STANLEY RAGALEVSKY
‘A clear warning’
Despite the upbeat East-West Mortgage radio commercials, the behind-the-scenes picture at the lending company and its parent, Worcester-based Commerce Bank & Trust Co., is less rosy, and now customers are being compensated for the companies’ mistakes.
In May, the state Division of Banks and the Federal Deposit Insurance Corp. issued a cease- and-desist order against East-West Mortgage and Commerce Bank. DOB Senior Deputy Commissioner David Cotney said there were 102 complaints against the company from February 2001 through May 2004.
Reimbursement payments totaling about $800,000 stemming from mortgage applications received by East-West Mortgage in the past three years are currently being processed, according to company officials.
In May, when the order was first issued, Cotney said that the companies had engaged in various practices that violated consumer protection laws, including reneging on promised mortgage interest rates.
Consumers who received a rate higher than originally promised would either have their loans rewritten or receive a check for the difference, Cotney said.
John Gallagher, founder and general manager of East-West Mortgage, cited rapid increases in interest rates last summer as the main cause of the company’s problem with locking rates in.
In the summer of 2003, the DOB received hundreds of complaints accusing various mortgage companies of not following through on a rate that was promised.
“In a rising rate environment, that is when you see all these problems come pouring out of the woodwork,” said Boston bank attorney Stanley Ragalevsky, a partner at Kirkpatrick & Lockhart. “If people are gambling with consumers’ contracts, they [mortgage lenders] will end up paying a fairly significant price.”
East-West Mortgage also charged borrowers a “good faith deposit” of $199, which was credited back if the loan was closed. However, the company did not tell consumers the $199 was nonrefundable if the loan did not close. Cotney said East-West Mortgage has been ordered to refund the $199 to those consumers.
Gallagher said the $199 fee was mislabeled on the company’s paperwork and should have been named as an “appraisal fee.” As of June 30, the DOB had been notified by East-West and Commerce Bank on the number of customers entitled to the $199 reimbursement.
Consumers who also paid prepayment penalties in excess of what is allowed under Massachusetts General Law will also be reimbursed.
Gallagher said the prepayment fees were miscalculated due to a glitch in software the company used. He said there have only been a few borrowers identified as eligible for that particular reimbursement.
According to Gallagher, the company hired an outside firm to handle the reimbursement process and $800,000 is being returned to various customers.
As for the more than 100 complaints against the mortgage company, Gallagher said upon tracking them, East-West Mortgage determined that complaints accompanied one-quarter of 1 percent of all loan applications received by the company in the last three years.
East-West has also shuffled around employees, Gallagher said.
“We’ve changed some of the senior management in response to the handling of complaints,” said Gallagher.
He added that there has also been an overhaul of the company’s computer system.
Cotney said the bank and mortgage company have complied with DOB orders in the first 30 days following the DOB’s cease-and-desist order. However, there are still deadlines approaching for further orders, according to Cotney.
Ragalevsky said the comprehensive cease-and-desist order suggests long-term issues with East-West Mortgage and a lack of oversight from parent Commerce Bank. However, he said a cease-and-desist order isn’t the first time a company hears from regulators.
“Cease and desist is a second step,” said Ragalevsky. “There may have been a prior memorandum of understanding.”
A memorandum of understanding is an informal enforcement procedure by the DOB. Cotney said the division does not comment on informal enforcements.
Melanie Brody, a partner at Kirkpatrick & Lockhart’s Washington D.C.-based Mortgage Banking Group, said the FDIC and DOB may have felt East-West Mortgage and Commerce Bank did not properly respond to issues that were raised prior to its formal enforcement steps.
‘Second Step’
Ragalevsky said there can be instances when financial institutions are not compliant, but consumers do not experience a financial loss. While there are regulations providing restitution to consumers, said Ragalevsky, it isn’t always sought out. But in a case where a consumer did not get what they were told and experiences a loss, there are consequences.
Brody said in her more than 10 years of watching the lending industry, she has only seen an order of this scope two or three times.
“What struck me is this company is required to go back to 2001 and reimburse fees that weren’t disclosed the way the Division of Banks thought they should have been,” said Brody.
Although the investigation goes back three years, Brody said that does not always mean the problems were taking place then and noted that sometimes a complaint can trigger an investigation.
Cotney said the company was required to go back to 2001 because that was the date of the last examination of the company by the DOB. The next scheduled examination into East-West Mortgage began in March 2003 and the DOB did a concurrent exam with the FDIC. The DOB and FDIC also followed up on consumer complaints, Cotney said.
East-West Mortgage and Commerce Bank waived their rights to a hearing, neither admitted or denied any wrongdoing, and they did not pay any fines.
Ragalevksy said that given a certain amount of complaints and enough potential impact to customers, a regulatory compliance issue can turn into a safety and soundness concern for regulators. He said when there is a failure to comply with a directive from regulators, for instance, if there are 600 loan customers who could bring a claim against a company, it becomes a safety and soundness issue.
“This is what I see with this particular order,” said Ragalevsky.
A compliance exam covers an institution’s compliance with numerous consumer protection laws such as Truth in Lending, Equal Credit Opportunity, Real Estate Settlement Procedures and Home Mortgage Disclosure acts. Whereas, the safety and soundness exam is a review of a financial institution’s capital, asset quality, management, earnings, liquidity and sensitivity to market risk, according to Ragalevsky.
He said the compliance exam is not usually taken as seriously as the safety and soundness exam.
Despite the cease-and-desist order, Gallagher said business has been up between 10 and 15 percent.
Linda Bates, senior executive vice president at Sherwood Mortgage in Boston, said East-West is still getting customers and she is unsure if the average consumer is aware of the regulatory order because they may not read trade publications where the news is published.
Ragalevsky said he hasn’t seen tough regulatory orders like the one issued to East-West Mortgage and Commerce Bank since the 1980s and early 1990s.
“The bottom line is this should be a clear warning signal to FDIC-insured banks and also to mortgage companies and lenders that the Division of Banks is certainly not going to tolerate serious compliance violations,” said Ragalevsky.
Ragalevsky said given the amount of work that needs to be done to correct the company’s problems coupled with a short amount of time, it wouldn’t be unlikely that Commerce Bank could decide to sell East-West Mortgage.
Bates, expressing a more optimistic view, said Commerce Bank is a “wonderfully run bank” and anticipates it will work to remove the problems that existed in the company.
Gallagher said he expects the cease- and-desist order to be released by the fall and called the entire incident “unfortunate.”
Cotney said there is no deadline to remove the cease-and-desist order.
Jerome Olin, chief executive officer of Commerce Bank, was unavailable for comment.
