Over the last several months, Benjamin Lawsky, the superintendent of the New York State Department of Financial Services, has vociferously raised concerns over potentially harmful practices and behaviors of lenders, servicers and other financial institutions.

In the past, he’s trained his crosshairs on Ocwen Financial Services (OCN) over its relationships with its affiliated companies, its practice of force-placed insurance through its subsidiary, Altisource Portfolio Solutions, and its alleged practice of using gag orders on borrowers who have had a mortgage modification.

And in May, Lawksy warned that the NYDFS’ fight against nonbanks over mortgage servicing rights and other practices was only going to intensify in the following months.

Now, Lawsky and the NYDFS have launched an investigation into a new target: hard-money lenders. According to the NYDFS, hard-money lenders originate short-term, high-interest loans that are secured by a borrower’s home or other real estate.

The NYDFS said that hard-money lenders do not typically evaluate a borrower’s ability to repay and likelihood of default, and it has concerns that some lenders may “intentionally structure loans with the expectation of foreclosing on and taking possession of the property.”

As part of its investigation, the NYDFS has subpoenaed nine lenders and is “demanding” a range of materials from the lenders, including marketing materials, terms and conditions provided to hard-money loan applicants, and policies for approving hard-money loan applications.

“While many hard-money lenders may be engaged in legitimate financial activities, certain unscrupulous companies appear to be taking advantage of borrowers in tough financial straits by making loans that are designed to fail,” Lawsky said.

“Preying on consumers who are in distress is unacceptable in any form, but these types of ‘loan-to-own’ schemes are simply unconscionable. We will vigorously investigate any lender that is trying to push a borrower over the foreclosure cliff.”

The investigation will focus on whether these nine lenders or any other companies are intentionally structuring hard-money loans with “onerous” terms, such as high interest rates, numerous upfront fees, and massive balloon payments at the end of the loan’s term, which would force borrowers into default.

“DFS is also probing complaints that hard-money lenders are requiring borrowers to sign deeds-in-lieu of foreclosure at loan origination, which permit a lender to take possession of the property as soon as a borrower misses a single payment, thereby denying the borrower the protections of the foreclosure process,” the NYDFS said in a release.

The nine lenders that the NYDFS has subpoenaed are:

  • Alston Ferris Capital Partners (New York City)
  • IAS Group, LLC (Nassau County)
  • Liberty Lending Group (Suffolk County)
  • Manitoli LLC (Putnam County)
  • Mercier Realty, Inc. (Monroe County)
  • Meritt Funding, Inc. (Westchester County)
  • PMG Lending Group (Erie County)
  • Quick Funding, LLC (Nassau County)
  • Rushmore Capital Partners (New York City)

The NYDFS also notes that some hard-money lenders may be seeking to evade detection by refraining from advertising their services in publicly available forums or, in some cases, changing their names or setting up affiliated entities to avoid licensing requirements.

The NYDFS does caution that a subpoena is a demand for documents and is not an indication of specific wrongdoing within any of the mentioned companies.

The NYDFS is encouraging borrowers who believe that they may have been the victim of predatory practices by hard-money lenders to file a complaint with the NYDFS.