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Bad brokers ran wild, state admits

TALLAHASSEE -- In a stinging critique of the state's oversight of the mortgage industry, top Florida investigators found that state regulators failed to alert police agencies to crooked mortgage brokerages, ignored citizen complaints and allowed hundreds of people with criminal histories to peddle loans.

The report released Tuesday to Gov. Charlie Crist and the Cabinet criticized the Office of Financial Regulation, saying the agency broke down in key areas, including screening brokers and shutting down shoddy operations, while the state grappled with the nation's worst home loan fraud crisis.

The investigation, carried out by the Inspectors General of the State Cabinet Offices, concluded the state's regulatory system was "insufficient to protect the people of the state of Florida."

The six-week probe was prompted by a Miami Herald series, Borrowers Betrayed, that found sweeping breakdowns in the state enforcement system, including the licensing of thousands of criminals, including money launderers, racketeers and cocaine traffickers.

The Herald's series led to the forced resignation of Commissioner Don Saxon, who had overseen the agency since 2003.

Saxon said last month he hoped the report would vindicate his leadership of the agency. When asked Tuesday if the audit had done so, Crist responded with an abrupt "No."

Saxon, 57, who is to step down in two weeks, was on vacation and didn't return repeated calls for comment.

Investigators said the agency functioned without clear guidelines, making up rules as it went along and operating at times on wrong interpretations of the law.

"In some instances, the office was not complying with existing governing directives, " the report states.

All the while, mortgage fraud skyrocketed during the most explosive housing boom in state history. Today, a quarter of all reported fraudulent loans across the country are for Florida properties.

Though the report was ordered by Crist and the Cabinet -- meeting Tuesday as the state Financial Services Commission -- they offered few comments other than pledges to improve oversight.

"There was no enforcement mentality at OFR, and the report bore that out, " said Chief Financial Officer Alex Sink, the first elected leader to call for Saxon's ouster. She added that the agency needs a "fresh set of eyes and new leadership."

She and other commission members passed emergency measures last month in response to The Herald's investigation, including rules that automatically ban felons convicted of financial crimes from selling homes.

In addition to tougher standards, Sink said she's considering pressing for the restoration of a state victims fund that would help reimburse people scammed by mortgage brokers.

The Miami Herald found the state guaranty fund was killed by regulators more than a decade ago, partly because it became too cumbersome to manage.

Sink said she wasn't aware of the program previously, but said it's "an idea we ought to revisit."

More measures are expected to be drafted before next year's legislative session that will address some of the problems brought out in Tuesday's report as well as The Herald's series.

The newspaper found that more than 10,000 people with criminal histories -- including bank robbers and land swindlers -- were able to peddle home loans across the state this decade. Of those, more than 4,000 cleared OFR background checks despite criminal pasts, with most committing offenses that state law required the agency to screen -- fraud, dishonest dealing and crimes of "moral turpitude."

The newspaper found that convicted criminals went on to steal at least $85 million from consumers and lenders.

In fact, the state report showed, there were even more problems with the background checks.

Auditors found that state regulators failed to conduct federal background checks or submit fingerprint cards of the applicants to the Florida Department of Law Enforcement until March of this year -- just days after The Herald made a series of requests for the criminal histories of mortgage brokers.

The auditors found the agency was relying on birthdates and Social Security numbers to do background checks, leaving fingerprint cards -- crucial to determining criminal histories -- in office files, unused.

The auditors wrote that Saxon said he was "not aware of the strict language" of the law and "did not believe" the Legislature meant for him to immediately implement the federal background checks required by law in 2006.

The Miami Herald found 88 former federal criminals were licensed by regulators, including former bank robbers.

While state auditors found 588 people with serious criminal backgrounds who were granted licenses since 2003, The Herald examined brokers from the entire decade, finding 2,000 with felonies, and another 2,000 guilty of lesser crimes.

The Herald's investigation also found scores of brokers were able to commit crimes while licensed -- including mortgage fraud -- and stay in the business.

Saxon said it would have been difficult to catch brokers convicted of crimes after they were licensed because the law didn't require the agency to do background checks once they were in the industry.

But auditors found regulators could have taken a more proactive approach by conducting the checks.

The probe also described an agency fraught with "internal tension" that led to breakdowns in its ability to police the industry.

The two enforcement arms -- administrative and criminal -- rarely communicated, the report found. Agency examiners were often kept in the dark on law enforcement investigations, and as a result, rarely pulled brokers from the business. Of the 51 criminal cases closed by the office between 2003 and 2007, the report found only one resulted in a license revocation. In addition, investigators found a 40 percent decrease in examinations of licensed mortgage brokers between 2003 and 2007 -- even as the numbers of brokers nearly tripled.

Further, auditors found that, in some cases, the agency failed to warn law enforcement of crooked brokers and boiler rooms, and that penalties imposed on bad brokers were often inadequate and far lower than proceeds from a single illicit mortgage transaction.

"These practices detract from the performance of the office's regulatory responsibilities, " auditors wrote.

The report also noted that telephone complaints about bad brokers were not recorded by state agents or even acted upon.

Separately, the report found that loan originators -- the largest segment of mortgage professionals in Florida -- do the same work as mortgage brokers but aren't licensed. Saxon told auditors that licensing loan originators would be next to impossible because of the "influence of the industry."

But industry leaders in Florida told The Miami Herald they had asked Saxon's office in 2002 and 2006 to license loan originators -- but regulators refused.

The Herald obtained agency e-mails that showed top leaders of Saxon's staff opposed the licensing of loan originators and, in one case, even removed a provision in a legal draft to license them.

Terry Straub, who oversees OFR's division of finance, acknowledged the agency "could have done a better job, " and said a massive rewrite of the state's mortgage law is in the works for the next legislative session.

Miami Herald investigations editor Michael Sallah contributed to this report.