Draft FRM report seeks financial regulatory changes

Aside from a little shift in emphasis – putting more of the blame on the Banking Department and the Attorney General’s Office and a bit less on the Bureau of Securities Regulation – no major revelations are contained in the 83-page draft report released Tuesday by the House and Senate joint committee investigating the state’s response to the alleged Financial Mortgage Resources Inc. Ponzi scheme.But the report does contain a series of recommendations that could affect the way financial services companies conduct business in New Hampshire.As is clear by now, FRM, the Meredith-based conduit of investors’ money into commercial loans, and CL&M, a related mortgage servicer — by happenstance or design — fell into various unregulated cracks. The companies primarily offered loans backed by property that were not quite residential and sold those loans off to various parties in trusts that that were not quite securities.Throw in narrow interpretation by the various agencies over their jurisdiction, some interagency mistrust and miscommunication and sending serious allegations to other agencies without any follow-up, and you had a disaster that finally happened in November 2009, when FRM suddenly shut its doors. The result was the loss of millions of dollars — nobody is sure how much — and hundreds of investors left in the lurch.FRM and its owners, Scott Farah of FRM and Donald Dodge of CL&M — are now in bankruptcy court and are the targets of a federal criminal indictment and a civil lawsuit by the Securities and Exchange Commission.In the meantime, the Gov. John Lynch and the Executive Council are trying to remove Banking Commissioner Peter Hildreth from his job. Mark Connolly, former Securities Bureau director, Connolly quit, charging a cover-up. And Kelly Ayotte, former attorney general, has been the subject of campaign ads charging that her office dropped the ball on the matter while she was in charge.Like a report submitted by the Attorney General’s Office earlier this year, the committee’s draft report blames everybody involved, but it seems especially hard on the Banking department, which it says “fell on its face in terms of its enforcement. No other agency had as much information at its disposal.” It faults the department for focusing on small consumer protection issues without really trying to find out whether FRM was solvent or not.Hildreth, it says, “indicated that Banking‘s role is not to ensure that the company doesn‘t fail, but to ensure that the consumer is not harmed. If nothing else, the FRM matter illustrates that when a company fails, whether it is a bank or a mortgage brokerage concern, there is potential for harm to consumers and to other business people.”The department also was faulted for not shutting down, or even examining, CL&M after citing FRM for using it as an unlicensed loan servicer.”Had Banking followed through in this area it may well have found the money trail,” according to the report.Hildreth also was faulted for recusing himself because he believed his brother was involved with FRM, but that recusal was flawed “in that it lacked any definition,” according to the report.But the Securities Bureau wasn’t let off the hook, though the report acknowledges that it pursued FRM more than any other agency, although it faults the bureau for not being more aggressive.Still, the agency “was at least to some degree, stymied in its efforts to pursue documentation regarding FRM that might have clarified the nature of FRM‘s business dealings. For its part, FRM used its status as a licensed mortgage broker as a shield, claiming that it could not provide documents that were subject to confidentiality under the Banking laws.”The report also faults the Attorney General’s Office for informally passing on two possible criminal complaints without follow-up, one lodged by one of its own former investigators to the FBI and the other by a FRM whistleblower to the Banking Department.It also criticizes the agency for assigning Deputy Attorney General Richard Head – who ran the AG’s Consumer Protection Bureau when it passed on some FRM complaints – to author the office’s report on the matter.”While the Committee is in no way suggesting that Mr. Head was anything but open and honest in drafting the report, the perception of a conflict appears to have undermined the credibility of the endeavor,” the report says.Despite the criticism, Al McIlvene, one of the leaders of group of FRM investors, found fault with the committee report because it so often referred to the AG’s previous report.”When you build off of something that is not completely verified, you are going to get a faulty product,” he said.While the AG’s report did make some suggestions for future remedies, the latest report has more extensive recommendations, and they could result in some far-reaching consequences for businesses and consumers, especially when it comes to regulated entities, which have been shielded from the state Consumer Protection Act, ostensibly because they are so well regulated.One recommendation – to put substantial consumer complaints on a database for the public to see – was sparked by FRM investors who were told by different state agencies that there were no reportable complaints against the company, when in fact there were many.Among the recommendations: • Exclusive enforcement authority that had been provided to Banking and Securities be deleted. Instead, coextensive authority for enforcement should be provided to the Attorney General’s Office and Department of Justice • Allow consumers private rights of action, if and agency doesn’t resolve matters in 90 days, but – in the case of regulated entities –- triple damages under the act for willful violations would be awarded to the agency as a fine, not to the complainant • Complainants would have to pay legal fees for frivolous suits • Formation of a Consumer Protection Working Group made up of representatives of all regulating agencies charged with enforcing the Consumer Protection Act • All consumer complaints should go to a central entity, most logically the Consumer Protection Bureau • Creation of a centralized consumer complaint database reflecting substantiated claims and/or enforcement actions taken against business entities • Require that the outstanding principal amount of mortgages and all notes or other evidence of indebtedness that is secured by the mortgage or other security agreement does not exceed the fair market value of the property at the time of the transaction • Clarify that the AG’s office can investigate and resolve complaints of unfair and deceptive practices, rather than just pass them on • Expand the scope of Banking Department examinations, so the agency has the right to examine a company’s financial condition. • Adopt less stringent protections against the release of information as it pertains to the non-chartered and/or non-depository institutions • Clarify what constitutes a security, and update the exemption for loans secured by mortgages to include more complex investment and lending vehiclesThe initial reaction from at least some of those regulated entities is one of cautious concern.”Traditional banks had nothing to do with FRM,” said Jerry Little, president of the New Hampshire Bankers Association. “We hope that in New Hampshire we focus in on the problem and not just reach out and hit everybody.”But some of those hurt by the debacle indicated that some hitting might be in order, particular at those regulators that missed the biggest alleged Ponzi scheme in the state history.”That many intelligent people didn’t know something crooked is going on?” said Jackie Stone, a former FRM investor. “If they are lining their pockets or if they are just plain stupid and inept, they should pay rather than just cover their own butts.” — BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW