the-fact quality assurance inspections. If you expect the lenders to run the program, you had better be certain that you are coming behind them to make sure they are running it correctly. So we wanted to take a look at HUD's quality assurance activities.

    What we found was that HUD had minimal oversight of its lenders, and, in fact, their oversight has been declining steadily. For example, in 1995, they conducted 26 quality assurance reviews; in 1996, 5 quality assurance reviews. By 1997, it was down to two. That is a total of 33 reviews over 3 years. That is 33 reviews of 3,700 lenders.
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    Now, if I was a lender and I was looking at the odds of getting picked, the odds are actually one-third of 1 percent. So there is a 99.7 percent chance that a lender will not be reviewed in any given year. Therefore, we believe that HUD has very little assurance that the Title I program is operating efficiently.

    To its credit, HUD has some plans to make its programs run better, and as part of its Management 2020 reform effort, HUD has done a number of things. They have relocated their claims unit to Albany, New York. They have hired Price Waterhouse to come up with some claims guidelines for them, and, finally, they have been consolidating their operations from 81 offices across the country into 4 homeownership centers that they think will be more suited to doing such things as quality assurance reviews.

    The bottom line is that we obviously think there are real significant weaknesses in the program, and we are encouraged that HUD is starting to do something about them, but we are far from certain that what they are doing is going to really take care of the problem. It is really a matter of just having to wait and see before we are willing to give HUD our approval on what they are trying to do.

    As I mentioned at the start of the statement, we are going to be reporting out in final to you this summer, and trying to finalize some of these issues and recommendations and options we have for addressing them.

    This concludes my statement, Mr. Chairman. We will be happy to answer any questions you may have.
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    [The prepared statement of Stanley J. Czerwinski can be found on page 62 in the appendix.]

    Chairman LAZIO. Thank you very much, Mr. Czerwinski.

    Our third witness is Ms. Kathryn Kuhl-Inclan, the Assistant Inspector General for Audit at HUD.

    In October of 1997, Ms. Kuhl-Inclan completed a survey of the Title I program supporting the Inspector General's long-standing recommendation to eliminate the program. Ms. Kuhl-Inclan is accompanied by Mr. Dale Chouteau, the District Inspector General for Audit in the Midwest Division of HUD's Office of Inspector General.

    I want to welcome you all.


    Ms. KUHL-INCLAN. Thank you, Mr. Chairman.

    In 1986, we issued an audit report on the Title I dealer program, and in that report, much as the newspaper articles and the testimony you have heard today, we detailed instances of unscrupulous dealers and contractors. There was lack of appropriate lender approval and lack of supervision of the dealers, and there was just plain poor underwriting by the lenders.
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    We were so concerned about the Title I program at that time and about the viability of the program to continue that, back in 1986, we recommended its termination. Usually, we would make recommendations dealing with fix-it kind of issues, but in this particular case, we took a very strong position that there was no way that this program could possibly be fixed with the work force in place, and that it probably needed to be terminated.

    When we made that recommendation, there were 13,000-plus HUD employees, and even then, we did not see any options for the program except termination.

    The Department did not agree with us, and since that time, they have made various changes to the programs, recommendations, and just changes to the program.

    Yet, in 1995, we issued a memorandum to the former Secretary on possible ways to focus sharply on the Department's core mission. We concluded as part of that study that the Title I program should be terminated because it served only a very small percentage of the population, and there were really some other HUD programs that served the same basic clientele.

    Finally, as you just mentioned, in 1997, there was a lot of publicity about the Title I program. So I asked our Chicago office to, again, look at the Title I program, at least do a quick survey of it, to see if anything had changed, and we again concluded that the dealer program should be eliminated.

    We based it on our work as well as some of the issues discussed in the draft Price Waterhouse report. We believe that the program only serves a small percentage of the population. There is documented evidence that does not support that the program provided access to low-income population who might not otherwise be able to obtain financing for home repairs.
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    We decided that the Title I program was not really being monitored by HUD because of its small size in relationship to the rest of the Department. It was not self-supporting. There were about three or four times the amount of claims versus the amount of premiums that were being paid. And due to HUD's downsizing, it would be very difficult for HUD to restructure the Title I program and make a difference.

    As part of HUD's 2020 plan, the Department now has a work force of only 9,100, and there will be more reductions before expected by the year 2002.

    As we have stated before in other testimony, this staffing number is not based on any real analysis. 2020 does not address the basic business mission of HUD, and there are also very relatively few programmatic changes envisioned in HUD 2020.

    Right now at HUD, as I have said, we have downsized to 9,100, but the organizational structures to accommodate that downsizing does not exist. The Department cannot adequately monitor the Title I program with 13,000 people. They certainly cannot do it with a work force of 9,100.

    We are convinced that the Department must better define its mission and consider its downsize capabilities when completing any redesigns of the program.

    I would like to conclude by saying that not only does the Department not have the capacity for managing the Title I program, but the Department does not really know who it serves. If the purpose is to provide home improvement opportunities to low and moderate income, then the figures that we have looked at show only 28 percent of the loans do go to the low and moderate income levels.
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    We believe, at a minimum, the dealer program needs to be eliminated. It is just not serving the people it is intended to serve, and for those people who are the recipients of Title I loans, they are not receiving the best benefits of the HUD care. HUD is not capable of overseeing the program, as GAO has clearly indicated.

    Thank you.

    [The prepared statement of Kathryn Kuhl-Inclan can be found on page 76 in the appendix.]

    Chairman LAZIO. I want to thank you both for some very insightful testimony.

    Let me focus, if I can, on the lack of data and how it impacts capacity, which I am flabbergasted by and am wondering, I guess—let me ask both of the witnesses this. Is this a pattern? Is this lack of data common to other programs beyond Title I?

    Mr. CZERWINSKI. Mr. Chairman, HUD collects more data for some of its other programs, and the data that we are talking about is basic program information such as lenders, the borrower's name, Social Security number, interest rate. That is information that the lenders right now report to their oversight agencies, such as FDIC, and so forth, under HMDA. All HUD would have to do is to get those data that are already being reported to other agencies.

    Ms. KUHL-INCLAN. We have a concern about the data aspects of the Department. As we have talked about in our 2020 reviews, that is one of our big concerns. It really does not deal with the systems in place that record information, receive information. The issues in Title I are not anything unique or different than we have seen in most of the other programs that we have audited and looked at.
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    Chairman LAZIO. I am very concerned, obviously, about that statement.

    One of the things, Mr. Czerwinski, that you had mentioned in your testimony was that there was not any information about why there was a decision on the Title I loan application, whether it was in the affirmative or negative.

    How important is that information, that data, to evaluating whether there is the potential to have capacity within the Title I program under the current structure?

    Mr. CZERWINSKI. Under the current structure, one of HUD's major responsibilities is to handle lender claims for defaults. The standard procedure would be to review a case, which is what HUD does, or that is what they tell us they do, because they do not have the documents showing that they actually reviewed the cases.

