Related to:
Order

Order Network Capital Funding Corporation

Date: 06/30/2014
Organization: Division of Banks
Docket Number: 2014-011
Location: Irvine, CA

Network Capital Funding Corporation, Irvine, CA - Orders to Show Cause and Right to a Hearing

COMMONWEALTH OF MASSACHUSETTS

Suffolk, SS.

COMMISSIONER OF BANKS
MORTGAGE LENDER AND
MORTGAGE LOAN ORIGINATOR
LICENSING
Docket No. 2014-011

ORDER TO SHOW CAUSE
AND
NOTICE OF RIGHT
TO A HEARING

In the Matter of

NETWORK CAPITAL FUNDING CORPORATION

Irvine, California.

Mortgage Lender License No. ML11712

ADMINISTRATIVE COMPLAINT

The Commonwealth of Massachusetts Division of Banks (Division), by and through the Commissioner of Banks of the Commonwealth of Massachusetts (Commissioner), for its Order to Show Cause and Notice of Right to a Hearing (Order and Notice), alleges as follows:

  1. The Division brings this action under Massachusetts General Laws chapter 255E, section 6 to obtain temporary, preliminary, and permanent injunctive relief ordering NETWORK CAPITAL FUNDING CORPORATION (Network Capital or the Corporation), at all relevant times, a licensed mortgage lender under Massachusetts General Laws chapter 255E, section 2 and its implementing regulation 209 CMR 42.00 et seq., to cease and desist from transacting business in the Commonwealth as a mortgage lender; for a revocation of Network Capital’s Massachusetts mortgage lender license number ML11712; and such other equitable relief as may be necessary due to Network Capital’s violation of a Consent Order and a failure to maintain and exercise the financial responsibility, character, reputation, integrity, and general fitness that would warrant the belief that its business will be operated honestly, fairly, soundly, and efficiently 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).

    JURISDICTION AND VENUE

  2. The Division is an agency of the Commonwealth of Massachusetts with jurisdiction over matters relating to the licensing and regulation of those persons and entities engaged in the business of a mortgage lender pursuant to Massachusetts General Laws chapter 255E, section 2 and its implementing regulation 209 CMR 42.00 et seq.
  3. The Division also has jurisdiction over the licensing and regulation of persons and entities 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.
  4. At all relevant times, Network Capital has been engaged in the business of a mortgage lender of residential property in the Commonwealth.

    RESPONDENT

  5. Network Capital is, and at all relevant times has been, a foreign corporation conducting business in the Commonwealth with its main office located at 5 Park Plaza, #800, Irvine, California.
  6. Network Capital is currently licensed as a mortgage lender under Massachusetts General Laws chapter 255E, section 2, with license number ML11712.  According to records maintained on file with the Division, and as recorded on the Nationwide Multi-State Licensing System (NMLS), the Commissioner initially issued a mortgage lender and mortgage broker license to the Corporation on or about February 19, 2008.  On or about April 23, 2013, Network Capital requested a surrender of the Corporation’s mortgage broker license and that surrender request was processed on June 13, 2013. 
  7. Tri M. Nguyen, is, and at all relevant times has been, the Chief Executive Officer and sole owner of Network Capital.

    REGULATORY BACKGROUND

  8. 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 transacting business in Massachusetts to determine compliance with the provisions of Massachusetts General Laws chapter 255E and any rule, or regulation issued thereunder, and with any law, rule, or regulation applicable to the conduct of the business of a mortgage lender.
  9. On March 3, 2014, pursuant to the authority granted under Massachusetts General Laws chapter 255E, section 8, the Division commenced an examination of the books, accounts, papers, records and files maintained by Network Capital to evaluate the Corporation’s compliance with the laws, regulations and regulatory bulletins applicable to the conduct of a mortgage lender in Massachusetts (2014 Examination).
  10. The Division’s Report of Examination (2014 Report) was issued on the effective date of this Order and Notice 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 lender in Massachusetts.  The findings and conclusions of the 2014 Report are incorporated herein in their entirety by reference.

