Lending, loopholes and liability .
Rick Jurgens
CONTRA COSTA TIMES, Aug. 15, 2005
Like most fans of the San Francisco 49ers, Carol Hull didn't find much to cheer about during the football team's dismal 2004 season.
But in December, as she watched the hapless Niners absorb another loss, Hull, 73 and a longtime season ticket holder, saw something even more distressing than the home team's on-field futility.
Looking across the stadium, she spied an advertisement for DreamLife Financial, a Modesto mortgage company owned by Tony Daniloo -- the man she says took $49,000 from her. "It was like being smashed in the face," says Hull.
Daniloo's brazenness shocked Hull. Despite the court judgments, lawsuits and criminal investigation that had marred his six-year career as a mortgage broker, it seemed that Daniloo moved from company to company with impunity. Now Daniloo was advertising his new business. "Don't they do background checks?" Hull asks.
Welcome to the wild frontier that is California's mortgage lending market. Tens of thousands of brokers -- some with individual licenses, some like Daniloo merely employed by licensed companies -- arrange billions of dollars of loans annually for home purchases and refinancing.
If you think of the mortgage market as the Wild West, then Bill Denny, a deputy district attorney in Alameda County, fills the role of the local sheriff. Denny, an earnest Irishman with more energy than hair and two decades of experience as a prosecutor, specializes in prosecuting real estate fraud.
Denny filed the 56-count complaint against Daniloo that outlines schemes to separate seniors and others from their life savings by transferring properties, forging documents and manipulating escrow accounts. Two counts charge Daniloo with grand theft and elder abuse for allegedly stealing $49,000 from Hull. Daniloo remains in Santa Rita Jail in lieu of $800,000 bond.
While no system can completely eliminate fraud, California's complicated licensing and legal framework for the mortgage industry makes it difficult for the public to avoid scam artists and for regulators and police agencies to go after them. "Everybody's confused because nobody knows where the enforcement is," Denny says.
There's a lot of territory to cover. Any of California's 127,000 brokers with licenses from the Real Estate Department can legally arrange mortgages and oversee deals done by individuals with lower-level sellers' licenses. An additional 3,000 licenses from the Corporations Department allow companies to hire employees to arrange mortgages. Those employees don't need an individual license, and only a few must register with the department.
That adds up to how many mortgage brokers active in the state? "No one really knows what the number is," says George Duarte, owner of a Fremont mortgage company and board member of the California Association of Mortgage Brokers.
Regulatory lapses extend beyond the lack of a head count. In the DreamLife case, it appears that the Corporations and Real Estate departments failed to notice Daniloo's involvement in the company or to exchange or check information with each other.
In 2002, Turlock real estate broker Donald Benjamin got a corporate license from the Real Estate Department for DreamLife. The application did not list Daniloo and, although he owned a half interest in the company and was required to disclose that interest, was never amended to include him, according to investigators.
In May 2004, the Real Estate Department, acting on a tip from a former DreamLife employee, began investigating the company. But just one month later, the Corporations Department issued a financial lender license to DreamLife. And in November -- only three weeks before Daniloo and his wife were arrested at their Turlock home -- the Corporations Department issued DreamLife financial lender licenses for six more offices.
Susie Wong, a spokeswoman for the Corporations Department, declined to comment on that sequence other than to emphasize that her department has strengthened its enforcement procedures since those events.
Tom Pool, the Real Estate Department's assistant commissioner for legislation and information, declined to comment, noting that Daniloo has not been convicted of any crime.
When, in the summer of 2002, Carol Hull sought to raise cash to repair the back porch and build a solarium on her house in San Francisco's Richmond district, she had no idea of the perils that awaited her. What seemed a routine mortgage transaction turned into an infuriating experience that for a time made her ashamed to face her family.
Hull arranged the refinancing through Park Place Capital, a Pleasanton mortgage company, according to her lawsuit pending in Alameda Superior Court. Park Place had done a refinancing for Hull a few months earlier, and that went smoothly, Hull says.
When permit problems delayed the porch project, Hull mentioned to her broker that she wished she could defer the loan and its interest payments. Her broker referred her to Daniloo, who telephoned Hull, said he could help and promised to make the necessary arrangements.
A few months later, when Hull was ready to start work on the porch, Daniloo failed to hand over the money, according to her lawsuit. Hull eventually arranged another loan to pay for the work on her porch.
Then Hull started to get notices to make payments on the loan that Daniloo had arranged but she had never received. When she called to ask him what was going on, he told her: "Don't be silly. I'm taking care of everything," she says.
But Hull never got the money from the Daniloo loan, according to her lawsuit. And after she got a foreclosure notice from an impatient lender, she had to pay a few thousand dollars to avoid losing her house, she says. She is still shaken by the thought of nearly being evicted from her home of 37 years.
Hull says her dealings with Daniloo proved "a rude awakening."
"You think you're street smart," she says. "You really do. You find out just how street smart you really aren't."
But it takes more than street smarts to fathom California's complicated regulatory framework for mortgage brokers. Denny notes that "most states have like a single agency" that licenses mortgage brokers.
In California a more complicated system has evolved. Two agencies license nonbank mortgage arrangers. Three different types of licenses can allow various brokering activities, and it is not unusual for a company to hold more than one type of license.
