Mortgage Industry Suit Raises Kickbacks Issue

With the mortgage industry rebounding in California, Thomas O. Gephart tried to get in on the action, paying $2.5 million a year ago for a small operation being spun off by mortgage lender Imperial Credit Industries Inc.

While the housing market picked up, however, Gephart’s new loan-production business dried up.

In a lawsuit filed Wednesday, Gephart asserts that Imperial sold him an unprofitable operation, propped up only by illegal kickbacks paid to independent brokers for mortgage applications.

Gephart, who said he didn’t pay kickbacks, found that the loan agents began sending applications to other lenders. The business was gone in six months or so.

Executives at Torrance-based Imperial denied that the operation did anything illegal. They contend that Gephart, a venture capitalist, had no experience in mortgage banking and no idea of what to do with the company.

“Mr. Gephart, I think, invested his investor money poorly, in a business that he didn’t know anything about, and he managed it poorly,” said H. Wayne Snavely, Imperial’s chairman.

The allegations in the lawsuit, nevertheless, renew concerns about the ability of state and federal regulators to enforce laws designed to rid the industry of bribes and kickbacks and, thus, reduce the closing costs home buyers must pay.

Complaints have been growing in recent years, for instance, about title insurers illegally paying off mortgage brokers to get business. The state Department of Insurance issued rules barring all such practices, though the agency acknowledged that the rules will be tough to enforce.

The state Department of Real Estate investigates such complaints, said Randy Brendia, regional enforcement manager, “but it’s a very difficult case to prove.”

In his lawsuit, Gephart charges that Imperial Credit Industries and a related real estate investment trust, Imperial Credit Mortgage Holdings Inc. in Santa Ana Heights, sold him “a dying, illegal and unprofitable business.”

The suit accuses the publicly held companies, Snavely and three other executives of concealing the nature of the business so that they could raise about $150 million in public stock offerings for both Imperial companies and themselves. The suit, which seeks unspecified damages, alleges that more than $9 million went to the executives.

“By defrauding and deceiving” Gephart into buying the operation, the suit alleges, the defendants were able to complete the stock offerings without disclosing that the operation was “unsound, unprofitable and totally reliant upon a routine corrupt business practice of paying illegal kickbacks to mortgage brokers.”

But Snavely and another defendant, Joseph R. Tomkinson, president of the real estate trust, asserted that Gephart not only failed to manage the business but told them in a letter that he didn’t have time for such details.

Calling Gephart’s suit “sour grapes,” Tomkinson said the venture capitalist not only ignored the business but also ignored repeated help that Imperial tried to give him.

He said Imperial Credit Industries funded Gephart’s mortgage lending “until the day he pulled the plug.”