    FINDINGS OF FACT

    A. Failure to Comply with the Terms of a Consent Order

  11. On August 11, 2011, pursuant to the authority granted under Massachusetts General Laws chapter 255E, section 8, the Division commenced an examination of the books, accounts, papers, records, and files maintained by Network Capital to evaluate the Corporation's compliance with the laws and regulations applicable to the conduct of the mortgage business in Massachusetts (2011 Examination).
  12. The Division's Report of Examination (2011 Report), issued to Network Capital, alleged non-compliance with applicable state and federal statutes, rules, and regulations governing the conduct of those engaged in the business of a mortgage lender and mortgage broker in Massachusetts.
  13. On June 13, 2013, the Commissioner and Network Capital entered into a Stipulation and Consent to the Issuance of Consent Order, Docket No.: 2013-021 (2013 Consent Order), to address the matters raised by the findings of the 2011 Examination. 
  14. Paragraph 3 of the 2013 Consent Order states:

    Network Capital must maintain policies and procedures to ensure that, when acting in the capacity of a mortgage lender, the Corporation timely funds all mortgage loans in accordance with the Division's regulation 209 CMR 42.12A(16).

  15. Paragraph 4 of the 2013 Consent Order states: <

    Network Capital must maintain policies and procedures to ensure that all loan files in the Corporation's books and records are maintained in a manner sufficient to evidence compliance with applicable state and federal statutes and regulations, in accordance with the record keeping requirements specified by the Division's regulations 209 CMR 42.09 and 209 CMR 48.03.

    1. Procedures adopted and implemented by the Corporation must ensure that Network Capital retains complete loan files, including without limitation, initial mortgage loan applications and all required disclosures.
    2. Procedures adopted and implemented by the Corporation shall necessarily require that the Corporation properly identifies and documents the initial date of application and ensures that all disclosures are properly dated and maintained in a manner that will allow the Division to determine whether time-sensitive documents are being provided to consumers within the mandated timing requirements.
  16. Paragraph 5 of the 2013 Consent Order states:

    Network Capital must maintain policies and procedures to ensure that the Corporation is in compliance with the Division's regulation 209 CMR 53.00 et seq. regarding determination and documentation of a borrower's interest when refinancing a home loan that was consummated within 60 months prior to the Corporation's receipt of an application for a new home loan.  Such procedures shall ensure that in any transaction in which Network Capital is performing in a mortgage lender capacity, the burden is upon Network Capital, exclusively, to determine that the refinancing is in the borrower's interest.

  17. Paragraph 8 of the 2013 Consent Order states:

    Network Capital must maintain policies and procedures to ensure that the Corporation completes and submits NMLS Mortgage Call Reports within 45 days of the last day of each calendar quarter in accordance with prescribed filing deadlines and instructions.

  18. Paragraph 9 of the 2013 Consent Order states:

    Network Capital must comply with all laws and regulations applicable to its conducting the business of a mortgage lender, including, but not limited to, Massachusetts General Laws chapters 255E and 255F, and the Division's regulations 209 CMR 41.00 et seq. and 209 CMR 42.00 et seq. Such obligations shall necessarily include the duty to address and correct all violations and areas of concern addressed in the Report, which Network Capital has done by way of its preliminary response submitted to the Division.

  19. Paragraph 14 of the 2013 Consent Order states:

    Failure to comply with the terms of this Consent Order shall constitute grounds for license suspension and/or revocation, or other formal regulatory actions pursuant to applicable provisions of the General Laws of the Commonwealth of Massachusetts.

  20. Books and records reviewed by the Division’s examiners during the 2014 Examination revealed that Network Capital is in substantial non-compliance with the provisions of the 2013 Consent Order as further described in this Order and Notice.

    B. Failure to Comply with Massachusetts Settlement and Funding Laws and Regulations

    i. Failure to Timely Fund Loans 

  21. Massachusetts General Laws chapter 140D, section 10(a) states in part:

    Except as otherwise provided in this section, in the case of any consumer credit transaction, including opening or increasing the credit limit for an open-end-credit plan, in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section…[Emphasis added].

  22. The Division’s regulation 209 CMR 42.12A(16) states in part:

    It is a prohibited act or practice for a mortgage lender to contract with a consumer through the underwriting and subsequent execution of mortgage loan closing documents and thereafter fail to fund the mortgage loan.

  23. The Division's regulation at 209 CMR 42.12A(20) states:

    A violation of 209 CMR 42.12A shall constitute grounds for the issuance of a cease and desist order under M.G.L. c. 255E, § 7; shall constitute grounds for license suspension or revocation under M.G.L. c. 255E, § 6 and shall constitute grounds for an administrative fine or penalty under M.G.L. c. 255E, §§ 11 and 12.

