Temporary Order to Cease and Desist  Lenders Direct Capital Corporation

Date:	02/20/2007
Organization:	Division of Banks
Docket Number:	2007-009
Location:	Lake Forest, CA

Lenders Direct Capital Corporation, Lake Forest, CA - Temporary Order to Cease and Desist

COMMONWEALTH OF MASSACHUSETTS

Suffolk, SS.

COMMISSIONER OF BANKS
MORTGAGE LENDER AND
MORTGAGE BROKER LICENSING
Docket No. 2007-009

FINDINGS OF FACT AND TEMPORARY ORDER TO CEASE AND DESIST

In the Matter of

LENDERS DIRECT CAPITAL CORPORATION
Lake Forest, California

Mortgage Company License No(s). MC4504 and MC4505

The Commissioner of Banks ("Commissioner") having determined that LENDERS DIRECT CAPITAL CORPORATION ("Lenders Direct" or the "Corporation"), located at 26140 Enterprise Way, Lake Forest, California 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 and mortgage broker in Massachusetts pursuant to Massachusetts General Laws chapter 255E, section 2.
2. Lenders Direct is, and at all relevant times, has been a foreign corporation conducting business in the Commonwealth of Massachusetts. Lenders Direct's main office is located at 26140 Enterprise Way, Lake Forest, California.
3. Lenders Direct is licensed by the Commissioner as a mortgage lender and 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 company license, license number MC4504, to Lenders Direct to engage in the business of a mortgage lender and mortgage broker on or about October 2, 2006. License number MC4504 authorized Lenders Direct to conduct the mortgage company business from the Corporation's main office located at 26140 Enterprise Way, Lake Forest, California.
4. Lenders Direct maintains an additional licensed office location at 1370 Washington Pike, Suite 101-C, Bridgeville, Pennsylvania from which the Corporation conducts its mortgage lender and mortgage broker business. According to records maintained on file with the Division, the Commissioner issued a mortgage company license to Lenders Direct for that location on or about October 2, 2006.
5. Beginning on or about Monday, February 12, 2007, the Division was alerted by a report published in the American Banker, a daily financial publication, that Lenders Direct had ceased funding wholesale originations. The Division confirmed this report by reviewing the information which was available on the Lenders Direct website as of February 12, 2007. Specifically, by a notice dated February 9, 2007 and maintained on the Corporation's website, Lenders Direct stated that the Corporation "is not currently accepting or funding wholesale residential mortgage loans."
6. The American Banker report further indicated, through statements attributed to the Corporation's President, that Lenders Direct had laid off its entire wholesale lending operations staff and that the Corporation would "try to manage through the rest of this year" with its retail lending division.
7. Based upon the information referenced in Paragraphs 5 and 6, and available to the Division on February 12, 2007, the Division requested that Lenders Direct provide, among other information, a current report of the Corporation's open pipeline of residential mortgage loan applications. In response to the Division's request for information, the Corporation reported via email and letter dated February 12, 2007 that "[a]s of 5:00 pm Pacific Standard Time on Thursday February 8, 2007 Lenders Direct . . . closed all wholesale operations and ceased originating or funding loans. This situation was brought about by [Lenders Direct] losing its ability to use its warehouse lending facilities as directed by its warehouse lenders."
8. A warehouse lending facility is a credit line used by mortgage lenders which enables them to fund mortgage loans prior to selling them to an investor. Without a warehouse lending facility, and in the absence of the mortgage lender independently maintaining sufficient reserves and liquidity positions within the institution to fund such loans, the mortgage lender would be unable to meet its funding commitments, negating its ability to meet contractual obligations to fund mortgage loans.
9. As of the close of business on Friday, February 9, 2007, after the expiration of the 24-hour period following the cessation of the Corporation's warehouse facilities, Lenders Direct had not notified the Division of the suspension, default, and/or termination of the Corporation's line(s) of credit or warehouse credit agreement(s).
10. Although the Division is now aware, through the published article appearing in American Banker, that Lenders Direct has ceased its wholesale operations, the full conditions under which the Corporation's wholesale lending facilities were suspended and/or terminated remain unknown to the Division.
11. The Division's regulation at 209 CMR 42.12(1)(e) states, in part:

    (1) A Licensee shall notify the Commissioner immediately, and in writing within one business day, of the occurrence of any of the following significant developments: . . . (e) Expiration, termination or default, technical or otherwise, of any existing line of credit or warehouse credit agreement.

12. By a letter dated February 14, 2007 which was sent by facsimile at or about 8:00 am (PST) to Michael McQuiggan, President of Lenders Direct, the Division requested that the Corporation provide the following:

    [A] detailed record of all pending residential mortgage loan applications on properties located in all states ('pipeline report') in which the Licensee holds a mortgage banker or mortgage broker license. The loan pipeline must be updated as of Thursday, February 8, 2007. Further, the Licensee must submit sets of financial statements, including balance sheets and income statements as follow [sic]: one set for the year ended December 31, 2006 as of December 31 and a set for the interim period from January 1, 2007 to February 2, 2007 as of February 2, 2007.

    The Division required that Lenders Direct provide the requested materials no later than 1:00 PM (PST) on Wednesday, February 14, 2007.

