The most recent disciplinary actions taken by the Massachusetts Division of Banks against seven Bay State mortgage companies have generated intense discussion within the mortgage industry. State regulators, meanwhile, say the move heralds a more aggressive stance in detecting and stopping abuses in lending.
Following several recent investigations, state regulators say they turned up evidence of consumers being steered toward loans they could not afford. The DOB said it found that some lenders were misleading prospective customers and committing fraud in order to seal the deal.
The Division of Banks cited the following alleged violations on Sept. 8: Achieva Home Loans in Worcester is charged with inflating applicants’ incomes; Equity Solutions in Worcester is charged with submitting applications to lenders with applicants’ incomes and liabilities differing significantly from the documentation available on site; Fintera Capital Corp. in Natick is charged with overstating the income of applicants; National Lending Corp., based in Houston but running several Massachusetts branch offices, is charged with operating with unapproved branch managers, failing to provide access to books, records and files, failure to notify the DOB of a branch closure and misrepresenting borrowers’ incomes.
The DOB also issued cease-activity letters to The New York Mortgage Co., based in New York City, for doing business at an unlicensed location in Lowell; to Woburn-based ARBC Financial Mortgage Corp. for conducting business at unlicensed locations in Lowell and Lynn; and to National Lenders for conducting mortgage broker activity at an office in Lynn without first getting a license from the division.
Regulators say they have a plan in place to catch and stop lenders involved in illegal practices. The plan includes surprise examinations specifically targeting lenders working in low- to moderate-income communities. An industry-wide letter was recently sent out to all licensed lenders and brokers in the state warning that “severe action” will be taken against companies where evidence of inflating borrower income is found. A mortgage fraud hotline was put into place for borrowers who feel they are victims of mortgage fraud.
The DOB also has issued emergency amendments to its regulations to expand the number of prohibited lending practices that are punishable by cease-and-desist orders, license suspension and the revoking of a license.
“We became very concerned that there could be some widespread practices,” said David Cotney, chief operating officer of the division. “I wish we could say this is the end.”
Cotney said that is unlikely to be the case, however. Cotney and other industry watchers say the current slump in the mortgage industry puts increased pressure on firms to close loans, leading some to adopt unscrupulous practices to get deals done. However, the DOB is cracking down of these sorts of practices, with half of its examiners now working on surprise examinations. Cotney said a significant amount of resources are being devoted toward catching those who commit mortgage fraud or engage in bad practices, but the division will not ignore the problems they are spotting in the industry.
“We wanted to get our hands around this as soon as possible,” he said. “We are disturbed when we see the significant inflation of income [on mortgage applications].”
One of the trends examiners are picking up on is the use of stated-income applications or reduced-documentation loans that do not call for lender verification of the borrower’s income. Such loans typically cost the borrower more than traditional loans but are easier for lenders to close. Cotney said some lenders appear to be steering borrowers toward these types of loans when they are obviously not suitable applicants for such a niche product.
“What we have seen is that brokers are actively participating in inflating income or just making it up,” said Cotney. “It’s really setting up some consumers for failure.”
Cotney said part on the plan is “to scare the industry into realizing this is a big concern.”
Kevin Handly, director and shareholder at the law firm of Gallagher Callahan & Gartrell in Boston, called the drastic actions of the DOB fairly unusual and commended the commissioner and the agency for taking such an approach.
“It’s great to see the commissioner really moving,” said Handly. “It’s an integrity issue and a consumer-protection issue.”
Handly said having standards and policies is critical for the mortgage industry, and it is the job of regulators to uphold them.
Handly said it is important that the DOB continue its program and not allow the latest actions to become simply a one-time message to the mortgage industry. Only a sustained campaign by regulators will send that message with enough force, he said.
“I think that they [state regulators] have set a high bar for themselves by taking these actions,” said Handly. “You get all kinds of folks going into the mortgage industry. This is just a forewarning to any bad actors out there. If there are bad actors out there, they will be caught.”
Industry Image
“I think it [the Division of Banks] is sending the appropriate message to the lending community,” said Jim Jones, president and founder of First Wellesley Consulting Group, a Wellesley-based management advisory firm that specializes in the financial services industry. “The message is that things need to be done honestly and transparently.”
Jones said there are a great many lenders running fair and honest operations. Although several companies have been charged for allegedly violatign lending laws, Jones still said that, in the big scheme of things, these are isolated incidents. He said there are far more loans being processed appropriately than not. However, as cases against local companies start to get the public’s attention, the image of the mortgage profession is brought into question.
“I do believe that it does represent a small portion of the industry. However, it doesn’t help the image of the industry,” said Jones.
“We don’t believe it is indicative of the industry as a whole. Unfortunately, we get a black eye because of a few bad actors,” said Denise Leonard, executive director Massachusetts Mortgage Association.
Leonard said that appropriate and immediate action does need to be taken against lenders that are found committing fraud of any kind. She said she agrees that is important that to continue to look at ways to prevent and eliminate the unethical and illegal practices in which some lenders engage.
Leonard and other MMA members say they believe that licensing of individual loan officers, rather than just those running mortgage offices, could help the industry by ramping up accountability. She said one of the MMA’s goals is to advance higher standards for mortgage professionals and create better result for consumers.
Licensing of individual loan originators also would also help with the industry’s image going forward, since licensing would require ethics training, said Leonard.
“To that end one of [MMA’s] initiatives is to move forward by revisiting a previously filed bill to licenses all loan officers,” Leonard said. “One of the components of the bill was continuing education and testing to help in that vein.”
The MMA first worked to get legislation passed to license individual loan officers in 2003. The proposal never reached a vote, however, in part because funding for regulator oversight of increased licensing requirements was not resolved, said Leonard.
“Part of it was the timing. It was more about timing and the need to come to an agreement on the details and administration of it. There was never a philosophical opposition by regulators to it,” she said. “Our association is looking to revisit it. We want to work to make sure it gets passed.”
Hardly also said it is wishful thinking to assume consumers will be more cautious about doing business with lenders even with recent cases of abusive practices making headlines.
Bankers, meanwhile, contend that the types of abusive practices being targeted by the Division of Banks is pervasive only at mortgage firms, not among bank lenders.
“These problems are not happening at banks. We as an industry generally don’t do this,” he said.
Spitzer said the banking industry has always tried to separate itself from the mortgage companies.
“We’ve been saying that for a long time. It’s riskier to borrow from someone you don’t know,” he said.
When consumers borrow from their bank, they often already have a relationship with the institution and can more easily find someone there who will talk them through concerns or issues. Spitzer said banks have generally taken a more active role in educating potential borrowers than have mortgage companies.
“They [mortgage companies] just push people into loans. They are in the business for the churn. Community banks are in it for developing long-term relationships. Local banks are dedicated to the community. They want to see the burrower succeed,” said Spitzer. “We are glad to see the DOB is being so vigilant on this matter.”
