I refused a consent order. Now regulators want my mortgage license
In May of this past year, the Connecticut Department of Banking conducted an examination of my mortgage company, 1st Alliance Lending. The auditors arrived unannounced, made no document requests prior to arrival, and declared "this is the new process." They made those representations to multiple of members of our executive management team, as well as some of the company's vice presidents. They were on site for multiple days, and our staff who participated found the entire examination to be highly unusual.
The Connecticut Department of Banking then proposed a consent order based on an interpretation of the Secure and Fair Enforcement for Mortgage Licensing Act that the DOB had not disseminated through regulation.
The premise of the SAFE Act is simple: every borrower should be entitled to work with a licensed, professionally trained and tested mortgage loan originator as they go through the mortgage application and loan closing process. The SAFE Act was designed, in the wake of the financial crisis, to eliminate unsupervised originations; thus reducing fraud and unethical origination practices such as steering. The SAFE Act has done a lot of good.
But 1st Alliance refused to sign the proposed consent order with the DOB for three reasons. First, it required us to apply Connecticut's interpretation across all 46 states in which we lend. It also required an admission of liability even though we, in good faith, dispute the DOB's interpretation. And lastly, it imposed a gag order worded as follows:
"1st Alliance shall not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any allegation referenced in this consent order or create the impression that this consent order is without factual basis."
This was offered as a take it or leave it proposition. We declined, and were told: "The department will proceed accordingly."
Soon thereafter, the meaning of those ominous words became apparent.
Our decision was not made out of disrespect. It was done solely to protect the company by retaining our rights to defend our position, especially with other regulatory bodies. Even though we refused to enter into the overbroad consent order, it is important to note that out of deference to the DOB, we implemented the DOB's interpretation for Connecticut borrowers immediately when they communicated their position.
The Connecticut DOB then deployed, with a vengeance, an attack unlike anything I've ever seen in my 20 years in the industry. They attempted to enlist the Multi-State Mortgage Committee in their action, not as a policy advocate, or an unbiased arbiter to find a solution, but as leverage. Fortunately, the Connecticut DOB's motives were discovered, and the said MMC member declined to join the DOB's action. They made it clear they reserved the right to seek more information, and we stand ready to comply. To date, no further request for information has been received.
In the coming weeks, 1st Alliance Lending will begin the administrative hearing process. We do not look for sympathy or support, as we are competent, acting in good faith, and right on the law. The fact that SAFE creep currently represents an existential threat to 1st Alliance may not matter to most readers; but the fact that an independent mortgage banker, with a 13-year track record of consumer care that makes us proud, without any record of consumer abuse or complaints besides the typical anger about loan denial, is currently being accused of not having the "fitness and character" for mortgage banking licensure, should concern all readers.
Despite our good-faith disagreement, we applied the DOB's interpretation as soon as they communicated it to us, absent a shred of prior regulatory guidance to licensees. We didn't sign the proposed consent order for valid reasons. There is no question we are compliant today, yet DOB is demanding our license; and they are trying to twist this dispute into questions about our character and fitness.
It is my view that the Connecticut Department of Banking's behavior represents an existential threat to each and every licensee, and all of us should pay very close attention to this case. If having the character and fitness for licensure requires us to shut up, and take it; regardless of the fact pattern, then we have a problem.
And on the legal question: We are right, they are wrong; especially on the federal act.
States are free to legislate, and enforce the SAFE Act as they see fit; and all of us should comply.