Just two months after the Consumer Financial Protection Bureau took action against lender NewDay Financial LLC for deceptive mortgage advertising and kickbacks, the nonbank mortgage lender is under siege again, this time by a group of state regulators that announced a nearly $5.3 million agreement to settle charges that the company engaged in a widespread licensing exam cheating scandal.

In February, the CFPB fined NewDay $2 million for allegedly deceiving consumers about a veterans organization’s endorsement of the company’s products and participating in a scheme to pay kickbacks to the organization for customer referrals. Now, the Fulton, Maryland-based mortgage broker and lender will pay more than double the CFPB fine to settle allegations of rampant cheating on mortgage loan originator license testing.

On April 13, the Multi-State Mortgage Committee (MMC), an organization created in 2008 by state financial regulators through the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, announced a settlement agreement and consent order between NewDay and 43 different state mortgage regulators. The case, which originated in 2013 with investigations in Maryland and New Hampshire, involved the illegal sharing of test information for mortgage professionals, as well as the practice of several NewDay employees completing continuing education requirements for numerous other NewDay employees. The consent order alleges that the scheme had been going on since at least 2005.

According to the consent order, when NewDay was made aware of the investigation, it retained an outside law firm to conduct an internal investigation, which concluded that NewDay employees had violated the Nationwide Mortgage Licensing System & Registry’s Rules of Conduct for Test Takers and Standards of Conduct for Course Providers. The internal investigation also revealed that certain NewDay loan originators had engaged compliance staff to sit through the multihour online continuing education program and take the associated quizzes on their behalf.

Once these findings came to light, NewDay required all employees with a continuing education requirement for 2013 to retake those courses in a proctored and controlled environment provided by a third-party vendor, and set new compliance reporting and whistleblower policies. NewDay also took an axe to its staff, terminating the head of its Virginia sales division, the head of its television division, the head of recruiting, the Delaware branch manager and a vice president for sales. Additionally, the head of NewDay’s reverse mortgage division resigned, and company demoted and/or reduced the pay of certain loan originators who were involved in the scheme.

But these remedies failed to appease state regulators, who assessed a $5.28 million administrative penalty; fired Chief Operating Officer Paul Alger; and required NewDay to hire an independent auditor to evaluate its policies and procedures and training and education program to determine if additional remedial action is necessary. The auditor must report back to the MMC within 270 days with a proposal detailing how the company intends to improve its corporate management and governance structures, with an eye to implementing best business practices for a mortgage company of its size and scope of business.

According to the consent order, Alger had continuing education requirements completed for him by other employees at least 18 times. Although he claimed he was unaware of his requirements and only became aware of this activity after the initial complaint was disclosed to NewDay, the Maryland investigation uncovered evidence demonstrating that he had direct knowledge of and condoned these practices while they were occurring. NewDay has 180 days to hire a replacement for Alger, and that replacement cannot be the current president or CEO.

The consent order also alleged that some of the employees NewDay had fired were subsequently rehired under part-time consulting contracts or by NewDay’s parent company, Chrysalis Holdings LLC.

Mortgage regulators who participated in the settlement were from Alabama, Alaska, Arizona, Arkansas, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming and the District of Columbia.

NewDay specializes in refinancing existing mortgages, reverse mortgages and VA- and FHA- backed mortgages. The company has not commented on the settlement agreement or consent order.

Email Amy Swinderman.

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