13. On February 14, 2007 at approximately 11:15 AM (PST), the Division received via facsimile a letter from Mr. McQuiggan in response to the Division's request for books and records described in Paragraph 12 of this Temporary Order. In his letter, Mr. McQuiggan stated that Lenders Direct could not provide the requested financial statements referenced in paragraph 12 of this Temporary Order within the required period. Mr. McQuiggan further stated that Lenders Direct intends to provide the financial statements with its Annual Report by March 1, 2007. Mr. McQuiggan did not indicate that Lenders Direct would attempt to provide financial statements prior to March 1, 2007. The letter also indicated that Lenders Direct provided a pipeline report of Massachusetts loans on February 12, 2007 and that Lenders Direct does not agree that the Division has authority to request records relating to property located outside the Commonwealth.
14. Massachusetts General Laws chapter 255E, section 8 states, in part:

    Each licensee shall, when directed by said commissioner, permit said commissioner or his duly authorized representative to inspect its relevant records and evidence of compliance with the provisions of this chapter or any rule or regulation issued hereunder and with any other law, rule or regulation applicable to the conduct of the business for which it is licensed under this chapter . . . . For the purposes of such inspection, said commissioner or his representative shall have access to the offices and place of business, books, accounts, papers, records and files of all such licensees.

15. The Division's regulation 209 CMR 42.09(4) states, in part, that:

    (4) 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.

16. The Division's regulation 209 CMR 42.10 states that:

    By March 1, 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.

    CONCLUSIONS OF LAW

17. Based upon the information contained in Paragraphs 1 through 16, Lenders Direct 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).
18. That the requirement contained in the Division's regulation 209 CMR 42.10, upon which Lenders Direct relied in submitting its response referenced in Paragraph 13, that each licensee file with the Commissioner of Banks an annual report for the preceding calendar year is a condition of maintaining the mortgage lender and/or mortgage broker license which must be renewed by the Commissioner of Banks on an annual basis.
19. That the Division's requests for information as set forth in Paragraphs 1 through 16, made pursuant to the Division's inspection authority under Massachusetts General Laws chapter 255E, section 8, was not superseded by 209 CMR 42.10.
20. Based upon the information contained in Paragraphs 1 through 16, that the Division's requests for information and the time allotted for a response to such requests were reasonable under the circumstances, given Lenders Direct authority and apparent intention to continue its retail lending and mortgage broker activities under the Corporation's Massachusetts licenses.
21. Based upon the information contained in Paragraphs 1 through 16, Lenders Direct failed to provide the Division with requested books, accounts, statements and reports in violation of Massachusetts General Laws chapter 255E, section 8 and 209 CMR 42.09(4).
22. Based upon the information contained in Paragraphs 1 through 16, Lenders Direct 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) and 209 CMR 42.06(2)(c).
23. Based upon the information contained in Paragraphs 1 through 16, the Commissioner has determined that:
    1. Lenders Direct 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 and mortgage broker 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 Lenders Direct.
24. Based upon the information contained in Paragraphs 1 through 16, had the facts and conditions found therein existed at the time of Lenders Direct'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 Lenders Direct's mortgage lender and mortgage broker licenses 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:

25. ORDERED that Lenders Direct and any and all employees, independent contractors, or agents operating on behalf of Lenders Direct, and their successors or assigns, shall immediately cease engaging in the activities of a mortgage lender and mortgage broker, as those activities are 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, Lenders Direct 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.
26. IT IS FURTHER ORDERED that Lenders Direct, 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.
27. IT IS FURTHER ORDERED that Lenders Direct 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. It being understood that "no loss to the applicant" shall mean that any loan which may have been closed by Lenders Direct and remains unfunded, as well as any pending application which has been approved by the Corporation but has not yet closed, shall be placed to a lender willing to fund, or close, the mortgage loan under the same terms and conditions extended by Lenders Direct. In the event that no such placement can be made, Lenders Direct 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. Lenders Direct shall obtain the prior approval of the Commissioner before placing such applications to the qualified lender(s) or broker(s) as appropriate.
28. IT IS FURTHER ORDERED that Lenders Direct shall immediately submit the following information in writing to the Commissioner:
    1. A year-to-date balance sheet and statement of income and expense. The balance sheet should indicate Lenders Direct's cash position at each of its depository banks as well as the corresponding bank account numbers. The balance sheet and statement of income and expense shall be signed and dated by an executive officer of Lenders Direct under the pains and penalties of perjury to certify that the information reported is true and accurate and prepared in accordance with generally accepted accounting principles.
    2. A detailed record of all pending residential mortgage loan applications, from both the Corporation's lending and its brokering operations, 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 Lenders Direct's submitted loans.
29. IT IS FURTHER ORDERED that Lenders Direct 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 Paragraph 27 of this Temporary Order, a copy of such document, correspondence, or paper relating to the mortgage loan shall be retained in Lenders Direct'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.
30. IT IS FURTHER ORDERED that Lenders Direct shall not pay or declare a dividend, nor otherwise authorize or execute any financial transaction, either singular or structured, in excess of one hundred thousand dollars ($100,000.00), except for wages and salaries paid to employees, contractors, officers, or other members of the Corporation's management in the normal course of Lenders Direct's business, without the prior written approval of the Commissioner. Upon the effective date of this Temporary Order, Lenders Direct shall implement or revise its practices and procedures, as necessary, to ensure that the Corporation'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.
31. 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.
32. 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 Lenders Direct 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 20th day of February, 2007.

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