  24. The Attorney General's regulation 940 CMR 8.06(8) states:

    It is an unfair or deceptive act or practice for a lender to fail to disburse funds in accordance with any commitment or agreement with the borrower.

  25. Books and records reviewed by the Division’s examiners during the 2014 Examination revealed in at least nine refinance transactions, Network Capital failed to disburse funds in accordance with the terms of the contract and at the conclusion of the three day rescission period, as required by Massachusetts laws and regulations.  Examples of four of the nine transactions identified during the 2014 examination include:
    1. Loan No. 13056246:
      1. The Division's examiners review of the loan file indicated that the Security Instrument or Note was executed by the borrower(s) on June 14, 2013.  The required funding or disbursement date was June 19, 2013.
      2. According to records provided by Network Capital to the Division’s examiners for review, Network Capital advanced funds to the Corporation’s designated settlement agent on June 24, 2013 and the settlement agent advanced funds on June 27, 2013, approximately eight days after the recession period expired.   
    2. Loan No. 13056633: 
      1. The Division's examiners review of the loan file indicated that the Security Instrument or Note was executed by the borrower(s) on June 28, 2013.  The required funding or disbursement date was July 3, 2013.
      2. According to records provided by Network Capital to the Division’s examiners for review, Network Capital advanced funds to the Corporation’s designated settlement agent on July 10, 2013 and the settlement agent advanced funds on July 11, 2013, approximately eight days after the recession period expired.   
    3. Loan No. 13114776: 
      1. The Division's examiners review of the loan file indicated that the Security Instrument or Note was executed by the borrower(s) on January 6, 2014.  The required funding or disbursement date was January 10, 2014.
      2. According to records provided by Network Capital to the Division’s examiners for review, Network Capital advanced funds to the Corporation’s designated settlement agent on January 13, 2014 and the settlement agent advanced funds on January 21, 2014, approximately eleven days after the recession period expired.
    4. Loan No. 14016369: 
      1. The Division's examiners review of the loan file indicated that the Security Instrument or Note was executed by the borrower(s) on February 14, 2014.  The required funding or disbursement date was February 19, 2014.
      2. According to records provided by Network Capital to the Division’s examiners for review, Network Capital advanced funds to the Corporation’s designated settlement agent on February 20, 2014 and the settlement agent advanced funds on February 24, 2014, approximately five days after the recession period expired.   
  26. The provisions of the 2013 Consent Order executed by Network Capital specifically stated that the Corporation was required to maintain policies and procedures to ensure that the Corporation timely funded all mortgage loans.
  27. In each of the transactions identified in Paragraph 25 of this Order and Notice, Massachusetts consumers were required to not only pay a daily interest rate on the loan that they had consummated with Network Capital but also on loans that they were attempting to pay off through the refinance transaction.
  28. The Division’s examiners review of the Corporation’s “WET” and “EOR” Funding Policy (Funding Policy) permitted Network Capital’s funding manager or executive management to make exceptions to the Funding Policy.  In addition, the Funding Policy allowed settlement agents to withhold funds for up to 2 days before disbursing loan proceeds. 
  29. The Funding Policy implemented by Network Capital is in violation of Massachusetts laws and regulations and the provisions of the 2013 Consent Order.
  30. During the 2014 Examination, the Division’s examiners notified the Corporation’s Chief Compliance Officer of the violations of Massachusetts laws and regulations and the provisions of the 2013 Consent Order. 
  31. Network Capital’s Chief Compliance Officer indicated that the Corporation did not believe that Network Capital was in violation of Massachusetts requirements.  
  32. As of the date of this Order and Notice, Network Capital has failed to update its policies and procedures and continues to violate Massachusetts laws and regulations and the 2013 Consent Order thereby harming Massachusetts consumers.    