    What you would like to see is a review of the reasons why the case defaulted and whether the lender followed the procedures laid out in the program before a decision was made to pay out the money that is owed.

    Chairman LAZIO. That suggests to me that there is always the potential that an arbitrary decision was made or that some external force came into play. That may or may not be the case, but when you do not keep data about why a decision was made either in the affirmative or negative, you certainly erode credibility and the integrity of the program is undermined.
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    You had mentioned in your testimony that there were about 247 instances of loans in which the same Social Security number appeared in multiple loan files. Could you explain further how that could possibly be?

    Mr. CZERWINSKI. Believe it or not, some of it is allowable under program regulations.

    For example, you could have a case where a person took out more than one loan on a single property. The limitation is on the dollar amount of loans that could be taken on a property, $25,000, not the number of loans. So, in some cases, it could be allowed.

    Also, people can own more than one property, and take out multiple Title I loans on those properties. However, when you see the same Social Security numbers showing up time and time again on defaults, that is a clue that something may be wrong. It is not necessarily wrong, but it is something you want to look at more carefully. Again, it gets back to HUD's focus on the information and what they do with the information.

    We noticed it in our review, which is not a review for fraud, waste, and abuse. It is a programmatic review, but this triggered some alarm bells with us, and for that reason, we referred it to our Office of Special Investigations to track those specific cases to see what had happened, and we also referred it to the Inspector General because that is the business that they are in.

    Chairman LAZIO. When you talk about determining fraud, one of the other issues that clearly comes to mind is your statement that HUD did 33 on-site quality assurance reviews during the fiscal years 1995 through 1997. And, again, out of how many?
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    Mr. CZERWINSKI. 3,700 lenders.

    Chairman LAZIO. 3,700 lenders.

    I am afraid to even ask you whether that was a sufficient number because it is obviously self-evident.

    Mr. CZERWINSKI. It depends on which side of the fence you sit on.

    Chairman LAZIO. I guess so.

    Now, in those 33 cases, there is only one this year?

    Mr. CZERWINSKI. There were two in 1997.

    Chairman LAZIO. 1997.

    Mr. CZERWINSKI. I believe HUD has done more this year, but, Bob, correct me if I am wrong. I believe it is under 10.

    Mr. PROCACCINI. I believe they have picked up, Mr. Chairman, on the number of on-site reviews they have made in this current fiscal year. I have heard the number, about eight so far, to date, which was more than what they did in fiscal 1997.
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    Chairman LAZIO. Does anybody know what the findings were of the on-site inspections?

    Mr. CZERWINSKI. Yes, we do. In all cases, the lenders were cited for violations. Nine of the 33 were severe enough that they were referred to the Mortgagee Review Board for further action. Of those nine, four resulted in penalties being imposed on the lenders. The total amount of penalties was about $23,000, and the most significant or common problems that was cited was false advertising. By false advertising, HUD means where a lender implies to the borrower that the Federal Government is there to ensure the borrower's well-being, when, in fact, we know that the Federal insurance is to ensure the lender against the borrower's default.

    Chairman LAZIO. So the on-site inspections have been productive? I mean, they have actually revealed significant violations; in some cases, very serious violations?

    Mr. CZERWINSKI. Yes, sir, they have.

    Chairman LAZIO. Let me ask this last question, so that I am respectful of my time. HUD has reduced its Title I staff significantly, approximately 71 percent from 188 staff persons to the 50 staff at the Title I center in Albany and four at the HUD headquarters in Washington.

    Ms. Kuhl-Inclan, you had mentioned that traditionally enforcement has been a low priority.
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    Ms. KUHL-INCLAN. That is correct.

    Chairman LAZIO. That was the case when the staff was significantly larger. Now with a staff reduced by 71 percent, clearly that undermines whatever potential capacity they had before.

    What would be an appropriate amount of staff to do an adequate level of enforcement?

    Ms. KUHL-INCLAN. I think that is hard to determine. You have to understand that in terms of enforcement, the people who are doing the enforcement of the Title I lenders are also the same people who are doing enforcement of the mortgage companies that do business with HUD and insure single-family loans. So it is sort of a matter of priority which they choose. There is a bigger risk in our single-family program of insuring the mortgages. So they only do a few of the Title I lenders.

    Those 54 people you mentioned will not be the enforcement folks. There will be some people stationed in each of our homeownership centers who will be doing enforcement, but they, again, will have to make judgments and decide what their priorities are. So the chances of an increased amount of enforcement are pretty slim because they are going to concentrate on the bigger risk areas; that is, the big single-family program.

    Chairman LAZIO. Does it make any sense to fence off some of the money that is raised in fees to be used to fund enhanced enforcement?
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    Ms. KUHL-INCLAN. On the Title I side, there are no fees because we are losing $3 for every $1 we collect. So there are no extra fees. It would have to come from the FHA fund for our insured single-family mortgages.

    Chairman LAZIO. But are we losing that money because of improper—is it sort of cyclical?

    Ms. KUHL-INCLAN. It is a Catch 22.

    Chairman LAZIO. Yes. I mean, if you do not have the proper levels of enforcement, you have losses.

    Ms. KUHL-INCLAN. There are other issues associated with why we have a significant amount. It is not just lack of enforcement. There are issues of the loan construction, the amount of fees we charge, and who the people are we serve as to why that figure is so slanted on the loss side.

    Chairman LAZIO. OK. Thank you very much.

    Do any colleagues have any questions?

    Mr. Weygand.

    Mr. WEYGAND. Yes. I thank you, Mr. Chairman.
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    In listening to all of you, you have indicated that there are very frequent problems with HUD in their review. Have you made recommendations, specific recommendations with regard to staffing, with regard to review, with regard to the problems that you see to HUD, and what has their response been?

    Mr. CZERWINSKI. I will start first. As I mentioned at the start of my statement, this is a preliminary recounting of where we stand.

    Our plan is to issue a report this summer, and we have two objectives between now and then. One is to try to flesh out some recommendations very much in line with what you are talking about.

    There are some very obvious areas about how to obtain information that is needed to manage the program. Our second objective is much more challenging. We are looking into structural issues for the program. Do you want to have a program that relies so heavily on after-the-fact enforcement to make sure that it runs properly, or do you want to restructure it in such a way that you build in incentives up front for the lenders to behave in a certain way? We will be looking at recommendations to manage things more efficiently and some options for trying to take a structural look at the program.

    Ms. KUHL-INCLAN. I think from our standpoint, initially when we did the audit in 1986, we recommended the program be terminated, but the Department did not go along with it. So we did concur with the changes that they recommended, but as the Department is downsized, now we are at a point where there is no turning back. There just is not staff available, we think, to do what needs to be done. So there is just not a lot of options to work with, and there is no staff, as the staff has been downsized, and the priorities are so much greater for our bigger programs. Something has to give.
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    Mr. WEYGAND. And you are right in that. If you downsize and do not provide any other kind of alternative for review or oversight, that is true, but aren't there other alternatives for oversight than just staffing up on HUD?

