Irvine’s Preferred Credit Corp. Accused of $1.5-Million Fraud

State regulators moved Thursday to shut down a mortgage lender that is trying to sell $100 million in stock, saying it had overcharged borrowers by at least $1.5 million.

The state Department of Corporations filed a lawsuit in Orange County Superior Court charging that Irvine-based Preferred Credit Corp. defrauded up to 10,000 borrowers, falsified loan documents to cover its tracks and lied about its officers’ titles and stock ownership in filings to regulators.

Separately, state real estate regulators said the licenses of Preferred and its top two officers were suspended in January for mishandling trust funds, failing to supervise employees, having unlicensed employees and other offenses. Those suspensions were stayed.

The actions followed Preferred’s registration Tuesday for an initial stock offering intended to raise $100 million from public investors who would wind up owning 30% of the company.

The charges seemed certain to scuttle that stock offering.

In a news release, Preferred expressed surprise at the charges, saying it had been working with regulators to resolve the issues and believed it was close to a good-faith agreement to reevaluate its practices to ensure it complies with all regulations.

Lawyers for Preferred, its chief executive and its president declined comment beyond the news release.

Preferred grew from a $16.5-million lender in 1994 to $597 million in 1996 by making second mortgages to borrowers with good credit but no home equity.

In its stock filing with the Securities and Exchange Commission, Preferred said it had loans in 42 states and hoped to continue to expand out of its base in California. Regulators said it has 10 California offices as well as offices in Colorado, Arizona, Oregon and Florida.

A Department of Corporations examiner became suspicious during an examination in April “and began digging deeper,” said department spokesman Bill McDonald.

What the examiner found were allegedly falsified United Parcel Service and other documents, department officials said.

They said it appeared that Preferred received loan proceeds that should have gone immediately to borrowers, but kept the money for one to 10 days while charging the borrowers interest.

All told, as many as 10,000 borrowers may be owed as much as $1.5 million from March 1, 1996, to the present, Corporations Commissioner Keith Paul Bishop said.

Preferred also is charged with stating that its 29-year-old chief executive, Todd A. Rodriguez, was sole owner when its president, Walter F. Villaume, held a 49% stake; falsely stating corporate positions held by Villaume; and other offenses.

Regulators said they couldn’t explain why Villaume’s ownership and roles had been misstated.

Nowhere in Preferred’s SEC stock filing were the suspensions by the Department of Real Estate or the investigation by the Department of Corporations mentioned.

They “absolutely” should have been, said Brian A. Thompson, chief deputy commissioner of the corporations department. “That’s material information that should be disclosed” to potential investors, he said.

In its filings, the company said it made a profit of $7.1 million last year and $9.7 million during the first three months of this year.

But it reported growing pains, including a struggle to train new employees and automate its loan operations, and said it cannot succeed in its high-growth strategy without selling new stock or bonds.

The Department of Corporations said it had obtained a court order giving it access to Preferred’s files and preventing their alteration or removal. At a hearing July 10, it will seek to have a monitor appointed to go through all the files.

Preferred has 30 days to request a hearing to challenge the department’s effort to revoke its mortgage lending license and bar Rodriguez and Villaume from the industry.