Home Equity: Calif. Lender's Woes Worsen As State Threatens License

The grand plans of Preferred Credit Corp. have gone up in smoke amid borrower complaints, threats from regulators, and allegations of fraud.

The Irvine, Calif., home equity lender's origination volume ballooned to $596.9 million last year, from $16.5 million in 1994. The company had hoped to raise $100 million in an initial public offering to fuel more growth.

Instead, its survival is suddenly in doubt.

The California Department of Corporations is seeking to revoke Preferred's mortgage license.

A three-month departmental investigation that ended this month indicated that the high-loan-to-value lender was charging interest on money that homeowners had not yet received, said William McDonald, assistant commissioner of department's enforcement division.

In moving to revoke the license, the Department of Corporations for the first time flexed a new legislative muscle, the California Residential Mortgage Lending Act, which became effective in January 1996.

The move also represents a black eye to high loan-to-value lending, a fast-growing sector of the business that has been viewed with skepticism by some traditional lenders.

On Friday, Orange County Superior Court appointed a monitor to inspect all the company's loan files.

From the initial exploration it was apparent that Preferred had "forged UPS slips and backdated loans," Mr. McDonald said.

The company is being charged with falsifying loan files, failing to remit funds to borrowers in a timely manner, and charging excessive interest rate payments to more than 10,000 borrowers.

An attorney for Gibson, Dunn & Crutcher, the Los Angeles-based counsel for Preferred Credit, did not return phone calls.

According to the Department of Corporations, the chief executive of Preferred, Todd Rodriguiez, denies knowledge of the alleged forgeries.

The ruse was a very low-stakes game, Mr. McDonald said, with Preferred receiving only $75 per loan. "This was a multibillion-dollar business," he noted. "It doesn't make a lot of sense to be chiseling people out of a couple of bucks."

Preferred was founded in 1989 when Mr. Rodriguiez, now 29, left his father's home equity company.

The younger Mr. Rodriguiez subsequently hired several key executives from his father's firm, other home equity lenders said, causing a rift between the two companies.

On June 24, Preferred filed with the Securities and Exchange Commission to offer five million shares of common stock at $20 to $23 a share.

Keefe, Bruyette & Woods was to be the primary underwriter of the deal, with Piper Jaffay Inc. as the second.

On July 1, the investment banks withdrew the filing. Representatives of each declined to comment.

The Department of Corporations had filed a lawsuit in Orange County seeking restitution for Preferred borrowers allegedly affected by abusive loan practices.

On July 3, Preferred agreed to pay more than $1 million in civil fines to settle the suit. Walter Villaume, director of consumer lending, was also barred at that time from mortgage lending.

Preferred is 15% owned by CS First Boston, which has also been securitizing its loans and provides the company with a warehouse line of credit. CS First Boston officials declined to comment on the matter.

Preferred is reportedly considering selling itself off, whole or in parts.

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