Prospect Mortgage LLC, a nonbank lender headquartered in Sherman Oaks, California, and the Multi-State Mortgage Committee (MMC), a representative body of state mortgage regulators representing the examination interests of combined states relating to lenders operating in multiple states, announced a $10.1 million settlement between Prospect and 50 state mortgage regulators.

The MMC announced the results of its examination of Prospect on May 2, 2013, concluding that Prospect had a practice of charging improperly disclosed and unsupported fees. Specifically, the examination focused on a “Settlement Service Fee” paid by Prospect’s customers to C2C Appraisal Services, an affiliate of Prospect. The MMC determined that Prospect failed to disclose the affiliation to borrowers, failed to provide the MMC with reliable documentation to account for the full Settlement Service Fee, and that some of the services charged by C2C were in fact performed by Prospect’s employees.

Prospect’s past practice of charging unsupported fees is unacceptable and borrowers must be compensated for monies they paid to Prospect erroneously.

–Karyn Tierney, Chairperson, Multi-State Mortgage Committee

Pursuant to the settlement, Prospect agreed to pay restitution to every borrower that was assessed a C2C settlement service fee in the amount of $40 plus interest, for a total of approximately $2.8 million, and an additional $7.4 million administrative penalty to state mortgage regulators. Prospect also agreed to submit a procedures manual to the MMC that will address the areas of mortgage operations, fees, disclosures, requirements for charging consumer credit cards and record retention.

Karyn Tierney, chair of the MMC, said that “Prospect’s past practice of charging unsupported fees is unacceptable and borrowers must be compensated for monies they paid to Prospect erroneously.”

Prospect had not admitted to any alleged violations and the conduct at issue ceased years ago. “This settlement is a significant step forward for our company, our employees, our valued customers and industry partners. Prospect is committed to being a leader in its legal and regulatory practices and has invested significantly in these areas,” Prospect General Counsel Joseph Grassi said. “This agreement resolves all legacy allegations contain in the 2013 examination report and we appreciate the MMC’s assistance in putting this matter behind us. We look forward to continuing to focus on our goal of helping our customers achieve their dream of homeownership.”

This settlement serves as a strong reminder of the significance of developing and maintaining the proper documentation to support settlement service fees. Additionally, it emphasizes the importance of affiliated-business arrangement disclosures—a step that is relatively inexpensive and easy to administer that can have costly implications when not properly utilized.