FRM witness cites 'drive-by' exams at Bank Department


A former examiner who worked under ex-New Hampshire Bank Commissioner Peter Hildreth testified last week that firms like Ponzi scheme company Financial Resources Mortgage Inc. were subject to "what I call a drive-by exam." Kurt Gillies, who worked at the Bank Department from 1995 to 2007, testified before the inquiry convened by the Secretary of State that when Hildreth became commissioner in September 2001 the method of examination changed. He recalled that the number of non-depository lenders, including mortgage bankers and brokers like FRM, had grown to more than 2,000 by 2001. Meanwhile, the Consumer Credit Division of the department, which licensed and regulated these entities, had only five examiners, one of whom processed license applications. Gillies said that the department "tiered" its examinations, lending priority to the largest and newest licensees as well as those about which it received complaints. At the same time, he said that the process for granting and renewing licenses required firms to submit extensive documentation, including audited financial statements. "We were asking for more information than other states," he said. Examiners, Gillies said, spent weeks preparing their reports, which ran from 10 to 12 pages. "Financial integrity, operational activities and capital adequacy were all concerns," he said. "We looked for the strongest set of financial statements we could obtain." In particular, he said the law required licensees to maintain positive net worth of $100,000, 365 days a year. Gillies said that before Hildreth became commissioner, he was asked "to take a hard look at how we were conducting examinations" and prepared a protocol for based on the template for examining banks prescribed by the Federal Deposit Insurance Corporation. His proposal mimicked the so-called "CAMELS" ratings, which measure capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risks. In other words, examiners would assess the financial condition of the licensees as well as determine that their operations complied with statutes and regulations. After Hildreth became commissioner, Gillies submitted his proposal. "I was told it was unacceptable," he said. In the meantime, Hildreth asked the Legislative Budget Assistant to conduct an audit of the department. In the audit, which was completed in March 2002, auditors cited the department for failing to examine non-depository licensees every 18 months, as the law prescribes. Gillies said that Hildreth and Mary Jurta, who was hired to head the Consumer Credit Division, responded by hiring more examiners, changing the method of examination and increasing the number of annual exams. He said that unlike the veteran examiners, who had accounting backgrounds and were trained by the FDIC, the new hires were "not accountants per se and were trained on the job." Describing the examinations as "very abbreviated," Gillies said "we were in and out in a matter of days instead of what had been weeks." Reports, he said, shrank to "three or four pages." There was, he said, "a massive expansion in the number of examinations. We were doing hundreds a year." Likewise, Gillies said that prior to Hildreth's arrival he had worked closely with other regulatory agencies, including the Attorney General's Office, Department of Safety and the U.S. Attorney. "There was a record of successful cooperation with other agencies," he said. "That cooperation ceased under Hildreth," he said. "I was instructed not to contact other agencies, except through Jurta or Hildreth." In 2004, Gillies examined FRM in response to a complaint that the firm failed to protect the personal information of its clients. He said that his report listed 14 observations and explained that the department's attorney was responsible for determining if his findings amounted to "violations." After reviewing Gillies's report the attorney, Andrea Shaw, initiated enforcement action by ordering the firm to show cause why its license should not be revoked. She wrote that FRM and Scott Farah, its principal, "have illustrated a willingness to forgo the laws and rules of the State of New Hampshire whenever they see fit." Gillies, who served a tour in Iraq with the United States Army, said after he returned he asked Shaw what happened with respect to FRM -- which he told investigators he considered "a problem entity" -- and was surprised to learn "it's pending." He said that he had expected the department would have joined other agencies in an enforcement action. The department never pursued the enforcement action, but instead renewed FRM's license in 2005 and every year after until the firm collapsed in November 2009. -- MICHAEL KITCH/LACONIA DAILY SUN