Yes, pretty amazing, but did you see this? Just absolutely astounding!
washingtonpost.com
Credit Firm Gave Moran Favorable Loan As He Sought Deal, Lawmaker Backed Finance Industry Bill
By Jo Becker and Spencer S. Hsu
Washington Post Staff Writers
Sunday, July 7, 2002; Page A01
Nearly $700,000 in debt and juggling two dozen credit cards, U.S. Rep. James P. Moran Jr. (D-Va.) had begun to slip behind
on his payments. One bank had already rejected his application for a loan.
"I didn't see any way out," Moran said in an interview.
MBNA Corp., a credit card lender with critical legislation pending on Capitol Hill, came to his rescue.
On Jan. 30, 1998, MBNA gave its delinquent borrower Moran a $447,500 home refinancing package that consolidated much
of his debt at a lower interest rate. It was the largest mortgage package MBNA reported giving to a single borrower that year,
an analysis of Federal Reserve records shows.
Moran's loan had a number of favorable aspects that permitted him to borrow more money at a lower cost than was standard
for the industry, according to a review of his financial records and interviews with a dozen lending experts.
As Moran was negotiating the loan, he also was supporting a bill pushed by MBNA and others in the credit card and finance
industry that would make it tougher for people to walk away from debts by declaring bankruptcy.
Moran said the loan had absolutely nothing to do with the legislation, and was an honest attempt to solve mounting financial
troubles.
This is not the only time Moran, a public official in personal financial crisis, has borrowed money from a party with interests on
Capitol Hill. A $25,000 loan in 1999 from a friend who was a drug company lobbyist prompted politically embarrassing
questions. In a transaction disclosed last month, Moran borrowed $50,000 from the politically active co-founder of America
Online.
The MBNA loan -- a first and second mortgage -- was awarded based on a generous appraisal of Moran's three-bedroom
house in Alexandria, its subsequent sales price showed. Moran's poor credit and the loan's size placed him at high risk of
default. Nevertheless, he secured an MBNA interest rate that saved him about $800 a month over what he would have paid if
he'd gotten the average rate given similar high-risk borrowers in an analysis by Standard & Poor's.
MBNA said it granted the mortgage for sound business reasons, and two financial specialists who reviewed the loan at Moran's
request found it reasonable.
"There's no question this is not an everyday loan," said one, then-U.S. representative Norman D'Amours, a past chairman of
the National Credit Union Administration. "On the other hand, it's not unheard of. I would say that this is a loan that -- while it
might raise an examiner's eyebrows -- might, would, very well could pass muster."
But lending experts consulted by The Washington Post questioned the deal.
"This loan was the worst," said Frank Raiter, a Standard & Poor's residential mortgage specialist who, like other experts,
reviewed the loan without knowing the borrower's identity. "Whoever granted this loan gave this person an incredibly good
deal. The person must have had extenuating circumstances for the lender to say, 'I want to do this loan' at that rate."
Four days after his MBNA home loan was final, Moran raised his profile in the bankruptcy debate, becoming lead Democratic
co-sponsor of an even broader bill. Weeks later, Moran and the executive in charge of MBNA's loan department testified on
the same day in favor of the bill before a House subcommittee.
Today, the legislation is positioned to pass Congress, the culmination of a years-long, multimillion-dollar lobbying effort led by
MBNA.
Moran said he was unaware that MBNA was a major backer of bankruptcy reform and does not recall speaking with MBNA
or other credit industry lobbyists about the legislation. The timing of the loan and his heightened role in pushing bankruptcy
reform were pure coincidence, Moran said, with the bill's chief Republican sponsor setting the schedule.
He said he supported the bill because it fit the pro-business agenda of a centrist Democratic group he helped found. Moreover,
he said, his interest in the issue predated the loan; in 1995 and 1996, Moran backed bills to bar people from discharging child
support and alimony through bankruptcy.
As for the loan, Moran said it was initiated by a cold call from the company, that the contact he had with MBNA was limited to
lower-level loan officers and that he was "stunned" to learn that experts considered the terms unusual.
"There was no connection with my sponsoring bankruptcy [reform] and this loan," he said. "It never occurred to me to see any
connection."
