STANLEY RAGALEVSKY
‘Operating philosophy’ key
In the wake of a cease-and-desist order issued by the Federal Deposit Insurance Corp. and the state’s Division of Banks, East/West Mortgage and Worcester-based Commerce Bank & Trust Co., which owns East/West, have recently restructured some personnel at both the bank and mortgage company subsidiary. In the midst of these changes, a New Hampshire Realtor group has filed a complaint against the online division of the mortgage company. However, some analysts say if the company can repair the damage, it is likely to survive this latest rough spot.
According to John Gallagher, founder and general manager of East/West Mortgage, the recent string of complaints filed against the company has not negatively impacted business.
“We’ve had a great summer,” Gallagher said.
In May, the FDIC and the DOB issued a cease-and-desist order against the bank and mortgage company alleging that both had engaged in various practices that violated consumer protection laws, including reneging on promised mortgage interest rates during the period from February 2001 through May 2004. There were 102 complaints filed with the DOB against East/West during that time.
East/West Mortgage was also accused of charging borrowers a “good-faith deposit” of $199, which was credited back if the loan was closed. The company did not tell consumers the $199 was nonrefundable if the loan did not close.
Some consumers also were assessed prepayment penalties in excess of what is allowed under Massachusetts General Law.
East/West Mortgage and Commerce Bank waived their rights to a hearing, neither admitted nor denied any wrongdoing and did not pay any fines. The companies have since paid out $800,000 to consumers who, according to the FDIC and DOB, were assessed improper fees.
The problems for the company didn’t end there. In late August, the New Hampshire Association of Realtors filed a complaint with the state against ISoldMyHouse.com, a division of East/West Mortgage, stating the Web site acts as an unlicensed real estate broker.
“We don’t think [the complaint in New Hampshire] is going anywhere,” Gallagher said.
Gallagher added that Realtors are failing to recognize that the Internet is eliminating middlemen.
“People don’t look favorably on real estate agents,” said Gallagher.
The Web site allows sellers to advertise their home for sale online for a $95 fee. Buyers may also search the site for homes. While the site lists information about the home, it does not list the address or contact information. An interested party must be pre-approved by a lender (not necessarily East/West) in order to gain access to the home’s address and seller information.
Even as the new complaint surfaced, East/West and its parent there have been implementing internal staff changes. Jerome Olin, former president and chief executive officer of Commerce Bank, retired. Gallagher said that was planned before the company was issued the cease-and-desist order. Brian Thompson, who previously worked at First Essex Bank, has replaced Olin.
Gallagher said the company has also hired Christopher Barrows, a full-time compliance manager, and Sherry Antonellis, a full-time senior vice president, for the bank and East/West.
“You really need an expert to be fully in compliance [with banking and lending regulations],” Gallagher said.
Other middle-management positions also have been added.
Gallagher remains in the same position as founder and general manager. He said despite the problems the company has faced, he has no plans to step down.
“I have to take care of many loan programs,” Gallagher said. “Compliance is just one aspect.”
Spillane Costa & Assoc., a Quincy-based consulting firm, is also working with East/West on compliance issues, but Gallagher said they have been onboard for some time.
“They were here during the period cited [in the DOB’s cease-and-desist order],” Gallagher said.
John Spillane, president of Spillane Costa & Assoc., would not comment on whether East/West was a client, maintaining the information is confidential.
Gallagher said East/West also uses other consulting firms on compliance issues, as well.
Thompson joined the bank on July 6 along with William Burke, the bank’s new chief financial officer. Burke also came from First Essex. However, Thompson said these open positions were unrelated to the cease-and-desist order and do not constitute a restructuring resulting from the regulatory imbroglio.
“We came in because there were openings here,” said Thompson.
Thompson began his tenure at Commerce Bank with a list of regulatory issues to handle, but says he is up for the job.
“We [Thompson and Burke] do have experience in managing and leading banks,” said Thompson.
Both the mortgage company and bank communicate regularly with the FDIC and DOB to resolve compliance issues, Thompson said.
“We have made many changes,” Thompson said. “Substantial progress has been made.”
Any issues affecting customers were dealt with first and internal problems were then solved, Thompson said.
“I think we’ve made good progress,” he said.
‘A Potential Threat’
Other changes to the company include consolidation of facilities. East/West Mortgage is based in Peabody and is currently housed in five buildings. Thompson said the mortgage lender will soon be consolidated into two buildings in the same community.
Thompson said Commerce Bank, which has 12 offices, has a good customer base and a desire to do more business. Thompson said he does not feel East/West’s or ISoldMyHouse.com’s troubles will tarnish the bank’s image and does not foresee any plans for the bank to distance itself from its troubled mortgage lending arm.
“They’ve been successful at branding themselves,” Thompson said.
One analyst said if the company can work to correct the problems, the business would likely survive.
“Obviously this is something that will be carefully monitored,” said Boston bank attorney Stanley Ragalevsky, a partner at Kirkpatrick & Lockhart. “[East/West] will take it seriously. When an institution gets into a position of having regulatory issues, it takes it seriously.”
Even if Commerce Bank or East/West tried to sell the company now, they wouldn’t have much luck, Ragalevsky said.
“When [a company is] under a regulatory order, they can’t sell the company for any value,” Ragalevsky said. “Who’s going to pay for that?”
However, Ragalevsky said most companies faced with a cease-and-desist order usually survive, if they do the right things.
“If they have a network of people, a system in place and complaints are addressed, it’s important for the company to show they have [gotten] religion and not only take the criticism the regulators dished out, but basically adopt it as their operating philosophy,” Ragalevsky said. “Most [companies] can recover if they focus on the basics.”
Ragalevsky said the new compliance officer positions appear to be an indication that the company is taking its problems seriously.
Only a few months into the job, Thompson must now deal with the complaint facing ISoldMyHouse.com. Thompson defends the site, saying it’s providing a service to customers.
“We believe we have a very pro-consumer, cutting edge offering,” Thompson said.
Ragalevsky said the complaint in New Hampshire could be related to a more deep-rooted issue.
“I see that as part of this push made in Washington [D.C.] by real estate brokers who want to make sure banks don’t get involved in real estate brokerage business,” said Ragalevsky. “I’m sure [ISoldMyHouse.com] is seen by some people in the realty and brokerage [business] as a potential threat.”
Jennifer Jope may be reached at jjope@thewarrengroup.com.
