Lenders Agree to Force Slumlords to Fix Buildings

A group of Inglewood loan companies signed an unprecedented agreement with Los Angeles on Wednesday in which they promised to change their lending policies and force borrowers to repair slum buildings--or face losing them.

The agreement marks a partial settlement of a landmark civil lawsuit filed by the city in March that accused 146 defendants of fraud and racketeering in connection with their investments in 11 of the city’s worst slum properties. The lawsuit charges that some lenders have secretly controlled slum buildings from behind the scenes by piling enormous debts onto old buildings.

Under terms of the 22-page agreement, Alexander Spitzer, his A & B Loan Co. and nine related defendants will insert a slum clause into their loan contracts that will force borrowers to begin repairs on any substandard buildings within 30 days of getting loans. It also limits the size of loans that can be issued on a single property.

“This agreement could break the cycle of slum transfers,” said Stephanie Sautner, deputy city attorney in charge of the city’s Housing Enforcement Unit, which brought the suit. “It says that if your building is a slum, you had better repair it or you’re going to lose it. And it makes the lender the enforcer.”

In essence, the agreement forces the little-regulated industrial loan companies--commonly known as “hard money lenders”--to follow lending guidelines similar to those now required of the more regulated savings and loan associations, as well as monitoring the buildings’ maintenance.

If a borrower fails to bring his building up to code, according to the agreement, he will be considered in default and the loan company must foreclose. If a lender breaches the agreement, he is subject to being taken back to court by the city. The settlement also contains a provision for a retired judge to resolve any disputes that may arise between the city and the lenders.

Spitzer declined comment. In a brief statement, Marc Marmaro, one of his attorneys, said his client was “pleased to enter into the agreement.”

“There is no admission of wrongdoing,” Marmaro said. “And we will vigorously defend the remaining sections of the lawsuit.”

Still unsettled are claims by the Legal Aid Foundation of Los Angeles and Litt & Stormer, a private law firm, which filed the lawsuit jointly with the city. At stake in the class-action suit are damages sought by hundreds of tenant families that claim they have been victimized by fraudulent lending practices carried out by Spitzer and several of his Inglewood companies.

“This is undoubtedly the largest slum tenant lawsuit in the country . . . and it involves potentially a lot of money,” attorney Barry Litt said. “We think this settlement is in the best interests of the lenders as well because it holds them to higher lending standards. But as far as the tenants are concerned, we will proceed.”

However, he said, it will take months before he will even be able to learn the names of all of the tenants who have lived in the building, let alone contact them and determine the details of their situations.

Legal Aid attorney Kim Savage said tenants have lived for years at a time with rats, mice and roach infestations while owners who are not credit-worthy pass buildings to each other. Tenants have lived for nearly three years in the Cameo Hotel at 520 S. Bonnie Brae, she said, with broken windows, no fire safety equipment, broken plumbing and pest infestations while the building was passed from one “uncredit-worthy owner” to the next.

That building and several other of the 11 buildings on which Spitzer’s loan companies have held mortgages are now being fixed up, Sautner said.

City Atty. James K. H a hn issued a statement calling the settlement a “major breakthrough” that has achieved, after 13 weeks, a settlement that is similar to the request for injunctions the city had sought in its suit.

“We have a unique settlement in a unique lawsuit,” he said. “This is what we sought from this litigation and it is what we will be continuing to demand of the remaining lending defendants. This settlement agreement is a blueprint for the type of lending practices that we consider responsible in the Los Angles rental housing market.”

Other Lending Firms

It is unclear just how many buildings will be affected by Wednesday’s agreement. According to the 22-page document, signed Wednesday, all new loans and refinancings issued by A & B Loan Co., Golden West Loan Co., California Pacific Funding Inc., World Finance of Orange County, West Coast Loan Co., Manchester Associates and Bengal Discount Corp. will have to insert slum clauses into their mortgages. All of those companies have either current or past ties to Spitzer.

Also signatory to the agreement are Spitzer associates Larry Blumenstein, Peter Gluck, Eugene Ephrat and Howard Bardach. Bardach, who signed for World Finance Co. of Orange County, is not a defendant in the suit.

Specifically, the agreement prohibits the signatory companies from giving any loan that would bring the total of all mortgages against slum buildings to more 80% of their value. That value must be determined by an independent appraiser, and credit reviews must be done to determine whether the potential borrower is credit-worthy.

It also goes beyond the requirements of such traditional lenders by forcing borrowers to make repairs needed to bring substandard buildings up to code. Any time a borrower transfers his slum property, the lenders are required to foreclose and take the property back unless the new borrower agrees to the terms of the city’s settlement.

Special exceptions to the 80% limit are made for loans to borrowers who ask for additional money to make the repairs. In those cases, the agreement calls for the lenders to retain separate accounts to pay licensed contractors directly for repairs.

One prominent lender, Highland Federal Savings & Loan Assn., remains a defendant in the suit. Highland’s attorney, Michael Berk, issued a brief statement saying it is not in settlement negotiations with the city and will continue to “vigorously defend” itself in the suit.

“A & B is a different type of lender than Highland Federal,” Berk said. “Highland Federal Savings will continue to make loans in the central city in compliance with the rules and regulations of the Federal Home Loan Bank Board governing its lending practices.”