               ii.    Failure to Comply with the Good Funds Statute

  1. Massachusetts General Laws, chapter 183, section 63B states in part:

    No mortgagee who makes a loan to be secured by a mortgage or lien on real estate located in the commonwealth in conjunction with which, a mortgage deed evidencing the same is to be recorded in a registry of deeds or registry district in the commonwealth, shall deliver said deed or cause the same to be delivered into the possession of such registry of deeds or registry district for the purpose of the recording thereof unless prior to the time said deed is so delivered for recording, said mortgagee has caused the full amount of the proceeds of such loan due to the mortgagor pursuant to the settlement statement relevant thereto given to said mortgagor or in the instance of any such loan in which the full amount of the proceeds due to the mortgagor pursuant to the terms thereof are not to be advanced prior to said recording, so much thereof as is designated in the loan agreement, to be transferred to the mortgagor, the mortgagor’s attorney or the mortgagee’s attorney in the form of a certified check, bank treasurer’s check, cashier’s check or by a transfer of funds between accounts within the same state or federally chartered bank or credit union, or by the funds-transfer system owned and operated by the Federal Reserve Banks, or by a transfer of funds processed by an automated clearinghouse…
  1. Massachusetts General Laws chapter 183, section 63B (Good Funds Statute)  requires that loan proceeds in a mortgage transaction be transferred to the mortgagor, the mortgagor's attorney or the mortgagee's attorney, in the form of good funds, i.e., a certified check, bank treasurer's check, cashier's check or wire transfer, prior to recording of the mortgage.  The Good Funds Statute specifically prohibits any mortgagee from recording a mortgage document at the relevant registry of deeds prior to ensuring that funds were appropriately transferred.
  1. Books and records reviewed by the Division’s examiners during the 2014 Examination revealed that in at least one instance, Network Capital, through its designated settlement agent recorded a mortgage deed at the relevant registry of deeds prior to ensuring that loan proceeds were appropriately transferred to the mortgagor, the mortgagor's attorney or the mortgagee's attorney, in the form of good funds (Loan No.13067102).
  1. The Division’s examiners review of the loan file provided by Network Capital revealed that the Massachusetts refinance transaction identified a settlement date of July 29, 2013 and funding date on August 2, 2013.  A review of information provided by both Network Capital and public records available at the registry of deeds revealed that the mortgage deed was recorded on August 8, 2013 and funds were not advanced to Network Capital’s settlement agent until August 13, 2013 who thereafter disbursed the loan proceeds on August 14, 2013.
  1. The Division’s examiners requested an explanation from the Corporation regarding Network Capital’s failure to comply with the Good Funds Statute; however Network Capital was unable to provide any explanation. 

       C.  Failure to Obtain Written Evidence of Borrower’s Right of Rescission

  1. The Division’s regulation, 209 CMR 32.15(1)(b), states in part:

    To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram, or other means of written communication.  Notice is considered given when mailed, or when filed for telegraphic transmission, or, if sent by other means, when delivered to the creditor's designated place of business. [Emphasis added].
  1. During the 2014 Examination, the Division’s examiners reviewed at least three loan files provided by Network Capital, that failed to include a signed document executed by a Massachusetts consumer evidencing that the borrower had exercised their right to rescind as required by the Division’s regulation.
  1. During the 2014 Examination, the Division’s examiners review of the loan file and public records available at the public registry of deeds for Loan No. 13068339,   revealed that a mortgage deed for the borrower(s) in this transaction had been executed as of September 11, 2013, and a second mortgage deed had been executed as of September 25, 2013, however only one loan file was provided by Network Capital for review and that loan file identified a settlement date of September 25, 2013.
  1. In response to the Division’s examiners request for the loan documents for the September 11, 2013 transaction, Network Capital indicated that the borrower had initially rescinded the September 11, 2013 transaction, however the Corporation was ultimately able to convince the borrower to re-execute new closing documents as of September 25, 2013.
  1. Network Capital failed to provide any documents indicating that the borrower(s) had exercised their right to rescind the transaction.
  1. The Division’s examiners also determined that Network Capital had failed to obtain written requests for recession in at least two other transactions, Loan No(s).13010819 and 12115846.
  1. Network Capital indicated that it was the Corporation’s general practice to allow borrowers to rescind mortgage loans verbally, in order to attempt to convince them to go through with the loan or agree to modified terms. 

        D. Unfair or Deceptive Acts or Practices
  1. Massachusetts General Laws chapter 93A, section 2(a) states:

    Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.
  1. During the 2014 Examination, Network Capital presented the Division’s examiners with HUD-1 settlement statements which were prepared as of the date of disbursement, as though they had been provided to the borrower and signed at closing.
  2. The Division’s examiners requested the HUD-1 settlement statements signed by the borrower, at closing, and Network Capital thereafter provided the Division’s examiners with what the Corporation termed to be the “estimated HUD.” 
  3. The Division’s examiners review of the signature addendum page which included borrower’s signatures revealed that Network Capital provided the Division identical copies of signature addendum pages of the “estimated HUD-1” as part of the HUD-1 settlement statements prepared at the time of disbursement.
  4. The Division’s examiners were unable to determine if Massachusetts consumers received a proper accounting of the transaction at any time during or after the loan closing process.

