The New York Attorney General and NYDFS agreed to a nearly $2.8 million settlement with a private investment fund over claims that the fund allegedly financed unlicensed and predatory mortgage lending activities of a real estate investment management company in the state.
According to the state, the real estate investment management company bought distressed residential real properties at a discount and sold them at a substantial markup to its target demographic – lower income, economically vulnerable consumers. Generally, the properties purchased and resold by the company required significant repairs to be habitable and compliant with local building codes. However, the company allegedly did not repair or rehabilitate these homes and instead generally passed that responsibility and cost to the homebuyer. The state alleges that, in many instances, the properties had serious undisclosed conditions that made them unsafe or uninhabitable, posing significant risks to future occupants. The company initially used seller-financing agreements to sell the homes, activity that the state and federal government was increasingly regulating. Thus, with the alleged help of the private investment fund, the company then changed its business model to use lease-with-option-to-purchase agreements in an alleged effort to, in part, avoid applicable state licensing requirements and regulatory scrutiny.
The state further alleges that, among other things, the investment fund received regular reporting regarding the company’s business operations from owners and senior management, reviewed the performance of the properties sold by the company, conducted due diligence on the company’s operations, and in some instances participated in decisions regarding modifications to transactions that were in default. Therefore, the state regulators claim that the fund was: (i) either aware, or should have been aware, that the company was engaging in illegal, predatory, and deceptive mortgage lending business and agreed to fund them anyway; and (ii) knew or should have known that the company would use the funding to buy uninhabitable houses and then contract with financially distressed consumers through these arrangements that shifted the repair and maintenance responsibilities onto those consumers. In all, the fund, essentially through its financing and structuring assistance (which the state claims it knew or should have known would have led to the concerns identified in the settlement), allegedly provided substantial assistance to the company in carrying out the acts and practices that the state claims were unfair, deceptive, abusive, and fraudulent, under state law and the federal Consumer Financial Protection Act, as applicable. Such activities included, for example, misrepresentations about the nature and cost of the financing, false implied representations about required consumer disclosures and proper company licensure, and entering into these financial transactions with consumers that the company knew were unlikely to be able to make the monthly payments plus pay for all of the necessary repairs to the subject property.
In settling, the fund agreed, among other things, to engage in certain due diligence before making future investments and to pay up to $2.4 million in consumer restitution and $250,000 in civil penalties. Additionally, the fund agreed to cooperate with New York regulators in their litigation against the real estate investment management company.