    Ms. KUHL-INCLAN. It is a very staff-intensive process to oversee the Title I program, and we just do not see where there is any way to deal with that.

    Mr. WEYGAND. What kind of staffing recommendations would you have, then, since you have been studying this for the last 12 years, to HUD to properly staff the office for the Title I review and the kind of things that you think are appropriate?

    Ms. KUHL-INCLAN. We really do not have a specific number for how many people it would take. We just have never felt that that particular area was never properly staffed.

    Mr. WEYGAND. So, rather than making a recommendation of what they should do, you just said to get rid of the program.

    Ms. KUHL-INCLAN. The issues were so significant in 1986, we did not see any alternative.

    Mr. WEYGAND. At this point in time, do you think that, based on the information that you have gathered with regard to the people that they serve, the clients that they serve, the program is at all worthwhile saving, or are you still of the recommendation back in 1986 that——
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    Ms. KUHL-INCLAN. I do not think the issue is that it is not a worthwhile program to save. What we are concerned about is that there is the perception that it is a Federal Government program and that the people who are receiving the loans are protected. That is just not the case. There is not staff overseeing the enforcement. There is not staff overseeing the loans. They do not have a good measure of who is being served.

    So we are giving a false perception to the Title I program. If it was fixed in a way that we were serving the people and they were getting what they expected, we have no problem with that.

    Mr. WEYGAND. OK. The other question I had was with regard to—I am not sure who it was that mentioned—who they actually serve, and someone had mentioned only about, I think it was, 28 percent of the people that are being served are low-and moderate-income levels. Am I to believe that the remaining 72 percent are upper income, or did I hear wrong when I heard someone mention that earlier?

    Ms. KUHL-INCLAN. No, you heard right. We are saying that the balance of the people are above the 87 percent cutoff for median income.

    Mr. WEYGAND. For median income.

    Ms. KUHL-INCLAN. Right.

    Mr. WEYGAND. Thank you.
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    Chairman LAZIO. I thank the gentleman.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Thank you all for your testimony.

    Mr. Czerwinski, in your capacity, you are obviously becoming familiar with the Title I Home Improvement Program, but you are also, I assume, familiar with the FHA Single Family Program. I assume you have looked at that some.

    You have a loan file for an FHA program that has a certificate that backs it up. Presumably, you have looked at loan files for this Title I Home Improvement Program.

    I guess my question is this. First of all, the way you describe the files in your report, if this was a private lender who was doing this and was not FHA-backed, they would have the Comptroller of the Currency or the Federal Reserve or the State banking regulator, or whoever their regulator was, on their back asking them what they are doing with these files that do not have proper documentation in them because, if they had to go and enforce a lien, there could be a lot of questions raised.

    And the IG is telling us that the staffing is part of the problem, and you have the same people who are in the Single Family Program also overlooking this.
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    What impedes HUD from having a uniform standard, loan documentation standard for both the Home Improvement Program as they have with the Single Family Program? Unless this is a precursor to the FHA Single Family Program, which I do not believe it is, but why can't HUD, the same people who are doing the same work, follow the same rules that they have for the Single Family Program and ensure that the documentation is the same, and if the documentation is not the same, why don't they kick the file back to the lender and say ''fix it or we will not guarantee it''?

    Mr. CZERWINSKI. I cannot speak for HUD's thinking, but one factor is that the Title I program only makes up about 1 percent of FHA lending. So, in some respect, it may be a stepchild.

    When we looked at other FHA programs, such as 203(b), the files were much more extensive.

    Would you like to elaborate a little bit on that, Bob, what we found in their files?

    Mr. PROCACCINI. Basically, on the FHA Single Family 203(b) Program, which is FHA's, by far, most significant dollar-volume program that is operates, it collects, when loans are made, more information than what is collected on Title I loans when they are made.

    On the Title I loans, it basically collects information on the lender and borrower names, the State and county, the size of the loan, and the purpose of the loan, the terms, and whether it is a dealer or a direct loan.
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    In addition to that kind of information, under the 203(b) program HUD is collecting information on borrower address, Social Security numbers, income, and debt, and that is all when loans are being made.

    I think part of the thinking as to why this information is not collected on Title I is because, again, it is that philosophy and thinking that this is a lender-driven program; that we do not need as much information on a Title I loan as we need on a 203(b) type.

    Mr. BENTSEN. Well, you know, 60 years ago or 45 years ago or even 25 years ago, I might understand. I have looked at a lot of loan files that are 15 or 20 years old that is a lot of paper, but in the days of automation, at least before 2000 when everything is supposed to blow up, it seems to me that you ought to be able to run a pretty standard form, even down to income, and since we are dealing with taxpayer money, what is to preclude HUD to have an income matched, to look at it and say, ''Hey, that person is only making $10,000 a year. Their house is only worth $15,000 a year. They probably are not going to qualify for a $25,000 loan''? Certainly, the bank regulators are capable to do that on private lending.

    My time is running out, but could you elaborate a little bit on—one, I look forward to your report, and as you get into the interest rates that are charged and the pricing—and I know you are still doing that, but, also, you discuss some of HUD's reaction to abuses, but can you give us a little more of your review as it relates to whether or not HUD in the past has followed up sufficiently on complaints that were made about abuses both in the dealer and the direct loan program?

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    We heard complaints in Houston where there were contractors, where complaints had been filed over and over and over and over again. Finally, after it goes on TV or something, they are disbarred, but, until then, they have defrauded not only the borrowers, but the taxpayers out of a lot of money.

    Mr. CZERWINSKI. Mr. Bentsen, you have raised two very good issues. On the first one, when we talked about what information HUD could collect, we agree with you 100 percent that the standard practice should be to gather some of the basic information we talked about. It could be very easily done because regulators such as FDIC, and so forth, already get this from these lenders. So you are right on target on that point, Mr. Bentsen.

    On the issue of complaints, that has not been the focus of our review, but we did pick up some tangential information on that. The bottom line is that there are very few complaints that make it as far as HUD when it comes to the dealer portion. Since HUD started the hotline, I believe the number was between 50 and 100 complaints, and this is against a volume of about, I think, 100,000 loans per year, of which 60 percent are dealers. It is like 60,000 loans generating 50 to 100 complaints that reach as far as HUD.

    Now, there is another way for complaints against dealers to reach HUD other than the borrower directly contacting HUD through the hotline. This other way is where the lender has a problem. And the number of complaints that the HUD officials told us about—and, again, I have to emphasize we have not checked behind these numbers because that was not the original intent of our review—it was something like 100 to 200. So we are talking very, very small numbers of complaints that HUD is dealing with on its dealer program. That is not to say the complaints are not out there. It is just to say that HUD is not seeing them. This goes back to our theme: HUD just does not have that much information.
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    Mr. BENTSEN. Thank you.

