By the Division of Banks

COMMONWEALTH OF MASSACHUSETTS

Suffolk, SS.

COMMISSIONER OF BANKS
MORTGAGE LENDER
LICENSING
Docket No. 2007-016

FINDINGS OF FACT AND TEMPORARY ORDER TO CEASE AND DESIST


In the Matter of
SOUTHSTAR FUNDING, LLC
Atlanta, Georgia

Mortgage Lender License No. ML2251


The Commissioner of Banks ("Commissioner") having determined that SOUTHSTAR FUNDING, LLC., ("SouthStar Funding" or the "Company"), located at 400 Northridge Road, Suite 1000, Atlanta, Georgia 30350 has engaged in, or is engaging in, or is about to engage in, acts or practices constituting violations of Massachusetts General Laws chapter 255E and applicable regulations found at 209 CMR 42.00 et seq., hereby issues the following FINDINGS OF FACT AND TEMPORARY ORDER TO CEASE AND DESIST ("TEMPORARY ORDER") pursuant to General Laws chapter 255E, section 7(b).

FINDINGS OF FACT

  1. The Division of Banks ("Division"), through the Commissioner, has jurisdiction over the licensing and regulation of persons and entities engaged in the business of a mortgage lender in Massachusetts pursuant to Massachusetts General Laws chapter 255E, section 2.
  2. SouthStar Funding is, and at all relevant times, has been a foreign Corporation conducting business in the Commonwealth of Massachusetts. SouthStar Funding's main office is located at 400 Northridge Road, Suite 1000, Atlanta, Georgia 30350.
  3. SouthStar Funding is licensed by the Commissioner as a mortgage lender under Massachusetts General Laws chapter 255E, section 2. According to records maintained on file with the Division, the Commissioner initially issued a mortgage lender license to SouthStar Funding to engage in the business of a mortgage lender on or about October 9, 2002.
  4. On Monday, April 2, 2007, a licensed Massachusetts mortgage broker ("Mortgage Broker A") notified the Division that SouthStar Funding had failed, or was about to fail, to timely disburse loan proceeds in two mortgage loan transactions involving a single residential property in Massachusetts which Mortgage Broker A had placed with SouthStar Funding.
  5. According to Mortgage Broker A, two loans (Loan# 3000027543 for $318,400.00; and Loan# 3000027845 for $39,800.00) that his firm had brokered to SouthStar Funding, had closed on Tuesday, March 27, 2007, and were scheduled to fund on Monday, April 2, 2007, at the conclusion of the loan rescission period. At the time that Mortgage Broker A contacted the Division on April 2, 2007, neither loan had been funded.
  6. Mortgage Broker A notified the Division that his office had received a call from a representative of SouthStar Funding on Saturday, March 31, 2007, notifying the mortgage broker that the Company would be ceasing all operations by the end of April 2007. However, the SouthStar Funding representative assured Mortgage Broker A that SouthStar Funding would continue to process any loan applications that the Company had previously accepted and remained pending.
  7. On Sunday, April 1, 2007, the Mortgage Broker received a second call from a representative of SouthStar Funding indicating that the Company would be ceasing all operations immediately.
  8. On Monday, April 2, 2007, at approximately 10:18 a.m., the closing attorney for the loans referenced in Paragraph 5, forwarded to the Division, by facsimile, a copy of the notification that his law firm had received at approximately 9:51 a.m. from SouthStar Funding, which stated, in part, that "SouthStar Funding, had ceased its mortgage lending operations effective immediately and was unable to close or fund any loans."
  9. The facsimile notification forwarded stated in part, "DO NOT …fund any loans from this point forward," and further instructed the closing attorney to return all SouthStar funds held in the firm's client trust account (IOLTA), previously transmitted for the purpose of funding residential mortgage loans, by wire transfer immediately.
  10. On Monday, April 2, 2007, the Division reviewed the Web site maintained by SouthStar Funding which confirmed the representations made to the Division by the industry participants referenced above whereby SouthStar Funding had posted the following message to its Web site:
    SouthStar Funding, LLC sincerely regrets that it was necessary to cease its mortgage lending operations. The recent unprecedented downturn and policy changes in the mortgage industry necessitated this action.
  11. On Monday, April 2, 2007, at approximately 11:47 a.m., the Division received information from a second licensed Massachusetts mortgage broker, ("Mortgage Broker B") indicating that SouthStar Funding had recently sent him a notification via e-mail stating in part that SouthStar Funding was "ceasing its mortgage lending operations on April 2, 2007," and that the Company would not be closing or funding any residential loans going forward.
  12. SouthStar Funding's notification to Mortgage Broker B further stated that the events leading to the Company's decision to cease funding loans began the week of March 26, 2007, when two of the Company's primary purchasers of loans refused to fund loan pools that were already locked and committed until such time as SouthStar Funding reimbursed them for all of the Company's existing repurchase obligations, something that SouthStar noted that it was "financially [sic] unable to do."
  13. The notification to Mortgage Broker B further stated that, with respect to another loan sale agreement, a separate investor had apparently "bought only a portion of loans that they had previously committed to" without disclosing the conditions under which the diminished sale occurred.
  14. The e-mail correspondence from SouthStar Funding referenced in Paragraph 12 stated that as a result of the events set forth therein, the Company was "approaching an insolvency situation."
  15. Based upon information and belief, the loans referenced in Paragraph 5, have not yet funded as of the date of this TEMPORARY ORDER.
  16. Notwithstanding the correspondence between SouthStar Funding and the mortgage lending industry participants referenced above, SouthStar Funding had not notified the Division of the facts and circumstances set forth above as of the issuance of this TEMPORARY ORDER.

