By the Division of Banks

COMMONWEALTH OF MASSACHUSETTS

Suffolk, SS.

COMMISSIONER OF BANKS
MORTGAGE BROKER
LICENSING
No. 2010-371

FINDINGS OF FACT AND
TEMPORARY ORDER TO
CEASE AND DESIST

In the Matter of
LENOX FINANCIAL MORTGAGE, LLC
Atlanta, Georgia

Mortgage Broker License No(s). MB3345, et al.


The Commissioner of Banks ("Commissioner") having determined that Lenox Financial Mortgage, LLC, Atlanta, Georgia ("Lenox Financial" or the "Company"), 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) and chapter 255F, section 11(a).

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 broker in Massachusetts pursuant to Massachusetts General Laws chapter 255E, section 2.
  2. The Division also has jurisdiction over the licensing and regulation of persons engaged in the business of a mortgage loan originator in Massachusetts pursuant to Massachusetts General Laws chapter 255F, section 2 and its implementing regulation 209 CMR 41.00 et seq.
  3. Lenox Financial is, and at all relevant times, has been a foreign corporation conducting business in the Commonwealth of Massachusetts. Lenox Financial's main office is located at 6 Piedmont Center, Suite 500, 3525 Piedmont Road, Atlanta, Georgia.
  4. At all relevant times, Lenox Financial has been licensed by the Commissioner as a mortgage broker under Massachusetts General Laws chapter 255E, section 2. According to records maintained on file with the Division, the Commissioner initially issued a mortgage broker license, license number MB3345, to Lenox Financial to engage in the business of a mortgage broker on or about March 11, 2004.

    A. Failure to Maintain Minimum Standards of Financial Responsibility for Holding a Mortgage Broker License in Massachusetts

  5. The Division's regulation 209 CMR 42.06(2)(a) states, in part, that, "An applicant [for a mortgage broker license] shall demonstrate and maintain: 1. a net worth of not less than $25,000;"
  6. On or about August 16, 2010, Lenox Financial submitted, through the Nationwide Mortgage Licensing System (NMLS), audited financial statements for the period ending December 31, 2009. Lenox Financial's balance sheet for this period reports a Members Deficit position of ($3,282,122). The accompanying Statement of Operations for the same period reports a net loss of ($2,547,013).
  7. In the auditors' notes to the December 31, 2009 financial statements, the auditors identified that if Lenox Financial is, "to continue as a going concern, the ability to generate sufficient cash flow is critical." ( See Note 9). The auditors briefly describe some of the steps taken by Lenox Financial to increase revenue and reduce expenses. Among the strategies adopted by Lenox Financial to address its financial condition, as described by the auditors, was to enter an agreement, on February 4, 2010, with a mortgage lender to streamline certain operations and control costs.
  8. The Division, by letter dated October 5, 2010 (the "Division's Letter"), in addition to addressing other pending matters between the Division and Lenox Financial as further described below, notified Lenox Financial of the regulatory concerns caused by the financial condition of Lenox Financial as reported in the audited financial statements which had been submitted on August 16, 2010 and requested among other things, an updated, interim balance sheet and statement of operations for the period ending September 30, 2010.
  9. Lenox Financial responded, in part, to the Division's Letter by submitting on October 12, 2010, Lenox Financial's interim balance sheet and statement of operations for the period ending September 30, 2010.
  10. Lenox Financial's balance sheet for the interim period continued to report a Members Deficit position which was as of that date ($2,777,251).
  11. By cover letter dated October 11, 2010, which accompanied the interim financial statements, Lenox Financial projected that the Company would restore profitability by the end of 2010 or the first part of 2011 and requested additional time through the end of the first calendar quarter of 2011 to establish the minimum net worth requirement of $25,000.