    Ms. KUHL-INCLAN. I would just like to make one point. One of the other issues we were concerned about is they may go through each file and decide whether the claim should be paid or not, but they do not analyze any pattern or trend against the lenders or dealers. So there is no way that they know which dealer they should be concentrating on. They may have a high percentage of defaults, but they do not track that information or otherwise analyze it. So it is just kind of lost in the paper shuffle.

    Mr. BENTSEN. My time is up, and maybe you could answer for the record, do you think that it is possible to develop a model that you could track this and a model that sets a trip wire if it looks like there is fraud? I mean, you know, the same Social Security number on one or two may not trip a wire, but on 3-or 400 or 200, that would probably raise an eyebrow here or there. In terms of other data, do you think it is possible to develop a model like that?

    Ms. KUHL-INCLAN. Absolutely. I mean, you can look at it and see which lenders have a high default rate on originating loans. Even in our quick review, we identified several lenders we want to take a closer look at, because that kind of statistics was so obvious to us in looking through the individual claims.

    Mr. BENTSEN. Thank you.

    Chairman LAZIO. Thank you, gentlemen.
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    Mr. Fox, you had one additional question.

    Mr. FOX. If I may. Thank you, Mr. Chairman.

    I guess it would be to Ms. Kuhl-Inclan. Did I say that right?

    Ms. KUHL-INCLAN. That is right.

    Mr. FOX. I understand your concerns as Inspector General for the program as it exists today. However, if we took into account all the reforms that could be accomplished in its most positive light, there are many families that have benefited in a program if it were reformed in ways that would make sure that the home repair folks were, in fact, qualified, did their work with quality workmanship, and the price the Government pays would be what you and I might consider appropriate.

    Under that scenario, could you see a way that the Inspector General's Office might see that as a possible alternative?

    Ms. KUHL-INCLAN. Yes, sir.

    We are really concerned that there is enough oversight; that HUD really does give the oversight, so that the people that receive the loans are protected.

    Mr. FOX. Well, I appreciate your candor and your optimistic view to the situation. While we obviously need to look to agencies and making sure that we get our money's worth from our taxpayers, likewise, we want to make sure those who need the home repair program do not have a situation like the Harrises have had and to actually make the program work better.
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    Thank you.

    Chairman LAZIO. I thank the gentleman.

    I want to thank the panel. Thank you for, once again, some excellent testimony.

    Chairman LAZIO. I would ask the next panel to come forward, please.

    Good afternoon. Our next witness is Ms. Christine Harris, a homeowner from Norwood, Pennsylvania. Ms. Harris and her husband, Charles, who is with her today, took out a $34,000 home improvement loan from who they were led to believe were Government-approved contractors. Ms. Harris is here with her husband, Charles, and is accompanied by her attorney, Mr. Jeffrey Kodroff, who is representing the Harrises in their class-action lawsuit against the contractors.

    I will also take the opportunity now to introduce our final witness, Mr. Peter Bell, who is a good friend of this subcommittee. Mr. Bell is the Executive Director of the Home Improvement Lenders Association, a national trade association comprised of lenders, who originated home improvement loans under the Title I program as well as conventional programs. Mr. Bell has been tremendously helpful to the subcommittee in its efforts to reform the Title I Home Improvement Loan Programs. I understand that Mr. Bell will expound on potential enhancements for the program to safeguard consumers. I want to again acknowledge, there are many stakeholders and many associations who are very stubborn about coming forward with reforms and changes that it may seem like they are against the interests of their members.
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    You have been incredibly constructive, and I appreciate that.

    Mr. Bell is accompanied by Mr. Michael McGuire, President of First Plus Bank located in Tustin, California, and Mr. Marc Grayson, President of South Central Bank in Chicago, Illinois.

    Welcome to all of you. I want to welcome you and thank you, frankly, for your courage and for your efforts in getting here, and I turn the attention now to you, Ms. Harris.


    Ms. HARRIS. My name is Christine Harris. I, along with my husband, Charles Harris, own a home in Norwood, Pennsylvania. I am a waitress, and my husband is an airline ground employee. We came here today to try to get some attention to a terrible problem that happened to us and to many other homeowners like ourselves.

    In early 1996, my husband and I decided to have some home improvements done on our home. We went to our local bank, and we could not get any funding because we did not have enough equity in our home. A couple of weeks passed, and we decided to—you know, we were looking through the paper, and my husband found an ad in our local newspaper. The ad read, ''A Title I Federal Housing Authority Government insurance program may make loans available through approved lenders for home improvements, installed by vendor-approved contractors. The Federal Government wants to help you repair and remodel your house. The builder is a Title I lender-approved contractor.''
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    Thinking that this was the Government when we called, we thought that it would be a safe way for us to get our house repaired. We made a phone call, and we spoke to someone from T&F Builders who, in turn, came out to our home and explained to us—''Uncle Lenny'' was sent from the T&F Builders to explain to us how the program worked and it was a Government loan, and we went over all of the details of what we wanted done on our home.

    He took all of our financial information. He left. A couple of days passed, and we got a phone call saying that ''Uncle Lenny'' promised us too much work for the amount of money that they were going to lend us; that we would have to downgrade our project and maybe do some of the work ourselves. They were going to send out someone else which was Frederick Thorpe from T&F Builders.

    So we arranged a meeting with him, and he came out and went over all the work that we wanted done on the house. We downgraded the project, and he left.

    A couple—like a week passed by, and we got a phone call saying we were approved for a loan and it was a Government loan, and they were going to be sending someone out to—for us to sign the papers and go over the Government papers with us.

    The man on the phone was Frank Lucci. He said he would be the one coming out. We set up the meeting, and when they came out, it was not Frank Lucci, but this Frederick Thorpe.

    When he came out, he explained to us that this normally was not his job; that Mr. Lucci could not make it; that they sent him. We were just supposed to sign where they had the little sticky notes, and that he was in a hurry, and if we had any questions, we were supposed to call the office when he left.
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    So, you know, my husband and I were very skeptical, especially my husband. He did not really go for this, but he was very pushy. You know, he just wanted to get in and out, and he said this was not his normal job. So we were anxious. We wanted the work done. So, of course, we signed the papers. He left. That was on the 21st of May.

    On the 30th of May, we get a phone call saying that our checks will be coming in the mail, Fed Ex. On the 31st, the checks came, and I thought ''it is really weird. How did they even know that the checks were going to be getting Fed Ex'd to us?''

    So, on the 31st, we get a phone call from Frederick Thorpe from T&F Builders saying that the bank, that Greentree Financial would be sending us our checks. I thought it was weird. How would the builder know that the bank was sending us the checks?

    The checks came. Within 20 minutes, Frederick Thorpe was on the phone from T&F Builders telling us that the checks should have arrived. I said, ''Yes, they did.'' He goes, ''Well, I will be there in about 20 minutes.'' I said, ''My husband is not even home. You are going to have to wait, because the checks were made out to my husband, myself, and the builder.''

