The year was 1956. Standing in the kitchen, a five-year-old Clark announced his wish to fly airplanes when he grew up. "I remember my mom saying that you had to be good at math," he says. "I'll never forget her telling me that."
Equations would define Clark's life. After graduating from St. Joseph High School, he studied math at Saint Louis University, but he never realized his dream of becoming a commercial airline pilot. Instead, in 1973, he went to work for his father, selling insurance. The salesman's life disagreed with him, though he did enjoy crunching actuarial numbers, and in his spare time he read finance books.
Clark and his wife bought a home in 1976. Parents of two small children, they found a place on Montford Road in Cleveland Heights. Ohio Savings provided the mortgage: $28,800 at 9 percent over 29 years. The day Clark signed the note, he noticed something strange about the terms. Ohio Savings was computing the interest in such a way, he suspected, that he'd be stuck with a balloon payment at the end of his mortgage. He said nothing. He wasn't sure, and after years of rental living, he was anxious to call a house a home.
But that hunch, and Clark's increasing curiosity, would lead to a class-action suit, charging Ohio Savings with fraud, breach of contract, unjust enrichment, and violating the Truth in Lending Act. According to the suit, the bank cooked mortgages in such a way that borrowers were obliged to pay a higher interest rate than the one they had agreed to. The manipulation was subtle, a whisper of algebra, but unsuspecting homeowners might have lost thousands of dollars.
The lawsuit was filed in 1985. Seventeen years later, it has yet to be resolved.
"I'm just amazed that something like this could drag on," says mortgage holder George Seidel, who stands to lose nearly $5,000 to Ohio Savings if the courts rule for the bank.
Whenever that might be.
The calendar, when you stop to think about it, is really strange. Seven months have 31 days. Four have 30. Then there's February and the oddity of leap year. Designed by Julius Caesar and revised by a 16th-century pope, the calendar makes about as much sense as our stubborn resistance to the metric system.
The calendar is a particularly clunky financial tool. Chances are, your home or car-loan payments are the same every month, even though months vary in length. What the bank has done is it imagined that every month is the same, to avoid the hassle of charging you one amount in January and then another in February. Lenders usually treat months as if they were all 30 days, which spreads out to a 360-day year. The 360-day year is pretend, but highly practical.
A few centuries ago, some clever banker discovered that if he combined elements of the pretend 360-day year with the 365-day year we live by, he could increase his profits. It works this way: The lender computes the daily interest charge based on a 360-day year, which is slightly higher than it would be for a 365-day year. But when the lender computes the monthly interest charge, he doesn't multiply by 30, as required by the 360-day year, but by the actual number of days in the month. Of course, by year's end, that number adds up to 365. By charging the higher rate over more days, the lender stretches the interest like a fitting sheet. (For you masochists, the factor is 365 divided by 360.) An 8 percent loan in theory becomes -- presto! -- an 8.11 percent loan in reality.
It may not sound like much, but with interest, a little goes a long way. Consider a $100,000 loan. At 8 percent, the loan yields $8,000 a year. At 8.11 percent, the loan pays $8,111.11. Compound it over 25 or 30 years, as you would a mortgage, and you're into thousands of dollars.
Best of all, the bank method is nearly invisible. Few borrowers have the sophistication to translate "8 percent [365/360 method]" into 8.11 percent.
The "bank method," as it is also called, is as old as the steamship. As early as 1809, a disgruntled borrower challenged the practice in court. In the 200 years since, lenders have defended the practice with a variety of arguments. University of Kentucky law school dean Allan W. Vestal buys none of them. He concludes that the bank method is a sham, "surreptitiously, systematically, and deliberately" charging interest in excess of the stated rate. "It is simply unseemly for a bank to use such a naked artifice to cheat its customers."
Vestal is not a lonely academic crying over scrolls. Texas Congressman Wright Patman challenged the bank method in 1971, describing the practice as "just plain old-fashioned greed." Says Margot Saunders, an attorney with the National Consumer Law Center: "It's a rip-off. There's no justification for it."
It is not disputed that Ohio Savings, Cleveland's third-largest thrift, which bought or originated about $12 billion in mortgages last year, used the bank method to spice up thousands of home loans. The practice, much to Vestal's chagrin, is legal. But it is highly unusual for it to appear on home mortgages.
