KEY POINTS:
When homeowner Christopher Aultman, a mechanic for Union Pacific Railroad, called Quick Loan Funding in July 2005, a man identifying himself as Tim answered.
"He was friendly and he sounded like he knew what he was talking about," Aultman says.
Aultman wanted to refinance the 30-year fixed-rate mortgage on his four-bedroom home in Victorville, California, 129km northeast of Los Angeles. He needed to tap US$20,000 ($25,883) in equity to pay off mounting debts, and he wanted to build a backyard play area for his three children.
His average credit score was 465 out of a possible 850, according to Aultman's loan documents. That is well below the United States median of 720, according to Fair Isaac, whose software measures consumer credit-worthiness.
Daniel Sadek's sub-prime mortgage company, Quick Loan Funding, was the only lender that would talk to him, Aultman says.
"We'd been struggling and running away from bills, and I was tired of living that way," says Aultman, now 35.
"I wanted to be responsible and take care of my debts and wipe the slate clean."
A year earlier, Aultman had paid US$204,000 for the house.
Quick Loan Funding's appraiser said it was worth US$360,000. When Aultman called back later with questions, he says he was told Tim no longer worked there.
"I was passed from loan officer to loan officer," Aultman says.
"It just didn't feel right. But I was praying it was going to come through. I was desperate."
Loan officers were hired and fired all the time at Quick Loan Funding's 2415sq m call centre in Irvine, says Bryan Buksoontorn, who joined the company in 2004. By then, Irvine had become a hotbed of sub-prime lending companies.
"We were motivated by fear," says Buksoontorn, 28, who is now an independent mortgage broker. "It was a boiler room. You had to make your numbers."
Buksoontorn's job: get the caller's credit card and charge US$475 for an appraisal, he says.
"You told the callers what they wanted to hear and you got the credit card," says Steven Espinoza, 39, an employee from 2003 to 2005.
Sadek and his managers would berate the sales staff, many of whom had no experience or training, Buksoontorn says.
"They would get in your face," he says. "'Why aren't you ordering appraisals? Why aren't you selling?"'
Sadek brought a car salesman's mentality to mortgages, Espinoza says.
"It's the same type of hard sell," Espinoza says. "Close 'em, close 'em, close 'em."
Former employee Lisa Iannini, who was vice-president for compliance and risk management, says she tried to make sure the hard sell didn't result in bad loans.
"I went to work every day as an uninvited hall monitor at a fraternity party," Iannini says.
Sadek says 95 per cent of Quick Loan Funding's mortgages were made to sub-prime borrowers.
"If we had a prime borrower on the line, we hung up on them," Buksoontorn says.
"We were geared toward sub-prime because they were easier to close. We were giving them money no other bank would dare to give them."
Sadek says that with the support of Citigroup, which funded the loans, he pioneered lending to homebuyers with credit scores of less than 450.
Citigroup spokesman Stephen Cohen said the bank would not comment on its relationships with clients.
"We made most of our money from selling loans to banks," Sadek says.
Quick Loan Funding, like many sub-prime companies, specialised in 2/28 loans - 30-year mortgages that start with lower "teaser" interest rates and ratchet higher after two years.
A key selling point was the 50 per cent rise in home prices nationally from 2001 to 2006, according to the National Association of Realtors.
Mortgage salespeople told homeowners that as long as values continued to increase, they could refinance or sell before their interest rates jumped.
It wasn't a lie. Year after year, prices had not fallen since the 1930s, according to the Realtors group.
The belief that values would form a stairway even seduced Quick Loan Funding employees who took out 2/28 loans themselves, says Marcus Bednar, 32, a former sales manager.
"They believed everything the borrowers believed, that the market was going to go up," Bednar says. "It wasn't just something we were pushing because we tried to rip people off."
Bednar adds, "We were never encouraged to do anything shady."
Borrowers with sub-prime adjustable-rate mortgages are seven times more likely to default than those with prime fixed-rate mortgages, according to the Mortgage Bankers Association.
Quick Loan Funding, like most sub-prime lenders, wrote so-called stated-income or "no doc" loans that don't require the borrower to document income with pay stubs or tax forms. They are also known as "liar loans".
In 2004, Bohan Group, a due diligence underwriting company, was hired by a bank to double-check the suitability of mortgages written by Quick Loan Funding that the bank was looking at buying and turning into securities. Bohan sent Nicole Singleton, 39, to the Irvine office. She reviewed 40 loans and rejected every one, she says.
Sadek says he fostered a competitive selling atmosphere, and underperforming workers "either quit because they're not making money or they're fired because they don't work."