House rules state that a loan may be considered an improper gift if it is made on terms more favorable than an ordinary citizen
could obtain. A loan could fall into that category if it is "much riskier" than the lender normally allows, said Charles Tiefer, a
University of Baltimore Law School professor and former House solicitor and deputy counsel.
"The test is whether the loan is commercially reasonable, taking into account lenders' practices in general and this particular
lender's motives," he said.
MBNA said Moran received no special treatment. The congressman and his wife owed nearly $30,000 on three MBNA credit
cards and were behind on payments, credit reports show. Refinancing allowed him to pay off that unsecured credit card debt
and gave MBNA the house as collateral in return, the company said.
"No matter what a bunch of industry experts say, we thought this was a good business deal," said spokesman Brian Dalphon.
"It makes it easier for him to make his payment, which ensures that MBNA gets paid."
Bankers, industry analysts and federal regulators interviewed by The Post said that lenders often restructure delinquent loans to
avoid losses, but that this loan was nonetheless irregular.
"Deals like this make sense, but only up to a certain point. It's going to cost you way more than $30,000 if the borrower
defaults," said a stock analyst who studied MBNA for the firm A.G. Edwards. "This is not a prudent deal, and it's a highly
unusual transaction for the industry."
Questions about the circumstances of the MBNA mortgage package mirror criticism of other borrowing by Moran, whose
district includes Alexandria, Arlington and parts of Fairfax.
In 1999, Moran borrowed $25,000 at below-market interest from Terry Lierman, a longtime friend who was a lobbyist for the
pharmaceutical giant Schering-Plough Corp. Five days after the loan, Moran signed onto a bill extending the company's
lucrative patent on the allergy drug Claritin.
Moran, who repaid the loan at the market rate after it was made public, has denied wrongdoing. Lierman has said he lent
Moran the money based solely on their friendship. The U.S. Justice Department and the House ethics committee dropped
probes without comment.
Late last month, Moran reported accepting a January 2001 loan of $50,000 from James V. Kimsey, chairman emeritus of
AOL, one of Northern Virginia's major employers and a company with a range of interests before Congress. Moran used the
money to play the stock market before repaying it a few months later. When he disclosed the loan he acknowledged that "there
may be questions about my judgment," but said he paid an above-market 15 percent interest rate to avoid the appearance of
impropriety.
Both the Lierman and Kimsey loans were disclosed in financial statements required by members of Congress. The MBNA loan
might easily have escaped public notice; disclosure rules exempt information about members' primary homes. Dealings with
mortgage lenders -- even those with legislative interests before Congress -- may be excluded.
Details of the MBNA loan emerged in court documents filed as part of the Morans' December 2000 divorce. After The Post
asked him about it, Moran voluntarily provided copies of loan documents.
'He Wanted to Play'
By late 1997, years of accumulating debt had begun to catch up with Moran. His $133,600-a-year congressional salary was
the family's main income, and the Morans had run up high medical bills seeking cancer treatment for their daughter, who later
recovered.
Moran had incurred more debt with high-risk stock trading, losing $120,000 in 1995 and 1996, according to his disclosure
forms. To keep up their lifestyle, the Morans relied heavily on credit cards.
They had already refinanced their Alexandria home and their vacation house in King George County, Va. Moran had even sold
his car, turning to his campaign for a year-round auto lease. But for all the rejiggering, the Morans couldn't keep up.
Moran and his former wife, Mary, both remember their negotiations with MBNA beginning with a call from a company
representative checking their delinquent accounts. The caller recommended MBNA's home refinancing program to Mary, who
Moran said handled initial negotiations.
As those negotiations moved forward, so did legislative action on bankruptcy reform.
The MBNA loan file shows that the couple's credit report -- usually a first step in processing a loan -- was pulled on Oct. 22,
1997, one day after the credit industry held a news conference asking Congress for "sensible bankruptcy reform."
MBNA loan worksheets listed Moran's occupation as "Congressman." But, said Dalphon, "when we initiated the call, we didn't
know he was a congressman."
On Oct. 28, the New Democrat Coalition co-chaired by Moran invited GOP sponsors of the industry-backed reform bill to
solicit the support of its members. Twelve days later, Moran became one of the first Democrats to sign on to support the
legislation.
