SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
_____________ to _____________
Commission File Number: 1-12109
Delta Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware 11-3336165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Woodbury Road, Suite 200, Woodbury, New York 11797 (Address of
registrant's principal executive offices including ZIP Code)
(516) 364 - 8500
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes [ x ] No [ ]
As of March 31, 2000, 15,920,869 shares of the Registrant's common stock,
par value $.01 per share, were outstanding.
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INDEX TO FORM 10-Q
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999.............................................. 1
Consolidated Statements of Income for the three months ended
March 31, 2000 and March 31, 1999.............................. 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and March 31, 1999........................ 3
Notes to Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................20
Item 2. Changes in Securities and Use of Proceeds......................23
Item 3. Defaults Upon Senior Securities................................23
Item 4. Submission of Matters to a Vote of Security Holders............23
Item 5. Other Information..............................................23
Item 6. Exhibits and Current Reports on Form 8-K.......................23
Signatures................................................................24
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(Dollars in thousands, except for share data) 2000 1999
---------- -----------
<S> <C> <C>
ASSETS
Cash and interest-bearing deposits $ 49,356 55,989
Accounts receivable 34,835 32,367
Loans held for sale, net 92,426 89,036
Accrued interest receivable 52,406 63,309
Capitalized mortgage servicing rights 45,144 45,927
Interest-only and residual certificates 233,111 224,659
Equipment, net 20,773 21,721
Cash held for advance payments 14,286 13,568
Prepaid and other assets 11,602 5,428
Goodwill 4,535 4,831
----------- -----------
Total assets $ 558,474 556,835
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank payable $ 954 1,195
Warehouse financing and other borrowings 122,067 109,019
Senior Notes 149,498 149,474
Accounts payable and accrued expenses 39,353 43,607
Investor payable 73,825 82,204
Advance payment by borrowers for taxes and insurance 14,130 13,784
Deferred tax liability 9,680 10,411
----------- ----------
Total liabilities 409,507 409,694
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 49,000,000
shares; 16,000,549 shares issued and
15,883,749 shares outstanding at March 31, 2000
and December 31, 1999 160 160
Additional paid-in capital 99,472 99,472
Retained earnings 50,653 48,827
Treasury stock, at cost (116,800 shares) ( 1,318) (1,318)
----------- ----------
Total stockholders' equity 148,967 147,141
----------- ----------
Total liabilities and stockholders' equity $ 558,474 556,835
=========== ==========
See accompanying notes to consolidated financial statements.
1
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
(Dollars in thousands, except per share data) 2000 1999
-------- --------
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REVENUES:
Net gain on sale of mortgage loans $ 14,654 25,103
Interest 10,537 6,433
Servicing fees 4,066 3,613
Origination fees 6,688 7,364
--------- ---------
Total revenues 35,945 42,513
--------- ---------
EXPENSES:
Payroll and related costs 15,561 15,842
Interest expense 7,803 6,172
General and administrative 9,456 11,057
---------- ----------
Total expenses 32,820 33,071
---------- ----------
Income before income taxes 3,125 9,442
Provision for income taxes 1,299 3,698
---------- ----------
Net income $ 1,826 5,744
=========== ==========
PER SHARE DATA:
Net income per common
share - basic and diluted $ 0 .11 0.37
========== ==========
Weighted-average number
of shares outstanding 15,920,869 15,358,749
========== ==========
See accompanying notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
(Dollars in thousands) 2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,826 5,744
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan and recourse losses 542 25
Depreciation and amortization 1,798 1,289
Deferred tax benefit (731) (153)
Capitalized mortgage servicing rights, net of amortization 783 (2,521)
Deferred origination costs 23 170
Interest-only and residual certificates received in
Securitization transactions, net (8,452) (4,838)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,468) (3,308)
Increase in loans held for sale, net (3,417) (1,298)
Decrease (increase) in accrued interest receivable10, 903 (2,382)
Increase in cash held for advance payments (718) (724)
(Increase) decrease in prepaid and other assets (6,700) 299
Decrease in accounts payable and accrued expenses (4,266) (1,592)
(Decrease) increase in investor payable (8,379) 8,606
Increase in advance payments by borrowers for taxes and insurance 346 1,260
----------- ----------
Net cash used in operating activities (18,910) 577
----------- ----------
Cash flows from investing activities:
Purchase of equipment (530) (2,672)
----------- ----------
Net cash used in investing activities (530) (2,672)
----------- ----------
Cash flows from financing activities:
Proceeds from warehouse financing and other borrowings, net 13,048 10,199
Decrease in bank payable, net (241) (582)
---------- ----------
Net cash provided by financing activities 12,807 9,617
---------- ----------
Net increase in cash and interest-bearing deposits (6,633) 7,522
Cash and interest-bearing deposits at beginning of period 55,989 49,152
---------- ----------
Cash and interest-bearing deposits at end of period $ 49,356 $ 56,674
=========== ==========
Supplemental Information:
Cash paid during the period for:
Interest $ 11,715 9,518
=========== ==========
Income taxes $ 2,039 3,850
=========== ==========
See accompanying notes to consolidated financial statements.
3
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<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Delta Financial Corporation (the "Company" or "Delta") is a Delaware
corporation, which was organized in August 1996.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying unaudited consolidated financial statements and the
information included under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" should be read in conjunction
with the audited consolidated financial statements and related notes of the
Company for the year ended December 31, 1999. The results of operations for the
three-month period ended March 31, 2000 is not necessarily indicative of the
results that will be expected for the entire year.
All adjustments that are, in the opinion of management, considered
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented have been made. Certain prior
period amounts in the financial statements have been reclassified to conform
with the current year presentation.
(2) SUMMARY OF REGULATORY SETTLEMENTS
In September 1999, the Company settled allegations by the New York State
Banking Department and a lawsuit by the New York State Office of the Attorney
General alleging that Delta had violated various state and federal lending laws.
The global settlement was evidenced by that certain (a) Remediation Agreement by
and between Delta Funding and the NYSBD, dated as of September 17, 1999 and (b)
Stipulated Order on Consent by and among Delta Funding, Delta Financial and the
NYOAG, dated as of September 17, 1999. As part of the Settlement, Delta will,
among other things, implement agreed upon changes to its lending practices;
provide reduced loan payments aggregating $7.25 million to certain borrowers
identified by the NYSBD; and create a fund of approximately $4.75 million to be
financed by the grant of 525,000 shares of Delta Financial's common stock valued
at a constant assumed priced of $9.10 per share, which approximates book value.
The proceeds of the fund will be used, for among other things, to pay for a
variety of consumer educational and counseling programs.
In March 2000, the Company finalized an agreement with the U.S. Department of
Justice,
4
the Federal Trade Commission and the Department of Housing and Urban
Development, to complete the global settlement it had reached with the NYSBD and
NYOAG. The Federal agreement mandates some additional compliance efforts for
Delta, but it does not require any additional financial commitment by Delta.
(3) IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that any entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the effective
date of SFAS No. 133, for one year, to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The delay applies to quarterly and annual
financial statements. SFAS No. 133 does not require restatement of prior
periods. Management of the Company currently believes the implementation of SFAS
No. 133 will not have a material impact on the Company's financial condition or
results of operations.
(4) EARNINGS PER SHARE
The following is a reconciliation of the denominators used in the
computations of basic and diluted Earnings Per Share ("EPS"). The numerator for
calculating both basic and diluted EPS is net income.
For the three months ended March 31:
(Dollars in thousands, except EPS data)
2000 1999
- ------------------------------------------------------------------------------
Net income $ 1,826 5,744
Weighted-average shares 15,920,869 15,358,749
Basic EPS $ 0.11 0.37
Weighted-average shares 15,920,869 15,358,749
Incremental shares-options -- 10,973
- ------------------------------------------------------------------------------
15,920,869 15,369,722
Diluted EPS $ 0.11 0.37
- ------------------------------------------------------------------------------
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and accompanying Notes to Consolidated
Financial Statements set forth therein.
GENERAL
Delta Financial Corporation (the "Company" or "Delta"), through its
wholly-owned subsidiaries, engages in the consumer finance business by
originating, acquiring, selling and servicing non-conforming home equity loans.
Throughout its 18 years of operating history, the Company has focused on lending
to individuals who generally have impaired or limited credit profiles or higher
debt-to-income ratios for such purposes as debt consolidation, home improvement,
mortgage refinancing or education.
Through its wholly-owned subsidiary, Delta Funding Corporation ("Delta
Funding"), the Company originates home equity loans indirectly through licensed
mortgage brokers and other real estate professionals who submit loan
applications on behalf of the borrower ("Brokered Loans") and also purchases
loans from mortgage bankers and smaller financial institutions that satisfy
Delta's underwriting guidelines ("Correspondent Loans"). Delta Funding currently
originates and purchases the majority of its loans in 24 states, through its
network of approximately 1,600 brokers and correspondents.
Through its wholly-owned subsidiary, Fidelity Mortgage Inc., the Company
develops retail loan leads ("Retail Loans") primarily through its telemarketing
system and its network of 14 retail offices located in eight states. In March
2000, the Company decided to close a loan production center in Georgia.