    B. Failure to Provide Required Notice to the Division of the Occurrence of Significant Events

  12. The Division's regulation 209 CMR 42.12(1)(k) states, in part:

    A Licensee shall notify the Commissioner immediately, and in writing within one business day, of the occurrence of any of the following significant developments…(k) Any change to net worth resulting from market valuation or future loss liability or any other change which causes the net worth of the licensee to fall below the requirements of … 209 CMR 42.06 . . .
  13. To date, the Division has no record of receiving any notice from Lenox Financial of its deficient net worth position which caused the Company to fall below the minimum mortgage broker licensing requirements. Therefore, the amount of time which Lenox Financial has continued to conduct the mortgage broker business while failing to maintain the minimum net worth requirement for licensing is unknown to the Division, but has continued since at least December 31, 2009.
  14. The Division's regulation 209 CMR 42.12(1)(c) states, in part:

    A Licensee shall notify the Commissioner immediately, and in writing within one business day, of the occurrence of any of the following significant developments: (c) Receiving notification of the institution of license denial, cease and desist, suspension or revocation procedures, or other formal or informal regulatory action, in any state against the Licensee, and the reasons thereof.
  15. On September 22, 2010, regulatory action was entered against Lenox Financial by the Wisconsin Department of Financial Institutions whereby Lenox Financial's mortgage broker license was revoked in Wisconsin (the "Wisconsin Revocation Order"). Based upon information and belief, the revocation proceedings related, in whole or in part, to Lenox Financial's failure to satisfy the financial reporting requirements in Wisconsin.
  16. To date, the Division has not received notification from Lenox Financial of the Wisconsin Revocation Order.
  17. On September 22, 2010, the Division entered a deficiency license item on Lenox Financial's NMLS record, requesting that Lenox Financial provide details regarding the Wisconsin Revocation Order. The entry of the deficiency generated an email to Lenox Financial's designated contact person of record, notifying him that further information was required.
  18. To date, Lenox Financial has failed to notify the Division of the entry of the Wisconsin Revocation Order or to provide a response to the Division to the license item deficiency referenced in Paragraph 17.

    C. Failure to Demonstrate the Character, Reputation, Integrity, and General Fitness to Maintain a Mortgage Broker License

