Buffalo's premier housing developer faces discipline -- perhaps a loss of federal support -- because of allegations that he takes advantage of poor families and the government.
Frank Parlato Sr., who has bought and sold about 800 homes over the past decade, is accused of violating federal rules by giving cash and checks to home buyers so they could qualify for federally insured mortgages.
In many cases, those same low-income buyers later default on their mortgages and risk losing their homes. The government picks up the tab.
For months, lawmakers have argued that Parlato's real estate companies are adding to the decay in neighborhoods struggling to stay alive.
A new federal audit reveals that 23 percent of the houses sold by Parlato's companies are now in default. The audit covered a two-year period. The audit mentions only Frank Parlato Sr., but his son Frank Jr. has been the most visible and vocal advocate of the family's real estate companies.
A national advocacy group, which has studied mortgage lending, described the default rate as high, even for a high-risk, inner-city area.
"That's very high," said Gale Cincotta, executive director of the National Training and Information Center in Chicago. "These people are being sold the American dream, and actually they're being set up."
The findings are part of a new audit by the U.S. Department of Housing and Urban Development, the first official indication of its interest in Parlato's real estate dealings.
HUD's inspector general is recommending "immediate action" against Parlato's companies -- Erie Development and Franklin Enterprises. He also wants the government to recover any money lost when the mortgages went into default and eventually foreclosure.
A similar allegation in California last month resulted in HUD's recommending two men be barred from government business for three years.
Parlato has come under attack in recent months for what two local lawmakers claim is a housing scam that cheats low-income buyers and leaves the government holding the bag.
"This supports what we've said all along -- Frank Parlato is ripping off poor people," said County Legislator Gregory B. Olma, D-Buffalo.
Frank Parlato Jr., a spokesman for his father's companies, said the money given to the relatives of home buyers was in return for work they did on the houses. He produced tax forms and receipts for work they did for the companies.
"We feel vindicated," Parlato said. "After all this investigation, all they found was that we let poor people work so their family could own a home."
He also maintains that the 23 percent default rate is relatively low when compared to the performance of Buffalo's own non-profit housing agencies. He claims Broadway-Fillmore Neighborhood Housing Services has a default rate of 45 percent. The housing group, however, claims its default rate on mortgages is zero.
In addition, he claims a recent change in HUD's regulations makes it legal for a seller to provide financial assistance to buyers.
"If it was so wrong then, why does HUD allow it now?" he said.
A local bank confirmed that a seller can provide money for specific closing costs. They include taxes, points and fire insurance.
City lawmakers claim Parlato is making huge profits by buying the homes of desperate home buyers and then selling them at inflated prices to risky, low-income families. They also found that Parlato rarely receives city-approved building permits despite claims that substantial improvements are made to his properties.
"He's taking people who want to be homeowners, ruining their credit and then walking away with the money," said Fillmore Council Member David Franczyk.
Parlato has responded by calling his critics racists who want to keep blacks from moving into the Broadway-Fillmore area.
"If Frank Parlato was just serving the Polish community, would Franczyk attack him?" said Marguerite Jackson, a community activist. "I think the attack is racially motivated."
Franczyk said most of Parlato's victims are black. "Here's a guy who hurts minorities and non-minorities alike," he said.
Parlato acknowledges his foreclosure rate in some neighborhoods is high but attributes it to the inherent risk of lending to poor families. He also claims business has doubled since Franczyk and Olma began criticizing him.
"Everyday, we are getting dozens of calls from desperate sellers and hopeful purchasers," he said. "We will continue to be the best, last hope for poor people trying to own and sell property in Buffalo."