What the SFDPA Administrators Don’t Want You To Know: Part 1, The Penobscot Indian Tribe Down Payment Grant Program

In researching sovereign nation down payment payment grants, I was expecting nothing more than a bunch of boring stuff on down payment grants.  Surprisingly, what I found was a trail of intrigue which had nothing to do with the Penobscot Indian Tribe, and everything thing to do with the business history of the program administrators, and nature of the down payment grant business itself.  

The content of the article is so explosive as to yield a scathing comment from Penobscot Indian Nation Grant America Program administrator, Christopher Russell which included this statement: (Click here to read entire comment)    

“So, you need to remove your libelous article here.  For your information, I will seek damages, as I have now collected nearly a quarter million from Mr. Brandon so far.  (We allow him to make monthly payments.  I won't be so generous with your "scam" blog.)”

After seriously considering Mr. Russell’s statement, I decided to comply with one request, and that is to remove the word “scam”.  I will not, however, back down from publishing this article or the content therein which is all a matter of public record.  I have, however, added more links and additional information.  

This article is crucial for the public and the media because it involves the history of the individuals who created the sovereign grant program, administer the program, and who have sued the Department of Housing and Urban Development to prevent the program from being terminated.  

So pull up a chair, sit down, and prepare for enlightenment.

First, a bit of background the Penobscot's Grant America Program founders Russell & Hill:

The Penobscot Indian Nation Grant America program is the brain child of Ameridream founders, Christopher Russell and Ryan Hill who according to an article in Forbes netted a combined $14,000,000 from their business interests involving Ameridream.  

You may recall the 2004 scandal involving Russell and Hill’s purported misallocation of Ameridream assets as revealed by the testimony of Mr. House during the June 22, 2004 Congressional Hearing on Charity Oversight and Reform. Click here to view the entire transcript of the Congressional Hearing that is posted on the Senate Finance Committee website and is a matter of public record.  

Among other things, Mr. House provided testimony that the founders of Ameridream, referred to as Mr. Red and Mr. White, used their position and control over the charity to divert millions to their private business interests. According to Mr. House, Mr.'s Red and White (Russell and Hill), participated with a third party (Mr. Blue) to create Synergistic Marketing, LLC which funneled millions from the charity.

Mr. House’s statements appear to correlate with information shown on Ameridream’s IRS Return of Organization Exempt from Income Tax (form 990) for years 2000 to 2004.   The returns for this period show $26,483,916 in payments from Ameridream to Synergistic Marketing, LLC. The returns also contain disclosures that two officers in Ameridream were members of Synergistic Marketing, LLC. After Russell and Hill left the company, the disclosure was changed to state that two former officers were members of Synergistic Marketing. Additionally, Ameridream's 990 returns for 2002 and 2003 include the following disclosure:

In 2003, AmeriDream’s current Board of Directors and Management became aware of certain transactions and arrangement from prior years that present potential for “excess benefit” within the meaning of section 4958 of the Internal Revenue Code. At that time, AmeriDream voluntarily sought guidance from the IRS. As of this filing, the specific nature and scope of those transactions is under review. Once the review is completed and if any excess benefit transactions are identified, AmeriDream will make the required disclosure on either an amended return for 2003 or a return for a subsequent year as appropriate.

Hence, this portion of Mr. House’s testimony appears to be substantiated, at least in regard to Russell and Hill's participation in Synergistic Marketing, LLC. Please note that payments to Synergistic Marketing from 2000 to 2003 ranged between 36% to 40% of Ameridream’s gross income less actual funded grants. Click here for a link to Ameridream's IRS returns (990's) from 1999 to 2006.

The testimony also accused the founders of Ameridream of creating an investment company, Valao Mortgage, and funding the company with a $4,000,000 loan from Ameridream. Mr. House stated that Avalar Properties, another LLC of Russell's, borrowed $1,000,000 through Valao. This, too, was supported by information on Ameridream’s 2002 IRS return (990) which shows a $4,000,000 loan to Valao Mortgage. While an affiliation between Russell and Hill and Valao was not confirmed, the Maryland Secretary of State filing for Valao shows the same business address at the time of filing as Ameridream. The Maryland Secretary of State filings, however, confirm Christopher Russell as the Agent for Service for Avalar Properties, and the address listed for Avalar Properties is the same address shown for Valao in various business listings.

Mr. House’s testimony also included an allegation that Russell and Hill (aka Mr.'s Red and White) purchased a jet using Ameridream as loan guarantor. The jet was purportedly used for Russell and Hill's personal enjoyment including golf trips to Mexico. While it is difficult to trace the liability on the Ameridream returns (form 990), the 2002 return notes a loan guaranty in exchange for a 10% interest in Rycho, LLC which was organized by Russell and Hill. Both Russell and Hill are showing current affiliation with Rycho Funding and Rycho Aviation which are one in the same. There is also a settled lawsuit involving Ameridream, Russell, Hill, and Rycho Aviation LLC as defendants against plaintiff American Flight Group.