    So he came over. He did not even turn his truck off when he came. He came into our house. He told us that it is normal for the way, you know, that they handle it is that they take two of the checks the first time when they come out, and the balance is due upon completion. We questioned this because we were like, you know, ''How can that be?'', and he was like, ''Oh, Greentree does this all the time.'' This is what—you know, ''They would not let us get you to sign the checks. They would not even clear the checks if this is not the practice that we use.''
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    So, skeptically, again, my husband did not want to sign these checks. I was anxious. We signed the checks. He left.

    Several weeks go past. The whole project was supposed to take six weeks. Several weeks passed. Nobody comes to our house to do any work. So we started calling Greentree, because that is who is on the name of the check, the remaining check, because we have one check still, OK? They took two.

    We started calling Greentree. Well, they did not know what they can do to help us, you know, ''just wait and see what happens.'' I mean, they just beat around the bush. Nobody cared. No one there cared.

    So, finally, my husband, after calling the T&F Builders over and over, he went to their office in Warminster. He told them we wanted our money back, that we did not want to do this. They refused. They said we could not have our money back, but that, you know, since we downgraded and we are going to do some of our work ourselves, now they will do all the work for us. They are going to do everything for us now, because we were so patient and they did not start when they were supposed to.

    So a couple more weeks go by. They came out to our home. They started the work. They ripped apart my entire house, and I mean my entire house, and finished nothing. I had gaping holes in my wall. I had an 8-by-8 hole in my wall in my kitchen that was plywood that was supposed to be French doors. I had a boarded bathroom window, a boarded bedroom window. I had a tarp on my roof, no siding.
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    I was getting upset.

    Mr. FOX. [Presiding.] Take your time.

    Ms. HARRIS. I did not have any back steps. My house was destroyed.

    I was a single parent for ten years, and I never, ever missed a mortgage payment. I never had a lien on my property. Now because T&F filed bankruptcy, I have a mechanic's lien on my property for $6,000. My home is destroyed, and I could not even sell it tomorrow for what—I mean, half of what it was worth before they started. They totally destroyed my home and walked away, and the bank let them do this. Greentree did not do anything to protect us.

    When we called them, they said, you know, they will get back to us, they will get back to us. Well, you know, T&F decided to file bankruptcy. They never paid any of the subcontractors. They all walked off the job. They left my house destroyed. I mean, they felt bad because they had been working at my house, but they left my whole house destroyed, and that was two years ago. My house is destroyed. We are on our second or third tarp on my roof.

    My sons are humiliated. I mean, I have a 16- and 14-year-old. We did this so that they could have their own bedrooms. They cannot even bring their friends home. I mean, it is destroyed, but, anyway, back to the facts here.

    So, after numerous phone calls and then filing bankruptcy, we wrote letters to the Attorney General's Office, the District Attorney in Philadelphia, the media. We did all that. Then, finally, my husband and I decided to do our own investigating.
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    We went to Media Courthouse. I pulled all the records for Greentree and T&F Builders. I contacted as many people as I could find that were in the phone book for their address. I called all that I could find, and I found numerous people.

    I found a woman in Chester in her 70's, Ms. Pettyjohn, whose home has no kitchen to this day, and this is two years ago. She is 70 years old. They took her kitchen out and did not put it back yet. She did not even know that T&F had filed bankruptcy. Nobody at Greentree will help her at all. So her house is destroyed, just as mine is, and it is happening everywhere, and there is no one there. I am sorry. There is no one helping us anywhere. No one has helped me, and no one is helping any of these people, and that is why I am here, basically.

    [The prepared statement of Christine Harris can be found on page 82 in the appendix.]

    Mr. FOX. It is an alarming story.

    Ms. HARRIS. I wanted to thank you for letting me speak.

    Mr. FOX. Well, we thank you for coming here today to tell this. This is the reason why Congress wants to make changes is because of what you have gone through.

    We have to make a vote on the House floor. We will be back here in about 15 minutes to continue asking you questions about how we can make changes in the law and how to help you personally.
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    Thank you.

    We will reconvene in 15 minutes.


    Chairman LAZIO. [Presiding.] This hearing is back in session.

    Let me now, if I can, turn to Peter Bell.


    Mr. BELL. Mr. Chairman and Members of the subcommittee, I appreciate the opportunity to appear before you today and commend you for convening a hearing on this particular topic and commend Mr. Fox in particular for suggesting it.

    Everybody knows that it is a good thing to own a home. Everybody also knows that it is one big nuisance to maintain or improve that home. Home improvement projects can be time consuming, disruptive to our daily living, messy, and inconvenient. They are also a time when many consumers find themselves most vulnerable to firms or individuals who might not have the skills or the integrity to perform a job properly.
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    What I would like to do, Mr. Chairman, is request that my written testimony be entered into the record for this hearing along with our recommended draft legislation, which we call the Home Improvement Consumer Protection Act, along finally with our top ten tips for consumers on how to work with contractors.

    Chairman LAZIO. Without objection, all those documents will be included in the record.

    Mr. BELL. And then I would like to try and summarize the salient points.

    Mr. FOX. Mr. Chairman, I do not think we got the top ten. Do you have extra copies of the top ten?

    Mr. BELL. I am sorry?

    Chairman LAZIO. I wonder if we can have the staff please make a copy of that.

    Mr. BELL. We have plenty of them here.

    Mr. FOX. Thank you, Mr. Bell.

    Mr. BELL. Right.
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    And what they are is there is a limitless number of web sites that have information, Internet web sites that have this type of information, and we have gone through and compiled what we think are really the most important ten for people to pursue.

    Well, fortunately, most of the home improvement incidents that occur turn out to be salvable, though sometimes with greater inconvenience or additional cost to homeowners. A small percentage turn out to be home improvement nightmares, and it is on that subject what we can do to address or hopefully to eliminate the nightmares that I would like to focus my comments.

    Our organization, the Home Improvement Lenders Association, is a national trade association comprised of the lenders who originate home improvement loans on both the FHA Title I program and other conventional programs.

    I am accompanied here today by Marc Grayson, who is President at the South Central Bank in Chicago, and Mike McGuire, President of First Plus Bank in Tustin, California.

    Mr. Grayson's bank, South Central Bank, is a community bank on Chicago's South Side that has been making dealer-oriented Title I loans for 32 years, and Mr. Grayson has told me the other day, when we were preparing for this hearing, that in those 32 years, he is not aware of one incident of dealer fraud in their program. So I think that shows that it is possible to run a Title I dealer program and really work with dealers of integrity.

