Banking Department battle melts down

To understand the depth of animosity in what could well be the state’s most entrenched regulatory battle ever, a four-year saga with no sign of letting up, follow along on the first day in court in the appeal of a mortgage lender with 178 jobs put out of business by the state Department of Banking.

The case stands as a picture of government vs. business absurdity, more than two years after 1st Alliance Lending LLC vanished under attack by a department seeking, presumably, to protect the borrowing public. Never mind that 1st Alliance had not a single customer complaint against it in this whole matter. In a dark comedy with no humor, the department hasn’t even shown that a consumer was harmed.

Last April 16, three years after a surprise investigation at the 1st Alliance offices in

East Hartford, the Banking Department found the company in violation of multiple state laws and ordered its license revoked and a $750,000 fine — even though it had already revoked the license of 1st Alliance in October of 2019. That 2019 action, the company’s CEO and founder contends, forced the company out of business in all 46 states where it sold loans and led to the layoffs of its last employees.

The heart of the dispute is an accusation by the department that 1st Alliance systematically had unlicensed people in its East Hartford call center taking mortgage applications in a way that violated state and federal laws. The SAFE Act laws requiring anyone selling home loans to be a “licensed mortgage originator” were part of the reforms of 2009, after widespread mortgage fraud and meltdowns led the nation into the worst recession since the Great Depression.

That seems like a simple enough question and a simple enough problem to have fixed back in 2018, if 1st Alliance was in violation, as Banking Commissioner Jorge Perez and his dogged staff seem certain. They may be right, 1st Alliance may well have violated multiple state statutes. But it should never have come to this — a mess playing out in three separate court cases with all those dozens of people losing their jobs.

The department did indeed offer an easier out back in 2018, in the form of a $150,000 fine, no findings of guilt and an agreement that 1st Alliance sign a confidentiality clause saying it would not contest the charges. John DiIorio said he would not and could not sign that deal. I wrote about it back then. Things exploded from there.

Now 1st Alliance has unearthed evidence that could lead a reasonable person to at least wonder whether Perez or others at the department acted out of anger and vengeance. At the least, Perez made an exceedingly poorly considered remark last March at a hearing of the legislature’s Banking Committee, unrelated to 1st Alliance.

Perez, speaking about the routine Community Reinvestment Act exams that banks must pass by showing they have lent money in disadvantaged neighborhoods, said, “In my opinion, to fail CRA it takes a lot. Unless you really piss off your regulator and then they get even with you. That’s a possibility. But even at that case they have to have a reason.”

He was arguing for lawmakers to tighten the rules, but how about that comment? Was he joking? Now he may have to answer for it, as the remark was entered into evidence in the 1st Alliance appeal in Superior Court.

The company appealed that April 16 decision and Tuesday was the first day of hearings in Superior Court. The 2019 revocation is the subject of a separate case, which the Banking Department won in Superior Court, and is now before the state Supreme Court, which heard arguments in November. And separately, 1st Alliance has been sued by the U.S. Consumer Financial Protection Board based on Connecticut’s allegations.

At Tuesday’s hearing before Superior Court Judge John Cordani, we certainly did not see arguments about the underlying charges against 1st Alliance. Oh no, this case is far too entrenched for that. The company’s lawyers -- including Ross Garber, a CNN legal commentator who has represented at least four governors under fire in four states — brought out the Perez comments from March.

To tie those remarks to this case, they produced a transcript of a presentation by a former Banking Department lawyer, Stacey Valerio, who told mortgage bankers about lessons in the 1st Alliance case. One of them was that it’s unsafe to assume, as she said 1st Alliance has, that just because multiple states have examined you and found you to be in compliance with the unified federal and state laws, does not mean all states will find you in compliance.

“Because it may not get you very far and you may, you may make them very angry,” Valerio said, referring to bank regulators. “I raise that because it was the most interesting, insightful comment from the regulator about the significance of that case at the end of the day, to the regulator.”

She was apparently talking about a Connecticut banking regulator involved in the 1st Alliance case, whom she did not name. A lawyer for the state called 1st Alliance’s logic hearsay and irrelevant, as the hearing officer was not involved – and if a regulator is angry, thee alwyer said, “so what?”

A department spokesman declined to comment Wednesday but it’s very clear that the department contends the findings against 1st Alliance are serious enough to warrant the revocation. The company wanted the judge to allow a deposition of Valerio, to see what she actually heard. Cordani didn’t rule on that. But on Wednesday he did agree with 1st Alliance that large passel of documents should have been admitted in the lengthy hearings in 2019 and 2020.

So, back to the hearing officer the case goes, for revisions of the order – or not – based on the new evidence.

What’s the point of all this? Clearly this case is out of control, whether 1st Alliance and DiIorio violated lending laws or not – and he and Garber insist the state’s interpretation is all wrong.

Judge Cordani’s message is clear, now that he has given the case back to Perez and the department, now that he has said he may consider Perez’s ill-considered remarks when the case comes back to him: Work this out, people. Get into a room and makes this case go away.

That should have happened back in 2018, then in 2019 before the company melted down. Now it might be too late and if DiIorio wins the case, the taxpayers will be on the hook for a whole lot of money.