In addition to the purported misallocation of Ameridream funds and inappropriate loans and guaranties, Mr. House also speaks of Mr. Red’s (Russell’s) sheltering of approximately $3,000,000 in income by establishing residency in the US Virgin Islands and becoming a shareholder in a U.S. Virgin Islands company. According to Mr. House, the company acquired an economic development certificate from the U.S. Virgin Island government which provided a tax credit of over 95% of the taxable income. While this statement is unconfirmed, Russell is open regarding his investments in St. Croix and prior partnership with International Asset Management.

Aside from minor lawsuits, there has been no verifiable recourse against Russell and Hill except for a Federal Tax Lien of $1,104,575 against Hill in 2006 for the 2001 tax year.

It is interesting to note that in 2006, Ameridream won an arbitration decision against Christopher Russell regarding Russell’s registration of the domain name: ameridreamprogram.com. According to the National Arbitration Decision, Russell registered the domain name one day prior to the expiration of a binding non-compete agreement. In addition to the copy cat web site, the decision states Russell registered additional web sites utilizing the “F” word along with the name Ameridream as a “protest” site which  accused Ameridream of fiscally irresponsible policies and squandering of public benefit funds. This is especially ironic coming from Russell who has been accused of the exact same thing with Ameridream. In addition to allegations that Russell acted in bad faith by registering copycat and defamatory domain names, Ameridream claimed Russell attempted to extort $5,000 per domain from Ameridream by requesting that Ameridream purchase the domains rather than incur thousands in legal expenses. The actions of Russell were ultimately found to be made in bad faith, and the decision rendered was in favor of Ameridream.

Following this fiasco, Russell and Hill created a new venture known as the Dp Funder Program and the Owner’s Alliance. The Dp Funder is another type of seller-funded down payment program which involves payment of “earned” commission to the buyer instead of “gift” or “grant”. The program is simple. The buyer signs with Global Direct Sales, LLC and becomes a dealer. As a dealer, the buyer’s job is to convince the seller to purchase a membership in the Owner’s Alliance which offers various discounts and costs between 3% to 22% of the sales price plus processing fee. Once the seller “enrolls” in the Owner’s Alliance program, Global Direct Sales, LLC transfers the “commission” to a savings account which Global opens in the borrower’s name at Sandy Springs Bank of Maryland. Of course, Global is the primary account signor, and maintains absolute control of the account. In the event that the transaction does not close, funds revert back to Global unless the seller pays a $295 fee to extend the contract. Click here to see documents.

At closing, funds for the “membership fee” is remitted to Rycho Funding, LLC and is shown as a payoff on the HUD-1. Global Direct Sales’ Dp Funder web site gives explicit instructions to show the source of buyers down payment as “cash” on the loan application, and to show Global Direct Sales, LLC as secondary employment on the application using the position title of Independent Dealer. Revenue for Global Direct Sales, LLC ranges between 1% to 2% of the sales price plus $300 processing fee.

The latest version by Russell & Hill:

Russell and Hill's current venture involves the administration of Sovereign Nation grants. According to Russell in a 2008-09-08 phone conversation, he came up with the idea in 2006 when the IRS began cracking down on the non-profit seller-funded grant providers. It occurred to Russell that the Sovereign Nation status of tribes exempted the Tribes from the recent IRS ruling revoking the non-profit status of agencies that participated in seller-funded down payment grants. Shortly thereafter, according to Russell "he and Hill approached the Penobscot Indian Tribe and launched the Grant America Program" which he states "is ran exclusively by Global Direct Sales, LLC."  Russell also stated "the Penobscot Indian Tribe declined the option of processing grants for a $100 transaction fee, and instead only receives 20% of the proceeds."

In 2007, after HUD published their Final Rule in the Federal Register eliminating seller funded grants, Global Direct Sales and the Penobscot Indian Tribe filed suit in Federal Court for an injunction against HUD in implementing the rule. The Penobscot suit was in addition to suits filed by Nehemiah and Ameridream costing the Federal Government and taxpayers time and money.

Finally in March 2008, HUD’s Final Rule was vacated and the matter was remanded back to HUD to address the deficiencies in the rule-making process in accordance with the Administrative Procedures Act. On April 3, 2008, HUD and the Penobscot Indian Tribe executed a Stipulation to Resolve Remaining Claims and Dismiss Action which the Grant America Program website posts as a HUD approval letter. Click here to view the Stipulation of Dismissal.

Not only is the Stipulation and Dismissal not an approval letter, it doesn’t provide specific approval of seller-funded grants as Sovereign Grant providers claim. The Stipulation and Dismissal is merely a temporary settlement which gave HUD the opportunity to publish a revised proposed rule and re-open the comment period. Click here to view the proposed revised rule that HUD published in the Federal Register on June 16th, 2008.

What the stipulation provides is confirmation that the Penobscot Indian Tribe's Sovereign Nation "government entity" status qualifies the tribe to participate in the FHA program as an acceptable downpayment assistance provider as per Chapter 2, Section 2-10(C) of the 4155.1 REV 5. As such, loans involving PIN grants are insurable under standing HUD rules at the time.

