Government and fair-housing lawyers are finally headed to court in their years-long quest to stop what they say is one of Washington's worst predatory lenders.
Two multimillion-dollar lawsuits, which were consolidated this spring, claim that Washington-based Capital City Mortgage Corp. engaged in "massive" deceptive lending targeted at minorities. The allegations triggered local and national examinations of lending practices five years ago.
The man at the center of the litigation, painted by accusers as "a shark" who "personally manipulated" loans at every step of the process to keep black and elderly borrowers from repaying their loans and causing them to lose their homes, will not be in the courtroom.
Thomas K. Nash, Capital City's president and sole shareholder at the time of the lawsuits, went into a coma after a horseback riding accident a year ago at his estate in Brookeville and is unable to communicate in a meaningful way, his lawyers and a cousin said.
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His cousin, Fairfax real-estate businessman Alan W. Nash, was appointed guardian in January by the Montgomery County Circuit Court and is now serving as company president. Alan Nash and the company deny the allegations and are fighting the legal claims.
Civil rights lawyers representing local borrowers say they "regret the personal tragedy," but are proceeding because of the firm's past "egregious" practices, because it is still foreclosing on borrowers and because it may be continuing its past lending practices.
"We think that right up until the time of the accident he was making predatory loans," said John P. Relman of the civil rights law firm Relman & Associates of Washington. "And the bottom line is we know that they're continuing to service those abusive loans and pursue people who they abused in the past."
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Predatory lending has no official definition, which is one reason lawmakers have had trouble outlawing the practice.
The practice is generally described as lending, by creditors, mortgage brokers or home repair contractors, that involves deception or fraud, manipulating borrowers through aggressive sales tactics, or taking advantage of those who don't understand or can't afford the loans. Often the loans have unnecessary or exorbitant fees.
Community activists say predatory lenders can ruin neighborhoods by forcing homeowners into foreclosure, then buying back houses at low prices that undermine housing values, and then conning new buyers into another round of abusive loans. Elderly residents who are house-rich but cash-poor and need home improvements are particular targets.
Relman is co-counsel for a handful of local borrowers who filed suit in mid-1998 against Capital City. The borrowers include a District minister who lost his church to the lender and could lose his home, and two Prince George's County residents in the same situation.
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The borrowers were joined in their suit by the Equal Rights Center, formerly known as the Fair Housing Council of Greater Washington.
These plaintiffs allege fraud and racial targeting of abusive loans by the firm and Thomas Nash and seek $5 million to $10 million in compensation and damages.
The Federal Trade Commission filed suit just before Relman's clients, alleging a widespread pattern of deceptive lending. The FTC did not specify damages or compensation, but it estimates that relief could total $8 million for at least 1,200 borrowers in the Washington area who took out loans from 1979 to 1998, plus several million dollars in fines.
The two legal actions followed a 1996 investigation by The Washington Post that found that Capital City foreclosed on 1 in 5 mortgages made from 1984 to 1995. The investigation found that the lender foreclosed on 1 in 3 mortgages made from 1989 to 1991.
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The national foreclosure rate is rising because of the slowing economy, but the rate for all loans was less than 1 in 100 in the second quarter of 2001, the Mortgage Bankers Association of America said. The percentage of "subprime" loans in foreclosure -- those loans made at higher cost to people with faulty credit -- was less than 4 in 100 last year, said LoanPerformance, a San Francisco research firm.
"If your underwriting is so weak that one in five of your customers is being foreclosed on, there's something wrong with your underwriting, or you're in another business: You're in the foreclosure business," said Jeffrey Zeltzer, executive director of the National Home Equity Mortgage Association, an association of subprime lenders.
Capital City helped trigger a national call for new consumer protections because of its practices, government regulators and fair housing activists said. It also led the District to pass a law in 1996 requiring licensing of mortgage lenders and brokers and to overhaul the 100-year-old foreclosure law last December.
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"There are a lot of entities nationally and even locally whose absolute number of predatory loans far exceed that of Capital City," said Jeffrey Robinson, co-counsel for local borrowers with Relman. "But their practices are the most egregious I've ever seen."
The FTC's action against Capital City was the first case brought in the agency's investigation of predatory lending by subprime mortgage lenders, an FTC spokesman said.
