Citing fraud, state closes loan broker
State banking regulators shut down New England Merchants Corp. on Wednesday, charging that the Arlington mortgage firm inflated incomes of borrowers on loan applications and used unlicensed loan brokers.
The state's order for the firm to cease operations comes 2 1/2 years after the brokerage firm reached an agreement with the Massachusetts Division of Banks to halt use of unlicensed brokers. The division said one in three - a total of 53 - of the independent brokers employed as the firm's outside contractors did not have the proper licenses required by state law.
New England Merchants, with 20 Massachusetts offices and operations throughout New England and in New York, is among the largest firms closed down by regulators, said David Cotney, chief operating officer for the Division of Banks.
In 2006, the firm brokered 1,832 mortgages, the division said.
New England Merchants issued loans as well as brokered them, but that activity last year was "minimal," the division said.
Philip Goduti, New England Merchants' chief executive, did not return telephone calls yesterday. An employee who answered the phone at the Arlington office said the firm was shutting down, but that he didn't know why.
The firm generated both subprime and traditional loan business for major lenders, including Bank of America Corp., H&R Block subsidiary Option One Mortgage Corp., Fremont Investment & Loan, Wells Fargo amp; Co., and New Century Mortgage Corp., as well as for several small lenders, the division said. These lenders either declined or did not respond to requests for comment.
As a loan broker, New England Merchants helped customers who wanted to purchase or refinance a house determine which lenders would qualify them for a mortgage and then filed those loans applications with the lender.
In the state's order to halt business, regulators identified four mortgages in which the incomes of New England Merchants customers were misrepresented when they applied for their loans. The erroneous applications were uncovered during a May 2007 examination of New England Merchants' loan records, the state said. "There were also cases where there was missing information" in customers' files, Cotney said. But, "one case of fraud is enough," he said.
In one instance, an unnamed borrower provided documents in a June 2005 home-loan application showing he earned $26,400 annually. But two months later the same borrower applied for a no-documentation loan with a $70,680 income, according to the state's order.
New England Merchants explained to regulators that the lender for this loan suggested the broker combine the borrowers' and his fiancee's incomes on the application, though the fiancee did not cosign the loan. In another instance, a borrower's April 2006 loan application put his income at $3,750 a month, which changed to $8,500 a month on a second application in July; the total annual income "was overstated by $57,000," the state said in its order.
The borrower initially planned to use his mother as a cosigner but then determined that was not necessary to get a loan. Yet the borrower added his mother's income to his own in the application, though she was not a cosigner, regulators said.
Another loan file uncovered by the exam found "multiple loan applications, in various stages of completion," for a single loan. The firm was ordered to stop generating new loans and to find other lenders to finance mortgages that were in the pipeline.
It has offices in Newton, Agawam, Pittsfield, Northampton, Methuen, Braintree, Salem, and Hampden, according to regulators and the firm's website.
Kimberly Blanton can be reached at blanton@globe.com. 