Regardless of the Stipulation and Dismissal, the seller contribution to the Grant America Program is clearly a concession that is confirmed by IRS ruling 2006-27, which only allows sellers to deduct the SFDPA contribution as a sale expense and not as a charitable deduction. The PIN program Seller Enrollment form itself solidifies the fact that it is a sales concession by stating that the service fee (which includes down payment contribution) may be deductible as a sale expense and is not a charitable contribution. See final paragraph of Seller Enrollment Form: Click here to view the form.

Excerpt:

"Seller understands that the G.A.P service fee may be tax deductible as a selling expense, depending upon Seller's personal circumstances. Seller should consult a tax advisor. Seller further acknowledges that the G.A.P. service fee is a fee for service, and is not a charitable contribution. No changes may be made to the pre-printed text of this Agreement, without the prior written consent from PIN Fair Housing Administration."

The PIN-FHA gift letter also confirms that it is a concession: Click here to view gift letter.

Excerpt:

The IRS issued Revenue Ruling 2006-27, on May 22, 2006. This ruling implies that for TAX PURPOSES ONLY, similarly structured transactions are not to be treated as a gift for income tax purposes. Similar down payment funds are to be treated as a rebate against the purchase price of the property, lowering the purchaser's basis in the property. Please seek competent legal and tax advice before entering into this agreement. This information is not to be construed as tax advice. Each individual's situation may be different and advice should be provided by a competent tax advisor.

By their own admission, the seller contribution is a sales concession and not a charitable donation. Hence, the Penobscot Indian Tribe isn’t really providing “assistance” and is merely laundering the down payment for a fee, no different than the other seller-funded down payment assistance (SFDPA) providers.

Nonetheless, the Stipulation and Dismissal predates H.R. 3221, and seller-funded down payment grants will not be allowed for loans approved after October 1, 2008 for FHA loans regardless of provider as per Federal Law. In speaking with Christopher Russell, he confirms that the changes to the National Housing Act which prohibit seller-funded down payments also apply to Sovereign Nation grants. Fortunately, Russell states:

"That the impact to the tribe will be minimal and will not result in job losses due to the program being entirely administered by Global Direct Sales. At most, the Tribe stands to lose approximately $250,000 a year in revenues. Also, the Penobscot’s manned Fair Housing Department will still be able to provide Portable Housing and Indian Block grant opportunities for their Tribal members and other types of legitimate, non seller funded assistance, for Tribe members."

However, not to be dissuaded from the seller-funded down payment assistance business, Russell and Hill are already working on an alternative program through the Down Payment Grant Alliance which is a URL Russell states he founded in 2001. Their idea is to create a network of non profit companies and grant providers and have one party provide the grant while another party receives the donation. According to Russell, the seller contribution would not be tax deductible as a charitable contribution and would be considered a sale expense. This grant alliance sounds more like convoluted down payment shell game than a down payment assistance program due to the stated purpose to circumvent public law.

When asked about the adverse effects of seller-funded down payment grants and what could be done to mitigate risks to borrowers and the FHA fund, Russell stated that "Some steps that can be taken to mitigate risk include requiring the seller to sign a certification that the sales price was not increased for the grant, implementing strict appraisal controls, and limiting borrower credit scores to a minimum of 580." When asked whether limiting credit scores might displace low income and ethic groups who traditionally have lower scores as well as multiple borrowers, Russell stated "it required some thought." Russell did assert that seller-funded down payment assistance loans had a 92-94% success rate, however, I cannot confirm this information.

It is no secret that FHA’s delinquency and default rate are rising dramatically. As I have outlined in a prior entry, currently, 1 in 6 borrowers are delinquent or in default on their FHA loan and that number is increasing. Furthermore, there is a clear correlation between the expanding FHA delinquency rate and the rise in seller funded down payment grants. As you can see from this chart, the FHA delinquency rate rose in tandem with the increase use of non profit down payment grants as the source of down payment.  

While many who argue the merits of seller funded down payment grants cite the negative impact on sales prices and values that eliminating the programs will have on the market, the reality is that the economy needs inflation relief. Lower sales prices actually benefit homebuyers who have been displaced by astronomical home prices and rents. Considering that incomes did not rise in tandem with price increases caused in recent years by irresponsible lending, a little inflation relief is exactly what Americans need to improve their quality of life. The last thing that Americans and the economy need is anything that sustains continued housing inflation. While adding 3-5% to the sales price may not sound like much, the increases gradually add up in areas where these types of grants are prevalent resulting in higher overall prices.

Furthermore, the current proposal, H.R. 6694, which is sponsored by the Representatives Al Green, Gary Miller, Christopher Shays, Maxine Waters along with Ameridream and Nehemiah Corporation, proposes increases in mortgage premiums to offset the risk of SFDPAs to the FHA insurance fund. H.R. 3221 included a provision which placed a moratorium on risk based premiums that are based on borrower credit decision scores. However, credit score based premiums or eligibility create a barrier for racial minorities and socioeconomically disadvantaged borrowers who typically have lower scores. The proposal of risk based credit scores along with higher prices caused by seller funded down payment grants could displace the very borrowers that seller funded down payment grant providers claim to help. The taxpayers and FHA should not be forced to sponsor continued lending abuse via seller funded down payment grant schemes.

Posted in Uncategorized | 15 Comments »