In June 1999, the Company announced a settlement in principle with the Office
of the Attorney General for the State of New York ("NYOAG"), which was to
provide for retrospective relief to certain borrowers in the form of reduced
monthly obligations aggregating $6 million and prospective changes to some of
the Company's lending practices. The NYOAG took issue with Delta's lending
practices, specifically which loans should and should not be made by Delta. The
settlement in principle was later expanded to include the New York State Banking
Department ("NYSBD") and the U.S. Department of Justice ("DOJ"), which had
raised similar concerns relating to Delta's lending practices. In September
1999, the Company finalized its settlements with the NYSBD and the NYOAG, but
only after the NYOAG filed suit against the Company in August 1999, as evidenced
by (1) a Remediation Agreement by and between the Company and the NYSBD, and (2)
a Stipulated Order on Consent by and among the Company and the NYOAG.
As part of the final global settlement (in lieu of the previously announced
$6 million settlement with the NYOAG), the Company agreed to, among other
things, implement agreed upon changes to its lending practices; provide reduced
loan payments aggregating $7.25 million
6
to certain borrowers identified by the NYSBD; and create a reversionary fund
(the "fund"), administered by a trustee named by the NYSBD, financed by the
grant by Delta of 525,000 shares of Delta's common stock, valued at an assumed
constant price of $9.10 per share, which approximates the book value of the
shares. All proceeds raised through the fund shall be used for restitution and/
or to pay for a variety of educational and counseling programs at the discretion
of the NYSBD.
The Company recorded a $6.0 million pre-tax charge in the second quarter of
1999 when it reached a settlement in principle with the NYOAG. Subsequently, an
additional $6.0 million pre-tax charge was recorded in the third quarter of 1999
when the Company reached a global settlement with the NYSBD and the NYOAG. The
Company finalized its agreement with the DOJ in March 2000. The DOJ settlement,
which parallels the NYSBD and NYOAG settlement agreements, was also signed by
the Federal Trade Commission and the U.S. Department of Housing and Urban
Development. See "Legal Proceedings" for a more detailed discussion of the
settlement.
For the three months ended March 31, 2000 the Company originated and
purchased $287.0 million of loans, a decrease of 29% over the $404.1 million of
loans originated and purchased in the comparable period in 1999. Of these
amounts, approximately $173.2 million were originated through its network of
brokers, $71.5 million were originated through its retail network and $42.3
million were purchased from its network of correspondents during the three
months ended March 31, 2000 compared to $235.5 million, $77.4 million and $91.2
million, respectively, for the same period in 1999.
The following table sets forth information relating to the delinquency and
loss experience of the mortgage loans serviced by the Company (primarily for the
securitization trusts, as described below) for the periods indicated. The
Company is not the holder of the securitization loans, but generally retains
interest-only or residual certificates issued by the securitization trusts, as
well as the servicing rights, the value of each of which may be adversely
affected by defaults.
7
Three Months Ended
-------------------------------
(Dollars in thousands) March 31, December 31,
2000 1999
------------ ------------
Total Outstanding Principal Balance
(at period end)...................... $ 3,732,118 $ 3,631,830
Average Outstanding(1)................. 3,698,545 3,605,675
DELINQUENCY (at period end) 30-59 Days:
Principal Balance.................... $ 195,375 $ 208,302
Percent of Delinquency(2)............ 5.24% 5.73%
60-89 Days:
Principal Balance.................... $ 81,290 $ 83,000
Percent of Delinquency(2)............ 2.18% 2.28%
90 Days or More:
Principal Balance.................... $ 48,619 $ 56,435
Percent of Delinquency(2)............ 1.30% 1.55%
Total Delinquencies:
Principal Balance.................... $ 325,284 $ 347,737
Percent of Delinquency(2)............ 8.72% 9.56%
FORECLOSURES
Principal Balance.................... $ 192,067 $ 185,843
Percent of Foreclosures by Dollar(2). 5.15% 5.11%
REO (at period end).................... $ 44,588 $ 36,663
Percent of REO...................... 1.19% 1.01%
Net Losses on Liquidated Loans......... $ (4,544) $ (4,282)
Percentage of Net Losses on Liquidated Loans
(based on Average Outstanding Balance)(3) (0.49%) (0.47%)
- ---------------
(1)Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total principal balance by the number of
months in the applicable period.
(2)Percentages are expressed based upon the total outstanding principal balance
at the end of the indicated period.
(3) Annualized.
FAIR VALUE ADJUSTMENTS
The fair values of both interest-only and residual certificates and
capitalized mortgage servicing rights are significantly affected by, among other
factors, prepayments of loans and estimates of future prepayment rates. The
Company continually reviews its prepayment assumptions in light of company and
industry experience and makes adjustments to those assumptions when such
experience indicates.
The Company makes assumptions concerning prepayment rates and defaults based
upon the seasoning of its existing securitization loan portfolio. The following
table compares the prepayment assumptions used during the first quarter of 2000
(the "new" assumptions), with those used during the first quarter of 1999 (the
"old" assumptions):
8
<PAGE>
Loan Type Month 1 Speed Peak Speed
- ------------------------------------------------------------------
New Old New Old
- ------------------------------------------------------------------
Fixed Rate Loans 4.0% 4.8% 31% 31%
Six-Mo. LIBOR ARMs 10.0% 10.0% 50% 50%
Hybrid ARMs 4.0% 6.0% 50% 50%
- ------------------------------------------------------------------
In the first quarter of 1999, the Company increased its loss reserve
initially established for both fixed- and adjustable-rate loans sold to the
securitizations trusts from 2.00% to approximately 2.20% of the issuance amount
securitized.
In the fourth quarter of 1999, the Company lowered its prepayment speed
assumption along parts of the prepayment rate vector curve while leaving the
peak speeds intact. In addition, the Company increased its loss reserve
initially established for both fixed- and adjustable-rate loans sold to the
securitizations trusts from 2.20% to approximately 3.10% of the issuance amount
securitized.
The prepayment rate assumption was revised primarily to reflect the Company's
actual loan performance experience over the past several quarters. Management
believes that industry consolidation and a higher interest rate environment has
and will continue to deter borrowers from refinancing their mortgage loans. The
loan loss reserve assumption was revised to reflect management's belief that
slower prepayment speeds, coupled with an anticipated flat to slightly moderate
rise in home values as compared to the past few years and borrowers who had
avoided default through refinancing may be readily unable to do so because of
industry consolidation and a higher interest rate environment, may have an
adverse effect on the Company's non-performing loans.
These changes resulted in approximately a $3.8 million reduction in the
Company's value of the residual and interest-only certificates for the three
months ended March 31, 1999.
An annual discount rate of 12.0% was utilized in determining the present
value of cash flows from residual certificates, using the "cash-out" method,
which are the predominant form of retained interests at both March 31, 2000 and
December 31, 1999.
The Company uses the same prepayment assumptions in estimating the fair value
of its mortgage servicing rights.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1999
GENERAL
The Company's net income for the three months ended March 31, 2000 was $1.8
million, or $0.11 per share, compared to $5.7 million, or $0.37 per share, for
the three months ended March 31, 1999. Comments regarding the components of net
income are detailed in the following paragraphs.
9
REVENUES
Total revenues decreased $6.6 million, or 16%, to $35.9 million for the three
months ended March 31, 2000, from $42.5 million for the comparable period in
1999. The decrease in revenue was primarily attributable to a decrease in the
net gain recognized on the sale of mortgage loans and origination fees,
partially offset by an increase in interest income and servicing fees.
The Company originated and purchased $287.0 million of mortgage loans for the
three months ended March 31, 2000, representing a 29% decrease from $404.1
million of mortgage loans originated and purchased for the comparable period in
1999. The Company securitized or sold loans above par of $290.0 million during
the three months ended March 31, 2000 compared to $375.0 million securitized or
sold above par in the corresponding period in 1999, representing a 23% decrease.
Total loans serviced increased 18% to $3.73 billion at March 31, 2000 from $3.16
billion at March 31, 1999.
Net Gain on Sale of Mortgage Loans. Net gain on sale of mortgage loans
represents (1) the sum of (a) the fair value of the interest-only and residual
certificates retained by the Company in a securitization for each period and the
market value of the interest-only certificates sold in connection with each
securitization, (b) the fair value of capitalized mortgage servicing rights
associated with loans securitized in each period, and (c) premiums earned on the
sale of whole loans on a servicing-released basis, (2) less the (x) premiums
paid to originate or acquire mortgage loans, (y) costs associated with
securitizations and (z) any hedge loss (gain) associated with a particular
securitization.
Net gain on sale of mortgage loans decreased $10.4 million, or 41%, to $14.7
million for the three months ended March 31, 2000, from $25.1 million for the
comparable period in 1999. This decrease was primarily due to a 23% decrease in
the amount of loans securitized or sold above par to $290.0 million in 2000,
compared to $375.0 million of loans securitized or sold above par in 1999; a
revision to the Company's loan loss reserve assumption in 1999 (see "-Fair Value
Adjustments"); a change in the securitization structure which reduced the
Company's profitability (but did, provide the Company with better cash flow
dynamics), coupled with wider spreads demanded by asset-backed investors who
purchase the pass-through certificates issued by securitization trusts during
the three months ended March 31, 2000 compared to the corresponding period in
1999. The decrease was partially offset by lower aggregate premiums paid to
acquire loans, resulting from both a decrease in amount of loans purchased
through the correspondent channel and lower average premiums paid to
correspondents. The weighted average net gain on sale ratio was 5.1% for the
three months ended March 31, 2000 compared to 6.7% for the comparable period in
1999.
Interest Income. Interest income primarily represents the sum of (1) the
difference between the distributions the Company receives on its interest-only
and residual certificates and the adjustments recorded to reflect changes in the
fair value of the interest-only and residual certificates, (2) the gross
interest earned on loans held for sale (other than for loans sold into the
conduit in which case, it is the net interest spread), (3) with respect to loans
sold into the conduit, the net interest margin earned (excess servicing) between
the weighted average rate on the mortgage loans less the conduit's variable
funding rate plus administrative fees, and (4) interest earned on cash
collection balances.
