LOS ANGELES (CN) — A California man claims in a class action that the state's environmentally friendly HERO program inflates interest on home-improvement loans made to low and middle-income families.
Michael Richardson claims in the 33-page class-action complaint that defendant Renovate America "overcharges virtually every cost, fee and amount due from borrowers in the HERO Loan program to maximize its own profits at the expense of HERO loan borrowers."
HERO is an acronym for home energy renovation opportunity. The program is designed to give low and middle-income homeowners the ability to borrow money they otherwise would not have to make energy-efficient improvements.
The program's website says it partners with local governments to make "energy and water efficiency upgrades more affordable for homeowners like you," with up to 25-year terms with "low, fixed rates" on loans equal to up to 15 percent of a home's value.
Richardson says he and other class members signed up for HERO loans through lead defendant Los Angeles County.
The homeowner alleges San Diego-based Renovate America offers HERO loans in at least 48 California counties and could not do so without the help of Los Angeles County, which promotes the program.
The HERO program is "comprised of an extremely complex series of transactions" among Renovate America, Los Angeles County and its tax collector, investors, and borrowers, according to Richardson's complaint, which was filed Tuesday in Los Angeles County Superior Court.
Instead of helping homeowners, though, Richardson says Renovate America "carries out the HERO loan program by materially false and deceptive means," including imposing "excessive and unlawful" closing costs, double-counting fees, imposing unlawful compound interest and pre-payment penalties, and not crediting installment payments until well after they are paid.
Richardson claims Renovate America has originated more than 100,000 HERO loans valued at more than $2 billion, and the loans have "first-lien status over each borrower's pre-existing mortgage(s)."
Renovate America charges an administrative fee of between 5 percent and more than 7 percent of the loan, which Richardson says is shared with Los Angeles County.
He says the county and Renovate America engage in a "pervasive pattern of false, deceptive and otherwise unlawful practices regarding their origination and administration of purportedly 'energy efficient' home-improvement loans."
Compounding the problem, Richardson says, Renovate America does not provide the state-required disclosures that warn program participants they could lose their homes.
He says one required disclosure that is not provided reads: "You are not required to complete this agreement merely because you received these disclosures or have signed a loan application."
Another omitted disclosure allegedly states: "If you obtain this loan, the lender will have a mortgage on your home. You could lose your home and any money you have put into it, if you do not meet your obligations under the loan."
Renovate America also did not disclose the final annual percentage rate after determining the final principal amount of their HERO loans, and its salespeople inflate potential costs to come as close as possible to the maximum amount homeowners can borrow, according to the lawsuit.
One such salesperson visited Richardson at his home and told him he could obtain a HERO loan to cover the estimated $43,159 cost to replace the roof, windows and stucco on his home, he says.
Richardson alleges he obtained the loan on Sept. 9, 2015, but Renovate America recorded a note of assessment saying the loan's principal amount was $48,777.71, not the $43,159 he agreed to borrow.
In August, Richardson says he asked for a payoff statement, and the amount indicated is $49,456.53, including the $2,434.01 for administrative cost, $130 in county fees, and $3,733.52 in interest.
To pay off the loan, Richardson claims Renovate America and Los Angeles County demanded he pay interest through Nov. 2, despite the payoff being valid only through Sept. 26.
"In other words, defendants demanded that plaintiff pay interest even after his HERO loan was paid off," the complaint states.
Richardson says Renovate America and Los Angeles County "secretly charge interest twice on the amount of accrued interest added to the state amount of all the HERO loans from whenever the accrued interest is calculated until the date of the borrower's first loan payment."
"Defendants simply inflate the stated amount of each HERO loan by the amount of accrued interest, and then re-compute interest on that inflated amount," according to the class action.
Richardson says the "double-counted interest" is not disclosed to HERO program borrowers or agreed to by them, and is amortized over the life of the loans and included in pay-off amounts.
He also says the administrative fee, likewise, is inflated by a "complicated formula" that is differs from what borrowers are told, rather than simply on the principal amount.
Instead of paying the stated 4.99 percent administrative fee, Richardson says he was charged a 5.25 percent fee.
According to the lawsuit, Renovate America and Los Angeles County credit payments only on July 1 of each year, instead of when actual payments are made, and understate the estimated annual percentage rate by not subtracting administrative, recording and annual assessment fees from the annual percentage rate calculation.
Richardson says the stated interest on his contract is 8.35 percent, and the estimated annual rate is 9.38 percent, but the actual rate charged exceeds 10 percent.
He estimates more than 5,000 HERO loans were made to potential class members.
Richardson seeks actual, statutory and additional damages, disgorgement of wrongfully obtained profits, and injunctive relief for a conspiracy claim and alleged violations of the Truth in Lending Act, Home Ownership Equity Protection Act and the California Business and Professions Code.
Renovate America was not immediately available by phone Thursday morning. A contact number listed for the Los Angeles County HERO loan program rerouted the call to Renovate America.
Richardson and the proposed class are represented by San Diego attorneys Betsy Manifold and Rachele Rickert of Wolf Haldenstein Adler Freeman & Herz. They were also not immediately available by phone Thursday morning.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.