He says Quick Loan Funding "thrived on customer service, so the idea of hanging up on callers is not right".
"If the loans were so bad, why did Wall St keep buying them?"
In July 2005, Espinoza, Buksoontorn, Bednar and other employees sued Quick Loan Funding in federal court alleging various workplace abuses, including failing to pay overtime and not providing adequate lunch breaks. Sadek later settled with the employees, agreeing to pay them more than US$3 million, says Jon Mower, an Irvine attorney who represented the loan officers.
"I don't think Quick Loan Funding was much different than many of the other sub-prime companies."
Sadek denies the charges, adding that it's the type of lawsuit a jury would never decide in the employer's favour. "They see me as a rich guy and who do you think they are going to believe?" he says.
To get US$20,000 in cash from the Quick Loan Funding refinance, Aultman was told, his monthly payments would rocket to US$2264 from US$1464.
"I said I can't do this," Aultman says. "They said take the mortgage, make the payments and once everything is paid off, within 30 days your credit will shoot up 150 points and we'll get you a better rate and everybody wins."
They convinced him, he says. The company sent a notary to his house with the documents to sign.
It was 9.30pm. Aultman was worn out from work and the rest of the family was in bed.
Aultman says he didn't see the pre-payment penalty in his contract. If he refinanced within two years, he'd have to pay six months' interest.
He also says he didn't notice his income on the contract: US$5950 a month. At the time Aultman says he made US$3420.
Sadek says he watched employees closely and anyone caught falsifying information would be "fired on the spot".
For a US$247,500 mortgage, Aultman paid Quick Loan Funding US$10,813, including origination fee, application fee, processing fee, underwriting fee and quality control fee, according to his loan documents.
The average closing costs for a mortgage of that amount in California is about US$5000, according to Pete Ogilvie, president of the California Association of Mortgage Brokers.
Sadek defends charging those fees by saying he took more of a risk by lending to people with such lousy credit. If legislators want to limit fees, they ought to pass laws against them, he says.
Aultman received US$21,674.70 in cash, according to the documents.
The monthly payments proved too steep and he fell behind.
"I feel burned," Aultman says. "There's a lot of nights I've gone into my son's room and watched him sleep and I've cried."
Quick Loan Funding's survival, like that of other non-bank mortgage lenders, depended on a stream of new borrowers like Aultman. To fund the mortgages, the company had US$400 million in short-term credit from Citigroup. To pay that off, Quick Loan Funding sold the mortgages to securitisers as soon as it could.
Sadek collected a fleet of cars that included a Lamborghini, a McLaren, a Ferrari Enzo, a Saleen S7 and a Porsche, frequented casinos and was engaged to soap opera actress Nadia Bjorlin.
"Daniel was charismatic, crazy, unconventional and passionate about his company and his borrowers," says Iannini.
Sadek would try to help Bjorlin break out of TV's Days Of Our Lives, co-writing and spending US$35 million to produce Redline, a feature film about illicit car racing, starring Bjorlin as a daring leadfoot.
By August 2005, Sadek was spending most of his time working on his movie. He hired Iannini to upgrade the company's risk management.
"My biggest problem day to day was reining in uneducated loan officers," Iannini says.
"You have to almost use police force tactics and threaten brutality on a sales floor of a lending institution and have that whip ready to crack, because you never know what employee will be pressured by what influences on any given day."
Iannini had worked at two other mortgage lenders before joining Quick Loan Funding. She says Sadek's firm was the most committed of the three to maintaining lending standards.
Asked about borrowers who have trouble making their payments, Sadek quickly leafs through a loan application. He stops, folds over the pages and points to the line that says, "Cash to borrower".
"Who's getting ripped off?" he says.
Sadek was featured on TV newscasts in March. During a publicity event for Redline at an Irwindale racetrack, comedian Eddie Griffin, a star of the movie, drove Sadek's US$1.2 million Ferrari Enzo into a concrete barrier, wrecking it.
Sadek, who appears in Redline as a poker player, also intentionally trashed two of his own Porsches in the making of the movie. In one scene, a Carrera is catapulted high in the air before it crashes.
Sadek may be in trouble, too. The California Department of Corporations wants to revoke his lending licence. The state says he tried to use the bank account of his escrow company, Platinum Coast, to apply for markers, or gambling loans, at three Las Vegas casinos in April and May.
"It was a bank error," Sadek says. "No money ever left the account."
He holds up a copy of the marker application. It has his name at the top and his signature at the bottom. In the middle of the page is a bank-account number. He says he thought it was his personal account, but it turned out to be Platinum Coast's. He says he didn't know what he was signing.
- BLOOMBERG