  19. Mortgage brokers in Massachusetts are licensed and regulated under Massachusetts General Laws chapter 255E, which is administered and enforced by the Commissioner. Pursuant to Massachusetts General Laws chapter 255E, section 8, the Division is authorized to inspect the books, accounts, papers, records, and files of mortgage lenders and mortgage brokers transacting business in Massachusetts to determine compliance with the provisions of Massachusetts General Laws chapter 255E or any rule, or regulation issued thereunder, and with any law, rule, or regulation applicable to the conduct of the business of a mortgage broker.
  20. On September 25, 2008, pursuant to Massachusetts General Laws chapter 255E, section 8, the Division commenced an examination/inspection of the books, accounts, papers, records, and files maintained by Lenox Financial to evaluate its compliance with the laws, regulations, and regulatory bulletins applicable to the conduct of a mortgage broker business in Massachusetts (the "examination/inspection").
  21. The Division's Report of Examination/Inspection on Consumer Compliance (the "Report"), which was issued to Lenox Financial on January 15, 2010, presented the findings of the examination/inspection and alleged significant failures to comply with applicable state and federal laws, rules, regulations, and regulatory bulletins governing the conduct of those engaged in the business of a mortgage broker in Massachusetts.
  22. Due to the severity of the violations in the Report, including numerous repeated violations from the prior examination and violations requiring monetary reimbursements to consumers, the Division presented Lenox Financial with a proposed Consent Order to resolve the compliance deficiencies referenced in the Report. The proposed Consent Order required, inter alia, that Lenox Financial reimburse all consumers for the fees collected by Lenox Financial that were not disclosed to the consumers prior to the closing of the loan and that Lenox Financial reimburse consumers for fees collected by Lenox Financial for services which the Company, as a mortgage broker, is prohibited from performing in a mortgage loan transaction or where no, or only a nominal, service was provided by the Company.
  23. Since the Division's issuance of the Report on January 15, 2010, the Division, Lenox Financial, and at various times counsel retained by Lenox Financial, have engaged in numerous teleconference discussions, as well as two in-person meetings on January 20, 2010 and April 6, 2010 at the Division's offices, to discuss the findings presented in the Report and Lenox Financial's written response to the Division's findings presented in the Report which Lenox Financial prepared and dated as of March 10, 2010. The Division and Lenox Financial have been unable to reach an agreement as to the terms of the Consent Order.
  24. The Division's Letter responded in detail to Lenox Financial's written request for reconsideration of certain findings presented in the Report. The Division's Letter also addressed concerns regarding Lenox Financial's failure to notify the Division of the Wisconsin Revocation Order as well as concerns raised by the financial condition of Lenox Financial as reported in the audited financial statements provided by the Company on August 16, 2010.
  25. The Division's regulation 209 CMR 42.09(4) states, in part, that, "In addition to the reports required by law, a Licensee shall make such other statements and reports to the Commissioner as he or she may require from time to time."
  26. The Division's Letter required that Lenox Financial respond within seven (7) days to the Division's requests for the following: an updated balance sheet and statement of operations reflecting the Company's financial condition; information relating to the mortgage lender agreement, so-called, entered by Lenox Financial during February 2010 for the reported purpose of improving the financial condition of Lenox Financial; a detailed record of all of Lenox Financial's pending Massachusetts residential mortgage loan applications; and a report of Lenox Financial's 2010 year-to-date volume of applications taken, and closed residential mortgage loan transaction completed, in Massachusetts. The Division's Letter required that Lenox Financial respond to the remainder of the issues raised in the Division's Letter within 20 days.
  27. On October 12, 2010, the Division received Lenox Financial's updated balance sheet and statement of operations for the period ending September 30, 2010 and a cover letter describing the factors contributing to Lenox Financial's financial condition. To date, however, Lenox Financial has failed to provide any information in response to the remaining items described in the Division's Letter which required a response within seven days, including but not limited to, the information requested by the Division to determine the number and scope of pending mortgage loan applications taken from consumers by Lenox Financial relating to Massachusetts residential properties.
  28. By email delivered on October 12, 2010, the Division notified Lenox Financial of the deficiencies in Lenox Financial's October 12 th response and directed that this request for the overdue, outstanding information required the immediate attention of Lenox Financial and must be submitted as soon as possible. To date, Lenox Financial has failed to provide any response to acknowledge or address the outstanding information described above in Paragraph 26 or to in any way indicate their intention to comply with the Division's directive.
  29. To date, Lenox Financial has also failed to submit evidence of consumer reimbursements directed by the Report and, upon information and belief, has failed to reimburse such consumers or to identify additional consumers to whom reimbursements were similarly directed pursuant to the findings of the Report.