"I've not heard about it in so long," says Charlotte Bahin, regulation director for America's Community Bankers, a thrift trade association. A puzzled Ilyce Glink, the Chicago-based author of several books on home finance, deferred questions to her husband, real-estate lawyer Sam Tamkin. The bank method, Tamkin says, is used often in commercial lending, but "I've never seen it in residential." Neither has James R. Webb, a Cleveland State professor of finance and real estate. "This is a strange one," he says. "This is definitely a strange one."
Ohio Savings has admitted as much. In deposition, Senior Vice President Raymond McDonald was asked why the bank did not package and sell the mortgages on the securities market, as banks often do. McDonald confessed the bank method is "non-uniform" and "not highly recognized."
Ohio Savings officials declined to discuss the case, but in court documents they have argued that the bank method, however rare, was disclosed properly. The plaintiffs disagree. They say Ohio Savings used math and fine print the way a magician waves a handkerchief.
In 1982, John Clark received a letter from Ohio Savings that reignited his suspicion that he held a faulty mortgage. The letter announced a small change in the way Ohio Savings would administrate outstanding loans. The change failed to correct his lump-sum problem, so Clark, who was by then teaching math at St. Ignatius, decided to take up the matter with the bank.
Clark's monthly payment was $233.57. Nothing strange there. But Ohio Savings, he understood from his pay stubs, was amortizing the loan, or calculating its present value, using the bank method. It was as if he had two loans working: The one he paid was a 9 percent interest loan. The one he owed was 9.125 percent. Hence, in the bank's eyes, every month Clark's payment would fall short. The 0.125 percent of interest he "missed" each month would pile up to $4,100 at the end of the loan. Nowhere did his agreement mention anything about a balloon payment of such size.
Clark discussed the matter with Ross Felumlee, a specialist in the mortgage accounting department. "Freakish," Felumlee said, according to Clark. "I doubt there are two or three more loans like this."
Felumlee told Clark his loan would be fixed. Problem solved.
Clark, however, was curious to know if there truly were only two or three loans like his. Inquisitive by nature and fastidious in the ways of money, he went to the county recorder's office and wrote down the names of about 100 people who had taken out mortgages with Ohio Savings. He reached half of the names on the list. "My name is John Clark," he would say. "You and I may have something in common."
Clark first had to convince his fellow borrowers that he wasn't a loon or a salesman. If they stayed on the line, Clark asked that they fetch a mortgage slip and read him the key figures. Of those with documentation, all had the lump-sum problem.
Now 52 and rounded by middle age, Clark is an unlikely crusader. His cheerful voice is untouched by the cynicism and paranoia that tend to lantern the path of the righteous. He is better thought of as a man of precision, trained by math to see the world as correct or incorrect. He's almost prim, like the grammar teacher who points out comma splices on menus to restaurateurs. Once he alerted National City Bank to an interest rate advertisement that he found misleading. National City changed the ad. "They were nice about it," he says.
Ohio Savings, in contrast, left Clark feeling uneasy. About the time of his trip to the recorder's office, he took a job as a cost economist at Ohio Bell. One day, he noticed an Ohio Savings mortgage bill on the desk of a co-worker, Barbara Jordan. Clark asked Jordan if he could run a few calculations. Sure enough, she too had the lump-sum problem. While Ohio Savings later corrected her loan, Clark sensed that the bank hadn't dug into its books to see how great the problem was. "Wouldn't the natural thing be to go back and look at your mortgage database? They didn't want to do that," he says.
Clark now believed no mistake had been made. What Felumlee called "freakish" served Ohio Savings a little too well to be an innocent mistake. For by using the bank method only to amortize the loan, Ohio Savings was able to quote prospective borrowers low monthly payments -- a critical sales point. Then, once the note had been signed, Ohio Savings would begin exacting the higher rate. As this devious scenario continues, it's unlikely borrowers would ever know they paid the higher rate, because so few homeowners hold their mortgages until term. Most folks either sell or refinance, in which case Ohio Savings would quietly deduct the unpaid interest from the proceeds.
Spread across who-knew-how-many mortgages, the bank method's voodoo would add up to millions. "I knew there was a lot of money at stake," Clark says.
In October 1984, one month after squaring Barbara Jordan's mortgage, Ohio Savings received a warning letter from the Federal Home Loan Board.