10
Interest income increased $4.1 million, or 64%, to $10.5 million for the
three months ended March 31, 2000, from $6.4 million for the comparable period
in 1999. The increase in interest income was primarily due to (1) a higher fair
value adjustment during the first quarter of 1999, including a $3.8 million
reduction in the Company's value of residual and interest-only certificates,
related to an increase in its loan reserve, (2) the accounting of loans sold
through a mortgage loan conduit prior to securitization in the first quarter of
1999, in which the Company earns and records the net interest margin between the
interest rate earned on the pool of mortgage loans sold to the mortgage loan
conduit and the conduit financing rate, less administrative expenses and (3) a
higher mortgage coupon rate of 10.8% from 10.2% reflecting a higher economic
interest rate environment.
Servicing Fees. Servicing fees represent all contractual and ancillary
servicing revenue received by the Company less (1) the offsetting amortization
of the capitalized mortgage servicing rights, and any adjustments recorded to
reflect valuation allowances for the impairment in mortgage servicing rights and
(2) prepaid interest shortfalls.
Servicing fees increased $0.5 million, or 14%, to $4.1 million for the three
months ended March 31, 2000, from $3.6 million for the comparable period in
1999. This increase was primarily due to an increase in the aggregate size of
the Company's servicing portfolio. The average balance of the mortgage loans
serviced by the Company increased 20% to $3.70 billion for the three months
ended March 31, 2000 from $3.09 billion during the comparable period in 1999.
Origination Fees. Origination fees represent fees earned on brokered and
retail originated loans. Origination fees decreased $0.7 million, or 9%, to $6.7
million for the three months ended March 31, 2000, from $7.4 million for the
comparable period in 1999. The decrease was primarily the result of (1) a 27%
decrease in broker originated loans and (2) a 6% decrease in retail originated
loans.
EXPENSES
Total expenses decreased by $0.3 million, or 1%, to $32.8 million for the
three months ended March 31, 2000, from $33.1 million for the comparable period
in 1999. The decrease was primarily the result of a decrease in general and
administrative costs and personnel costs, partially offset by an increase in
interest expense.
Payroll and Related Costs. Payroll and related costs include salaries,
benefits and payroll taxes for all employees. Payroll and related costs
decreased by $0.3 million, or 2%, to $15.5 million for the three months ended
March 31, 2000, from $15.8 million for the comparable period in 1999. The
decrease was primarily due to a decline in staffing in the Company's broker and
retail divisions and in commissions paid to these employees, related to a
decrease in loans originated. This was partially offset by an increase in
staffing related to growth in the Company's servicing portfolio, coupled with an
increase in employee fringe benefits. As of March 31, 2000, the Company employed
1,049 full- and part-time employees, compared to 1,237 full- and part-time
employees as of March 31, 1999.
Interest Expense. Interest expense includes the borrowing costs to finance
loan originations
11
and purchases under the $150 million aggregate principal amount of 9.5% Senior
Notes due 2004 issued in July 1997 (the "Senior Notes") and the Company's credit
facilities.
Interest expense increased by $1.6 million, or 26%, to $7.8 million for the
three months ended March 31, 2000 from $6.2 million for the comparable period in
1999. The decrease was primarily attributable to the accounting for loans sold
through a mortgage loan conduit prior to their securitization in the first
quarter of 1999, in which the Company earns and records the net interest margin
between the interest rate earned on the pool of mortgage loans sold to the
mortgage loan conduit and the conduit financing rate, less administrative
expenses. Typically, interest expense related to the Company's other warehouse
financing and borrowings are recorded directly to interest expense. The Company
did not utilize its mortgage loan conduit during the first quarter of 2000. In
addition, there was a increase in the cost of funds on the Company's credit
facilities, which were tied to one-month LIBOR. The one-month LIBOR index
increased to an average interest rate of 5.9% in the three months ended March
31, 2000, compared to an average interest rate of 5.0% for the comparable period
in 1999.
General and Administrative Expenses. General and administrative expenses
consist primarily of office rent, insurance, telephone, depreciation, goodwill
amortization, legal reserves and fees, license fees, accounting fees, travel and
entertainment expenses, advertising and promotional expenses and the provision
for loan losses on the inventory of loans held for sale and recourse loans.
General and administrative expenses decreased $1.6 million, or 14%, to $9.5
million for the three months ended March 31, 2000, from $11.1 million for the
comparable period in 1999. This decrease was primarily attributable to higher
legal-related costs and reserves in the first quarter of 1999.
Income Taxes. Income taxes are accounted for under SFAS No. 109, "Accounting
for Income Taxes." Deferred tax assets and liabilities are recognized on the
income reported in the financial statements regardless of when such taxes are
paid. These deferred taxes are measured by applying current enacted tax rates.
The Company recorded a tax provision of $1.3 million and $3.7 million for the
three months ended March 31, 2000 and 1999, respectively.
FINANCIAL CONDITION
MARCH 31, 2000 COMPARED TO DECEMBER 31, 1999
Cash and interest-bearing deposits decreased $6.6 million, or 12%, to $49.4
million at March 31, 2000, from $56.0 million at December 31, 1999. The decrease
was primarily the result of lower prepayments which caused a decrease in monies
held in securitization trust accounts by the Company, acting as servicer for its
ongoing securitization program.
Accounts receivable increased $2.5 million, or 8%, to $34.8 million at March
31, 2000, from $32.3 million at December 31, 1999. The increase was attributable
to an increase in reimbursable servicing advances made by the Company, acting as
servicer on its securitizations, related to a higher servicing portfolio. The
Company's servicing portfolio increased 3% to $3.73 billion as of March 31, 2000
from $3.63 billion as of December 31, 1999.
12
Loans held for sale, net increased $3.4 million, or 4%, to $92.4 million at
March 31, 2000, from $89.0 million at December 31, 1999. This increase was
primarily due to the net difference between loan originations and loans
securitized during the three months ended March 31, 2000.
Accrued interest and late charges receivable decreased $ 10.9 million, or
17%, to $52.4 million at March 31, 2000, from $63.3 million at December 31,
1999. This decrease was primarily due to the sale of interest receivable assets,
partially offset by an increase in reimbursable interest advances made by the
Company, acting as servicer on its securitizations.
Capitalized mortgage servicing rights decreased $0.8 million, or 2%, to $45.1
million at March 31, 2000, from $45.9 million at December 31, 1999. This
decrease was primarily due to the sale of a prepayment penalty servicing asset,
coupled with the amortization of capitalized mortgage servicing rights. These
decreases were partially offset by an increase directly attributable to the
Company's capitalizing the allocated carrying value amount of servicing fees,
totaling $4.4 million, resulting from loans securitized in the first quarter of
2000.
Interest-only and residual certificates increased $8.4 million, or 4%, to
$233.1 million at March 31, 2000, from $224.7 million at December 31, 1999. This
increase is primarily attributable to the Company's receipt of residual
certificates valued and recorded at $9.7 million from loans securitized in the
first quarter of 2000, coupled with an increase related to fair value
adjustments. These increases were partially offset by normal amortization due to
cash distributions.
Prepaid and other assets increased $6.2 million, or 114%, to $11.6 million at
March 31, 2000, from $5.4 million at December 31, 1999. This increase was
primarily attributable to the Company's investment in two new affiliate
companies (qualified special purpose entities).
Warehouse financing and other borrowings increased $13.1 million, or 12%, to
$122.1 million at March 31, 2000, from $109.0 at December 31, 1999. This
increase was primarily attributable to the operating cash deficit and to a
lesser extent, the funding of the Company's loans held for sale, net.
The aggregate principal balance of the Senior Notes totaled $149.5 million at
March 31, 2000 and December 31, 1999, net of unamortized bond discount. The
Senior Notes accrue interest at a rate of 9.5% per annum, payable semi-annually
on February 1 and August 1.
Investor payable decreased $8.4 million, or 10%, to $73.8 million at March
31, 2000, from $82.2 million at December 31, 1999. The decrease was primarily
the result of lower prepayments, which caused a decrease in the amount payable
to investors. Investor payable is comprised of all principal collected on
mortgage loans and accrued interest. Variability in this account is primarily
due to the principal payments collected within a given collection period.
LIQUIDITY AND CAPITAL RESOURCES
Following three successive quarters of generating positive cash flow from
operations, the Company had operating cash deficits in the third and fourth
quarters of 1999 and in the first quarter of 2000. The Company anticipates it
will continue to have an operating cash deficit for at least the next quarter,
due primarily to lower projected aggregate cash inflows from the
13
Company's retained interest-only and residual certificates. The lower projected
inflows are due to expected timing differences between older deals cash flowing
less per month per deal as the mortgage pool pays down and newer deals not
yet cash flowing until initial reserve requirements are satisfied. As initial
reserve requirements on some newer deals are reached, the Company expects to
receive greater aggregate cash inflows from its retained interest-only and
residual certificates which, coupled with (a) the Company's continued
concentration on its less cash-intensive broker and retail originations and
(b) its recent history of utilizing favorable securitization structures that
have allowed the Company to sell senior interest-only certificates for an up
front cash purchase price, may offset the operating cash deficit in future
quarters. However, market conditions and various other possibilities identified
below under "Risk Factors" could impact the Company's cash flows potentially
resulting in a more significant negative cash flow.