    Mr. McGuire's bank, First Plus Bank, has been one of the most active participants in the Title I program for the past 14 years.
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    There are three areas I would like to cover in my testimony this afternoon. The first is to deal with the problems that arise with contractors that are occasionally observed and reported by our members. Second, I would like to explain how Title I actually offers some safeguards that help protect consumers and how those safeguards might be further enhanced, and, finally, I would like to suggest some safeguards that might be applied across the board to all home improvement transactions where the contractor is involved in the delivery of the financing.

    I would also like to suggest that a task force with representatives of consumer organizations, lender associations, the remodeling industry, State and local officials be formed to undertake a public education campaign on how consumers can best protect themselves on home improvement transactions and to explore the possibility of developing model legislation for adoption by the States governing home improvement activity.

    Let me first turn to the contractor issues that we hear. The most commonly heard complaint is that a contractor has failed to complete a job. If the job is being financed by a dealer loan, the funds might have been paid directly to the contractor. If they were already disbursed, the job is incomplete and the contractor is gone.

    In such cases, the homeowner might decide to withhold payment on the loan until the problem is addressed. The lender, however, might not be aware of the borrower's dissatisfaction and might move to collection, and if there is a lien on the property, proceed toward foreclosure.

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    A second common complaint revolves around transactions where a completion certification is utilized. Consumers are sometimes asked, pressured, or enticed to sign the certification before the work is done, sometimes even up front while signing a confusing assortment of other closing documents. Other times, contractors forge signatures on completion certificates.

    A third set of complaints comes up about the pricing of home improvements. The Title I program has drawn some fire of its own recently, but actually includes a number of provisions that give consumers greater protection than if they undertook the same improvements with a different financing vehicle, and I think it is worth looking at these provisions to see if they might be adopted elsewhere and also to review them to see how they can be modified to enhance the protections in Title I.

    There are several key protections embedded in the Title I process. When properly carried out, they create strong consumer protections, and, in fact, if the Harrises had ,in fact, had a Title I loan, which they did not—and, unfortunately, they could not in their case because I understand that the size of their job was larger than the loan limits would allow under Title I, but if they had and it was from a lender who abided by the rules of the program, what happened to them could not have happened. The protections are there.

    Under the Title I program, there are very extensive procedures for the lenders to monitor, to approve contractors. They must check their financial capacity. They must check their track record, visit their place as a business, look at their marketing materials, and revisit them on an annual basis, actually twice a year.

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    If a dealer does not satisfactorily perform under the Title I program or is unresponsive to the lender's supervision and monitoring, the lender is required to terminate the dealer's approval and immediately notify the Secretary of HUD with written documentation of that fact.

    The termination of dealers is one of the areas at which the current system has failed to work. Many of our lenders have notified HUD of contractor terminations, and no action has been taken by the Department enabling terminated contractors to simply go up the road and find new lenders to work with.

    Another safeguard under FHA is the completion certification which is required to be signed by the borrower before the job can be funded. Basically, the job gets completed. The contractor presents the completion certification to the borrower who signs it. The contractor then forwards it to the lender who then advances the funds.

    Often what happens is people sign this completion certificate ahead of time. Either it is placed in the documents up front or they are enticed with some sort of cash incentive by the contractor to sign it. There is any number of ways that they get snookered into signing this.

    It is important that contractors and consumers both be made to understand that it is illegal to falsely sign this completion certification. HUD should impose stiff penalties for anyone doing so, both contractors and consumers.

    Third, most lenders, while not a requirement of the program, will conduct a telephone interview with a borrower once they receive the completion certificate to ascertain that the work actually has been done. Some lenders even go so far as to record this conversation to keep a permanent record of it.
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    HILA recommends that the telephone interview with the borrower upon receipt of the completion certificate become an absolute requirement under the Title I program.

    Next, there is an inspection of the improvements under the program. Under the current rules, the inspection must be carried out within 60 days after the funds are disbursed. It is our association's recommendation that the program be changed to require that the inspection take place prior to the disbursement of the funds. So the job would be completed, and inspecting would occur, and then the funds would be disbursed.

    We would also welcome the opportunity to work with HUD to design an appropriate inspection procedure. Right now it is up to each lender to determine what is appropriate.

    There is also concern that consumers that are unhappy with the work that is done that decide not to pay on the loan to voice their frustration will find themselves facing foreclosure. In a Title I transaction, the lender, after attempting all other remedies to bring the loan current, would file an insurance claim with HUD, not foreclose. So there really is no chance or very little chance of foreclosure in an FHA Title I transaction.

    The lenders also have a very large incentive to try to avoid filing claims. First of all, the loan is a 90/10 percent risk share. In the event that the loan goes to claim, the lender loses 10 percent of its outstanding principal balance on the loan. The lenders also have a portfolio limitation which further restricts their ability to file claims. They can only file claims for an amount up to 10 percent of the portfolio of loans that they have.
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    Finally, in no case will HUD pay a claim to a lender on a dealer loan if there is an outstanding consumer complaint about the work. The lender must investigate the complaint before filing the claim and try to get it resolved by the contractor or another party.

    These provisions go a long way toward making a Title I deal a much better deal for a consumer, but we also feel that they can be strengthened. As I mentioned earlier, we believe that the telephone interview between the borrower and the lender prior to funding should be mandated. There should be a requirement that disbursements and dealer loans be made by a jointly payable instrument that requires an endorsement by both the borrower and the contractor before the contractor can deposit it. We recommend that the inspection be conducted prior to disbursement of the funds; that HUD establish uniform standards for property inspections; that HUD establish a registry for complaints against home improvement dealers, so that other lenders can find out that a dealer that has approached them to participate in their program can find out about that dealer's track record. We also suggest that HUD increase the mortgage insurance premiums to make sure that the program is self-sustaining and that they raise the lender approval and annual verification fees to a level that covers the Department's cost of administration, so it has the resources to do a proper job of monitoring the program.

    We also recommend that net worth requirements for correspondents be increased, and that the loan limits be increased, so that a job such as the Harrises' $34,000 job could be done under Title I so they are not forced to go to other less advantageous programs.

    Finally, let me discuss broadening protections to folks outside of the Title I program. Even if we were successful in strengthening the Title I protections, the home improvement market is roughly $125 billion a year. Title I is $1.3 billion. So we would really be touching the tip of the ice berg. We really need to reach farther beyond Title I and find ways to protect consumers.
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    Over the past couple of weeks, I have been involved in meetings with some of my colleagues from a number of other lender organizations, as well as with some of the consumer groups. We have been discussing some of the consumer groups' concerns and are in the process of drafting voluntary standards that we would hope that all lenders would adhere to which would require a standardized completion certificate to be signed by both the borrower and the contractor before contractors are paid.

    We would like to see that standard include a requirement that the lenders arrange for a property inspection on any home improvements exceeding $10,000 before the funds are disbursed, and we would also like to deal with the issues of borrower complaints where by having a voluntary arrangement whereby a borrower would be asked to notify a lender in writing of its dissatisfaction with the home improvements that have been conducted, and that within 20 business days, the lender would acknowledge receipt of that complaints in writing back to the borrower. Within 60 days of that, the lender would undertake an investigation and notify the borrower in writing of the lender's determination and proposed course of action.

