Under fire from a critical bankruptcy probe, Maitland-based mortgage lender TransLand Financial Services Inc. said its top executive has resigned amid allegations the company has engaged in a multimillion-dollar accounting scheme for much of the past three years.
TransLand Chief Executive Officer Roger W. "Roddy" Conner III stepped down Monday only one week after a bankruptcy court examiner issued a scathing report detailing the company's diversion of millions of dollars in mortgage proceeds to pay for some of its own operational expenses.
Conner had been the firm's only chief executive since it was formed in 1995. He is being replaced by Paul Reich, a veteran of Central Florida's lending industry.
One of the country's largest privately owned mortgage companies, TransLand originates its own home loans and provides mortgage-processing services to banks that had originated loans to their customers.
Conner admitted no wrongdoing in resigning, according to a lawyer for TransLand, and he remains on the board of directors. The company is being sued by creditors who want to force it into involuntary bankruptcy.
"There were poor internal controls at TransLand and that situation has been remedied," said Roy S. Kobert, who represents the company in the case. "There will be a detailed response to the examiner's report. We look forward to telling our side of this story."
The examiner found that TransLand officials poured its clients' mortgage proceeds into a company account that funded "anything they saw fit," including outstanding bills, acquisitions, salaries, bonuses and, in some cases, executives' personal expenses, according to the report.
In a so-called "lapping scheme" -- that began in 2004 -- the company took mortgage collections that should have gone to some of its bank clients and paid off money it had withheld from others, examiner Robert E. Lynch said in his report.
When asked about the status of the loans, "TransLand officers provide false and misleading information to the banks," Lynch said. TransLand's reports "showed mortgage payments still being made and interest being accrued on the mortgage even though the money had already been received by TransLand."
Overall, TransLand had withheld more than $27.4 million from its banking clients through the end of August 2007, the examiner said. TransLand's practices violated its contracts with clients by not "segregating" the money into specific accounts and failing to remit the money in a timely manner, the examiner said.
He traced the company's woes to a cash-flow problem that began to develop in 2004 after the company changed its business strategy to focus on construction loans. It had to finance those loans by continually obtaining new lines of credit, which strained the company's operating cash, he said.
Industry experts said many lenders suffered similar consequences this year when the global credit markets seized up after the mortgage-industry turmoil.
"As a non-bank lender, they've gone through what everybody else had gone through in what is a very scary market," said Philip van Dooren, senior industry analyst for TheStreet Ratings Inc., a financial-rating service based in the Palm Beach area. "Any lenders that rely on lines of credit as a sole source of funding are in serious trouble."
The examiner's findings supported claims made by several clients -- including Sanford-based Federal Trust Bank -- which sued TransLand in August to force it into bankruptcy to recover nearly $22 million they claim they are due. Minnesota-based MidCountry Bank and Nebraska-based Tier One Bank joined Federal Trust in the action.
The financial institutions alleged that TransLand misled them and secretly used their money for other business purposes, according to filings in the Orlando division of federal bankruptcy court for the Middle District of Florida. Now, because of its rising debt, TransLand doesn't have enough capital and can't obtain financing to continue doing business, the banks alleged.
TransLand denied the allegations, which the company said erupted from a series of billing disputes. Although it acknowledges that it owes money to the banks, TransLand disputes it did anything improper.
"This is the way TransLand has always done business for the past decade," said Kobert, the company's lawyer. "It was not brought to the attention in any external audit or by any of the lenders before this summer. However, when TransLand discovered it had a problem, it reported the problem itself."
Kobert said the lender is now negotiating with clients to resolve their issues.