UpClose with Felecia Rotellini, Arizona Department of Financial Institutions
PrintWhen Felecia Rotellini rejoined the Arizona Department of Financial Institutions in 2005, the state was in the throes of unprecedented growth.
Since then, she has watched the state sink into economic despair induced by the resulting crash of Arizona's economy. Mortgage fraud flourished like never before. The community banks and credit unions that Rotellini's agency regulates have been brought to their knees as the communities they served felt the sting of the recession. And as her agency's need for more resources grew, recession-induced budget cuts hampered her ability to investigate and prosecute people for mortgage-related crimes.
But as her term as superintendent of the department came to an end Aug. 28, Rotellini was optimistic the changes she made and the agenda she pursued will help make Arizona a better place to do business in real estate.
How different is the state's economic climate now compared to when you started this job in 2005? How far has it fallen in that period?
In 2005, I think there was a lot of speculation that the real estate market was nearing its bust, and there were certainly national articles about whether we'd hit the bust of the real estate-boom cycle. And I think Arizonans - I know a lot of our banks and our credit unions only saw increased value in the housing market. So in 2005 we were pretty unrealistic. I'd say we were pretty comfortable with the thought that our home values would continue to grow. But there was a lot of speculation that it was reaching its peak.
Certainly in 2005 and 2006 we were seeing the utilization of the nontraditional mortgage products in the subprime market. And it was during 2006 that we knew out-of-state investors were coming into Arizona and investing heavily in the real estate market using the nontraditional mortgage products. So we knew there was a lot of speculation going on using loan products that really were not intended for speculation, but rather for homeowners to get into homes and hopefully be able to refinance as the value of their houses go up.
So you saw the roots of the crisis emerging before the crisis had manifested itself?
Right. And as a matter of fact, in the fall of 2006 - I took over as superintendent in January of '06 - and during '05 and into '06 we were working with the Real Estate Department and the Attorney General's Office on the types of mortgage fraud we were seeing, where real estate agents and mortgage brokers were taking advantage of the fact that the home values were high. And it was very difficult, perhaps, to determine the value of a house that was too high.
We were seeing inflated home values and the cash-back schemes where the seller was actually transferring money back to the buyer.
How did your agency respond to those problems?
First off, one of our best sources for the inflated values was the appraisers. They were trying to do comps in some of the outlying subdivisions. ... They were working on appraisals for their clients, and they were realizing that in some of the subdivisions that they were looking in that they were seeing a pattern of the same appraiser, the same loan officer, the same real estate agent, and that these values were being artificially inflated. And so they would bring us spreadsheets of home values that they believed were overvalued.
And that became part of our mortgage fraud task force ... we started in the fall of '06 with ... the United States (Department) of Urban Development and the U.S. Attorney's Office, the Attorney General's Office. And we had meetings here every month or down at HUD's offices.
And we brought in a lot of the local police departments and the county attorney's office, the sheriff's office and many federal agencies as well. ... We basically started getting together and sharing information.
Last year, the Department of Justice indicted 36 individuals, which included several of our licensees' employees, in what was called Operation Cashback. Just yesterday our department received an award from the Department of Justice for our efforts in a cooperative manner with all these other law enforcement agencies, for bringing these cases to the point of indictment. And several of these guys have gotten convicted.
Much of the problem seems to have been things that were troublesome and led to a lot of mortgage fraud but perfectly legal. How frustrating was that for you?
I guess for me, the resource issues we're facing now are creating a lot of frustration. But that's true of all state agencies. To be frank, every single state agency is having difficulty doing their mission-critical functions.
The one saving grace, I think, for us - at least for me personally - is that loan officers who work for these mortgage companies will be licensed as of July 1, 2010, and that starting in the fall of '06 I started working with the mortgage brokers and the mortgage bankers to clean up their industry. The leadership of both the Arizona Association of Mortgage Brokers and the Arizona Mortgage Lenders Association agreed that the issue was unlicensed loan originators.
When you think about it, real estate agents are licensed, and then they have to work for a licensed real estate broker. That's been the law on the books for a very long time. But it wasn't until 2008 that the loan officers who work for licensed mortgage brokers and bankers had to be licensed, and then had to work by law for a licensed mortgage broker or banker.