    Those three protections, along with a new crystal clear disclosure form that we are working on, we think will go a long way to broaden the protections beyond Title I to all home improvement transactions.

    Finally, there is just so much that we can do as legislators, regulators, lenders, and consumer advocates to protect individual homeowners. Consumers must assume some responsibilities themselves, although we can help them prepare to take that responsibility by providing educational and informational resources.
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    Over the next several weeks, we will be inviting a number of organizations which share our concerns to join the Home Improvement Lenders Association in a national consumer education effort to alert homeowners to the steps they should take to pick a good. qualified, dependable home improvement contractor, and our top 10 tips that I have distributed here is really a launching of that effort.

    It is my hope, Mr. Chairman, that this hearing today, our public education effort and actions by other concerned parties, will result in a home improvement environment in which more households achieve their dream and fewer have a home improvement nightmare.

    Thank you for this opportunity.

    [The prepared statement of Peter H. Bell can be found on page 92 in the appendix.]

    Chairman LAZIO. Thank you. Thank you, Mr. Bell.

    Let me, if I can, ask a couple of questions of you, Ms. Harris, because your testimony—and I heard part of it when I was outside of the room—was really very riveting.

    It appears that you were enticed to enter into this loan agreement because you thought that the Government stood behind the lender. Would you have not pursued it if you thought—or what would you have done if that were not the case, if you did not have perception that the Government was——
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    Ms. HARRIS. Well, we knew we could not get a loan without the Government being behind it. We believed even after we had the loan that we had an FHA loan. We did not know that we did not until further on when we kept calling Greentree and trying to find out what was going on with the builders. We did not even know we did not have one.

    Up until now, I am not sure what I have, to be perfectly honest. I do not know what kind of loan we have. We thought we did have an FHA loan, but, no, we would not have gone along with it because, first of all, we had gone to our own bank. We did not have enough equity in our home. There would be no—we thought the Government was doing it just for that purpose. We believed that this loan was just for people, you know, who needed that assistance. You know, we had low equity in our home. We did not have enough money invested in our home for us to get a loan anywhere else. So we truly believe that this program was designed for us. So, no, we would not have.

    Chairman LAZIO. Obviously, you had a need. This is almost two years after——

    Ms. HARRIS. May well be two years.

    Chairman LAZIO. May well be two years, and you are still fighting. Why have you fought so long and as hard as you have to bring this to public awareness to this Congress?

    Ms. HARRIS. Well, I take it very personally. I mean, they came into my home. I believed them. I thought the Government was behind it. There are other people out there that this is happening to.
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    My home is destroyed. I have a lien on my home. I cannot get funds anywhere else to even fix my home. I have leaks everywhere. What am I to do? And there are thousands of people out there. They should separate the banks from the builders. Let us pick our own builders.

    I mean, that is the way it should be done. Instead, Greentree is telling us they are going to help us, they are going to fix our house, and they have done nothing. That is why I am here, because they have done nothing. My house is destroyed. Other people's homes are destroyed, and how could I sit back and let this happen to other people? It is wrong.

    I am a hard-working person. I deserve my home to be fixed. That is what I wanted. That is what I paid for.

    Chairman LAZIO. Let me ask you, Mr. Bell. There have been circumstances and situations where lenders have reported contractor problems directly to HUD. Could you characterize what you believe the experience has been with some of these referrals? Are they promptly acted upon? Are they dealt with effectively?

    Finally, is there any way for subsequent lenders to get this information to know that there is a problem contractor out there?

    Mr. BELL. Well, to the first part of your question, our experience has been that there has been very little follow-up, if any whatsoever, by HUD when people have been reported to them for poor performance, both contractors and loan correspondents as well.
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    Until the Wayne Dottrofino aired in Houston, there was no follow-up whatsoever by HUD, as far as I know, for the past three, four, five years.

    Chairman LAZIO. So there were circumstances where lenders actually would report?

    Mr. BELL. Lenders have been voicing their frustration about reporting contractors to HUD and having no action for ages. In fact, what goes on in a lot of our meetings is an informal sharing of information among lenders saying we had this problem with XYZ Contracting, have any of you dealt with them. So some of the lenders have been able to tip each other off by that, but without really having a proper enforcement mechanism, there is a lot of legal issues that arise in that kind of sharing of information, trading of information, but there has been an informal network.

    What is really needed is a proper formal network, perhaps using some sort of online information system, so that the reports that come in are logged and future lenders can check when a contractor approaches them to see whether they have ever been terminated by another lender.

    Chairman LAZIO. Could you give me an idea of the time lag or the timeframe between the point in which a violation or a complaint is lodged by a lender to HUD and when HUD ultimately acts?

    Mr. BELL. To my knowledge, I have not seen them act, but let me turn to my lender colleagues here and see if they have any experience.
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    Chairman LAZIO. Mr. Grayson.

    Mr. GRAYSON. Well, I cannot really answer because we screen our contractors at our own bank so thoroughly that we know our contractors, and we have almost never over the years run into people that we have to refer to HUD, quite frankly.

    I think one of the problems is there are a lot of larger financial institutions. We have about 64 contractors currently that we work with through HUD out of a total of about 100 contractors. I think the problem is when financial institutions are operating in numerous State—we operate in three States—but perhaps a little bit further from their base, and they are growing very fast, and they do not research their contractors.

    So I think part of it, really, the lenders should be required to—I am not going to say it should all be the Government from my perspective. My feeling is that the lenders through the regulatory process should be required to keep proper dealer files showing that they are dealing with proper contractors.

    Chairman LAZIO. Should they be disqualified from the program if they have unreasonable levels of default and problems?

    Mr. GRAYSON. I would think so. I think an individual lender in certain circumstances could, even doing a good job, run into contractors that do not do a proper job, but if the contractors are screened by lenders, I think what Mr. Bell is suggesting, that we have a centralized system of checking is important. I am not saying that that should not happen. I think that is an extra safeguard, and I think all of that has to be monitored by HUD. I do not think HUD really has thought this through and come up with a solution. I do not think it is that complicated.
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    As Mr. Bell has said, we received our license in the same year that our bank opened, 32 years ago, and I cannot think of a single instance where we have ever had any dealer fraud. We have had complaints, but I think everyone should understand under Title I that if there is ever a service complaint by a contractor on a dealer program, there is no insurance. You cannot make a claim if there is an outstanding service complaint under Title I. It is a wonderful program.

    And HUD has to do some work, and I think this registry is a very good idea. I do not know if it should be industry-wide or it should be through HUD, but it is a good idea.

    Chairman LAZIO. Thank you very much.

    Mr. Weygand.

    Mr. WEYGAND. Thank you, Mr. Chairman.