           

E. Prohibited Acts or Practices

  1. The Division’s regulation, 209 CMR 42.12A(6), states:

    It is a prohibited act or practice for a mortgage broker or mortgage lender to have a consumer sign a blank or incomplete mortgage loan application or mortgage loan documents.

  1. The Division's regulation at 209 CMR 42.12A(20) states:
  2. A violation of 209 CMR 42.12A shall constitute grounds for the issuance of a cease and desist order under M.G.L. c. 255E, § 7; shall constitute grounds for license suspension or revocation under M.G.L. c. 255E, § 6 and shall constitute grounds for an administrative fine or penalty under M.G.L. c. 255E, §§ 11 and 12.

  1. Books and records reviewed by the Division’s examiners revealed that Network Capital provided blank or incomplete loan documents and/or disclosures to Massachusetts consumers for signature and thereafter electronically manipulated information relative to the loan transaction after the consumer had signed the document.
  2. During the 2014 examination, the Division’s examiners discovered that  Network Capital had used the “Adobe Comment Function” to electronically fill-in types of credit inquiries made which appeared on the borrower’s credit report and provide explanations for the inquires.  This electronic manipulation of the Undisclosed Debt Acknowledgement form was found in at least four loan files, Loan No(s).14016322, 14016218, 13044529, 14017451.
  1. During a review of a Net Tangible Worksheet form (Worksheet) for Loan No. 14016369 and a Veterans Affairs disclosure titled Old vs. New Loan Comparison form for Loan No. 14017451, the Division’s examiners noted that the borrowers each signed the relative disclosures with only the terms of the proposed loan.  The terms of the existing loan were subsequently added electronically.
  1. Further manipulation of documents was discovered during the Division’s examiners review of documents contained in Loan No. 13115340.  The Division’s review of the loan file indicated that Network Capital used the “Adobe Comment Function,” to electronically “white-out” an apparent signing error made by the borrower at closing.
  1. On June 4, 2014, the Division’s examiners requested an explanation from the Corporation’s Chief Compliance Officer of the findings identified above.  The Chief Compliance Officer denied the assertion that the Corporation had provided blank documents to Massachusetts consumers for signature and stated that Network Capital expected the borrower to fill in the information pursuant to the Corporation’s instructions.   
  1. Network Capital’s Chief Compliance Officer also indicated that the Corporation has a “Zero Tolerance Loan Fraud” policy in place.  Additionally, the Chief Compliance Officer noted that Network Capital had no way to determine who had altered the documents.
  1. During the Division’s review of the loan documents, the Division’s examiners were able to view the username and time/date entry for all but one instance of the manipulated documents.  The usernames indicated that certain employees including members of the Corporation’s management had participated in the manipulation and alteration of the documents.  In the above-cited examples of Undisclosed Debt Acknowledgement forms, the documents were altered by the Corporation’s Director of Business Process Management, the Processing Manager, the Senior Processor, or someone accessing one of the aforementioned individuals’ usernames after the documents were signed by the consumers.  The electronic “white-out,” Worksheet, and Old vs. New Comparison forms were altered by the Corporation’s Investor Relations Specialist, or someone accessing her username after the consumer signed the documents. 
  1. Network Capital’s failure to ensure that loan documents were not altered after Massachusetts consumers signed them demonstrates a serious deficiency in the Corporation’s internal controls and employee oversight.  Despite the existence of a “Zero Tolerance Loan Fraud” policy, senior staff members, including experienced managers, participated in prohibited acts and practices in the normal course of business without regard to the integrity and authenticity of the loan application process. 

F. Failure to File Required Financial Statements in a Timely Manner and Violation of Warehouse Line Covenants

  1. The Division’s regulation at 209 CMR 42.03 (2)(b)(3) states:

    Renewal Applications. Within 90 days of the close of its fiscal year, an Applicant for license renewal shall submit financial statements for the preceding fiscal year that have been audited or reviewed by an independent certified public accountant and such other financial information as the Commissioner may require.
  1. The aforementioned regulation requires a licensed mortgage lender to upload the Corporation’s audited financial statements on the NMLS on or before March 31 of each calendar year.  According to records maintained on file with the Division, and as recorded on the NMLS, the Corporation filed the required financial statements on June 10, 2014. 
  1. The Division’s examiners review of two of Network Capital’s warehouse line agreements  require the Corporation to furnish audited financial statements within ninety (90) and one hundred twenty (120) days after the end of its fiscal period. 
  1. The Division’s examiners review of the audited financial statements for the fiscal year ending December 31, 2012, indicated that the Corporation violated covenants of certain repurchase agreements of the warehouse lines of credit and Network Capital was unable to present the auditors with warehouse issues waivers regarding the noncompliance.
  1. Based upon information and belief the Corporation was in violation of the aforementioned covenants as of the date of the 2014 Examination. 