The Arizona Association of Mortgage Bankers wanted to have loan originators in Arizona licensed as early as 2002. But it was very difficult for them to get some footing in the Legislature. And so they came to me and proposed that the state should license loan originators. What's unusual about that is that you actually have the industry that knew they were going to be saddled with the additional expense of licensing their own people, coming to the regulator, coming to the Legislature and saying, 'Please license us. ' And the reason is they recognized that their business model allowed loan originators to essentially run amok if they didn't have enough oversight and quality controls.
When we talk about will this ever happen again, will we ever have this incredible boom and bust, and I think in Arizona one of the reasons why I'm hopeful, at least, or optimistic that we won't have the same peaks and valleys that we had before, is there's a lot more accountability right now.
House Bill 2143 that just passed requires them to act with reasonable care to make sure that the loan that they place a consumer in is beneficial and is appropriate under the circumstances. And that's a new standard that raises the bar for the whole independent mortgage company profession.
If these things had been implemented in 2002 when the mortgage industry started asking for it, how would things have been different?
I'd like to think that there would've been more people worried about complying with the law, and there would've been a level of accountability that perhaps would've maybe not made our peaks as high as they are or our valleys in our real estate market as low.
If you look at national trends versus Arizona's trends, the boom of the real estate market across the United States is high, but Arizona's peak is higher. And then the drop in the values and the bust is larger and more dramatic in Arizona. And my speculation is that there were an awful lot of inflated values of homes and a lot of flipping of home sales, because the transaction, the mortgage transaction, became a vehicle to make a profit.
How much of a challenge is it facing the loss of resources due to budget cuts that you, along with every other state agency, is facing?
I've lost over 50 percent of my examination team, so we're down to two general fund-funded bank examiners for 33 state chartered banks, and two general fund examiners for state chartered credit unions, and we've got 26 of those. We've actually got 2,751 ... licensed mortgage broker and banker locations, and we have two mortgage examiners funded through the general fund right now.
We're doing what we can, and the silver lining there is - and there is a silver lining - that in House Bill 2143 we did get a financial services fund. We've taken the first step that I think we need to take toward self-funding.
Out of 50 states, there's only five states that do not have a department of financial institutions that's not self funded. So in other words, we're one of only five states that still require financial services regulation to be controlled by general fund appropriations.
Your agency deals a lot with community banks. What are the problems facing those banks?
Community banks service the community and they service the economy of their community. And in Arizona we have a real estate growth-based economy. And so as a result of that, our banks have high concentrations of loans in real estate, construction and development.
Many of our loans are impaired. The value of the collateral behind the loans has gone down, and so they don't have the capital, the asset quality that they used to have. This hurts the financial condition of the bank overall. Then we have all the companies and depositors that work in related areas that support the real estate industry. Wholesalers. Concrete manufacturers. Electricians. All of the different subcontractors. As these depositors lose their businesses, then the banks lose their depositors.
Our community banks were not making loans to people that could not afford their homes. Our community banks were not making subprime loans. ... They really, in my opinion, did not contribute to the boom and bust ... but their certainly suffering the consequences of that.
Would you have liked to serve another term as superintendent?
I was very fortunate that the term that I had expired in January of this year, and I've worked very closely with Governor (Jan) Brewer's staff, and I think at this point in time I have an opportunity I can't pass up in the private sector.
This was a mutual agreement between the Governor's Office with me ... to stick around past the ending of my term. I've had a great working relationship with Governor Brewer. I could have left and I really wanted to stick around. I go way back with the department. I was their lawyer from 1992-1996, and it's been a great.
I think I was in the right place at the right time for this job, and now it's time for new opportunities to serve, really.
What do you feel are your biggest accomplishments as superintendent?
I think I've enhanced the communication between consumers and our department, and consumers and the companies that they do business with. And we've done a lot of outreach with our companies.
I've really tried to be fundamentally fair in how we approach regulation and how we examine and investigate our companies. We educate the companies on what it takes to comply and what we expect from them to comply with the law, and we communicate with them through outreach.
I've really found that the industry has really embraced the approach that I've taken to regulation, because it really enhances consumer confidence. And so I think that's been one of the biggest accomplishments I've had.
We helped Senator (Jay) Tibshraeny in 2007 pass legislation that creates mortgage fraud as an actual crime, and right now one of the department's investigators is working with the AG's office on prosecuting the first mortgage fraud case that utilizes that new law.