Former representative Bill McCollum (R-Fla.), the bill's sponsor, said he cannot remember how Moran became involved in the
bankruptcy fight. "He was not on any of the [key] committees," said McCollum. "But he wanted to play."
U.S. Rep. Rick Boucher (Va.), McCollum's initial Democratic ally, said James Free, an MBNA lobbyist with ties to Virginia
Democrats, solicited his support and worked with him on the bill.
Moran recalled meeting with Free but said he does not remember ever discussing the legislation. Free did not return numerous
calls requesting comment.
The bill was a top priority for MBNA. Passage could reduce MBNA losses due to consumer bankruptcy by tens of millions of
dollars per year over the long term, said Jennifer S. Scutti, a Wall Street analyst who follows the company for CIBC World
Markets.
Winning Moran's backing was a breakthrough, said lobbyists on both sides, because it gave momentum to the industry's pursuit
of bipartisan support.
"Jim Moran was an early and harmful presence," said bill opponent Travis Plunkett of the Consumer Federation of America.
'Faulty Logic'
On Nov. 24, 1997, 15 days after Moran signed on to McCollum's bill, MBNA sent an appraiser to the congressman's home.
The value for the house and an adjoining land parcel was set at $460,000 -- "considerably too high" based on values at the
time, according to Jan Symons, a Virginia appraiser at Renner, Hansborough & Reese, and one of three who reviewed the
appraisal for The Post. All agreed it was overly generous.
Moran provided an earlier appraisal done on behalf of another bank that had rejected the Morans as borrowers. That appraisal
put the house's value at $491,000.
Both appraisers used what Symons called "faulty logic": They assigned the same value to an adjacent empty lot owned by the
Morans as they did to the lot underneath Moran's house. In fact, the empty lot was classified as "substandard" -- too small for a
home to be built on it, said Cindy Page-Smith, Alexandria's director of real estate assessments.
Ultimately, neither appraisal was backed up by the market: When the Morans sold their house in March 2001, it netted
$451,000 after givebacks to the buyer -- $9,000 less than MBNA's 1997 appraisal in a Zip code where the average sales
price of homes had jumped 32 percent in the interim.
The appraiser hired by MBNA referred all questions to the company, which said only that she was independent and
state-certified.
The appraisal was onlyone of several favorable turns for Moran.
The lending experts who reviewed Moran's MBNA loan for The Post without knowing the borrower's identity all agreed it was
unusual. As Doug Duncan, chief economist for the Mortgage Bankers Association of America, put it: "It's unique; it's obviously
not a mainstream loan."
Lenders rely on some basic standards to ensure that borrowers can make their payments. Generally, they will lend only a set
percentage of a home's appraised value. They also generally decline to make loans that exceed a certain percentage of a
borrower's monthly income.
MBNA spokesman Dalphon said the company's policy was to lend no more than 80 percent of a home's appraised value.
Loan documents show that MBNA allowed Moran to borrow 97.2 percent, a ratio that would not have met the standards of
one of MBNA's principal competitors: "We would not make that loan," said a Citigroup spokesman.
But Dalphon said MBNA decided to exceed its guidelines because Moran was an established customer and MBNA was
vulnerable to a loss on the couple's credit card debt.
The MBNA loan package meant that Moran's monthly debt totaled 61 percent of his income, according to a Post analysis that
used a standard formula employed by lenders. Other lenders said they would avoid such a loan.
"Our system is hard-wired so you can't go over 40 percent," said Household International Inc. spokesman Craig Streem,
whose credit card company purchased Moran's mortgages along with MBNA's mortgage portfolio in 1999 and also has a
stake in the bankruptcy debate. "It can only be overridden by a very senior member of the underwriting team, and even then it
cannot go above 51 to 52 percent, max."
Another issue was Moran's impaired credit. MBNA gave Moran a credit score that today would place him in the bottom 14
percent of U.S. consumers. People in that category have a 40 percent chance of default, bankruptcy or 90-day delinquency
within two years, according to Fair Isaac & Co., a firm that rates credit risk.
The loan's size and Moran's poor credit meant that he could not qualify for the lower-interest "prime" loans that were available
at the time for about 7.5 percent. Instead, high-risk borrowers fall into the "subprime" market and pay much higher rates.
