When Treasury Secretary Henry M. Paulson released the government's blueprint for overhauling the nation's financial regulatory structure, he promised to direct more attention toward the front-line people who arrange mortgage loans.
"Simply put, that process was broken," Paulson said.
To protect consumers from predatory lending and deceptive disclosure practices, Paulson proposed the creation of a federal Mortgage Origination Commission that would establish minimum standards for loan officers. It would also evaluate, rate and report on each state's efforts to license and regulate these mortgage salespeople.
Sounds impressive, doesn't it?
But based on my investigation of one mortgage operation - which has continued to arrange loans despite state sanctions - what's needed is more criminal prosecution, not another commission with little power. After all, we're talking about loan officers responsible for explaining mortgage products, some of which have complicated terms and high fees, the types of products that have led this nation into its current economic mudslide.
You may better understand the problems with the mortgage processing system by looking at CashFlow Strategies, formerly called Financial Independence Group, which was run by Georgia-based businessman Frederick C. Lee Jr. This case highlights serious holes in how state and nationally regulated financial institutions can fail to verify that borrowers are working with licensed loan officers.
Lee has been banned from arranging loans in Maryland and Georgia because neither he nor his companies were licensed for such activity. And yet, in violation of those orders, people working for Lee have continued to arrange mortgage loans that for many borrowers are inappropriate, according to sources and company documents. Equally disturbing is that these borrowers are paying fees on these loans that many consumer advocacy groups would label as predatory.
Several Maryland homeowners acknowledged that they gave personal information to people working for CashFlow in order to have them process loan applications. Some said they knew the loan originators used to work for Financial Independence, others said they were unaware. Candice Thompson, whose business card says she's a CashFlow marketing representative, assured one Maryland loan applicant that she was licensed, and that the company was free of any legal troubles.
"Yes, I am licensed and no the company isn't under investigation," she wrote in a text message.
Thompson is not licensed as a loan officer in Maryland, according to state officials. The company is under investigation.
In a subsequent text, Thompson said she didn't have to be licensed in Maryland because she worked for Home Savings of America, which is based in Little Falls, Minn.
"we r federally chartered we don't have 2 follow state guidelines!" Thompson wrote.
Dirk Adams, chief executive of Home Savings, said Thompson is not employed by the bank and Home Savings has no business relationship with CashFlow.
Thompson did not respond to e-mails or telephone calls for comment.
Sarah Bloom Raskin, Maryland's commissioner of financial regulation, said the state is continuing to aggressively investigate the Lee case.
In Maryland, unlicensed loan officers can be fined up to $25,000 and imprisoned for up to five years, or both.
Lee denies Financial Independence ever arranged mortgage loans. He also said he has nothing to do with CashFlow, although the company has the same Georgia address and telephone number as Financial Independence. One company document welcoming new team members to CashFlow says Lee is its founder.
With Lee's history of regulatory run-ins, one would think financial institutions would avoid doing business with him. And yet Lee has continued to do business with banks and licensed mortgage brokers who fail to detect questionable actions by him and the people working for his companies.
Paulson is right. The mortgage sales process is broken. But I doubt another impotent federal commission will be enough to patch the holes in a system where unlicensed individuals can easily arrange and broker loans for the most significant asset that many people own.