Some First Magnus Managers Lost Assets

'Net' branch leaders say lender kept their funds
By Christie Smythe
arizona daily staR
Tucson, Arizona | Published: 09.27.2007
advertisementSome of the former employees of Tucson-based First Magnus Financial Corp. had much more money on the line than a twice-monthly paycheck when the mortgage lender filed for bankruptcy last month.
Managers of so-called "net" branches, offices that were operated using managers' funds, said that when First Magnus filed for bankruptcy, it took possession of accounts, holding more than $100,000 in some cases, that were rightfully theirs.
"Unfortunately, they were using our money and basically stole it," said Sue Marshall, a net branch manager in Modesto, Calif., who said she had $118,000 in an account under First Magnus' control.
First Magnus spokesman Gary Baraff said the company does not use the term "net branch," but that its retail branches were operated under "varying compensation structures."
"From our point of view, they were all just retail locations," he said.
Many of the company's 277 retail branches nationwide were established as net branches, said Greg Frost, owner of a net branch called Frost Mortgage in Albuquerque, who also acted as a trainer for First Magnus branch managers. Net branches included some Charter Funding and Great Southwest Mortgage locations, he said.
The arrangements might also have violated some regulatory standards, including those set by the U.S. Department of Housing and Urban Development and the state of Arizona.
Unlike regular branch managers, who are simply employees, First Magnus net-branch managers were on the hook for office expenses, including rent, equipment, furniture and payroll, according to a net-branch agreement forwarded by a former manager. The net-branch managers were also responsible for paying fees to First Magnus for originating loans and for administrative expenses. In exchange, the managers got to keep the profits from the branch, a portion of which had to be kept in First Magnus accounts, former managers said.
Not only did the managers lose access to those funds when the company filed for bankruptcy, they also found that some checks written against those accounts had bounced, leaving the managers to repay those debts with personal funds.
Frost, whose mortgage business includes several offices and 31 employees, said he paid about $125,000 to cover bounced checks and his employees' wages. Frost said he lost more than $1 million that was kept in his First Magnus account.
Darrell Giannone, a net-branch manager in California, said he has paid $650 after checks bounced, and expects he will have to pay about $4,000 more. At the time of the bankruptcy filing, he had about $110,000 in a branch account.
"In my opinion, and the way it was expressed to us, it should never be in jeopardy," Giannone said about his branch account. "It's income earned."
Baraff said he could not confirm whether the branch agreement sent by a former manager was valid without its being reviewed by the company's legal staff. All branches were overseen by First Magnus, he said.
Net branches draw scrutiny
Mortgage industry experts said net branch arrangements have proliferated over the last decade or so as companies have looked for ways to expand with minimal expense. The arrangements also help attract top-notch talent, experts said, because they allow managers to profit from the branches' success.
"After it's all said and done, it's getting to participate in the net profits," said Bill Anastopoulos, president-elect of the Arizona Association of Mortgage Brokers.
But some state and federal regulators object to the arrangements because the branches may lack direct oversight by a parent company and have a higher potential for fraud, industry experts said.
In Arizona, mortgage lenders are not permitted to assign licenses to branch managers and allow them to operate autonomously, according to a regulatory alert issued by the state Department of Financial Institutions in 2006. HUD also prohibits lenders from offering government-backed loans at nonapproved locations, which might include net branches, according to the agency's Mortgagee Approval Handbook and a 2000 agency letter clarifying prohibited branch arrangements.
In 2006, both the state Department of Financial Institutions and HUD found First Magnus' Great Southwest branches violated net-branching regulations.
Funds may be hard to recover
Financial documents filed with the bankruptcy court on behalf of First Magnus do not appear to include branch managers as creditors. Baraff said he was not able to determine by Wednesday evening how the funds were accounted for.
In August, Tucson-based First Magnus abruptly stopped funding loans, laid off most of its 5,500 employees nationwide and filed for Chapter 11 bankruptcy protection without issuing the former employees final paychecks. The company plans to be liquidated.
Some industry experts said the legal concerns about net branching might make it difficult for the managers to recover funds in their accounts, regardless of what their branch agreements state. The branch profits might be considered assets of First Magnus, said Amy Swaney, past president of the Arizona Mortgage Lenders Association.
"It's going to be something that goes to court," she said. "The bottom line ... it's going to be a difference of opinion as to whose money that is."
Read more stories and download PDFs about First Magnus at go.azstarnet.com/firstmagnus
● Contact reporter Christie Smythe at 434-4083 or at csmythe@astarnet.com

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