Firm must be pointed in an honest direction

4 June 2004

The feds and the state are all coming down on East-West Mortgage, accusing it of all sorts of improprieties: unrefunded application fees, interest rates higher than promised and onerous prepayment penalties.

How can this be? The "We're there when you need us" guys? The same friendly folks who banter on the radio about how even those of us with, ahem, credit issues (all a mistake, really) are welcome to the fold? The company whose ubiquitous jingle ("Call 1-800 East- West, oh yeah!") is so driven into our brains that we find ourselves humming it at work and in the car?

One and the same. Jerome Olin, president of Commerce Bank and Trust, which owns East-West, blames the mess on "miscommunication and misunderstandings," and promises improvements. Indeed, he says, much of the problem was in the past; complaints this year are way down.

Perhaps, but I'm not buying it. What East-West engaged in seems like classic bait-and-switch: Lure a customer in with glittery promises, but deliver something far inferior. And it's still happening.

Why do I say so? Because it happened to me.

Two months ago, I decided to refinance my home. Rates were down, and the prospect of them going up in the near future seemed likely. I searched around, looking to see what was available. One of those I called was East-West, and I called for the same reason most everyone calls - its music was stuck in my head. The deal the mortgage rep offered sounded reasonable, and so I bit.

A few weeks later, the paperwork done and the appraisal finished, we talked again to schedule closing. Just to be sure, I confirmed my rate.

Sorry, came the response, but it's gone up. Instead of the promised 4.375 percent, my rate would be 4.625 percent.

I objected, saying I wouldn't have gone forward at the higher rate. The loan rep tried to mollify me, explaining it was no big deal. From one perspective, she was right: On a $300,000 loan, for example, the difference in rates would work out to a relatively small $44 a month.

Divide enough, however, and anything can be made to seem small. Over the life of the loan, that same difference amounts to over $16,000 - clearly not a trivial amount.

When I wouldn't shut up, the loan rep - sounding just like a car dealer haggling over the price of a new automobile - asked if she should check "upstairs."

"You do that," I answered.

A few moments later, she was back with the good news. Her bosses had agreed to drop the rate to 4.5 percent. Not the rate I was originally promised, but still, wasn't I pleased?

I wasn't.

A few hours later, though, I got another call: The loan was back to its original rate.

Early the following week, as my wife and I settled down to sign documents, there was a new surprise. If we prepaid the loan (or even part of it), there would be large prepayment penalties.

A prepayment clause had never been part of the deal, and I balked, threatening to walk out. The lawyer was quickly on the phone, passing on my objection. A few minutes of discussion, and East-West Mortgage again capitulated.

We closed. I was annoyed but thought my experience unique.

Not so.

Exactly two weeks later, East-West signed a consent agreement with the state's Division of Banks and the Federal Deposit Insurance Corp. It marked the conclusion of a major case prompted by more than 100 consumer complaints. And while the company isn't admitting guilt, the terms of the agreement are tough. They hold East-West and Commerce Bank to strict new standards of behavior, review and training. Moreover, East-West has to make restitution to its customers (including refunding fees and rolling back interest rates) and rewrite any unfair prepayment penalty clauses. In the future, the company will be on a very tight leash.

There are three points to this tale.

First, be cautious. Snappy music and a folksy image don't mean a firm isn't trying to cheat its customers. The Romans had a term for it: CAVEAT EMPTOR - buyer beware.

Second, push back and complain if you think something is wrong. A deal is a deal, and if new terms come up or things change, don't be afraid to walk away. Oftentimes, you'll end up getting what you originally bargained for.

Third, a tip of the hat to the state. It's easy to rant about lazy state employees, lumbering bureaucracies and over-regulation. The truth is, though, a vast number in government are doing the right thing and making a positive difference in people's lives. Indeed, I suspect one of the reasons East-West yielded so quickly when I resisted was that it was already under the gun from the authorities.

And as for East-West? It's got problems. Olin seems sincere in what he says is his desire to change the "culture" of the company.

Nevertheless - and you know the tune - "You got just what you deserved, oh yeah!"

Talk back to Tom Keane at tomkeane@tomkeane.com.