G.  Failure to Provide Notice of Significant Events

  1. The Division’s regulation 209 CMR 42.12(1)(e) states: A Licensee shall notify the Commissioner immediately, and in writing within one business day, of the occurrence of any of the following significant developments…Expiration, termination or default, technical or otherwise, of any existing line of credit or warehouse credit agreement.
  1. Books and records reviewed by the Division’s examiners during the 2014 Examination indicated that as of January 2012, the Corporation maintained six (6) warehouse lines of credit.
  1. As of the date of the 2014 Examination, four of the six warehouse lines of credit had been terminated.  The Corporation’s Chief Compliance Officer indicated that the terminations had been initiated by the Corporation due to excess capacity, non-usage fees and the Corporation’s inability to meet covenants for certain lines.
  1. The Division’s examiners’ review of the audited financial statements for the fiscal year ending December 31, 2012, indicated that the Corporation violated covenants of certain repurchase agreements of the warehouse lines of credit and Network Capital was unable to present the auditors with warehouse issues waivers regarding the noncompliance.
  1. According to the Division’s records, the Corporation failed to notify the Division within one day of the events referenced in Paragraphs 66 through 68 of this Order and Notice.

H. Filing Inaccurate Information with the Division

  1. The Division’s Regulation 209 CMR 42.09(4) states:

    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. The Commissioner may require regular quarterly reports and may furnish blank forms for all such statements or reports, required by 209 CMR 42.09.
  1. The Division’s Regulation 209 CMR 42.10 states: By March 31, each Licensee shall file an annual report with the Commissioner in such form as the Commissioner shall prescribe for the preceding calendar year. The annual report shall be in writing, subscribed by the Licensee under the pains and penalty of perjury.
  1. A review of Network Capital’s Mortgage Call Report (MCR) uploaded to the NMLS for 2013, revealed calculation errors as further described in the 2014 Report.
  1. The provisions of the 2013 Consent Order executed by Network Capital required the Corporation to maintain policies and procedures to ensure that Network Capital submitted MCR reports in accordance with prescribed filing deadlines and instructions.
  1.  The Division’s examiners review of information provided in conjunction with the Corporation’s 2012 annual report filed with the Division, indicated that Network Capital stated that the Corporation had not exceeded the credit limits on any of its warehouse lines of credit; none of its warehouse lines were suspended or terminated; and that no covenant(s) of the Corporation’s warehouse agreement(s) were violated.
  1. The Division’s examiners review of the Corporation’s 2012 audited financial statements filed with the Division, revealed that the audited statements noted that Network Capital was not in compliance with certain financial covenants of certain warehouse borrowing repurchase agreements as of December 31, 2012.

I. Refinancing in the Borrower’s Interest

  1. Massachusetts General Laws chapter 183, section 28C(a) states:

A lender shall not knowingly make a home loan if the home loan pays off all or part of an existing home loan that was consummated within the prior 60 months or other debt of the borrower, unless the refinancing is in the borrower’s interest. The “borrower’s interest” standard shall be narrowly construed, and the burden is upon the lender to determine and to demonstrate that the refinancing is in the borrower’s interest.

 

  1. The Division's regulation 209 CMR 53.07(1)(b) states in part:

A lender may request that a borrower acknowledge receipt of such a worksheet or other documentation; provided, however, a lender shall not shift the burden to the borrower to demonstrate that a home loan is in the borrowers' interest.

