Irvine Lender Preferred Credit Settles Fraud Suit

Controversial lender Preferred Credit Corp. agreed Thursday to pay a $1-million fine and its president agreed to a lifetime ban from the industry to settle a fraud lawsuit brought by state regulators.

The state Department of Corporations said that Preferred also agreed to the appointment of a loan monitor to ensure that borrowers have been repaid at least $1.4 million in excessive interest payments.

Preferred and its 29-year-old founder and chief executive, Todd A. Rodriguez, also agreed to tighten lending procedures to ensure compliance with state regulations.

Rodriguez said in prepared remarks that he was pleased the company and the state were able to reach an agreement. He said the refunds already have been made.

The company’s president, Walter F. Villaume, a real estate lawyer, agreed to leave the company and be banned for life from the mortgage lending industry. His lawyers declined comment about the settlement.

The Corporations Department sued last month to revoke Preferred’s license, saying borrowers were cheated out of $1.5 million, loan records were falsified and Villaume had lied about his major ownership position in the company.

In settling the case, none of the parties admitted any wrongdoing, a factor that could provide a windfall for Villaume.

Attorneys on both sides said the absence of a finding of guilt apparently makes Villaume eligible to receive a “golden handshake” severance pay of at least $1.26 million, according to his contract.

Preferred grew from a $16.5-million lender in 1994 to $595.6 million last year by providing second mortgages to people with no home equity but good credit. Borrowers typically used the funds to pay off credit cards or make home improvements.

The company has become one of the nation’s biggest such lenders, originating and buying loans throughout the country and reselling them individually or bundling them into securities for Wall Street investors.

It had hoped to fund continued expansion through an initial public offering of about $110 million in stock. But that proposal was withdrawn last Friday after previously undisclosed actions by state regulators became known.

Besides the Corporations Department’s lawsuit, the state Department of Real Estate had sanctioned Villaume and Rodriguez earlier this year for mishandling trust funds, making false statements and failing to provide disclosure documents to borrowers. Neither regulatory action was disclosed in the documents for the public offering.

For now, Preferred remains in business, though regulators say they could still move to shut it down later. Future action will depend on what is turned up by the loan monitor and by a separate independent investigator to be appointed later, said Bill McDonald, assistant corporations commissioner.

“We believe all of our options are still available to us regarding Mr. Rodriguez and the company,” McDonald said. “One of the objectives in investigating a closely held company will be finding out who knew what, and when.”

He added that “insisting on an immediate death penalty for the company would have had a ‘ripple effect’ on the industry, the borrowers, its employees and third parties.”

State law requires lenders to forward mortgage funds to borrowers in a timely manner. The Corporations Department accused Preferred of holding the funds for up to 10 days while charging interest. Thousands of borrowers were overcharged in such a manner, typically by about $75 each, according to the company’s own estimates.

Rodriguez, who was 21 when he founded the company in 1989, said in his statement that he is sure the regulators will find that the company already has made full restitution by paying $1.4 million to borrowers.

“We are anxious to again devote our full attentions to helping consumers restructure their finances,” he said.