Not all subprime loans are predatory, but all predatory loans are considered subprime, involving higher than normal rates and fees. Concerns about predatory lending have grown as the subprime industry exploded in the mid-1990s.
Fourteen other suits were later filed by the FTC; 12 companies have settled. Suits are still pending against former major subprime players Associates First Capital Corp., now a part of Citigroup Inc., and First Alliance Corp., which now is in Chapter 11 bankruptcy protection.
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The FTC alleges that Capital City frequently foreclosed on properties and then bought them back at auctions where Nash was the "only bidder, for a price substantially less than the appraised value."
The company then resold the property, "and the foreclosed-upon borrower did not receive the surplus from the resale," the FTC alleges.
Most Capital City borrowers lived in the District and Prince George's County, and many paid interest rates of 24 percent or more, government regulators said.
"We would like to bring this case to trial as soon as possible so consumers can be compensated," an FTC spokesman said. "Until it goes to trial, no court order is in place stopping the practices we continue to be concerned about."
The company has denied the claims. "The allegations are not true," Capital City general counsel Leticia M. Watson said. "But besides the allegations, there is, to Capital City's knowledge, no paperwork or files that support any FTC or fair housing allegations."
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"The FTC seems to think that there have been 1,200 loans since the company started 20 years ago . . . and that every one of the borrowers has been harmed such that they have to be recompensed," Alan Nash said. "But Capital City Mortgage has done repeat business with hundreds of people over the years and those people have no complaints against us. I don't know how they can say that 1,200 people have been wronged."
Nash added, "It is my understanding that the foreclosure rate is not that much higher than that of banks."
Nash said the company "hasn't made residential loans in years. All we do is commercial and investment loans. . . . The only time we may do a residential loan is if we sold a piece of property to a homeowner and financed it."
Watson would not estimate how many borrowers have gone into foreclosure since 1998. "Every mortgage company has to make the hard decisions," she said. "We do the best we can to not foreclose on anyone."
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Capital City has not been licensed to make residential loans in the District since Oct. 31, 1999, D.C. regulators said. The company also was not licensed from June 1997 to June 1999, after the District passed a licensing law, said Henry Scott of the District's Department of Banking and Financial Institutions.
The District's top banking regulator, S. Kathryn Allen, said she cannot comment on whether Capital City made residential loans during the time it wasn't licensed. "Any rights that we have under District law will be pursued subsequent to the [FTC] litigation that we are collaborating on and supporting," Allen said.
Lenders do not have to be licensed to make commercial mortgages.
The FTC began investigating Capital City after The Washington Post reported in May 1996 that scores of Washingtonians lost their homes and small businesses after they defaulted on high-cost loans.
Capital City's case was expected to come to trial last December, but it was delayed by Nash's accident. In July the judge handling the voluminous proceedings, U.S. District Judge Joyce Hens Green, retired. Green had tried, without success, to get the parties to settle, lawyers on both sides said.
U.S. District Judge Gladys P. Kessler, who inherited the combined case, in August ordered a pretrial conference date of Nov. 27.
The pretrial hearing would be the last big step before trial.
Some speculate that Nash's family may be wearying of the years of criticism and legal maneuvering and may become more interested in settling.
Alan Nash last month said, "I feel like I have a decent enough relationship with the FTC that we can reach a consensus," but he again questioned how the government could contend that all borrowers have been harmed.
Nash said the company's former head, his cousin Thomas K. Nash, 56, is in a rehabilitation center in Rockville.
The millionaire businessman and polo enthusiast suffered a "severe head injury" when he fell off his horse on Oct. 1, 2000, according to a report filed in District Court in February by Michael J. Makley, medical director at the Traumatic Brain Injury unit at Kernan Hospital in Baltimore. Nash's condition later worsened, according to court records.
By February, he had emerged from "a very deep coma and unresponsive state," but he was still "severely impaired" and "unable to communicate in any meaningful or consistent way," Makley wrote.
The doctor added that there was "a fairly low probability" that the situation would change much.
Alan Nash, however, said it would not be correct to say his cousin is in a coma or near death. Instead, he is "unable to communicate," Alan Nash said. "He is in excellent health" other than that.
Thomas K. Nash and his lending company face accusations of fraud and racial targeting.Thomas K. Nash, who suffered a head injury from a horseback riding accident last year, is "unable to communicate in any meaningful or consistent way," his lawyers and a cousin say.