    I first want to, again, compliment Mr. and Ms. Harris for coming here today. Your story is very riveting. It is unfortunate, but you are correct that there are many people, not only in Pennsylvania, but throughout the country that have had the same kind of problem that you have had, this has led many States to come up with registries, as Mr. Grayson has talked about, which actually begin to provide information for consumers, far better than what they presently have, about contractors and dealers that might defraud you.

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    Previously in the testimony—and I would like to direct this question to Mr. Bell, Mr. Grayson, and Mr. McGuire. The Attorney General from Pennsylvania indicated some of the problems that he had in the State and what they have been proposing, and Mr. Grayson actually commented in his statement about a registry as well as did Mr. Bell.

    I am listening to a couple of things. One of the things that I hear is that we have to have increased regulation, which I concur with. My concern is that if we are going to be helping the consumer, increased regulation sometimes provides for increased cost which means providing less service or product to the consumer. So we are concerned about that, but in an age of technology, I would think that we could have far more unified or uniform system for purposes of tracking, for purposes of making sure that we are correcting a number of the problems that have been mentioned here today.

    Secondly, it would also, for purposes of tracking contractors, provide us with far more information, whether it is Pennsylvania, whether it is California, or whether it happens to be Florida.

    I would like the three of you, if you could, to just briefly comment. Is that the way you are suggesting the industry go, that we have more uniform forms of application, and inspection later on with regard to contractors? I think Mr. Bell mentioned something about prior to payment, that we should have homeowners or have some home inspection of the improvements prior to the disbursement of funds. Is that what you are suggesting to us?

    Mr. BELL. Yes, Congressman. I am a strong advocate of the idea of requiring an inspection in all cases prior to the disbursement of funds on a contractor-originated loan, and I think it would be useful to have uniform standards for what that inspection should be around the country. It would be helpful if HUD would come up with some sort of standardized format and then the inspection industry would fall in line behind that format and utilize it.
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    Mr. WEYGAND. As you know, we had some testimony before this subcommittee a couple of weeks ago about FHA loans and the problem with some of the—aside from this issue—some of the problems with loans through FHA that do not have home inspections. They only have appraisals of the property but no inspections of the property. This is not a unique problem to Title I. It is happening in other places with FHA, as I understand.

    Mr. BELL. Right, though I think there is a difference in that the inspection there is what I would call—in the single family programs, that it is being called first—what I would call a qualitative inspection that is really to look at the condition of the property. Whereas, what I am talking about here is more of an inspection just to ascertain that the work has, in fact, been done that the contractor is submitting the voucher for.

    Mr. WEYGAND. What I am suggesting is that HUD has had a problem with any kinds of inspections, either prior to purchase or after home improvement, which seems to be a real problem.

    Mr. BELL. Right.

    Mr. WEYGAND. Thank you very much.

    Thank you, Mr. Chairman.

    Chairman LAZIO. I thank the gentleman for some excellent questions.
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    Mr. Fox, did you have some questions?

    Mr. FOX. Yes.

    Ms. Harris, has any of the work been done at all to repair your home yet?

    Ms. HARRIS. No, it has not.

    Mr. FOX. And it has been two years this way?

    Ms. HARRIS. Two years this way. Nobody has done anything to our home.

    Mr. FOX. I wondered, have you ever figured out the connection between how the company that was going to do the financing and the company that was going to do the work, how they knew each other? It sounds like a strange combination.

    Ms. HARRIS. Well, basically, T&F was one of their contractors, you know, the bank, you know, Greentree and T&F work hand-in-hand. So, therefore, that is how we got T&F, and that is how we got Greentree, but Greentree did not back T&F when the time came when they did not pay any of the subcontractors. They did not do anything. They just took the money and ran and destroyed my home. That is how I have the lien on my home because it is a mechanic's lien.

    Mr. FOX. By the subcontractors?
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    Ms. HARRIS. By the subcontractors that we did not even hire.

    Mr. FOX. How much is that lien for? $9,000, was it?

    Ms. HARRIS. $6,000 and 6 percent interest daily, whatever, however they do it.

    Mr. FOX. Right.

    Ms. HARRIS. Whatever.

    Mr. FOX. Had the Government had a Title I program check such that they met standards that everybody would want, you would not have had a company you are dealing with that was disreputable.

    Ms. HARRIS. Exactly. Greentree did not do any research on T&F Builders. I am not sure if they do any research at all, but they did none. T&F has had numerous complaints over the years. All the things that I found out regarding T&F, there is no way they did any background research on this company. I mean, they filed bankruptcy, and prior to that, their income the year before, I cannot see how a major financial institution would hire someone like T&F to be one of their contractors. I mean, they did not do any research on it at all.

    Mr. FOX. So, if we had only companies that you could go to in a Title I program that met certain criteria, that you could get assurances that they would be reputable, financially capable, workmanship met the appropriate minimum standards, then you would not be in this problem today.
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    Ms. HARRIS. Exactly. I mean, if they were monitoring them, when they took two checks from us, they should not have allowed them to cash the two checks because supposedly one was supposed to be at the beginning, the middle, and the end, but that is not what happened.

    We did have a certificate of, you know, completion, and at the end of this when everything was going on and T&F said, you know, ''that is it, we do not have any money, we are filing bankruptcy.'' They told us that, you know, ''just sign the last check over to us.'' They still wanted the last check signed over to them, and our house was destroyed, and ''maybe we can get to finish your house.'' And Greentree did not do anything to protect us.

    I mean, we wrote to them, like Mr. Bell had said. We wrote letters, phone calls. We did all that.

    Mr. FOX. Right.

    Ms. HARRIS. And nothing was ever done to complete our house. I mean, it is just deteriorating. It is just getting worse and worse every day.

    Mr. FOX. OK. Well, we certainly appreciate your testimony and that of Mr. Bell, and we hope that working with our Chairman, Mr. Lazio, who has been a visionary in trying to get enforcement and trying to get the industry, where the quality people are being hurt by those who are disreputable. So, as I said, personally we would be in touch with Congressman Weldon from your district and try to see what we can do in your instance, but also try to make sure that other people do not become victimized like you and your husband.
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    Ms. HARRIS. Thank you.

    Mr. FOX. And we thank you for your courage in coming forward today.

    Ms. HARRIS. Thank you.

    Chairman LAZIO. We have heard some remarkable testimony today, and I appreciate very much you coming forward, Ms. Harris, and sharing the experience you have had. We will be reflecting on that, certainly, as we think through the possible solutions and some of the challenges we have with a number of programs including, but not exclusively, Title I.

    Mr. Bell, once again, thank you for your help and input and for identifying some possible paths we can take to ensure that we have adequate levels of enforcement for the disreputable players in the marketplace that clearly preclude a program where so many Americans are using this.

    Let me again thank everybody. I wish you a safe ride back.

    We have a new Member of the subcommittee, Mr. Walsh.

    This hearing is adjourned.

    [Whereupon, at 5:09 p.m., the hearing was adjourned.]
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