For the three months ended March 31, 2000, the Company had a negative
operating cash flow of $18.9 million compared to a positive operating cash flow
of $0.6 million for the comparable period in 1999. The reduction in operating
cash flow was primarily due to a decrease in cash flows from the Company's
retained interest-only and residual certificates and the Company's use of
operating cash to fund interest (delinquency) and servicing advance obligations
required as servicer for its securitization program. These interest and
servicing advances are reimbursable to the Company as the borrowers repay their
obligations over time. As such, the exact timing of these reimbursements cannot
be predicted with certainty. This was partially offset by the Company's
de-emphasis of the correspondent loan production channel, thereby decreasing the
amount of premiums paid to correspondents.
Currently, the Company's primary cash requirements include the funding of (1)
loan originations and purchases pending their pooling and sale, (2) the points
and expenses paid in connection with the acquisition of correspondent loans, (3)
interest expense on its Senior Notes and warehouse and other financings, (4)
fees, expenses, interest (delinquency) advances, servicing-related advances and
tax payments incurred in connection with its securitization program, and (5)
ongoing administrative and other operating expenses.
The Company must be able to sell loans and obtain adequate credit facilities
and other sources of funding in order to continue to originate and purchase
loans. Historically, the Company has utilized various financing facilities and
an equity financing to offset negative operating cash flows and support the
continued growth of its loan originations and purchases, securitizations and
general operating expenses. On July 23, 1997, the Company completed an offering
of the Senior Notes. A portion of the Senior Notes proceeds were used to pay
down various financing facilities with the remainder used to fund the Company's
growth in loan originations and purchases and its ongoing securitization
program. The Company's primary sources of liquidity continue to be warehouse and
other financing facilities, securitizations and, subject to market conditions,
sales of whole loans and debt and equity securities.
To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. The Company has relied upon
a few lenders to provide the primary credit facilities for its loan originations
and purchases. The Company had six warehouse facilities as of March 31, 2000 for
this purpose. One warehouse facility is a $200 million committed credit line
with a variable rate of interest and a maturity date of May 2000.
14
The Company's second warehouse facility is a syndicated $100 million
committed revolving line with a variable rate of interest and matures in June
2000. The Company's third warehouse facility is a renewal of a committed $200
million mortgage loan conduit with a variable rate of interest and a maturity
date of September 2000. The Company's fourth warehouse facility is a $200
million committed credit facility that has a variable rate of interest and a
maturity date of May 2000. The Company's fifth warehouse facility is a $250
million committed credit facility that has a variable rate of interest and a
maturity date of June 2000. The Company's sixth warehouse facility is a $200
million committed credit line that has a variable rate of interest and a
maturity date of September 2000. As of March 31, 2000, the first warehouse
facility had an outstanding balance of $81.8 million and the second warehouse
facility had an outstanding balance of $25.0 million. There can be no assurance
that the Company will be able to renew any of these warehouse facilities at
their respective maturities.
The Company is required to comply with various operating and financial
covenants as provided in the agreements described above which are customary for
agreements of their type. The continued availability of funds provided to the
Company under these agreements is subject to, among other conditions, the
Company's continued compliance with these covenants. Management believes that
the Company is in compliance with all such covenants under these agreements as
of March 31, 2000.
The Company purchased a total of 116,800 shares of its common stock during
the year ended December 31, 1998, under the Company's stock repurchase program,
at a total cost of $1.3 million. All of the repurchased shares were purchased in
open market transactions at then prevailing market prices. During the first
three months of 2000, no additional shares were repurchased.
INTEREST RATE RISK
The Company's primary market risk exposure is interest rate risk.
Profitability may be directly affected by the level of, and fluctuation in,
interest rates, which affect the Company's ability to earn a spread between
interest received on its loans and the costs of its borrowings, which are tied
to various United States Treasury maturities, commercial paper rates and the
London Inter-Bank Offered Rate ("LIBOR"). The profitability of the Company is
likely to be adversely affected during any period of unexpected or rapid changes
in interest rates. A substantial and sustained increase in interest rates could
adversely affect the Company's ability to purchase and originate loans. A
significant decline in interest rates could increase the level of loan
prepayments thereby decreasing the size of the Company's loan servicing
portfolio. To the extent servicing rights and interest-only and residual classes
of certificates have been capitalized on the books of the Company, higher than
anticipated rates of loan prepayments or losses could require the Company to
write down the value of such servicing rights and interest-only and residual
certificates, adversely impacting earnings. In an effort to mitigate the effect
of interest rate risk, the Company periodically reviews its various mortgage
products and identifies and modifies those that have proven historically more
susceptible to prepayments. However, there can be no assurance that such
modifications to its product line will effectively mitigate interest rate risk
in the future.
15
Fluctuating interest rates also may affect the net interest income earned by
the Company resulting from the difference between the yield to the Company on
loans held pending sales and the interest paid by the Company for funds borrowed
under the Company's warehouse facilities, although the Company undertakes to
hedge its exposure to this risk by using treasury rate lock contracts. (See
"--Hedging").
HEDGING
The Company originates and purchases mortgage loans and then sells them
primarily through securitizations. At the time of securitization and delivery of
the loans, the Company recognizes gain on sale based on a number of factors
including the difference, or "spread," between the interest rate on the loans
and the interest rate paid to asset-backed investors who purchase pass-through
certificates issued by securitization trusts. Historically, the rate paid on the
pass-through certificates was generally related to the interest rate on treasury
securities with maturities corresponding to the anticipated life of the loans.
If interest rates rise between the time the Company originates or purchases the
loans and the time the loans are sold at securitization, the excess spread
narrows, resulting in a loss in value of the loans. The Company has implemented
a strategy to protect against such losses and to reduce interest rate risk on
loans originated and purchased that have not yet been securitized through the
use of treasury rate lock contracts with various durations (which are similar to
selling a combination of United States Treasury securities), which equate to a
duration similar to the duration of the underlying loans. The nature and
quantity of hedging transactions are determined by the Company based upon
various factors including, without limitation, market conditions and the
expected volume of mortgage originations and purchases. The Company will enter
into treasury rate lock contracts through one of its warehouse lenders and/or
one of the investment bankers, which underwrite the Company's securitizations.
These contracts are designated as hedges in the Company's records and are closed
out when the associated loans are sold through securitization.
If the value of the hedges decrease, offsetting an increase in the value of
the loans, the Company, upon settlement with its hedge counterparty, will pay
the hedge loss in cash and then realize the corresponding increase in the value
of the loans as part of its net gain on sale of mortgage loans and its
corresponding interest-only and residual certificates. Conversely, if the value
of the hedges increase, offsetting a decrease in the value of the loans, the
Company, upon settlement with its hedge counterparty, will receive the hedge
gain in cash and realize the corresponding decrease in the value of the loans
through a reduction in the value of the corresponding interest-only and residual
certificates.
The Company has continued to review its hedging strategy in order to best
mitigate risk pending securitization. As the asset-backed securitization market
improved in the first quarter of 1999, and spreads over treasuries became
largely more predictable, the Company resumed its hedging strategy of selling
treasury rate-lock contracts to mitigate its interest rate risk pending
securitization. For the three months ended March 31, 1999, the Company recorded
a $1.7 million hedge gain which largely offset a decrease in the value of
mortgage loans being hedged, as part of its gain on sale of loans. The Company
did not hedge during the first quarter of 2000.
16
INFLATION
Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. (See "--Interest Rate Risk.")
IMPACT OF NEW ACCOUNTING STANDARDS
For discussion regarding the impact of new accounting standards, refer to
Note 3 of Notes to the Consolidated Financial Statements.
RISK FACTORS
Except for historical information contained herein, certain matters discussed
in this Form 10-Q are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act ("PSLRA") of 1995, which involve risk and
uncertainties that exist in the Company's operations and business environment,
and are subject to change on various important factors. The Company wishes to
take advantage of the "safe harbor" provisions of the PSLRA by cautioning
readers that numerous important factors discussed below, among others, in some
cases have caused, and in the future could cause the Company's actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. The following include some, but not all, of
the factors or uncertainties that could cause actual results to differ from
projections:
o Costs associated with litigation, compliance with the NYSBD Remediation
Agreement and NYOAG Stipulated Order on Consent, and rapid or unforeseen
escalation of the cost of regulatory compliance, generally including but
not limited to, adoption of new, or changes in state or federal lending
laws and regulations and the application of such laws and regulations,
licenses, environmental compliance, adoption of new, or changes in
accounting policies and practices and the application of such polices and
practices. Failure to comply with various federal, state and local
regulations, accounting policies, environmental compliance, and compliance
with the Remediation Agreement and Stipulated Order on Consent can lead to
loss of approved status, certain rights of rescission for mortgage loans,
class action lawsuits and administrative enforcement action against the
Company.
o The Company's ability or inability to continue to access lines of credit at
favorable terms and conditions, including without limitation, warehouse and
other credit facilities used to finance newly originated mortgage loans held
for sale and interest and delinquency advances.
o The Company's ability or inability to continue its practice of securitization
of mortgage loans held for sale, as well as its ability to utilize optimal
securitization structures at favorable terms to the Company.
o A general economic slowdown. Periods of economic slowdown or recession
may be accompanied by decreased demand for consumer credit and declining
real estate values. Because of the Company's focus on credit -impaired
borrowers, the actual rate of
17
delinquencies, foreclosures and losses on loans affected by the borrowers
reduced ability to use home equity to support borrowings could be higher
than those generally experienced in the mortgage lending industry. Any
sustained period of increased delinquencies, foreclosure, losses
or increased costs could adversely affect the Company's ability to
securitize or sell loans in the secondary market.
o The effects of interest rate fluctuations and the Company's ability or
inability to hedge effectively against such fluctuations in interest rates;
the effect of changes in monetary and fiscal policies, laws and regulations,
other activities of governments, agencies, and similar organizations, social
and economic conditions, unforeseen inflationary pressures and monetary
fluctuation.
o Increased competition within the Company's markets has taken on many forms,
such as convenience in obtaining a loan, customer service, marketing and
distribution channels, loan origination fees and interest rates. The Company
is currently competing with large finance companies and conforming mortgage
originators many of whom have greater financial, technological and marketing
resources.
o Unpredictable delays or difficulties in development of new product
programs.
o The unanticipated expenses of assimilating newly-acquired businesses into the
Company's structure; as well as the impact of unusual expenses from ongoing
evaluations of business strategies, asset valuations, acquisitions,
divestitures and organizational structures.