Frankie and Wade Hamilton, an Oakwood Village couple, had complained about their mortgage. Frankie also worked at Ohio Bell, and Clark had run her numbers, finding the lump-sum problem once again. But by this point, Clark says, Ohio Savings was tuning out the calls he made on behalf of borrowers. "It just seemed as though we were being ignored." At his suggestion, Frankie petitioned the loan board.
Rose Thomas, the board's director of consumer affairs, responded to the Hamiltons' complaint. "In reviewing the data . . .," she wrote in her letter to Ohio Savings President Robert Goldberg, "we have determined that the payment of $364.76 disclosed to the borrower will not amortize the loan over the 348-month term of the loan." If the Hamiltons took it to term, they would have to come up with a balloon payment of almost $6,600.
Thomas instructed Ohio Savings to examine its records, as she believed a number of borrowers had the lump-sum problem. Then she wrote perhaps the most damning sentence in the entire case file: "We urge Ohio Savings to take the appropriate action to correct this problem, since these practices expose the institution to a class-action suit which may result in substantial damages."
A lawsuit was filed four months later.
Clark didn't look for an attorney. He went to the press, instead, approaching The Plain Dealer to see if the paper was interested in an article about the bank method. His aim was not to expose Ohio Savings. He didn't even mention its name, until an editor asked if he knew of a local bank that used the method. Clark says he simply wanted to inform the public about the practice. The newspaper passed on the idea, but the editor suggested that Clark talk to an attorney he knew, Steven Weiss.
Weiss has a one-man shop in the Illuminating Building. He specializes in personal injury. A typical case might involve factory machinery and a severed hand. "I was raised to believe in Ralph Nader, not King Miser," he says, surely not for the first time.
Weiss and Clark met in 1984. The bank method at first confused the attorney, but before long he saw the power of its nearly invisible touch. He filed the lawsuit in January 1985.
Eight months later, Ohio Savings did attempt to correct the mortgages -- but not as it had for Clark, Jordan, and a few others. In their case, no money exchanged hands; the bank simply made the problem disappear by dropping the bank method from its calculations.
But then Ohio Savings took a new tack. The bank sent 2,700 borrowers a letter informing them that their payments wouldn't sufficiently pay off their notes. The bank asked its customers to sign a new agreement that either increased the monthly payment or extended the life of the loan. Borrowers were expected to go along with this, because, the bank explained, heretofore the error had worked in their favor. "Until this time, you have been benefiting from the lower payment," the letter said.
Essentially, the bank was asking customers to pay the cost of the bank method as the loan progressed, as opposed to a lump sum. Either way, nothing about either agreement benefited borrowers.
Also, the letter did not say a class-action lawsuit had been filed. "What they tried to do was pull the wool over people's eyes," says Kevin McDermott, a lawyer assisting Weiss.
After April 1978, Ohio Savings began to figure the bank method into payments as well as the APR, the annual percentage rate printed on the truth-in-lending form that accounts for various loan charges. To Weiss, this is merely a different brand of grease. The bank method, he argues, is so esoteric, no one without a pocket protector would see it inside the jumble of closing costs and points that typically inflate the APR. And it doesn't change the fact that Ohio Savings was trying to inflate interest rates customers had already negotiated. "People bargain for an interest rate, not an APR," Weiss says.
George Seidel, one of the lead plaintiffs, has kept the Ohio Savings mortgage he took out in 1977. As it stands, he owes the bank a balloon payment of $4,700 in 2006. He's listened to Ohio Savings argue that its customers should have somehow been wise to the intricacies of the bank method. He picked up on it only because he worked with John Clark at Ohio Bell. "I've always been disappointed that they've tried to put the onus on us."
Even by class-action standards, 17 years is an eternity to spend in litigation. The earliest court documents bear the tactile strikes left by typewriters. When the case was filed, word processors had yet to permeate office life.
Mark Wintering, a lawyer working with Weiss, blames Ohio Savings for the gray beard the case has grown. "Whatever procedure the bank could throw out there, they threw out. The court bit on some of them. It's just been a tortured path."
The bank's attorney, Hugh Stanley of Arter & Hadden, politely waved off a chance to talk about why the matter is still unresolved. "It's just the nature of the case," he says. "With this matter in litigation, I just can't comment."