    CONCLUSIONS OF LAW

  17. Based upon the information contained in Paragraphs 1 through 16, SouthStar Funding's acts or practices of contracting with consumers, through the underwriting and subsequent execution of mortgage loan closing documents relating to Massachusetts residential property, and thereafter failing to fund the mortgage loans may constitute unfair and/or deceptive acts or practices in violation of Massachusetts General Laws chapter 93A, section 2.
  18. Based upon the information contained in Paragraphs 1 through 16, due to the delay in funding contractual mortgage loan obligations SouthStar Funding has harmed a consumer, mortgage brokers, and other parties in residential mortgage loan transactions in the Commonwealth by engaging in acts or practices which may be unfair and/or deceptive in violation of Massachusetts General Laws chapter 93A, section 2.
  19. Based upon the information contained in Paragraphs 1 through 16, by contracting to originate mortgage loans that the Company did not have sufficient warehouse funds available to fund, or any other available, alternative source of funds SouthStar Funding has engaged in unsafe or unsound practices in violation of the Division's regulation 209 CMR 42.04(2)(b)(3).
  20. Based upon the information contained in Paragraphs 1 through 16, SouthStar Funding failed to notify the Commissioner within one business day of the expiration, termination or default, technical or otherwise, of at least one existing line of credit or warehouse credit agreement, in violation of 209 CMR 42.12(1)(e).
  21. Based upon the information contained in Paragraphs 1 through 16, SouthStar Funding, which has indicated that the Company is approaching insolvency, failed to notify the Commissioner within one business day of the exercise of recourse rights by investors or subsequent assignees of mortgage loans if such loans, in the aggregate, exceed the licensee's net worth exclusive of real property and fixed assets in violation of 209 CMR 42.12(1)(g).
  22. Based upon the information contained in Paragraphs 1 through 16, SouthStar Funding failed to provide the Commissioner with thirty days prior written notice of the Company's intention to cease business operations in violation of 209 CMR 42.13(2).
  23. Based upon the information contained in Paragraphs 1 through 16, SouthStar Funding has failed to demonstrate the financial responsibility, character, reputation, integrity, and general fitness that would warrant the belief that the business will be operated honestly, fairly, and soundly in the public interest in violation of Massachusetts General Laws chapter 255E, section 4 and the Division's regulation 209 CMR 42.03(2)(c).
  24. Based upon the information contained in Paragraphs 1 through 16, the Commissioner has determined that:
    1. SouthStar Funding has engaged in, or is about to engage in, acts or practices which warrant the belief that it is not operating honestly, fairly, soundly and efficiently in the public interest in violation of standards governing the licensing and conduct of a mortgage lender including, but not limited to, the provisions of the Division's regulations at 209 CMR 42.00 et seq.; and
    2. The public interest will be irreparably harmed by delay in issuing an ORDER TO CEASE AND DESIST to SouthStar Funding.
  25. Based upon the information contained in Paragraphs 1 through 16, had the facts and conditions found therein existed at the time of SouthStar Funding's original mortgage lender license application, the Commissioner would have been warranted in refusing to issue such license. Further, the facts and conditions set forth in paragraphs 1 through 16 present sufficient grounds for the revocation of SouthStar Funding mortgage lender license pursuant to Massachusetts General Laws chapter 255E, section 6 and the Division's regulation at 209 CMR 42.04(2)(b).