  1. Books and records reviewed by the Division's examiners during the 2014 Examination revealed that the Worksheet provided to borrowers shifted the burden to the relevant borrower to demonstrate that the loan was in the borrower’s interest and their benefit.  Examples were found in Loan No(s):. 13114724, 13079795, and 14017451.
  1. The provisions of the 2013 Consent Order executed by Network Capital required the Corporation to maintain policies and procedures to ensure that it was in compliance with the aforementioned regulatory requirements.

  j. Failure to Maintain the Character, Reputation, Integrity and Fitness to Engage in the Business of a Mortgage Lender

  1. The Division’s regulation 209 CMR 42.03(2)(c), states in part: An Applicant shall submit information demonstrating that the Applicant possesses the character, reputation, integrity and fitness to engage in the business of a mortgage lender in an honest, fair, sound and efficient manner.
  1. The Division’s regulation 209 CMR 42.03(2)(d) states in part: An Applicant shall demonstrate to the Commissioner’s satisfaction that the Applicant and its applicable officers and employees, possess the necessary education and business experience to engage in the business of a mortgage lender.

 

  1. Books and records reviewed by the Division’s examiners revealed that Network Capital had demonstrated a complete disregard of regulatory directives and has demonstrated an unwillingness to devote any attention or resources necessary to remedy the violations noted in the 2011 Examination and ensure compliance with the provisions of the 2013 Consent Order.  Additionally, the findings of the 2014 Examination as described in Paragraphs 1 through 79 of this Order and Notice and further described in the 2014 Report is an indication that the Corporation and its current management team do not possess the character, reputation, integrity and fitness to engage in the business of a mortgage lender in an honest, fair, sound and efficient manner. 
  2. The Division’s examiners review of the Corporation’s policies and procedures, and the findings as further described in the 2014 Report indicate that Network Capital’s policies are not effective at preventing violations of consumer protection statues and regulations.  Multiple violations identified in the 2014 Report and described in this Order and Notice are in direct contradiction of Network Capital’s written policies and procedures. 

K. Other Violations
 

  1. In addition to the violations specifically set forth in this Order and Notice, the 2014 Report to be provided in conjunction with the issuance of this Order and Notice describe other violations observed during the 2014 Examination. 

VIOLATIONS

NOW THEREFORE, the Division sets forth the following charges against Network Capital:

  1. The Division hereby re-alleges, and incorporates by reference Paragraphs 1 through 84 of this Order and Notice as though fully set forth.
  2. CHARGE ONE: Network Capital has failed to demonstrate and maintain the character, reputation, integrity, and general fitness that would warrant the belief that the mortgage lender 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 regulations 209 CMR 42.03(2)(c). 
  3. CHARGE TWO: By contracting with Massachusetts consumers through the underwriting and subsequent execution of mortgage loan closing documents, and thereafter failing to fund the loan in a timely manner, Network Capital violated the Division’s regulation 209 CMR 42.12A(16) and the 2013 Consent Order.
  4. CHARGE THREE: By failing to disburse loan proceeds at the conclusion of the three day rescission period in a residential mortgage loan transaction, Network Capital violated Massachusetts General Laws chapter 140D, section 10(a).
  5. CHARGE FOUR: By failing to disburse funds in accordance with mortgage loan agreements, Network Capital violated the Attorney General’s regulation 940 CMR 8.06(8).
  6. CHARGE FIVE: By failing to ensure that loan proceeds in a mortgage transaction were transferred to the mortgagor, the mortgagor's attorney or the mortgagee's attorney, in the form of good funds, prior to recording a mortgage deed at the registry of deeds, Network Capital violated Massachusetts General Laws chapter 183, section 63B. 
  7. CHARGE SIX: By failing to retain written evidence of Massachusetts borrowers request to rescind mortgage loan transactions, Network Capital violated the Division’s regulation 209 CMR 32.15(1)(b) and the 2013 Consent Order.
  8. CHARGE SEVEN: By providing loan documents that contained borrower’s signatures on HUD-1 settlement statement signature addendum pages and representing that they were signed by the borrowers on the date of disbursement, Network Capital violated Massachusetts General Laws, chapter 93A, section 2(a).
  9. CHARGE EIGHT:  By providing consumers with blank or incomplete loan documents and/or disclosures for signature and then adding information after the borrower had signed the disclosures, Network Capital violated Division’s regulation 209 CMR 42.12A(6).
  10. CHARGE NINE:  By failing to file audited financial statements in a timely manner, Network Capital has violated the Division’s regulation 209 CMR 42.03 (2)(b)(3).
  11. CHARGE TEN:  By failing to notify the Division within one day of the termination of Network Capital’s warehouse lines, Network Capital violated the Division’s regulation 209 CMR 42.12(1)(e).
  12. CHARGE ELEVEN:  By failing to notify the Division within one day of Network Capital’s noncompliance with repurchase agreements of warehouse lines of credit, Network Capital violated the Division’s regulation 209 CMR 42.12(1)(e). 
  13. CHARGE TWELVE: By failing to submit accurate information on mortgage call reports filed with the Division, Network Capital violated the Division’s regulation 209 CMR 42.09(4) and the  2013 Consent Order. 
  14. CHARGE THIRTEEN: By failing to disclose Network Capital’s noncompliance with certain financial covenants of the Corporation’s warehouse borrowing repurchase agreements in its 2012 annual report filed with the Division, Network Capital violated the Division’s regulation 209 CMR 42.10. 
  15. CHARGE FOURTEEN: By requiring borrowers to determine whether a refinance transaction was in the borrower(s) interest, Network Capital violated Massachusetts General Laws chapter 183, section 28C(a), the Division’s regulation 209 CMR 53.07(1)(b), and the 2013 Consent Order.
  16. CHARGE FIFTEEN: By failing to establish adequate internal controls to ensure that the Corporation and its officers and employees complied with Massachusetts laws and regulations, Network Capital violated the Division’s regulation 209 CMR 42.03(2)(c) and 209 CMR 42.03(2)(d).
  17. CHARGE SIXTEEN: Had the foregoing existed at the time of Network Capital’s 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 84 present sufficient grounds for the revocation of Network Capital’s mortgage lender license pursuant to Massachusetts General Laws chapter 255E, section 6 and the Division's regulation at 209 CMR 42.04(2)(b), and 42.12A(20).