The case drags on, for no one reason in particular, though its assignment to then-Cuyahoga County Judge Sam Zingale was no blessing. In 1988, Zingale dismissed all claims, when Ohio Savings had only asked for a ruling on the Truth in Lending Act violation. An appeals court sent it back to "Slippery Sam," as The Plain Dealer referred to Zingale for his lapses in judgment and tact, and he dismissed it again, this time ruling that the statute of limitations had run out. To overturn that verdict, Weiss needed to visit the Ohio Supreme Court, where he won a unanimous decision: The clock, the Supremes said, starts running when the borrowers discovered the alleged fraud, not when it originally occurs. Back to square one. Zingale's haste cost the case six years.
In 1998, Weiss rescued the case from the brink of procedural death a second time. The bank's lawyers had argued successfully in lower courts that the case should be denied class-action status. Weiss appealed to Ohio's highest court and again prevailed by a 7-0 decision: The court said he could represent all Ohio Savings borrowers who held bank-method mortgages, including the ones who signed new agreements in response to the 1985 letter.
Weiss, not surprisingly, says the case is tailor-made for class action: The amount of money the bank method raked in is too little for borrowers to seek in private suits, but too much to ignore. Presently the case resides with Cuyahoga County Judge Brian Corrigan. He keeps the three-box file in his chambers, a totem of unfinished business. Nothing has happened in the last year and a half. Rape trials have a way of pushing truth-in-lending complaints down the docket.
Ohio Savings' efforts to detour the case with technical obstructions are the way of corporate law. Other tactics might embarrass even the bloodthirstiest litigator. The bank's attorneys filed a motion to have Frankie Hamilton tossed out as lead plaintiff after her husband Wade, who worked for RTA, pleaded guilty in 1995 to charges relating to theft of fares. His troubles, the lawyers argued, somehow made Frankie unfit to serve as plaintiff. The motion was dismissed.
The attorneys also deposed Clark for hours, looking for glitches in his academic and professional records, and repeatedly trying to ascertain whether he had been paid for his efforts. (At one point, Clark was asked if Weiss had bought him breakfast that morning.) But Clark is not even part of the suit, as his loan was corrected. "It was just obnoxious," Weiss says.
Clark, incidentally, has master's degrees in mathematics and economics, and has not been paid for his efforts in the Ohio Savings matter, though Weiss did retain his math skills for a suit against a different bank.
Clark and Weiss are a contrast in styles. Clark is sensitive and somewhat dreamy. "He does math equations for fun," says wife Bonnie. He and Bonnie today live in Canterbury Pointe, a newly built cluster of homes in Medina Township that has a quaint sterility about it. Clark's cream-colored sweater is almost a match for the plush and freshly vacuumed carpet in the living room. After a brief return to teaching, he is now working as a flight data analyst. "He really is just a do-gooder," Weiss says.
Agitation seems to be Weiss's principal mood. When he discusses the case, he fidgets about the conference room. At one point, he moves to the window and stares outside, as if waiting for a cloud of serenity to drift by. Ohio Savings gnaws at him. "If I think about it, I get sick, so I put it out of my thinking," he says.
Weiss's stomach turns in anonymity. Only a small percentage of Ohio Savings borrowers know that a suit has been filed, let alone the tricky math that prompted it. Weiss is their secret Santa, toiling for the day he can pop down the chimney with bundles of cash. The Federal Trade Commission delivered for Money Store customers in 1991. Just as with the pre-1978 Ohio Savings loans, the Money Store had used the bank method to amortize customers' accounts, but not to calculate payments. The Money Store agreed to stop the practice and refund $1.1 million to borrowers.
At this stage, how many Ohio Savings borrowers were affected is conjecture. When he filed the suit, Weiss believed the number was 2,700. He now puts it past 10,000. Ohio Savings, he says, used the bank method from 1970 to 1996. Given the technology of the age, determining the actual figure may ultimately require going through microfiche by hand. "I don't think they know, to be honest," Weiss says.
As for a dollar amount, the Hamiltons lost about $500 to the bank method, and they retired their loan after just six years. If they should prove typical, compensatory damages alone could begin in the mid-seven figures.
"There's no doubt in my mind we're right and that we'll be rewarded," George Seidel says. His optimism is Weiss's agony. As trying as the process has been -- Weiss calls it a "300-pound Rolaids case" -- the delays may prove advantageous. An accusation of corporate malfeasance should play better with a jury today than it would have in the past. "We now get to try this case in a post-Enron environment," Weiss says, clearly delighted.