Little data are collected on subprime interest rates. But Standard & Poor's sees interest rates and other proprietary information
because it rates loan portfolios sold on Wall Street. At The Post's request, S&P's Raiter reviewed Moran's loan, using the
credit score on MBNA's worksheets and other financial information from Moran.
Raiter graded the loan package in the worst of seven risk categories, then compared it to a database of 1,106 similarly risky
loans made in January and February 1998. The average rate was 12.84 percent, he said.
MBNA gave the Morans a 10.5 percent interest rate on both the first and second mortgages, documents show. Had Moran
paid 12.84 percent, it would have cost him an additional $800 a month, or about $288,000 over 30 years.
Dalphon said Moran's rate fell within the range of loans the company offered at the time for between 9.5 percent and 11
percent. Moran said that MBNA first offered nearly 12 percent, but that he was able to negotiate the 10.5 percent.
"I think your experts are wrong," Dalphon said. "We'd had a previous loan experience with the customer, and I don't think that
the Standard & Poor's model takes that into account -- any model is the average."
Doug Johnson of the American Bankers Association reviewed the loan for Moran and concluded that the interest rate fell at the
low end of a reasonable range: "I'd make the loan," he said.
On Jan. 30, 1998, MBNA did. The company gave the Morans the largest home purchase or refinance deal the company
reported making that year, according to an analysis of detailed neighborhood records compiled by the Federal Reserve.
Dalphon dismissed the loan's size as irrelevant. "There's some loan out there that's going to be the biggest for any mortgage
holder," he said. "The key is how the whole picture fits together."
An MBNA employee who worked on the loan and spoke on condition of anonymity said it was so big that it required a senior
manager's approval, possibly that of Bruce Hammonds, the vice president then in charge of MBNA's home loan subsidiary and
an MBNA lobbyist through 1997.
Dalphon declined to identify the officers whose initials appear on loan worksheets detailing the first mortgage, except to say that
Hammonds wasn't one of them. No approval documents were available for the second mortgage, and Dalphon wouldn't say
who ultimately approved the two-loan package.
He said that Hammonds "does not remember approving James Moran's loan. In fact, he didn't even know who James Moran
was until I asked him about it." Moran said he did not recognize Hammonds' name and did not recall ever speaking with him.
'A Source of Great Anxiety'
On Feb. 3, 1998, four days after he received the loan, Moran became the lead Democratic sponsor of an even broader
bankruptcy bill sponsored by U.S. Rep. George W. Gekas (R-Pa.).
On March 10, 1998, with his own finances in better order thanks to MBNA, Moran offered impassioned support for the bill
before a House subcommittee.
"The time-honored principle of moral responsibility and personal obligation to pay one's debts has been eroded by the
convenience and ease with which one can discharge his or her obligations," he said.
MBNA's Hammonds, by then promoted to chief operating officer, testified after Moran and mentioned Moran and the three
other lead backers in his written remarks.
Moran's financial stability was short-lived, however. Mary Moran filed for divorce in June 1999. By April 2000, Moran was
four months behind on his mortgage and barely "staving off foreclosure," divorce records show.
Moran said he certainly never felt like he got a good deal from MBNA. "I spent the last several years putting virtually all of my
money into paying off this mortgage every month, and it became a source of great anxiety," Moran said in an interview.
The loan wasn't a good deal for Household International, the company that took over Moran's mortgages when it purchased
MBNA's loan portfolio.
The Morans said that when they sold their house last year, Household agreed in a fairly standard transaction called a "short
sale" to accept less than it was owed. It forgave about $40,000 in principal, penalties and fees to avoid the costs and hassle of
foreclosing on the house, according to the Morans and their real estate agent.
Household wasn't the only company that forgave Moran's debts: In 2000, GM Card and First USA Bank wrote off Moran's
credit card balances totaling between $2,700 and $6,000, according to his financial disclosure reports.
Meanwhile, Moran's support for bankruptcy reform was unabated. In March 2001, he railed on the House floor against
credit-dependent consumers.
"Some people are taking these credit cards in, they sign up, they max it out, whatever they can charge," he said. "They pile debt
up, and then they get themselves relieved from paying off their debt, and oftentimes they can go right back to doing it all over
again. It needs to be fixed."
Database editor Sarah Cohen contributed to this report.
© 2002 The Washington Post Company |
