INSTAFI CASE SPURS GREATER SCRUTINY OF LENDING OVERSIGHT.

Byline: GREGORY J. WILCOX

A hearing in Sacramento last week shed some light on the financial hole former online lender Instafi.com dug for itself. And it could be the first step in improving regulation of the lending industry.

It's a case of a little movement in mortgage interest rates causing widespread collateral financial pain.

Testimony before the Assembly Banking and Finance Committee revealed that the Irvine-based company committed to a business deal with an institutional investor then could not deliver the goods.

In this case the company agreed to sell a pool of loans that met certain conditions but then failed to do so. The company hit Instafi with $34 million in fees.

Spokeswoman Julie Stewart would not disclose the company's name because the investigation is continuing.

Margaret Gladstein, the committee's chief consultant, offered a bit more detail and it came from a surprising source.

She managed to accomplish something that's nearly impossible these days: Have a conversation with company founder Sean Roberts.

``He indicated to me that he owed 'pair-off' fees to Washington Mutual and couldn't work out a payment plan,'' she said.

So the company closed and is liquidating assets. Roberts didn't respond to requests for an interview.

William P. Wood, commissioner of the California Department of Corporations, testified that sometime in 2002 Instafi agreed to deliver about $600 million in mandatory loan commitments at interest rates higher than the current market rates at that time.

Rates kept dropping, though, and Instafi could not put the loans together at the agreed-upon rate.

He also said that the company's troubled financial condition was not part of the department's routine regulatory exam that started in June of last year. In September, the company's balance sheet listed $122.5 million in assets and a net worth of $4.9 million.

That was after the implosion was well under way.

The department found out about the company's implosion from media reports, Wood said.

``Instafi's sudden closure without prior notice to either the department or its borrowers is unique in the department's experience.''

More than borrowers got hurt.

Mel Jones owns a mobile notary service in Sacramento and told the panel Instafi owed her $31,000.

``I doubt I'll ever get any of that money,'' she said.

One thing the committee is looking at are the laws that regulate consumer lending in California.

The Commercial Finance Lenders Law covers consumer and commercial finance lenders and generally applies to loans under $10,000. The holders of these licenses are required to maintain a minimum net worth of $25,000.

The California Residential Mortgage Lending Act specifically addresses the business of federally approved mortgage lenders and servicers that formerly operated under the state real estate law. You might recognize it by its acronym, CRMLA, and it's usually followed by a number recited by a fast-talking pitchman in mortgage commercials on the radio.

The lines do get blurred, though, because Instafi held the former license. And that's not unusual, either. Wells Fargo has the same kind of license, officials said.

Any change must be enacted by the Legislature so there will be more official talk on this subject.

And the corporations department has initiated proceedings to revoke Instafi's license despite the company's demise. This would prevent Roberts from restarting the business.

Whatever happens, though, won't protect borrowers from the human factor.

``Unfortunately there are no laws that protect people from making bad business decisions,'' Stewart said.

Gregory J. Wilcox, [phone]

greg.wilcox(at)dailynews.com