CAPE CORAL, Fla. — Like the three parts of a magic trick, an investment land scam in Florida described in a raft of lawsuits involving Norlarco CU, Huron River Area CU and New Horizons CU had its own twist on the three-step stage trick.

First, the Pledge, where a promise is made (you show the audience something), then the Turn, where a switch is made (you take it away) and finally, the Prestige, or payoff, (you bring it miraculously back). In magic though, people are entertained; in real estate, they are swindled.

How all three credit unions became involved in granting construction loans to residents from as far away as California, Florida, Massachusetts, Illinois, Indiana, Maryland, New Jersey and several other states was as simple as paying a $5 fee as a pro-forma means of becoming a “member.”

How these “members” then were defrauded, as alleged (in one among several) lawsuits into buying investment properties masquerading as primary residences is now a matter of investigation for Florida Attorney General Bill McCollum.

All three credit unions were placed into conservatorship and subsequently run by NCUA: Norlarco, Fort Collins, Colo., in July; Huron River Area, Ann Arbor, Mich., in February; and New Horizons, Denver, last year (it has since been merged into Security Services CU of San Antonio). The making of loans through third parties and the purchase of participations in subdivisions in Cape Coral and Lehigh Acres on the West Coast of Florida through several entities helped to tank the CUs in mounting delinquencies as buyers defaulted. Now, the CUs, the state regulators and NCUA are being pressed to explain how the potential losses and risky investments escaped notice until they collapsed of their own weight, and how three hometown credit unions got so deep into out-of-state real estate speculation in the first place.

“These deals were put together by Russ Whitney, who had relationships with other named defendants and lots of other co-owners,” said G. Donovan Conwell Jr., a Tampa attorney representing more than 50 clients in a 17-count suit against Whitney and associates who ran the Millionaire University. The lawsuit alleges that the MU used TV infomercials and other advertising to entice investors by claiming they could make large profits in buying lots for single home sites on what Conwell called “mostly scrub brush land. In many cases, it was just a vacant piece of property or a single home on one lot amid empty blocks.”

Norlarco and Port Huron gave the loans through The Construction Loan Company, (CLC) of Howell, Mich. (www.loantobuild.com) or through United Mortgage, a Florida corporation that “acted as an agent to obtain mortgages and loans for the lenders,” as specified in the suit.

The way the scheme worked, he said, was that the property was included at an inflated appraisal, which “got their assets up to where they could qualify for the loan,” said Conwell. The Florida rules on treatment of second or vacation property were also part of the scheme, as the property was presented as the borrower's primary residence.

“United Mortgage placed the financings with other loan documents that appears to be irregular,” said Conwell. While most of his clients got financing through Huron River, six got loans from Norlarco. “The credit union was extending loans to people who didn't have the assets to pay the loan,” he said. Kevin Caraotta, president of United Mortgage, completed and supervised preparation of the loan documentation containing the false appraisals, says the suit.

The charges in just this one lawsuit include fraud, abuse of fiduciary duty, violation of Florida land sales practices, unfair and deceptive sales practices, fraud and inducement, civil conspiracy and violation of the Florida RICO conspiracy statute among others. The lawsuit seeks rescission of the promissory notes (loans) and treble damages along with attorney costs and fees.

A “you can get rich in real estate” pledge was part of the alleged scam, according to this and several other lawsuits. The sale of real estate courses called Millionaire University tout how Russell Whitney made millions and others can learn easily as well. A one-day seminar in the local TV area provides basic instruction in RE investing and trust is gained by manipulating the student/teacher relationship. But that information only scratches the surface, as instructors advise increasing credit card limits and enroll in other courses, including one in the potential buyers home state (costing as much as $1,500). The advanced courses can cost over $10,000 for a three-day period.

They are told they must have a “Power Team;” a group consisting of a lender, broker, contractor, title company, property manager and others. They are introduced to the other named entities as such.

Near the end of the three-day course, MU students are taken on a bus tour and shown potential RE investments; first seeing distressed properties in low-income areas as potential “fixer-uppers.” Then going from poor neighborhoods to middle income areas, they see newly constructed model homes. They are advised of a “turnkey” investment operation just for MU students “which is so lucrative that it will pay back every dollar” spent on the course and start their RE careers. Other models will be built on “prime” lots in comparable neighborhoods. The offer is only open for a short time and they have to buy quickly. They are promised that the “best and most appropriate financing will be obtained.” The cost of the lot and the construction is financed through a one-year construction loan, and then refinanced when construction is completed. There is little money down required. Blank documents must be signed and returned, later to be filled out by the MU team.

The suit goes on to say that the financing is fit for buyers (like MU students) with credit ratings in the 700's. The appraisal would set the property value high enough so that the construction loan amount would be 80% of the appraised value. That facilitated the payment for the overpriced lot, the excessive price for the construction of the home and the excessive fees and charges paid at closing.

The “instructors” involved in the various entities named each have a financial interest or ownership in the companies. But students are required to attend the Intensified Real Estate Training Course offered in Cape Coral, at Whitney's headquarters.

The lots weren't “prime”, the terms of the financing weren't the best, and the residences weren't “primary” at all. When United Mortgage and CLC were asked by buyers about residency requirements they were told it had been taken care of. The documentation said the properties were second homes, yet they were understood to be investment properties. This was done, the suit says, to get a better interest rate, as investments are deemed riskier.

Part of the Prestige is obtaining trust and believability, as students of the MU were convinced the people they dealt with were genuine RE experts. The payoff proved to be lots in undeveloped areas (remote locations, poor roads, no curbs, sidewalks or street lighting, some in high crime areas). The homes were also overbuilt, many using the same floor plans as well, says the lawsuit.

The financing from the CUs was based on inflated, fraudulent appraisals and the rate of interest charged was excessive in light of the plaintiffs high credit scores and the closing points paid.

“A number of our clients were told by CLC to pay a $5 fee at closing to become members of the credit union,” said Conwell. “The credit union folks went hand-in-hand with CLC and United Mortgage on this.”

Norlarco's current manager Robert Hamer had nothing to do with the Residential Construction Program, he said, arriving in August after the retirement of the former CEO Mabry. But he did say, “They are actually very nice houses.” NCUA has brought in someone to manage the portfolio, Ken Chapman, he said.

“I'm a different kind of manager,” Hamer said. “In my 34-years of experience, I can say that this is very unfortunate. Nothing that happened here, to my mind, is the credit union way of doing business.”

State regulator Chris Myklebust, who has been quoted in several stories in the Fort Collins based newspaper, The Coloradoan, claiming that the conservatorship was kept hush-hush to protect deposits from a run, has since told Credit Union Times that that is not the case. “I don't believe the law specifically prevents me from doing that (issuing a press release). But I wanted to deal with the situation without making a lot of waves. Consumer protection is my first interest. This wasn't like New Horizons, where we removed the management team. Also, this is now a federal conservatorship. I thought it was prudent not to raise the concerns of the members. Norlarco has the same management team in place.” (The board has been dismissed, he confirmed.)

Myklebust would not elaborate on how a CU got involved in out of state RE investment construction loans. “The point now is to be useful to the members while we work through this,” he said.

Michigan CU regulator Roger Little offered that owing to the conservatorship, there was little he could say.

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