Even as the subprime housing crisis was exploding around them, Massachusetts mortgage regulators fell far short of other states in formally sanctioning the mortgage brokers and lenders they oversee. Over the past two-and-a-half years, Massachusetts banking regulators took serious punitive actions against less than three percent of the brokers and lenders it licenses, according to an analysis for Banker & Tradesman by the New England Center for Investigative Reporting at Boston University.
The 43 forced license surrenders, revocations and suspensions taken by Massachusetts between Jan. 1, 2007 and June 1, 2009 puts Massachusetts dead last compared to the number of serious actions taken in each of the other five New England states. For instance, during the same time, Connecticut took punitive action against 24 percent of its licensees, while New Hampshire pulled licenses from 11 percent of its mortgage brokers and lenders, the analysis shows.
While Massachusetts, compared to the other New England states, ranks last in the number of serious enforcement actions against mortgage brokers and lenders, it ranks second in its foreclosure rate.
John Taylor of the National Community Reinvestment Coalition, which promotes access to banking services for working families, believes state regulators should have been much more aggressive in policing the mortgage industry.
“A lot of the licensees have thus far gotten away with murder when to comes to these foreclosures,” Taylor said. “We’re looking at 1 in 100, 120 homes facing foreclosure in the Commonwealth, and that’s a lot for any state.
Auditors Concerned
A November 2007 state audit found the division lacked the resources to fulfill its oversight function even as it handed out thousands of additional mortgage licenses.
By September 2007, the agency had only completed 228 reviews, known as “examinations,” of brokers and lenders – or 16 percent of its licensees, the audit stated. An examination involves an inspection of the licensees’ books, reviews of loans made and ensuring compliance with laws and regulations.
“As a result of the increase in the amount of licensed brokers and lenders, combined with the current financial crisis in the mortgage industry, DOB should increase examination staffing to support a higher frequency of examinations and to ensure that consumers seeking mortgages are protected from unscrupulous lenders and brokers,” the audit states.
DOB Commissioner Steven Antonakes declined to be interviewed, but DOB Chief Operating Officer David Cotney defended the agency’s enforcement work. He said other states appear more aggressive because they pull mortgage licensees for infractions Massachusetts considers minor, like failing to file an annual report.
“I think we have an excellent record of taking action when we’ve found a problem and keeping people out of the business so they won’t perpetrate this fraud,” Cotney said. “If you look at our formal enforcement actions you’ll see clear, substantive cases of fraud, financial misconduct and a number of other issues we think are of a clear nature for a formal enforcement action.”
No Small Errors
A majority of the 501 punitive actions taken in Connecticut were made because broker and lenders failed to file or maintain a surety bond. The state also took a number of actions against firms for employing unlicensed loan originators.
“Failure to file a bond is not a minor infraction,” said Connecticut Commissioner of Banks Howard Pitkin, dismissing the claim his agency took more actions than Massachusetts because it penalizes firms for lesser offenses.
Cotney could not say how many of Massachusetts’ formal actions relate to predatory lending practices, nor could he estimate the amount of bad loans made to Massachusetts homebuyers over the course of the crisis. But he said the DOB is so proactive in weeding out unethical mortgage brokers and lenders that problems don’t often rise to the formal disciplinary stage.
Cotney said the agency has taken 210 “informal” actions during the past 2.5 years, such as convincing a company to hire auditors or revise internal practices. But unlike other states, those actions are secret. DOB policy prevents the public from even knowing the name of the licensee, Cotney said.
In contrast, every enforcement action the Connecticut’s Consumer Credit Division takes is documented on the state’s website.
“I believe in sunshine and every order while I’ve been here has been put on our website,” Commissioner Pitkin said.
Housing and banking professionals who interact frequently with the DOB said the agency is considered aggressive when it comes to strengthening policy and legislation.
But Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, said the DOB may have focused more during the housing crisis on the other financial institutions and professionals it oversees. Those include banks, credit unions, check cashing firms and debt collectors.
“Given the size of the state and the number of institutions that they are in charge of regulating, they’ve been under-resourced for years,” Callahan said. “Maybe the Division of Banks wasn’t nimble enough to switch and pull resources from the banking, the credit union world and say ‘our major concern has got to be the mortgage companies.'”
Fallout Severe
Lawyers laboring to save homeowners from foreclosure said the drastic increase in Massachusetts foreclosure rates demonstrates the insufficient monitoring of brokers and lenders.
“I think there was a lot more that could have been done [in Massachusetts] at the time,” said Nadine Cohen, an attorney with Greater Boston Legal Services who represents scores of minority predatory lending victims, including Alvarez.
In a report issued in July, the DOB said it referred “numerous cases to law enforcement agencies” for criminal prosecution. But Cotney said nine referrals were made to outside law enforcement agencies like the state Attorney General between Jan. 1, 2007 to date. Cotney said those referrals are still under review and he could not discuss them.
This story was reported by Jaime Lutz, Lyle Moran and Christie Musket of the New England Center for Investigative Reporting at Boston University.