    CONCLUSIONS OF LAW

  30. Based upon the information contained in Paragraphs 1 through 29, Lenox Financial 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 42.06(2)(c).
  31. Based upon the information contained in Paragraphs 1 through 29, Lenox Financial is unable to demonstrate that the financial condition of the Company is adequate and/or that Lenox Financial is currently maintaining the minimum net worth requirements for mortgage brokers in violation of the Division regulation 209 CMR 42.06(2)(a).
  32. Based upon the information contained in Paragraphs 1 through 29, Lenox Financial failed to notify the Commissioner, in writing, within one business day of a change to the Company's net worth that caused the net worth of the Company to fall below the requirements of 209 CMR 42.06(2)(a) in violation of the Division's regulation 209 CMR 42.12(1)(k).
  33. Based upon the information contained in Paragraphs 1 through 29, Lenox Financial failed to notify the Commissioner, in writing, within one business day of the Wisconsin Revocation Order, in violation of the Division's regulation 209 CMR 42.12(1)(c).
  34. Based upon the information contained in Paragraphs 1 through 29, Lenox Financial has been nonresponsive to the Division's requests for information which was intended to report the extent of Lenox Financial's current operations and/or consumer loan activity in Massachusetts as well as certain information relating to the Company's financial condition, in violation of Massachusetts General Laws chapter 255E, section 8 and the Division's regulation 209 CMR 42.09(4).
  35. Based upon the information contained in Paragraphs 1 through 29, the public interest will be harmed by delay in issuing an Order to Cease and Desist under Massachusetts General Laws chapter 255E, section 7(a) because, upon information and belief, (a) Lenox Financial has a portfolio of Massachusetts mortgage loan applications in various stages of origination, processing, and funding which may require immediate action to protect the interests of the affected Massachusetts consumers; and (b) Lenox Financial has failed to submit evidence of the consumer reimbursements directed by the Report, failed to identify additional consumers to whom reimbursements were similarly directed in accordance with such Report, and, based upon the financial condition of Lenox Financial, it remains unclear whether Lenox Financial is willing and/or able to fund the directed reimbursements during this time when Lenox Financial continues to accept additional Massachusetts residential mortgage loan applications.
  36. Based upon the information contained in Paragraphs 1 through 29, the Commissioner has determined that:
    1. Lenox Financial 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 broker including, but not limited to, the provisions of Massachusetts General Laws chapter 255E and 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 Lenox Financial.
  37. Based upon the information contained in Paragraphs 1 through 29, had the facts and conditions found therein existed at the time of Lenox Financial's original mortgage broker 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 29 present sufficient grounds for the revocation of Lenox Financial mortgage broker licenses pursuant to Massachusetts General Laws chapter 255E, section 6 and the Division's regulation at 209 CMR 42.07(2)(b).

    ORDER TO CEASE AND DESIST

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

  38. ORDERED that Lenox Financial and any and all members, managers, officers, employees, independent contractors, or agents operating on behalf of Lenox Financial, and their successors or assigns, shall immediately cease engaging in the activities of: (a) a mortgage broker, as those activities are defined under Massachusetts General Laws chapter 255E, section 1; and (b) a mortgage loan originator, as those activities are defined under Massachusetts General Laws chapter 255F, section 1, relative to any residential property in Massachusetts, not otherwise expressly permitted by the terms of this Temporary Order. Therefore, Lenox Financial 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.
  39. that Lenox Financial, 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.
  40. IT IS FURTHER ORDERED that Lenox Financial shall immediately place with one or more qualified broker(s) or lender(s), as appropriate based on the status of the application and with no loss to applicants, all of its pending Massachusetts residential mortgage loan applications. Lenox Financial shall place such applications with a licensed Massachusetts broker(s) or lender(s), as appropriate, or with a financial institution(s) that is exempt from the mortgage licensing requirements under Massachusetts General Laws chapter 255E, section 2.
  41. IT IS FURTHER ORDERED that as soon as possible, but in no event later than two days after the effective date of this Temporary Order, Lenox Financial shall submit the following information in writing to the Commissioner:
    1. A detailed record of all pending residential mortgage loan applications, which shall include, but is not limited to, the following: customer name, address, telephone number; all prepaid loan fees submitted by the customer; amount of loan; application status (i.e. filed, submitted to lenders); scheduled closing date; rate lock status; the location of all original open application files; and a list of applicable wholesale lenders. The latter list should include telephone numbers of contact persons familiar with Lenox Financial's submitted loans.
  42. IT IS FURTHER ORDERED that Lenox Financial shall not pay or declare a dividend, authorize a distribution, nor otherwise execute or authorize 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 Lenox Financial's management in the normal course of their business, without the prior written approval of the Commissioner. Upon the effective date of this Temporary Order, Lenox Financial shall implement or revise its practices and procedures, as necessary, to ensure that their 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.
  43. IT IS FURTHER ORDERED that Lenox Financial 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 or mortgage broker pursuant to this Temporary Order, a copy of such document, correspondence, or paper relating to the mortgage loan shall be retained in Lenox Financial's books and records and shall be available to the Commissioner, in their entirety, immediately upon request on the date and time specified by the Commissioner.
  44. 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.
  45. 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 Lenox Financial 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 15th day of October, 2010

By: Steven L. Antonakes
Commissioner of Banks
Commonwealth of Massachusetts