18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk to which the Company is exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond the control of the Company. Changes in
the general level of interest rates between the time when the Company originates
or purchases mortgage loans and the time when the Company sells such mortgage
loans at securitization can affect the value of the Company's mortgage loans
held for sale and, consequently, the Company's net gain on sale revenue by
affecting the "excess spread" between the interest rate on the mortgage loans
and the interest rate paid to asset-backed investors who purchase pass-through
certificates issued by the securitization trusts. If interest rates rise between
the time the Company originates or purchases the loans and the time the loans
are sold at securitization, the excess spread generally narrows, resulting in a
loss in value of the loans and a lower net gain on sale reported by the Company.
A hypothetical 10 basis point increase in interest rates, which historically
has resulted in approximately a 10 basis point decrease in the excess spread,
would be expected to reduce the Company's net gain on sale by approximately 25
basis points. Many factors, however, can affect the sensitivity analysis
described above including, without limitation, the structure and credit
enhancement used in a particular securitization, the Company's prepayment, loss
and discount rate assumptions, and the spread over treasuries demanded by
asset-backed investors who purchase the Companies asset-backed securities.
To reduce its financial exposure to changes in interest rates, the Company
generally hedges its mortgage loans held for sale by entering into treasury rate
lock contracts (see "-Hedging"). The Company's hedging strategy has largely been
an effective tool to manage the Company's interest rate risk on loans prior to
securitization, by providing the Company with a cash gain (or loss) to largely
offset the reduced (increase) excess spread (and resultant lower (or higher) net
gain on sale) from an increase (decrease) in interest rates. A hedge may not,
however, perform its intended purpose of offsetting changes in net gain on sale.
Changes in interest rates could also adversely affect the Company's ability
to purchase and originate loans and/or could affect the level of loan
prepayments thereby impacting the size of the Company's loan servicing portfolio
and the value of the Company's interest only and residual certificates and
capitalized mortgage servicing rights. (See "-Interest Rate Risk").
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Because the nature of the Company's business involves the collection of
numerous accounts, the validity of liens and compliance with various state and
federal lending laws, the Company is subject, in the normal course of business,
to numerous claims and legal proceedings. The Company's lending practices have
been the subject of several lawsuits styled as class actions and of
investigations by various regulatory agencies including the New York State
Banking Department (the "NYSBD"), the Office of the Attorney General of the
State of New York (the "NYOAG") and the United States Department of Justice (the
"DOJ"). The current status of these actions are summarized below.
o In or about November 1998, the Company received notice that it had been
named in a lawsuit filed in the United States District Court for the
Eastern District of New York. In December 1998, plaintiffs filed an
amended complaint alleging that the Company had violated the Home
Equity and Ownership Protection Act ("HOEPA"), the Truth in Lending Act
("TILA") and New York State General Business Lawss.349. The complaint
seeks (a) certification of a class of plaintiffs, (b) declaratory
judgment permitting rescission, (c) unspecified actual, statutory,
trebl and punitive damages (including attorneys' fees), (d) certain
injunctive relief, and (e) declaratory judgment declaring the loan
transactions as void and unconscionable. On December 7, 1998,
plaintiff filed a motion seeking a temporary restraining order and
preliminary injunction, enjoining Delta from conducting foreclosure
sales on 11 properties. The District Court Judge ruled that in order
to consider such a motion, plaintiff must move to interven on behalf
of these 11 borrowers. Thereafter, plaintiff moved to intervene on
behalf of 3 of these 11 borrowers and sought the injunctive relief on
their behalf. The Company opposed the motions. On December 14, 1998,
the District Court Judge granted the motion to intervene and on
December 23, 1998, the District Court Judge issued a preliminary
injunction enjoining the Company from proceeding with the foreclosure
sales of the three intervenors' properties. The Company has filed a
motion for reconsideration of the December 23, 1998 order. In January
1999, the Company filed an answer to plaintiffs' first amended
complaint. In July 1999, plaintiffs were granted leave, on consent, to
file a second amended complaint. In August 1999, plaintiffs filed a
second amended complaint that, among other things, added additional
parties but contained the same causes of action alleged in the first
amended complaint. In September 1999, the Company filed a motion to
dismiss the complaint. Also in September 1999, plaintiffs filed a
motion for class certification. In February 2000, Delta submitted
opposition to Plaintiffs' motion. In or about October 1999, plaintiffs
filed a motion seeking an order preventing the Company, its attorneys
and/or the New York State Banking Department (the "NYSBD") from issuing
notices to certain of Delta's borrowers, in accordance with a
settlement agreement entered into by and between the Company and the
NYSBD. In or about October 1999 and November 1999, respectively, Delta
and the NYSBD submitted opposition to plaintiffs' motion. In March
2000, the Court issued an order that permits
20
Delta to issue an approved form of the notice. The Company believes
that it has meritorious defenses and intends to defend this suit, but
cannot estimate with any certainty its ultimate legal or financial
liability, if any, with respect to the alleged claims.
o In or about March 1999, the Company received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York,
New York County, alleging that Delta had improperly charged certain
borrowers processing fees. The complaint seeks (a) certification of a
class of plaintiffs, (b) an accounting, and (c) unspecified
compensatory and punitive damages (including attorneys' fees), based
upon alleged (i) unjust enrichment , (ii) fraud, and (iii) deceptive
trade practices. In April 1999, the Company filed an answer to the
complaint. In August 1999, plaintiffs filed a motion for class
certification. The Company's response to the motion for class
certification is not due until after class discovery is completed. In
September 1999, the Company filed a motion to dismiss the complaint,
which was opposed by plaintiffs, and in February 2000, the Court denied
the motion to dismiss. In April 1999, the Company filed a motion to
change venue and Plaintiff's opposed the motion. In July 1999, the
Court denied the motion t change venue. The Company appealed and in
March 2000, the Appellate Court granted Delta's appeal to change venue
from New York County to Nassau County. The Company believes tha it has
meritorious defenses and intends to defend this suit, but cannot
estimate with any certainty its ultimate legal or financial liability,
if any, with respect to the alleged claims.
o In or about July 1999, the Company received notice that it had been
named in a lawsuit filed in the United States District Court for the
Western District of New York, alleging that amounts collected and
maintained by it in certain borrowers' tax and insurance escrow
accounts exceeded certain statutory (RESPA) and/or contractual (the
respective borrowers' mortgage agreements) ceilings. The complaint
seeks (a) certification of a class of plaintiffs, (b) declaratory
relief finding that the Company's practice violate applicable statutes
and/or the mortgage agreements, (c) injunctive relief, and (d)
unspecified compensatory and punitive damages (including attorneys'
fees). In October 1999, the Company filed a motion to dismiss the
complaint. In or about November 1999, the case was transferred to the
United States District Court for the Northern District of Illinois. In
February 2000, the plaintiff opposed the Company's motion to dismiss.
In March 2000, the Court granted the Company's motion to dismiss in
part, and denied it in part. The Company believes that it has
meritorious defenses and intends to defend this suit, but cannot
estimate with any certainty its ultimate legal or financial liability,
if any, with respect to the alleged claims.
o In or about August 1999, the Office of the Attorney General for the
State of New York (the "NYOAG") filed a lawsuit against the Company
alleging violations of (a) RESPA (by paying yield spread premiums), (b)
HOEPA and TILA, (c) ECOA, (d) New York Executive Lawss.296-a, and (e)
New York Executive Lawss. 63(12). In September 1999, Delta and the
NYOAG settled the lawsuit, as part of a global settlement by and among
Delta, the NYOAG and the NYSBD, evidenced by that certain (a)
Remediation
21
Agreement by and between Delta and the NYSBD, dated as of September
17, 1999 and (b) Stipulated Order on Consent by and among Delta, Delta
Financial and the NYOAG, dated as of September 17, 1999. As part of the
Settlement, Delta will, among other things, implement agreed upon
changes to its lending practices; provide reduced loan payments
aggregating $7.25 million to certain borrowers identified by the NYSBD;
and create a fund of approximately $4.75 million to be financed by
the grant of 525,000 share of Delta Financial's common stock valued
at a constant assumed priced of $9.1 per share, which approximates
book value. The proceeds of the fund will be used, for among other
things, to pay for a variety of consumer educational and counseling
programs. As a result, the NYOAG lawsuit has been dismissed as against
the Company.
