Charges against mortgage firm highlight debate over state regulation
It was a hectic spring and summer at 1st Alliance Lending.
The East Hartford-based mortgage loan originator, operating in 46 states, had gained $10 million in state incentives to expand from 132 people to 300, back in 2016 and 2017.
That project was underway a few months ago as 1st Alliance received zoning approvals for renovation of a vacant building into a call center in the heart of Putnam, in the northwest corner of Connecticut. Employment was up to 175 — but would soon drop sharply.
Around the same time, in June, the state Department of Banking dropped a bombshell. “They notified us that they are going to start an enforcement action based on unlicensed personnel performing licensed activities,” said John DiIorio, the 1st Alliance founder and CEO.
Regulators, after an unannounced visit in May, followed by surprise, unscheduled interviews with rank-and-file employees, accused the firm of having call center operators acting as mortgage originators. Apparently — though the charges are not clear — they’re accused of negotiating or offering terms of home loans, which requires a license.
The department later proposed a consent order with a $250,000 fine, admission of wrongdoing and other terms DiIorio said he would not accept, documents provided by the company show.
DiIorio and his lawyers — including Ross H. Garber, former chief counsel in the governor’s office, who has represented former Gov. John G. Rowland and governors in three other states — insist 1st Alliance company is following federal and state laws on what non-licensed employees can do in firms that originate home mortgage loans.
The company says no other state — many of which have audited 1st Alliance — interprets the law the way Connecticut is trying to do it. Documents suggest Connecticut tried to recruit Maryland to join in this case, and that state declined.
The Department of Banking won’t confirm or deny the investigation, but documents show it’s ongoing. DiIorio says 1st Alliance faces a deadline of this Tuesday to show it didn’t break the rules.
Matt Smith, a department spokesman, said — without referring to this case — that Connecticut has not changed the way it interprets or enforces the 2009 law on licensed mortgage originators.
Since the summer, 1st Alliance has eliminated 75 jobs and nixed its expansion plans.
With regulators unable to talk about the case, we can’t reach a conclusion that the Department of Banking has made a wrongful victim of DiIorio and his employees, nor that 1st Alliance broke the law.
Still, the case bears watching across Connecticut — a state that’s widely blamed for overzealous regulation that business groups call unfair. It’s a rare, inside glimpse at a financial company under attack from regulators 10 years after banking reforms tightened the laws in the hope of preventing another housing meltdown like we saw in the Great Recession.
No state deal
Even as DiIorio worked to respond to the state’s accusations, 1st Alliance eliminated 40 jobs in July as the mortgage business softened, with rates rising and the refinancing boom over. More recently, in October, the company eliminated about 35 more jobs — this time as a direct result of the state action, he said.
That brings the total to 98, down from 175 just a few months ago.
DiIorio says the firm, founded in 2005, servicing $600 million in mortgages, has been audited hundreds of times. In this case, he insists, rogue regulators are not following state law or policy.
Over the last few weeks, 1st Alliance unwound its deal with the state Department of Economic and Community Development, returned most of the money the firm borrowed and arranged to pay the rest back. The urban reinvestment tax credits were tied to the Putnam property rehabilitation, which isn’t now happening despite approvals.
“The expansion is dead, it’s not happening,” DiIorio said, because of the expense and focus required to respond to the allegations.
He added that despite the softening of the market that required a cutback over the summer, it was the state accusations, not business conditions, that led him to scrap the expansion. The firm has extensive experience as a national leader in refinancing distressed mortgages so he’s confident it would be able to grow in an economic decline.
“We have a very special expertise,” he said. “A difficult economy bodes well for 1st Alliance.”
To hear DiIorio and his lawyers talk about the case, it’s not just the allegations that rankle; it’s the way the state has gone about enforcement — starting with a highly unusual surprise audit in the first week of May.
“Their behavior while they were here was very atypical,” DiIorio said. “We have never had a surprise audit here, never.”
Soon after, state regulators returned to the 13th floor offices for a scheduled meeting with executives, he said. Instead, they insisted on talking on the spot with call center employees, some of whom had worked at the firm for less than a month.
About a month later, the department said it was preparing an enforcement action — which still hasn’t come, amid negotiations.
DiIorio describes himself as a “lifelong Democrat” who supports regulation. The company had a 2008 consent order with the state Department of Banking related to about a half-dozen unlicensed people doing work improperly, leading to a $6,000 voluntary contribution to an industry organization. It has also had a federal stipulation that the company described as technical, and a small handful of other regulatory issues in Texas and New York — most, DiIorio said, self-reported.
This, he said, is different because the state is interpreting the law incorrectly to mean his call center employees can’t take basic information and discuss mortgage rates generally.
He said officials at the state Department of Economic and Community Development believe the banking department is acting too aggressively. Catherine Smith, the DECD commissioner, declined to comment.
“Our dealings with the Banking Department have crossed from regulatory to prosecutorial,” DiIorio said. “I would describe dealing with the state as almost a feeling of being unwelcome as part of the business community. I believe that our track record shows responsibility and conscience...It makes me feel like a target.”
‘Persistent and pervasive’
The heart of the issue appears to be language in a 2009 state law, written to conform with a federal home lending act created in the thick of the 2008 housing market meltdown. It says anyone who “takes a residential mortgage loan application, or...offers or negotiates terms of a residential mortgage loan” must be licensed by the state as a mortgage loan originator.
Cases of unlicensed people doing work that requires a license have not been uncommon, especially around the time of the housing collapse. Connecticut joined ten other states in an action against a New Jersey firm in 2011.
“Most everything we do here at the Department of Banking is about protecting consumers,” Matt smith, the spokesman, said. He added that Connecticut adopted the licensing law in 2009 “not as a revenue source, but rather to vigorously defend Connecticut consumers and homeowners.”
In the 1st Alliance case, DiIorio and documents he showed me suggest that state regulators believe having call center employees working on commissions, and having them discuss mortgage rates generally, is a violation. It’s unclear whether the department is also accusing 1st Alliance of activity that’s clearly illegal.
“The Department believes that such unlicensed activity was persistent and pervasive, and persisted for several years,” an Aug. 15 memo to 1st Alliance said.
In September, documents show, DiIorio offered to pay $50,000 to compensate the department for is work — not as a fine — and said he would voluntarily stop the targeted call center activity for Connecticut customers. The department declined the offer.
DiIorio says many firms in the industry operate the way he does, with all leads quickly going to licensed people, then underwriters. Many of 1st Alliance’s calls emanate from advertisements with Zillow and other online housing market websites.
From 2009 to 2015 1st Alliance was a national leader in “loss mitigation refinancing,” buying thousands of bad loans from giant banks and renegotiating terms to keep people in their houses — but only those who had legitimate reasons for their inability to pay.
In 2012, he testified in the U.S. Senate about the program, calling it a method of resolving defaults that works best for all stakeholders.
“I am not here to debate the question of whether or not to help distressed homeowners, except to note that since early 2009 we have put in place a number of federal programs to do so. I am here to discuss how to help homeowners fairly and effectively,” he said to the Senate committee overseeing banks.