Mortgage lender to pay $4.2 million after Atlanta-based probe

A former California mortgage lender agreed to pay $4.2 million to settle civil fraud allegations that its lending practices in the Southeast caused taxpayers to lose millions of dollars when homeowners defaulted on their loans after the Great Recession.

The U.S. Attorney's Office in Atlanta said that one in eight of Prospect Mortgage Company's mortgage loans went into default after the 2007-2009 real estate collapse. The rate of bad loans was well above the national average, federal authorities said.

The Sherman Oaks, Calif.,-based company’s operations were bought earlier this year by HomeBridge Financial Services, a large non-bank lender in Iselin, N.J.

After an audit by the federal Housing and Urban Development Office in Atlanta, the inspector general found that more than three-quarters of Prospect’s bad loans in the Southeast came from two of its branches in Florida and North Carolina.

Federal authorities said many of the loans failed to meet lending requirements under two federal mortgage insurance programs that allowed the company to make loans and self-certify them for the insurance programs.

Under HUD’s and the Federal Housing Administration’s mortgage insurance programs, lenders are required to follow the agencies’ lending standards, to have quality-control tracking programs, and to report deficient loans to the agencies.

“Prospect failed to adhere to these requirements at two Southeastern branches and when many of these loans later defaulted, the United States suffered substantial losses,” said U.S. Attorney John A. Horn in a recent statement.

Prospect also faced similar probes elsewhere. In 2015, the company agreed to pay more than $10 million in penalties and restitution to borrowers to settle the California Department of Business Oversight’s allegations that it had violated state and federal laws.

In January this year, the federal Consumer Financial Protection Bureau also ordered Prospect to pay a $3.5 million fine for alleged improper loan referrals. The company had agreements with real estate agents that required home-shoppers to pre-qualify for loans from Prospect, even if they had already gotten similar approvals from other lenders, according to the agency.