The Remediation Agreement and Stipulated Order on Consent supersede the
Company's previously announced settlements with the NYOAG and the NY
Banking Dept. In March 2000, the Company finalized a settlement agreement
with the United States Department of Justice, the Federal Trade Commission
and the Department of Housing and Urban Renewal, to complete the global
settlement it had reached with the NYSBD and NYOAG. The Federal agreement
mandates some additional compliance efforts for Delta, but it does not
require any additional financial commitment.
o In November 1999, the Company received notice that it had been named in
a lawsuit filed in the United States District Court for the Eastern
District of New York, seeking certification as a class action and
alleging violations of the federal securities laws in connection with
the Company's initial public offering in 1996 and its reports
subsequently filed with the Securities and Exchange Commission. The
complaint alleges that the scope of the violations alleged recently in
the consumer lawsuits and regulatory actions indicate a pervasive
pattern of action and risk that should have been more thoroughly
disclosed to investors in the Company's common stock. The Company has
learned of several other lawsuits that purportedly contain the same or
similar allegations against the Company. The Company believes that it
has meritorious defenses and intends to defend these suits, but has not
answered yet and cannot estimate with any certainty its ultimate legal
or financial liability, if any, with respect to the alleged claims.
o In or about April 2000, the Company received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York,
Nassau County, alleging that the Company has improperly charged and
collected from borrowers certain fees when they paid off their mortgage
loans with Delta. The complaint seeks (a) certification of a class of
plaintiffs, (b) declaratory relief finding that the payoff statements
used include unauthorized charges and are deceptive and unfair, (c)
injunctive relief, and (d) unspecified compensatory, statutory and
punitive damages (including legal fees), based upon alleged violations
of Real Property Law 274-a, unfair and deceptive practices, money had
and received and unjust enrichment, and conversion. The Company
believes that it has meritorious defenses and intends to defend this
suit, but has not answered the complaint yet and cannot estimate with
any certainty its ultimate legal or financial liability, if any, with
respect to the alleged claims.
22
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS. NONE
ITEM 5. OTHER INFORMATION. NONE
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K.
(a) Exhibits: 11.1 Statement re: Computation of Per
Share Earnings
27.1 Financial Data Schedule - Three Months
Ended March 31, 2000
(b) Reports on Form 8-K: None.
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, as amended, the Registrant has duly caused this Report on Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly authorized.
Delta Financial Corporation
(Registrant)
Date: May 15, 2000
By: /s/ HUGH MILLER
---------------------------
Hugh Miller
President & Chief Executive Officer
By: /s/ RICHARD BLASS
----------------------------
Richard Blass
Senior Vice President and
Chief Financial Officer
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Department of Justice Settlement Agreement and Order
11.1 Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule - Three Months Ended March 31, 2000
DC-353673.10
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA, )
)
)
Plaintiff, )
)
)
v. ) Civil No. CV 00 1872
)
DELTA FUNDING CORPORATION, and )
DELTA FINANCIAL CORPORATION )
)
Defendants. )
)
)
- ------------------------------------------
SETTLEMENT AGREEMENT AND ORDER
The United States of America, through the United States Department of
Justice and on behalf of the Secretary of Housing and Urban Development and the
Federal Trade Commission, and Delta Funding Corporation ("Delta Funding") and
Delta Financial Corporation (except where otherwise noted, both defendants are
collectively referred to as "Delta" or "the lender") have agreed to enter into
this Settlement Agreement simultaneously with the filing of the United States of
America's Complaint (the "Complaint") alleging that Delta has violated the Fair
Housing Act (42 U.S.C. ss.ss. 3601-3619)("FHA"), The Equal Credit Opportunity
Act (15 U.S.C. ss.ss. 1691-1691f) and its implementIng Regulation B (12 C.F.R.
Part 202) (collectively, "ECOA"), the Home Ownership and Equity Protection Act
of 1994 (15 U.S.C. ss. 1639) and its implementinG Regulation Z (12 C.F.R. ss.ss.
226.31 - 226.32) (collectively, "HOEPA"), and The Real Estate Settlement
Procedures Act of 1974 (12 U.S.C. ss. 2601 - 2617) anD its implementing
Regulation X (24 C.F.R. Part 3500) (collectively, "RESPA"), all as amended. This
Settlement Agreement resolves fully all claims in the United States' Complaint.
1
I. INTRODUCTION
This case is brought by the United States to vindicate the rights of
persons whom the United States claims were injured by alleged violations of the
fair lending, fair housing and consumer protection laws and regulations, as set
forth above. The Complaint alleges that Delta is engaged in the business of
making subprime home mortgage loans; that a large part of its business is
concentrated in the minority residential areas of Kings and Queens Counties, New
York; that the majority of its loans are refinancing loans for the purpose of
debt consolidation; that the majority of its borrowers in these counties are
presented to Delta by mortgage brokers; that brokers submitting loans to Delta
charge up to 10% of the loan amount as a "broker fee," unless state law provides
for a lower amount; and that, during the period January 1996 through December
1998, approximately 17.5 percent of Delta's loans in Kings and Queens Counties,
New York were high fee loans covered by HOEPA.
The United States alleges that Delta violated ECOA and FHA by approving
and funding loans with disparate broker fees that resulted in African American
female borrowers being charged more on average than white male borrowers were
charged and that the higher prices charged to African American females were not
based on differences in risk of repayment. The United States does not claim that
Delta discriminated in charging borrowers disparate fees that were set by Delta,
but rather in acceding to the discretionary prices that were charged by mortgage
brokers for the loans made by Delta.
The United States alleges that Delta violated RESPA because it contends
that in certain cases the fees received by mortgage brokers were not for
services actually performed or were higher than an amount reasonably related to
the value of goods and facilities provided and services performed, and, as such,
constituted illegal payments for the referral of mortgage loan business or
unearned fees.
The United States alleges that Delta Funding violated HOEPA because it
contends that Delta made certain loans based on borrowers' equity in their homes
rather than the borrowers' ability to repay the obligation, and included
prohibited prepayment and increased interest rate default provisions in certain
HOEPA loan documents.
2
The allegations of the Complaint concern the period January 1996 through
December 1998, during which Delta made more than 5,000 home mortgage loans to
borrowers in Kings and Queens Counties, New York. Delta conducts its home
mortgage lending business in more than 20 states other than New York, but almost
half of its lending is in that state.
Delta denies all allegations in the United States' Complaint and that any
of its actions have constituted violations of the ECOA, FHA, RESPA, HOEPA or any
other fair housing, fair lending or consumer protection law. In particular,
Delta disputes the validity of the statistical analyses the United States relied
upon as the principal basis for its ECOA and FHA claims, because Delta's own
analyses did not reveal statistically significant differences in the prices paid
by borrowers in protected classes. Delta further maintains that the United
States' theories of liability regarding loans brought to it by mortgage brokers
are legally insupportable, because, inter alia, they seek to hold a lender
responsible for the conduct of independent third parties.
Delta disputes the United States' RESPA claims, and maintains that the
broker compensation at issue in the Complaint was reasonably related to the
value of the goods, facilities and services provided by brokers in similar
transactions in similar markets.
Delta also disputes the United States' HOEPA claims, and contends that it
underwrites all of its loans, including loans covered by HOEPA, based on the
borrower's ability to repay, and does not contract for or charge prohibited
prepayment penalties or default interest on HOEPA loans.
Although Delta disputes each of the United States' allegations, it is
nevertheless committed to furthering the spirit of fair lending and other
consumer credit laws by going beyond what Delta believes is required under
applicable law to remedy the violations alleged in the Complaint.
II. RESOLUTION OF THE DISPUTE
The parties have agreed that in order to avoid costly litigation, this
controversy should be resolved voluntarily, and that the terms of this
Settlement Agreement shall govern Delta's practices in all geographic areas in
which Delta makes loans. The parties have also agreed that
3
there should be no evidentiary hearing, trial or other adjudication on the
merits, and that entry of this Settlement Agreement is not to be construed as
an admission by Delta of the validity of the claims asserted against it.
Now therefore, on the basis of the foregoing representations of the United
States and Delta, Delta, its officials, and employees, as well as their
successors, collectively referred to as "Delta", are hereby ORDERED as follows:
III. GENERAL PROVISIONS
A. Delta is prohibited from engaging in any act or practice that discriminates
on the basis of sex, race, or color in the pricing of mortgage loans as
prohibited by FHA and ECOA, including but not limited to approving and funding
loans for which minorities and females pay more than similarly situated whites
or males.
B. Delta is prohibited from violating Section 8 of RESPA and Section 3500.14 of
its implementing regulations, and agrees to conduct its dealings with mortgage
loan brokers in a manner consistent with HUD's Statement of Policy 1999-1
Regarding Lender Payments to Mortgage Brokers (64 Fed. Reg.
10080, March 1, 1999).
C. Delta Funding is further prohibited from violating HOEPA (15 U.S.C.
ss. 1639), and Sections 226.31 and 226.32 of Regulation Z, 12 C.F.R. ss.ss.
226.31 and 226.32, by:
1. engaging in a pattern or practice of extending credit to borrowers based on
the borrowers' collateral rather than considering the borrowers' current or
expected income, debt or employment status to determine whether the
borrowers are able to make the scheduled payments to repay the obligations,
in violation of Section 129(h) of HOEPA, 15 U.S.C.ss.1639(h), and Section
226.32(e)(1) of Regulation Z, 12 C.F.R.ss.226.32(e)(1);
2. including in a HOEPA mortgage loan a prohibited prepayment penalty
provision, in violation of Section 129(c) of HOEPA, 15 U.S.C. ss. 1639(c),
4
and Section 226.32(d)(6) of Regulation Z, 12 C.F.R. ss. 226.32(d)(6); and
3. including in a HOEPA loan a default provision calling for increased
interest rate after default, in violation of Section 129(d) of HOEPA, 15
U.S.C. ss. 1639(d), and Section 226.32(d)(4) of Regulation Z, 12 C.F.R. ss.