Duarte says the upshot is that borrowers confront an "alphabet soup" of laws, rules and licenses -- DRE, CFL, RML. "What does that mean to the consumer?" he asks.
Some experts recommend that consumers seek out brokers with real estate licenses. "The best consumer protection is to form a relationship with a broker licensed by the Department of Real Estate," says Denny, the real estate prosecutor. "The law is clear that person has a fiduciary relationship to you as the customer."
Pool says that under a broker's license, all loan arrangements with the exception of purely clerical or administrative activities must be done by a broker or a licensed salesperson operating under the broker's supervision.
But Duarte says that sometimes that rule is bent by an "absentee broker" or "rent-a-broker" who signs off on deals done by others in exchange for a percentage of profits or a fixed fee for each deal.
Nonetheless, individual accountability helps, says Michael Quirk, a Walnut Creek lawyer who represents victims of predatory lenders. "You can complain to the DRE and people care about their DRE license."
Pool contrasted that individual accountability to the rules that apply to companies licensed by the Corporations Department, where "the individual employees of that entity are not separately licensed."
Currently, some 398 mortgage banks with residential mortgage lender licenses and 3,036 finance company offices with so-called finance lender licenses hold licenses to arrange mortgages under the auspices of the Corporations Department. Employees of those firms can arrange loans without holding individual licenses.
Brokers are still accountable, Wong says. Each licensed company "is responsible for an employee's lending activity" and "the employer's responsibility is to only hire qualified individuals," she says.
Whatever the pros and cons of the different licenses, regulators need to work together closely to keep bad actors from slipping through the cracks, says Norma Garcia, a lawyer for Consumers Union in San Francisco. She suggested that the Real Estate and Corporations departments establish a task force to meet monthly and coordinate mortgage industry oversight and regulation.
But the agencies say they are already working in sync. Wong, of the Corporations Department, says the two departments have a memorandum of understanding to share licensing information.
Wong says the two agencies as well as state bank regulators and the board that licenses real estate appraisers have also been working to develop a common data base.
Pool says the Real Estate Department's "working relationship with Department of Corporations is extremely close. We don't work autonomously."
"Before licenses are issued, there is cross-checking to see if there has been previous disciplinary action taken," Pool adds. Pool declined to say whether cross checking between the two agencies extends to customer complaints or investigations under way.
Yet the two agencies, with only about 600 employees between them and hundreds of thousands of brokers to oversee, have limited resources. All of the Corporations Department's investigator positions were eliminated by budget cuts two years ago, although some attorneys and recently hired examiners have investigative skills, according to Wong.
Gov. Arnold Schwarzenegger's California Performance Review proposed merging the state's licensing operations into a single Department of Commerce and Consumer Protection. However, the plan -- which was the subject of hearings in August 2004 -- would have kept in separate divisions functions now done by the Corporations and Real Estate departments.
Chris Nance, a spokesman for Business, Transportation and Housing Secretary Sunne Wright McPeak, said she is working toward the same ends by expanding use of current "best practices" and honing the current licensing framework to make it better. The two departments have "distinct constituencies" but a current project to integrate licensing data and Web sites would make checking easier for consumers and "prevent license shopping by licensees who have been disciplined," he said.
Overlapping jurisdictions and limited disclosure policies now make it difficult for consumers to check out the records of mortgage brokers. While the Corporations and Real Estate departments both operate Web sites where consumers can inquire about the licenses and disciplinary histories of companies and individuals that arrange mortgages, the sites operate separately and don't display information about customer complaints.
Pool says that as a matter of policy the Real Estate Department doesn't disclose pending investigations or customer complaints, and said that it wouldn't be fair to show such information on an official Web site. "Anybody can file a complaint. You've got to go back to due process," he says.
That can lead to surprising results. After the Corporations Department's Jan. 6 issuance of a formal notice of intent to revoke DreamLife's license, inquiries to the agency's Web site about the company's license status gave no indication of enforcement or disciplinary actions pending. Only after the uncontested revocation was officially executed Aug. 3 did the Web site's listing of DreamLife change to "revoked."
Wong said the department's policy is to include pending actions on its license status web page. However, the notice of intent to revoke DreamLife's license did not show on that page in July, and Wong could not immediately account for that omission. "We are working to improve our processes as we can," she said.
Two days after Corporations revoked DreamLife's license, the Real Estate Department filed a formal accusation against DreamLife and Benjamin, the licensed real estate broker associated with the company. It alleges that Benjamin failed to adequately supervise the company and four employees who arranged loans, and that the company submitted falsified documents with three loan applications. The accusation requests a hearing to consider revoking or suspending the licenses of DreamLife and Benjamin.
The Real Estate Department Web site lists DreamLife license status as canceled and Benjamin's as active but without any description of the charges against them -- other than a cryptic reference to H-1822 FR. That's the document number of the accusation, although it is not posted on the Web site.
Garcia of Consumers Union says that members of the public should be able to see records of complaints and pending disciplines and make their own judgments.
But for now, the onus remains on mortgage borrowers to beware of those looking to prey upon the unwary and confused. As Denny says, "There are no mortgage police."
Rick Jurgens covers real estate and energy. Reach him at 925-943-8088 or rjurgens@cctimes.com.
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