PRAYER FOR RELIEF

  1. WHEREFORE, the Division, by and through the Commissioner, prays for a final decision as follows: 
  1. For a final Agency decision awarding temporary and preliminary injunctive relief, and any other ancillary relief, as may be necessary to protect the public interest during the pendency of this matter.
  2. for a final Agency decision in favor of the Division and against Network Capital for each Charge set forth in this Order and Notice.
  3. For a final Agency decision revoking Network Capital’s mortgage lender license, number ML11712 to conduct business as a mortgage lender in Massachusetts.
  4. For a final Agency decision ordering Network Capital to immediately place any pending residential mortgage loan applications and related files with an independent, licensed Massachusetts mortgage lender or other qualified lender in Massachusetts, with no cost to the applicant.
  5. For costs and fees of the Division’s investigation of this matter; and
  6. For such additional equitable relief as the Presiding Officer may deem just and proper.

NOTICE OF RIGHT TO A HEARING

  1. Network Capital or their authorized representative are required to file an Answer or otherwise respond to the Charges contained in this Order and Notice within twenty-one (21) days of its effective date, pursuant to the Standard Adjudicatory Rules of Practices and Procedures, 801 CMR. 1.01 (6)(d).  Failure to do so will result in a default judgment against you.   The Answer, and any subsequent filings that are made in conjunction with this proceeding, shall be directed to the Administrative Hearings Officer, Division of Banks, with a copy to Prosecuting Counsel. 

All papers filed with the Division shall be addressed to the attention of:

Administrative Hearings Officer

Division of Banks

1000 Washington Street, 10th Floor

Boston, Massachusetts 02118

 

Prosecuting Counsel for this matter is:

Nicole Palumbo

Division of Banks

1000 Washington Street, 10th Floor

Boston, Massachusetts 02118

 

  1. You are further advised that Network Capital has the right to be represented by counsel or another representative, to call and examine witnesses, to introduce exhibits, to cross-examine witnesses who testify against Network Capital and to present oral arguments.  The hearing will be held at a date and time to be determined and will be conducted according to Massachusetts General Laws, chapter 30A, sections 10 and 11, and the Standard Adjudicatory Rules of Practice and Procedure, 801 CMR 1.01 and 1.03. 
  2. Network Capital or their representative may examine any and all Division records relative to this case prior to the date of the hearing, during normal business hours, at the office of the Prosecuting Counsel.  If you elect to undertake such an examination, please contact the Prosecuting Counsel, Nicole Palumbo at 617-956-1500, extension 673 in advance to schedule a time that is mutually convenient.


 

BY ORDER AND DIRECTION OF THE COMMISSIONER OF BANKS.

Dated at Boston, Massachusetts, this 30th day of June, 2014

David J. Cotney
Commissioner of Banks
Commonwealth of Massachusetts

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