226.32(d)(4).
IV. REQUIRED POLICIES AND PRACTICES CONCERNING DELTA'S BUSINESS DEALINGS
WITH MORTGAGE BROKERS
A. COMPLIANCE WITH THIS SETTLEMENT AGREEMENT
To promote the objectives of ECOA, FHA, RESPA AND HOEPA in connection with
its wholesale lending operations, Delta shall conduct its business with mortgage
brokers as follows:
1. With respect to fair lending, Delta shall:
a. adhere to the FHA and ECOA in all aspects of the credit process
including pricing of mortgage loans;
b. reject the broker's proposal or make a counteroffer when it believes
the broker's proposed compensation and costs are not permitted under
the fair lending laws; and
c. maintain loan underwriting standards designed to ensure that loan
applicants will be placed at the correct credit risk level on a
non-discriminatory basis.
2. With respect to real estate settlement procedures, and consistent
with HUD's Statement of Policy 1999-1 Delta shall:
a. only fund loans where it reasonably believes the compensation
to the mortgage broker is made in exchange for services actually
performed and goods and facilities actually furnished by the broker
and the broker's total compensation is reasonably related to the
services performed and the goods and facilities provided by the
broker;
b. operate on the understanding that (i) payments to mortgage brokers
by Delta for referral of business are not permissible
5
and (ii) referral fees are not payments for goods, facilities or
services;
c. where necessary to arrive at an overall mortgage broker compensation
that is reasonably related to the services performed or the goods
and facilities provided by the mortgage broker, reduce or eliminate
its yield spread premiums or other back-end fees, propose a reduction
in the mortgage broker's front-end charges or take other action.
Delta shall decline to fund the loan if the overall mortgage broker
compensation is not reasonably related to the services performed or
the goods and facilities provided by the mortgage broker;
d. refrain from providing, in exchange for the referral of business,
those settlement services for which the mortgage brokers are
receiving compensation; and
e. modify all its existing agreements with mortgage brokers within 60
days of the date of this Settlement Agreement to contain, and
ensure that all future agreements with mortgage brokers contain, a
provision that the mortgage brokers will make timely
disclosures to borrowers concerning the broker's services
and compensation, to the extent required by state law, and, within
60 days of the date of this Settlement Agreement, Delta shall provide
further disclosure, in the form of ATTACHMENT A hereto (the
"Broker Information Disclosure") to each borrower from whom Delta
receives a loan application. Delta shall provide the Broker
Information Disclosure no later than three business days after
the loan application is received by Delta.
3. With respect to loans covered by HOEPA proposed by brokers, Delta shall:
a. reject the broker's proposal when it believes the broker's proffered
documentation of the borrower's income is insufficient to support
the amount of income claimed;
b. maintain loan underwriting standards designed to ensure that
extensions of credit are based on the borrower's repayment ability
including the borrower's current and expected income, current
obligations, and employment; and
c. maintain loan underwriting procedures designed to ensure that any
borrower's income will be verified and documented to establish
a reasonable basis to believe such income exists.
6
B. NOTICE TO MORTGAGE BROKERS CONCERNING COMPLIANCE WITH THIS SETTLEMENT
AGREEMENT
1. Within 60 days of the date of this Settlement Agreement, Delta shall
notify each mortgage broker with which it does business of the compliance
requirements set forth in paragraph IV.A, and shall revise the materials
it provides to all brokers to include the following statements:
a. "The Fair Housing Act and the Equal Credit Opportunity Act apply to
all aspects of the credit process including the pricing of mortgage
loans;"
b. "It is unlawful to make differing initial price quotations
on the basis of the loan applicant's race, national origin, sex, or
age;"
c. "The Real Estate Settlement Procedures Act prohibits compensation to
a mortgage broker unless the compensation is in exchange for services
actually performed and goods and facilities actually furnished by
the broker, and the mortgage broker's total compensation is
reasonably related to the value of the services performed and the
goods and facilities furnished by the broker;" and
d. The Home Ownership and Equity Protection Act of 1994 prohibits
the making of non-purchase money mortgage loans that have total
points and fees that exceed eight percent of the total loan amount
without regard to the borrower's ability to repay. Accordingly,
all loans subject to HOEPA must be supported by credible
documentation that the borrower is able to repay the loan.
2. In addition, Delta shall offer all wholesale brokers with whom it
does mortgage loan business the opportunity to undergo training
similar to the training described in Section VII.
V. MONETARY COMPENSATION
On September 17, 1999, the Superintendent of Banks of New York State
("NYSBD") and Delta entered into a Remediation Agreement resolving NYSBD's
allegations that its examination of Delta's lending practices revealed
violations of the FHA, ECOA, RESPA and HOEPA
7
and Section 296-a of the New York Executive Law. The settlement includes a
$7,250,000.00 "Remediation Fund" by Delta and an "Amelioration Fund" consisting
of 525,000 unregistered shares of common stock ("Stock") of Delta Financial
Corporation. The "Remediation Fund" and the proceeds from the sale of the Stock
in the "Amelioration Fund" shall be used to compensate borrowers identified by
the NYSBD and the federal agencies.
One of the purposes of the Remediation Fund is to compensate New York
State borrowers, including residents of minority areas and African American
females identified by the Department of Justice and the NYSBD, who obtained home
mortgage loans from Delta between October 1, 1995 and September 17, 1999 and who
allegedly paid more for their loans than the average borrower who was a resident
of non-minority areas or the average non-minority borrower, and New York State
borrowers with respect to whom the NYSBD alleges Delta violated HOEPA or RESPA.
Compensation will be in the form of reductions to monthly mortgage payments on a
going forward basis as set forth in the September 17, 1999 Remediation Agreement
executed by the NYSBD and Delta.
The "Amelioration Fund" will be used to provide monetary restitution to
borrowers who were allegedly harmed by Delta's alleged fair lending, RESPA,
and/or HOEPA violations, as identified by the Department of Justice and the
NYSBD. Restitution must be paid to all eligible New York State borrowers before
restitution is made to borrowers outside New York State. Any borrower to whom
compensation is awarded from the Remediation Fund or Amelioration Fund shall be
required, prior to receiving any such compensation, to sign a general release.
VI. MONITORING AND COMPLIANCE SYSTEM
A. Within forty-five days of the date of this Settlement Agreement, Delta
shall submit to the federal agencies for review and approval a new monitoring
and compliance system designed to ensure uniform application of
underwriting criteria and appropriate payment of mortgage broker fees.
If the federal agencies do not otherwise notify Delta in writing within
forty-five days after their receipt of the new monitoring and compliance system,
it shall be deemed approved.
B. The monitoring and compliance system shall include:
8
1. Development and implementation of policies and guidelines
designed to ensure that the underwriting of mortgage loans is
made in compliance with law. Such guidelines shall be
incorporated into Delta's lending policy;
2. Development and implementation of a system designed t
accurately record data related to the charging of broker
fees on mortgage loans underwritten, closed and funded by
Delta, including the dollar and percentage amount of the
broker fee charged, the amount and type of loan, documentation
of any pricing exceptions, information about the borrower
as required by the Home Mortgage Disclosure Act ("HMDA"), the
name of the loan officer, and the name of the mortgage
broker;
3. Development and implementation of a comprehensive system
designed to permit detailed periodic monitoring of mortgage
origination pricing practices to ensure that flexible pricing
does not result in discrimination and that mortgage broker
compensation is in exchange for and is reasonably related to
the services, goods, and facilities provided by the broker.
4. The development and implementation of a system designed to
identify all borrowers whose loans are subject to the
requirements of HOEPA and permit detailed and ongoing
monitoring of file documentation that such borrowers are able
to repay their loans.
5. The designation of managers, including senior-level managers,
to serve as compliance officers and to monitor compliance with
the foregoing compliance system; and
6. The development and implementation of a disciplinary policy
for employees who violate the required policies and practices
described in this Settlement Agreement.
9
VII. EDUCATION OF DELTA EMPLOYEES
A. Within forty-five days from the effective date of this Settlement
Agreement, Delta shall amend its existing Fair Lending Training Program to
include the elements set forth below, and shall submit the amended
training program ("Amended Training Program") to the federal agencies for review
and approval. If the federal agencies do not otherwise notify Delta in writing
within forty-five days after their receipt of the Amended Training Program,
it shall be deemed approved. Such Amended Training Program shall include:
1. A detailed discussion of the purpose of, and the prohibitions
contained in HOEPA, ECOA, FHA, and RESPA;
2. A detailed discussion of liability for violations of HOEPA, ECOA,
FHA, and RESPA;
3. A certification form to be completed by each officer and employee
attending the training program; and
4. A schedule pursuant to which the training program and supplemental
training programs will be offered.
B. Within sixty days following the approval of the Amended Training
Program by the federal agencies, all Delta officers and employees
whose job responsibilities include contact with consumers or mortgage brokers
concerning mortgage loan applications, the pricing of mortgage loans or the
monitoring of mortgage pricing shall attend the Amended Training Program.
C. All new Delta officers and employees whose job responsibilities
include contact with consumers or mortgage brokers concerning mortgage
loan applications, the pricing of mortgage loans or the monitoring of
mortgage pricing shall attend the Amended Training Program within forty-five
days of their employment with Delta.
