Sunday, April 18, 2010

Oregon Regulators Taking A Close Look Into Portland-Based Foreclosure Rescue Operator Peddling Sale Leaseback Programs

A recent story in The Oregonian [see State regulators open civil investigation into Aspen Capital's mortgage affiliate] reports that the Oregon Department of Consumer and Business Services has commenced a civil investigation into the lending and foreclosure rescue activities of an affiliate of Aspen Capital for possible violations of consumer protection laws. The type of transactions being looked into include sale leaseback programs, an example of which was described in the following excerpt taken from a February 27, 2010 Oregonian story [see Foreclosure rescues by Aspen Capital affiliate -- a lender of last resort -- failed nearly half the time]:

  • Tammy Campbell was distraught. She couldn't find a job and fell behind on her mortgage in 2004. The modest Portland home she bought for its archways and oak floors headed to foreclosure. That's when she got a flier in the mail from an Aspen affiliate. Campbell signed a contract to sell her home to another Aspen affiliate just days before the foreclosure sale.

  • The $109,750 price was below market value, but it was enough to pay off her delinquent loan. The good part: The sale halted the foreclosure and Campbell stayed in her home, renting from an Aspen affiliate. The bad part: She no longer owned her home and her rent cost her more than her old monthly mortgage payment.

  • According to the contract, Campbell paid $719 rent compared with $599 on her mortgage. Irving Potter, lawyer for Aspen Capital and its affiliates, said the company didn't consider whether Campbell could afford the rent. Instead, he said, the company set the rent to ensure an 8 percent annual return. Even though she no longer owned the home, Campbell was required by the contract to pay the maintenance and property taxes. Potter said the company ended up covering the taxes.

  • The Aspen affiliate gave Campbell the option to buy her home back. The price would rise 10 percent a year. Under the contract, the company could put the home on the market if Campbell couldn't buy it back after two years. By buying the home for less than it was worth, the company would profit by selling at market value.


Under Oregon case law, this type of transaction has been found by the courts to constitute an equitable mortgage(1), an arrangement where a loan transaction is disguised as a formal sale, combined with:

  • a contemporaneous leaseback of the premises by the financially strapped property owner, and
  • an option to repurchase granted to the property owner.

Disguising a loan transaction in this way is believed by some (erroneously, in many cases) to be a way to: (1) evade state usury statutes, (2) evade the property owner's right of redemption by obviating a foreclosure action - in a sale leaseback, the new owner need only evict the now-ex-homewoner to take possession of the premises, and (3) make off with a distressed property owner's equity by providing for contractual obligations so onerous that they are unconscionable and illusory, coupled with hair-trigger default provisions that result in the property's forefeiture to the operator.

Inasmuch as these types of transactions have been under attack by several other states(2) as being in violation of state consumer protection laws, it would be interesting to see where Oregon regulators come out on this issue.(3)


(1) The Oregon Supreme Court, in Umpqua Forest Ind. v. Neenah-Ore. Land Co., 188 Or 605, 217 P2d 219 (1950), pointed to the following factors as indicia that a mortgage, as opposed to a true sale, was intended:

  • the fact that negotiations originated from an application for a loan,
  • the dire financial straits of the grantor,
  • the grantor's continued possession of the property,
  • the intimate business or social relationship of the parties,
  • failure of the grantee to carefully investigate the title of the grantor,
  • failure of the grantee to ascertain the value of the property,
  • inadequacy of consideration, and
  • the lack of bargaining between the parties as to the value of the property with the controlling consideration being the profit inuring to the grantee.

Further indication of intent to create a mortgage is present is: when a deed absolute in form, is accompanied by an option to repurchase, the instruments must be considered together. The option does not of itself convert the transaction into a mortgage, but it is a circumstance to be considered in favor of the existence of a mortgage.

See also these Oregon Court of Appeals rulings which applied these guideposts in evaluating a real estate transaction and concluding that it was an equitable mortgage, and not true sale:

  • Long v. Storms, 50 Or App 39 (1981) (ruled that, as an equitable mortgage, the arrangement was subject to the Federal Truth In Lending Act),
  • Swenson v. Mills, 198 Ore. App. 236, 108 P.3d 77 (Or. Ct. of App. 2005).

This short narrative on the equitable mortgage doctrine in Oregon, appearing on the State of Oregon Division of Finance and Corporate Securities (DFCS) website, also addresses the equitable mortgage doctrine in Oregon.

(2) In Massachusetts, the state Attorney General's office sued and reached a settlement in a case involving 26 real estate transactions that allegedly: (1) involved unfair and deceptive acts and practices under the Massachusetts Consumer Protection Act, and (2) constituted violations of specific state and federal laws and regulations designed to protect consumers from deceptive and unconscionable lending practices. Among the AG's allegations was that the sale leaseback arrangements constituted usurious equitable mortgages. See:

In Arizona, Attorney General Terry Goddard successfully sued an alleged foreclosure rescue operation believed to have defrauded a couple of hundred Arizonans of their homes in violation of, among other statutes, the Arizona Consumer Fraud Act, and alleged that the sale leasebacks were equitable mortgages. See:

The Arizona Attorney General also scored a victory in an earlier case (see Arizona Foreclosure Rescue Operator Ordered To Pay $1.2M In Home Sale, Leaseback Program) in which a foreclosure rescue operator, in lending money to more than 60 homeowners facing foreclosure or in need of money, designed its loans, which it called reverse sales, to evade laws protecting mortgage borrowers by structuring them as an outright sale of the property by the borrower, who then rented back the home with an option to repurchase it. If homeowners were late on a rental payment or unable to repay the loan and funding fee within two years, they could lose their homes and any equity in them. For the Arizona AG press release, see Court Orders Realty Firm to Pay $1.2 Million for Violating Fraud, Banking Laws.

In Washington, the state Attorney General’s Office successfully sued a notorious foreclosure rescue operator, and obtained a court order directing the operator to pay more than $3.2 million to victims he wronged plus $179,000 in penalties for violating the state's Consumer Protection Act. See:

(3) For other reports on sale leaseback, foreclosure rescue programs that have been found to violate the state's consumer protection laws, see: State Consumer Fraud Act Yields Triple Damages Award For Homeowners In Bogus Sale Leaseback Equity Stripping Racket, footnote 1. Oregon equitable mortgage doctrine theta

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