Some Mortgage Originators Skip State Licensing

By Michelle Singletary
Sunday, September 9, 2007; F01

Concerned about mortgage fraud and predatory lending practices, many states have toughened their laws by requiring loan officers or originators to undergo extensive background checks and show proof of professional experience and training. Still, attracted by the lucrative mortgage business, many individuals are originating loans without being properly licensed.

In a relatively new arrangement, some skirt the law by paying to become part of a "net branch" operation. Net-branching is similar to franchising. It allows individuals to operate their own mortgage loan origination branch using the mortgage-lending or broker license of the branching company. Individuals get assistance in running their businesses and gain access to a network of lenders.

Although state laws vary, many jurisdictions require loan originators working in a net branch operation to have their own license. For example, in Maryland, individual loan officers are required to obtain a license as of January 2007.

Because of problems with net branching, some states don't allow it. In states where it is allowed, operations can run afoul of the law if loan officers aren't properly supervised or aren't licensed as required.

The authorities have stepped up their enforcement actions against operations that do business with unlicensed mortgage brokers, loan officers or loan originators. Most recently, 10 states took action against Apex Financial Group, also called Apex Mortgage. Apex was doing business with multiple unlicensed entities, leaving consumers unprotected, the states allege.

One person who worked with Apex was Frederick C. Lee Jr., founder of Financial Independence Group and other mortgage companies, whom I wrote about in an earlier column. Former insiders, with knowledge of the inner workings of Lee's multi-state mortgage operation, said he has assembled a network of people who arrange mortgages, sometimes through net-branching, even though the officers are not properly trained or in some cases licensed as required by the states.

In an interview, Lee denied that he or his company was involved in facilitating mortgage loans. "I'm not a mortgage guy," he said.

Yet loan documents I obtained suggest that Lee is acting as a mortgage broker. In one case, a $504,000 residential loan in Maryland lists North American Real Estate Services as the broker. Lee's cellphone number is listed as the originator's contact number. Lee is not licensed as a mortgage broker in Maryland.

Neither Lee nor his attorney would return e-mails or telephone calls for further comment.

Other documents show that people who work for Lee are originating loans in Maryland, Virginia, the District, California, Colorado, Michigan, Arizona, Alabama, New Jersey, Georgia and North Carolina.

Some current members of Financial Independence, including some who also worked for Lee when the company was called Debt Management Consultants, are trying to obtain licenses through a net-branching company, sources said.

One top person at Financial Independence, regional manager Angela Garnett, has applied to become a loan officer in Maryland under a license for Florida-based 1st Continental Mortgage, according to her Maryland application obtained through the Maryland Public Information Act. Internal documents from Financial Independence indicate that Garnett is already helping arrange loans in Maryland.

Garnett referred questions to Lee's attorney, who did not respond.

Recently, the Georgia Department of Banking and Finance revoked the mortgage-broker license for 1st Continental for engaging in net branching in violation of its rules and for operating branches with unapproved branch managers. Net-branching in not allowed in Georgia.

To combat widespread mortgage fraud, Georgia has been aggressively going after individuals and companies in violation of its mortgage laws.

The state issued cease-and-desist orders for Lee and two of his companies for operating a mortgage business without a license. The orders were issued in May of this year and November of last year. The companies Lee operated in Georgia were Debt Management Consultants, also known as DMC and DMC Processing, and Debt Elimination Group, which also did business under the name the Processing Center.

Several former workers, who all spoke on condition of anonymity for fear of retribution, say Lee has violated the Georgia cease-and-desist orders. Documents show people working for Lee -- whose fees get funneled through his company -- have continued to originate loans in Georgia even after the cease-and-desist orders.

"That order means nothing to him," one former associate said. "Absolutely nothing."

Lee did not respond to questions about the cease-and-desist orders.

Lee registered Financial Independence in Delaware the same month the Georgia cease-and-desist order became final for Debt Management Consultants. Financial Independence is doing business out of the same office DMC and Debt Elimination Group did.

To become a member of Lee's network, recruits must pay a $100 fee. Former insiders say Lee tells his members that they don't need to be licensed because they are "document collectors." He instructs people to say Financial Independence is an "independent marketing company," sources said.

"Basically, we are taking mortgage applications," a former member said.

Lee was licensed to operate as a loan officer in North Carolina in 2002. But the North Carolina Banking Commission revoked the license after discovering that Lee had failed to disclose misdemeanor convictions, including one for an assault of a woman.

Lee did not respond to questions related to his convictions. In a hearing at the time, however, he testified that he thought the application question related only to money or banking crimes. The question asked if he had been convicted of an offense indicating "moral turpitude."

The revocation was overturned on appeal, and Lee regained his license, though it expired two years ago. As part of the appeal, investigators discovered that Lee had several outstanding judgments on his credit report related to unpaid appraisal fees in Virginia from 2002.

Lee testified that the fees, which were later paid, arose because he had "co-brokered loans" with a broker in Virginia.

In Virginia, if you act as a mortgage broker, you need a license to originate even one loan. There is no record that Lee or any of his companies -- Financial Independence, Debt Management Consultants or Debt Elimination Group -- were ever licensed in Virginia, according to Ken Schrad, a spokesman for the Virginia State Corporation Commission.

Typically, the term "co-brokered loan" is used when two brokers are involved in a transaction and the fees are divided between them, Schrad said.

One of the criteria that states consider in granting a license to arrange mortgages is how the company and its owner have acted in other jurisdictions. Without specifically referring to Lee or any of his companies, Schrad said if a business has been barred from doing mortgages in another state, that entity or individual would have difficulty obtaining a license in Virginia.

"Through the application process, we investigate the experience and integrity of the principals behind the company," he said.

Mark E. Pearce, deputy banking commissioner in North Carolina, was more direct.

"In North Carolina and in most other states, the existences of orders against an individual or company are reasons to support the denial of licensure," he said.

As a borrower, I would want to know if the person or mortgage broker handling my loan is supposed to be licensed.

"If they tell you they don't need one, check with the state banking department to see if that is true," Pearce said. "Every state requires mortgage companies to be licensed. And many states are increasingly requiring individuals to be licensed."

Often state regulators cannot catch and prosecute unlicensed operations and individuals because borrowers don't come forward to complain.

"We need the public to let us know about these things," Pearce said.

States need to know because these transactions involve homes, which for many people are their largest assets. If you are put into the wrong loan, you could lose your house.

But as Schrad said, "When you deal with an unlicensed entity, you are kind of on your own."

? On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.She also has a new personal finance call-in show that airs Sundays on XM Satellite Radio, Channel 169 "The Power," at 8 to 10 p.m.

? By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

? By e-mail:singletarym@washpost.com.

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