D. All Delta officers and employees attending the Amended Training Program
shall execute a certification form stating that the individual has
attended the Amended Training
10
Program, that the individual understands Delta's policies regarding
non-discrimination in the origination and underwriting of mortgage loans, that
the individual understands Delta's disciplinary policies with respect to
originating and underwriting mortgage loans and compliance with HOEPA, ECOA,
FHA, and RESPA, and that the individual understands that failure to comply with
such laws may subject the individual and/or Delta to sanctions.
E. Delta shall comply with the training provisions described above in all
states in which it does business; provided, however, that in states other than
New York, Delta shall not be required to provide training in connection with
laws that apply only in New York.
VIII. RECORDKEEPING AND REPORTING REQUIREMENTS
A. For a period of three years from the date of this Settlement Agreement,
Delta agrees to retain all loan application files submitted for mortgage loans,
all loan-related documents and notices relevant to any pricing decisions, and
all documents related to compliance and monitoring as set forth in Section
VI, above. During this period, upon reasonable notice from the Civil Rights
Division of the United States Department of Justice ("DOJ"), Delta shall make
individual mortgage loan application files and related records available for
inspection or copying by the DOJ.
B. Delta agrees that it will periodically review its lending operations
for compliance with the RESPA, FHA and ECOA.
C. For a period of three years from the date of this Settlement Agreement,
Delta shall report its compliance with this Settlement Agreement to the
DOJ semi-annually, beginning with the period ending September 30, 2000,
within forty-five days after the end of each half-year period.1 Each such report
shall include:
11
1. A report on Delta's fair lending pricing requirements; and
2. A description of corrective actions taken by Delta to comply
with this Settlement Agreement.
IX. ADMINISTRATION OF SETTLEMENT AGREEMENT; MISCELLANEOUS
A. The Court shall retain jurisdiction for the purpose of enforcing the
terms of this Settlement Agreement for a period of three years from the
date it is entered by the Court, at which time this Settlement Agreement shall
terminate. The Settlement Agreement shall be binding on Delta and any of its
employees, representatives, officers, heirs, assigns, subsidiaries, or
successors in interest.
B. The parties to this Settlement Agreement shall endeavor in good faith
to resolve informally any differences regarding interpretation of and
compliance with this Settlement Agreement prior to bringing such matters to the
Court for resolution. Furthermore, the United States shall not bring any matter
involving compliance with this Agreement to the Court for resolution unless it
reasonably believes that Delta has materially violated the provisions of this
Settlement Agreement. This Settlement Agreement may be modified by written
consent of Delta and the federal agencies. Any such modification may be
submitted to the Court for approval, and shall be deemed effective immediately
upon execution by the parties until such time, if any, that the Court
indicates a lack of such approval.
C. For purposes of measuring time periods, the "date of" this Settlement
Agreement shall be deemed to be the date of its entry by the Court.
D. Each party to this Settlement Agreement will bear its own costs.
E. This Settlement Agreement, when fully executed and performed by Delta to
the reasonable satisfaction of the federal agencies, will resolve all the
issues between Delta and its affiliates (including, without limitation, Delta
Financial Corporation), and the United States respecting the subject matter of
the United States' Complaint.
12
F. The entry into this Settlement Agreement shall not be deemed or
construed to be an admission of, or evidence of, any violation of any
statute, law or regulation or of any liability or wrongdoing or of the
truth of any of the claims or allegations of the United States, and may not be
used against Delta in any other action o proceeding. The United States
Agreement shall not be considered by the Unites States as a violation of any
federal or state law prohibiting discrimination.
G. Any requirement, responsibility, or obligation imposed on Delta by
this Agreement which is based upon statute, regulation, or Statement of Policy
shall bind Delta only to the extent that the applicable portion of that
authority remains in force and effect.
H. This Agreement may be executed in multiple counterparts, each of which
shall be deemed a duplicate original.
I. Nothing in this Agreement is intended to confer or limit any right,
remedy, obligation or liability upon any person or entity other than the parties
hereto and their respective successors.
13
It is so ORDERED this 5th day of April, 2000.
/S/ CHARLES SIFTON _
United States District Judge
<PAGE>
The undersigned apply for and consent to the entry of this Order:
For the United States:
JANET RENO
ATTORNEY GENERAL
BILL LANN LEE
ACTING ASSISTANT ATTORNEY GENERAL
LORETTA E. LYNCH
UNITED STATES ATTORNEY ----------------------------------
/S/ JOAN A. MAGAGNA
ALEXANDER C. ROSS
- ---------------------- VALERIE O'BRIAN
MARLA TEPPER (MT7529) Attorneys
Assistant U.S. Attorney Housing and Civil Enforcement Section
1 PIERREPONT PLAZA, 16th Floor Civil Rights Division U.S. Department of
Brooklyn, NY 11201 Justice
P.O. Box 65998
Washington, DC 20035
GAIL W. LASTER
General Counsel
- ------------------------------
/S/ PETER S. For Delta Funding Corporation
RACE and Delta Financial Corporation:
PETER S. RACE
Assistant General Counsel
KENNETH MARKISON /S/ THOMAS J. NOTO
Assistant General Counsel ----------------------------------
U.S. Department of Housing THOMAS J. NOTO (TN-9279)
and Urban Development
/S/ MELANIE L. HIBBS
---------------------------------
MELANIE L. HIBBS (MH-0154)
EUGENE R. LICKER (EL-0334)
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W
Washington, DC 20036-1800
/S/ MICHELLE CHUA (202) 778-9000
- ---------------------------
DAVID MEDINE
Associate Director for
Financial Practices
MICHELLE CHUA
Attorney
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
14
<PAGE>
ATTACHMENT A
DELTA FUNDING CORPORATION
1000 WOODBURY ROAD
WOODBURY, NY 11797
800-225-5335
BROKER INFORMATION DISCLOSURE
Date:
File:
Dear Customer:
The purpose of this disclosure is to provide you with an estimate of the fee you
will be paying to your Mortgage Broker in connection with your loan. This
disclosure does NOT include all fees you will pay for this loan. For that
information please refer to the Good Faith Estimate of settlement costs that you
already have or soon will receive, and the HUD-1 form that will be given to you
at closing. The HUD-1 will show the final charges for broker and other fees.
Please read this information carefully so that you make an informed choice. You
are entitled to a copy of this disclosure. Signing this disclosure does not
obligate you to obtain the mortgage loan described below, nor does it constitute
a mortgage loan approval.
We have received your application for a mortgage loan from (NAME OF MORTGAGE
BROKER) .
1) The Mortgage Broker is expected to charge a total of $_________ for
arranging a mortgage loan of $_______ at a proposed interest rate of ___%.
This amount is made of:
a) $__________ paid by you to the Broker as a percentage of the
loan; and
$__________ in additional amounts paid by you to the Broker as
noted on the Good Faith Estimate. These amounts will be paid
from the proceeds of your loan and/or directly out of your
pocket; and
b) $__________ paid to the Broker by Delta Funding Corp. which
increases your interest rate on the loan;
IF ANY PORTION OF THE BROKER FEE DESCRIBED ABOVE IS PAID FROM THE PROCEEDS OF
THE LOAN, YOU WILL BE OBLIGATED TO REPAY THIS AMOUNT WITH INTEREST OVER THE TERM
OF THE LOAN.
If you would rather pay a lower interest rate on your loan, you may be able to
pay higher upfront fees. If you pay less upfront, you may pay a higher interest
rate. If you have any questions about the different options available to you,
your mortgage broker and/or Delta will be glad to discuss them with you.
2) The Broker's Fee described above is payable only if the loan is approved and
accepted by you.
Please sign and return one copy in the enclosed envelope. Keep the other copy
for your files.
--------------------------------- --------------------
(SIGNATURE) (DATE)
- --------
1 All notices, correspondence, reports, or documents required to be provided to
the United States shall be mailed to the following address:
Chief, Housing and Civil Enforcement Section
Civil Rights Division
U.S. Department of Justice
P.O. Box 65998
Washington, D.C. 20035
EXHIBIT 11.1. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31,
(Dollars in thousands) 2000 1999
---- ----
Basic Earnings Per Share
Net income $ 1,826 $ 5,744
========== =========
Weighted average number of common
and common equivalent shares: 15,920,869 15,358,749
---------------------------------------
Basic earnings per share $ 0.11 $ 0.37
=========== =========
Diluted Earnings Per Share
Net income $ 1,826 $ 5,744
========== ==========
Weighted average number of common
and common equivalent shares:
---------------------------------------
Average number of shares outstanding 15,920,869 15,358,749
Net effect of dilutive stock options
based on treasury stock method -- 10,973
Total average shares: 15,920,869 15,369,722
========== ==========
Diluted earnings per share $ 0.11 $ 0.37
========== =========
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AND STATEMENTS OF INCOME FOUND IN THE COMPANY'S FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S>
<C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 49,356
<SECURITIES> 233,111
<RECEIVABLES> 224,845
<ALLOWANCES> 34
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 34,395
<DEPRECIATION> 13,622
<TOTAL-ASSETS> 558,474
<CURRENT-LIABILITIES> 0
<BONDS> 149,498
0
0
<COMMON> 160
<OTHER-SE> 148,807
<TOTAL-LIABILITY-AND-EQUITY> 558,474
<SALES> 0
<TOTAL-REVENUES> 35,945
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,474
<LOSS-PROVISION> 543
<INTEREST-EXPENSE> 7,803
<INCOME-PRETAX> 3,125
<INCOME-TAX> 1,299
<INCOME-CONTINUING> 1,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,826
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
