Banker And Tradesman
East-West Paying Out $800,000 to Consumers
Reimbursements Follow Violations
Cited by Regulators; Division of Banks’ Cease-and-Desist
Order Still in Effect
By
Jennifer Jope
Reporter
Despite the upbeat East-West Mortgage radio commercials,
the behind-the-scenes picture at the lending company and
its parent, Worcester-based Commerce Bank & Trust Co.,
is less rosy, and now customers are being compensated for
the companies’ mistakes.
In May, the state Division of Banks and the Federal Deposit
Insurance Corp. issued a cease- and-desist order against
East-West Mortgage and Commerce Bank. DOB Senior Deputy
Commissioner David Cotney said there were 102 complaints
against the company from February 2001 through May 2004.
Reimbursement payments totaling about $800,000 stemming
from mortgage applications received by East-West Mortgage
in the past three years are currently being processed, according
to company officials.
In May, when the order was first issued, Cotney said that
the companies had engaged in various practices that violated
consumer protection laws, including reneging on promised
mortgage interest rates.
Consumers who received a rate higher than originally promised
would either have their loans rewritten or receive a check
for the difference, Cotney said.
John Gallagher, founder and general manager of East-West
Mortgage, cited rapid increases in interest rates last summer
as the main cause of the company’s problem with locking
rates in.
In the summer of 2003, the DOB received hundreds of complaints
accusing various mortgage companies of not following through
on a rate that was promised.
“In a rising rate environment, that is when you
see all these problems come pouring out of the woodwork,”
said Boston bank attorney Stanley Ragalevsky, a partner
at Kirkpatrick & Lockhart. “If people are gambling
with consumers’ contracts, they [mortgage lenders]
will end up paying a fairly significant price.”
East-West Mortgage also charged borrowers a “good
faith deposit” of $199, which was credited back if
the loan was closed. However, the company did not tell consumers
the $199 was nonrefundable if the loan did not close. Cotney
said East-West Mortgage has been ordered to refund the $199
to those consumers.
Gallagher said the $199 fee was mislabeled on the company’s
paperwork and should have been named as an “appraisal
fee.” As of June 30, the DOB had been notified by
East-West and Commerce Bank on the number of customers entitled
to the $199 reimbursement.
Consumers who also paid prepayment penalties in excess of
what is allowed under Massachusetts General Law will also
be reimbursed.
Gallagher said the prepayment fees were miscalculated
due to a glitch in software the company used. He said there
have only been a few borrowers identified as eligible for
that particular reimbursement.
According to Gallagher, the company hired an outside firm
to handle the reimbursement process and $800,000 is being
returned to various customers.
As for the more than 100 complaints against the mortgage
company, Gallagher said upon tracking them, East-West Mortgage
determined that complaints accompanied one-quarter of 1
percent of all loan applications received by the company
in the last three years.
East-West has also shuffled around employees, Gallagher
said.
“We’ve changed some of the senior management
in response to the handling of complaints,” said Gallagher.
He added that there has also been an overhaul of the company’s
computer system.
Cotney said the bank and mortgage company have complied
with DOB orders in the first 30 days following the DOB’s
cease-and-desist order. However, there are still deadlines
approaching for further orders, according to Cotney.
Ragalevsky said the comprehensive cease-and-desist order
suggests long-term issues with East-West Mortgage and a
lack of oversight from parent Commerce Bank. However, he
said a cease-and-desist order isn’t the first time
a company hears from regulators.
“Cease and desist is a second step,” said
Ragalevsky. “There may have been a prior memorandum
of understanding.”
A memorandum of understanding is an informal enforcement
procedure by the DOB. Cotney said the division does not
comment on informal enforcements.
Melanie Brody, a partner at Kirkpatrick & Lockhart’s
Washington D.C.-based Mortgage Banking Group, said the FDIC
and DOB may have felt East-West Mortgage and Commerce Bank
did not properly respond to issues that were raised prior
to its formal enforcement steps.
‘Second Step’
Ragalevsky said there can be instances when financial
institutions are not compliant, but consumers do not experience
a financial loss. While there are regulations providing
restitution to consumers, said Ragalevsky, it isn’t
always sought out. But in a case where a consumer did not
get what they were told and experiences a loss, there are
consequences.
Brody said in her more than 10 years of watching the lending
industry, she has only seen an order of this scope two or
three times.
“What struck me is this company is required to go
back to 2001 and reimburse fees that weren’t disclosed
the way the Division of Banks thought they should have been,”
said Brody.
Although the investigation goes back three years, Brody
said that does not always mean the problems were taking
place then and noted that sometimes a complaint can trigger
an investigation.
Cotney said the company was required to go back to 2001
because that was the date of the last examination of the
company by the DOB. The next scheduled examination into
East-West Mortgage began in March 2003 and the DOB did a
concurrent exam with the FDIC. The DOB and FDIC also followed
up on consumer complaints, Cotney said.
East-West Mortgage and Commerce Bank waived their rights
to a hearing, neither admitted or denied any wrongdoing,
and they did not pay any fines.
Ragalevksy said that given a certain amount of complaints
and enough potential impact to customers, a regulatory compliance
issue can turn into a safety and soundness concern for regulators.
He said when there is a failure to comply with a directive
from regulators, for instance, if there are 600 loan customers
who could bring a claim against a company, it becomes a
safety and soundness issue.
“This is what I see with this particular order,”
said Ragalevsky.
A compliance exam covers an institution’s compliance
with numerous consumer protection laws such as Truth in
Lending, Equal Credit Opportunity, Real Estate Settlement
Procedures and Home Mortgage Disclosure acts. Whereas, the
safety and soundness exam is a review of a financial institution’s
capital, asset quality, management, earnings, liquidity
and sensitivity to market risk, according to Ragalevsky.
He said the compliance exam is not usually taken as seriously
as the safety and soundness exam.
Despite the cease-and-desist order, Gallagher said business
has been up between 10 and 15 percent.
Linda Bates, senior executive vice president at Sherwood
Mortgage in Boston, said East-West is still getting customers
and she is unsure if the average consumer is aware of the
regulatory order because they may not read trade publications
where the news is published.
Ragalevsky said he hasn’t seen tough regulatory orders
like the one issued to East-West Mortgage and Commerce Bank
since the 1980s and early 1990s.
“The bottom line is this should be a clear warning
signal to FDIC-insured banks and also to mortgage companies
and lenders that the Division of Banks is certainly not
going to tolerate serious compliance violations,”
said Ragalevsky.
Ragalevsky said given the amount of work that needs to
be done to correct the company’s problems coupled
with a short amount of time, it wouldn’t be unlikely
that Commerce Bank could decide to sell East-West Mortgage.
Bates, expressing a more optimistic view, said Commerce
Bank is a “wonderfully run bank” and anticipates
it will work to remove the problems that existed in the
company.
Gallagher said he expects the cease- and-desist order to
be released by the fall and called the entire incident “unfortunate.”
Cotney said there is no deadline to remove the cease-and-desist
order.
Jerome Olin, chief executive officer of Commerce Bank, was
unavailable for comment.
link to Cease and Desist - http://www.mass.gov/dob/commerce.htm
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