    ORDER TO CEASE AND DESIST

    After taking into consideration the FINDINGS OF FACT and CONCLUSIONS OF LAW stated herein, it is hereby:

  26. ORDERED that SouthStar Funding and any and all officers, directors, employees, independent contractors, or agents operating on behalf of SouthStar Funding, and their successors or assigns, shall immediately cease engaging in the activities of a mortgage lender, as defined under Massachusetts General Laws chapter 255E, section 1, relative to any residential property in Massachusetts, not otherwise expressly permitted by the terms of this TEMPORARY ORDER. Therefore, SouthStar Funding is ordered to immediately cease soliciting or accepting, either directly or indirectly, any residential mortgage loan applications from consumers for residential property located in Massachusetts.
  27. IT IS FURTHER ORDERED that SouthStar Funding, shall immediately place any fees previously collected from Massachusetts consumers relative to any pending mortgage loan applications in a separate escrow account maintained at a federally insured bank.
  28. IT IS FURTHER ORDERED that SouthStar Funding shall not pay or declare a dividend, nor otherwise authorize or execute any financial transaction, either singular or structured, in excess of two hundred and fifty thousand dollars ($250,000.00), except for wages and salaries paid to employees, contractors, officers, or other members of the Company's management in the normal course of SouthStar Funding's business, without the prior written approval of the Commissioner. Upon the effective date of this TEMPORARY ORDER, SouthStar Funding shall implement or revise its practices and procedures, as necessary, to ensure that the Company's financial books and records are accurately maintained, in a manner illustrating compliance with the provisions of this Paragraph, and available for review by the Division's examiners upon request.
  29. IT IS FURTHER ORDERED that SouthStar Funding shall immediately place with one or more qualified lender(s), with no loss to applicants, the following: (a) the Company's entire portfolio of Massachusetts residential mortgage loans which were closed by the Company, and remain unfunded as of the issuance of this Temporary Order; and (b) the Company's entire pending application list of Massachusetts residential mortgage loans. It being understood that "no loss to the applicant" shall mean that any loan which was closed by SouthStar Funding, as well as any application which was approved by the Company, shall be placed to a lender willing to fund, or close, the mortgage loan under the same terms and conditions extended by SouthStar Funding. In the event that no such placement can be made, SouthStar Funding shall either independently fund the mortgage loan under such terms and conditions or buy down the mortgage loan offered by the lender so that the applicant does not incur a loss as a result of such placement. SouthStar Funding shall obtain the prior approval of the Commissioner before placing such applications to the qualified lender(s).
  30. IT IS FURTHER ORDERED that in any instance in which SouthStar Funding failed to fund a loan closed by the Company and in which the consumer, prior to the effective date of this TEMPORARY ORDER, obtained funding through an alternate lender, the Company shall reimburse each consumer the amount necessary to put the consumer in the same position as if SouthStar Funding had funded the mortgage loan under the terms and conditions agreed upon at the closing of the loan.
  31. IT IS FURTHER ORDERED that SouthStar Funding shall submit to the Commissioner a detailed record, prepared as of the date of submission, of all of the Company's pending residential mortgage loan applications on property located in Massachusetts. The records to be produced shall include all information on file regarding the Company's Massachusetts mortgage loan portfolio, including but not necessarily limited to, the following:
    1. Within one (1) day of the effective date of this TEMPORARY ORDER, SouthStar Funding shall submit to the Commissioner all information on file as of the date of submission regarding the Company's portfolio of mortgage loans that were closed by SouthStar Funding prior to the effective date of this TEMPORARY ORDER, but remain as yet unfunded. Such information shall include, but is not limited to, the following: The names of all individuals from whom SouthStar Funding processed an application and closed the residential mortgage loan, but failed to fund; the applicants' addresses and telephone numbers; the loan number; the amount of all prepaid loan fees submitted by the customer; the amount of each loan; the loan terms; the current funding status; the actual closing dates; the loan purpose (i.e. purchase or refinance); and identification of the applicable lender with whom each application will be placed. The record should include telephone numbers of contact persons at each lender who is familiar with the Company's submitted loans;
    2. As soon as possible, but not later than five (5) days after the effective date of this TEMPORARY ORDER, SouthStar Funding shall submit to the Commissioner (i) all information on file as of the date of submission regarding the Company's pipeline of pending mortgage loan applications including but not limited to, the following: The names of all individuals from whom SouthStar Funding has accepted an application for a residential mortgage loan; the applicants' addresses and telephone numbers; the loan number; the amount of all prepaid loan fees submitted by the customer; rate lock status; the amount of each loan; application status (i.e. filed, submitted to lenders, cleared to close, etc.); loan terms, if approved; scheduled closing dates; the loan purpose (i.e. purchase or refinance); and identification of the applicable lender with whom each application will be placed. The record should include telephone numbers of contact persons at each lender who is familiar with the Company's submitted loans; and (ii) SouthStar Funding's balance sheet and year-to-date income statement, prepared as of the date of submission, and attested by a duly authorized officer of the Company. The balance sheet should indicate SouthStar Funding's cash position at each of its depository banks as well as SouthStar Funding's bank account numbers; and
    3. On the last business day of each subsequent week after the effective date of this TEMPORARY ORDER, SouthStar Funding shall provide the Commissioner with an updated, written status report of the mortgage loan applications identified above under subparagraphs 31(a) and 31(b). The form of the status report shall follow the format of the initial submission under subparagraphs 31(a) and 31(b) and shall indicate the final disposition of the loan application and include the final terms under which each approved loan is closed. The reporting requirement shall continue until each of the approved applications is placed with a lender and funded, funded by SouthStar Funding, or withdrawn by the applicant(s).
  32. IT IS FURTHER ORDERED that SouthStar Funding shall immediately secure all pending mortgage loan application files and, to the extent that any original documents must be forwarded to the relevant mortgage lender pursuant to Paragraph 29 of this TEMPORARY ORDER, a copy of such document, correspondence, or paper relating to the mortgage loan shall be retained in the Company's books and records and shall be available to the Commissioner, in their entirety, upon request.
  33. IT IS FURTHER ORDERED that this TEMPORARY ORDER shall become effective immediately and shall remain in effect unless set aside, limited, or suspended by the Commissioner or upon court order after review under Massachusetts General Laws chapter 30A.
  34. IT IS FURTHER ORDERED that a hearing will be scheduled on this matter to determine whether or not such TEMPORARY ORDER shall become permanent and final only upon receipt of a written request for such a hearing from SouthStar Funding within twenty (20) days of the effective date of this TEMPORARY ORDER. If no hearing is requested within this twenty (20) day period, this TEMPORARY ORDER shall become permanent and final until it is modified or vacated by the Commissioner.

BY ORDER AND DIRECTION OF THE COMMISSIONER OF BANKS.

Dated at Boston, Massachusetts, this 3rd day of April, 2007.

By: Steven L. Antonakes
Commissioner of Banks