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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NO. 1-12109
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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 PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(516) 364-8500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 26, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of $2.14, was
approximately $12,241,157.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. Yes [__] No [X]
As of March 17, 2003, the Registrant had 15,905,549 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III, Items 10, 11, 12 and 13 are incorporated by reference from Delta
Financial Corporation's definitive proxy statement to stockholders which will be
filed with the Securities and Exchange Commission no later than 120 days after
December 31, 2002.
PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
Delta Financial Corporation (together with its subsidiaries "Delta" or "we")
is a specialty consumer finance company that originates, securitizes and sells
(and, prior to May 2001, serviced) non-conforming mortgage loans, which are
primarily secured by first mortgages on one- to four-family residential
properties. Throughout our 21-year operating history, we have focused on lending
to individuals who generally do not satisfy the credit, documentation or other
underwriting standards set by more traditional sources of mortgage credit,
including those entities that make loans in compliance with conventional
mortgage lending guidelines established by Fannie Mae and Freddie Mac. We make
loans to these borrowers for such purposes as debt consolidation, refinancing,
education and home improvement. Our corporate offices are located at 1000
Woodbury Road, Woodbury, NY 11797 and we can be contacted at (516) 364-8500 or
through our internet web site at HTTP://WWW.DELTAFINANCIAL.COM. Our Exchange Act
filings can be accessed on the Investor Relations page of our web site, through
a link to EDGAR.
Our mortgage business has two principal components. First, we make mortgage
loans to individual borrowers, which is a cash and expense outlay for us,
because our cost to originate a loan exceeds the fees we collect at the time we
originate that loan. At the time we originate a loan, and prior to the time we
sell that loan, we finance that loan by borrowing under warehouse lines of
credit. Second, we sell loans, either through securitization or on a whole loan
basis, to generate cash and non-cash revenues, recording the premiums received
as revenues. We use the proceeds from these sales to repay our warehouse lines
of credit and for working capital.
ORIGINATION OF MORTGAGE LOANS. We make mortgage loans through two
distribution channels - wholesale (or broker) and retail. We receive loan
applications both directly from borrowers and from licensed independent third
party mortgage brokers and other real estate professionals who submit
applications on a borrower's behalf. While we generally collect points and fees
from the borrower when a loan closes, our cost to originate a loan typically far
outweighs any fees we may collect from the borrower.
In 2002, we originated approximately $872 million of loans, of which
approximately $535 million were brokered loans and $337 million were retail
loans, compared to 2001, when we originated approximately $622 million of loans,
of which $346 million were brokered loans and $276 million were retail loans.
INDEPENDENT MORTGAGE BROKER (WHOLESALE) CHANNEL. Through our wholesale
distribution channel, we originate mortgage loans indirectly through licensed
mortgage brokers and other real estate professionals who submit loan
applications on behalf of borrowers. We currently originate the majority of our
wholesale loans in 26 states, through our network of approximately 1,500
brokers. The broker's role is to source the business, identify the applicant,
assist in completing the loan application, gather necessary information and
documents and serve as the liaison between us and the borrower through the
entire origination process. We review, process and underwrite the applications
submitted by the broker, approve or deny the application, set the interest rate
and other terms of the loan and, upon acceptance by the borrower and
satisfaction of all conditions imposed by us as the lender, lend the money to
the borrower. Because brokers conduct their own marketing and employ their own
personnel to complete loan applications (and hence charge a broker fee that is
commensurate with their services) and maintain contact with borrowers,
originating loans through our broker network allows us to increase our loan
volume without incurring the higher marketing and employee costs associated with
increased retail originations.
RETAIL LOAN CHANNEL. Through our retail distribution channel, we develop
retail loan leads ("retail loans") primarily through our telemarketing system
and our network of 7 retail offices and 4 origination centers (which are
typically staffed with considerably more loan officers and cover a broader area
than retail offices) located in eight states. In 2002, we converted our
Charlotte, North Carolina retail office into an origination center and opened an
additional origination center in Phoenix, Arizona. We continually monitor our
retail operations and evaluate current and potential retail offices on the basis
of selected demographic statistics, marketing analyses and other criteria
developed by us. Typically, contact with the customer is initially handled
through our telemarketing center. On the basis of an initial screening conducted
at the time of the call, our telemarketer makes a preliminary determination of
whether the customer and the property meet our lending criteria. If the customer
does meet our criteria, the telemarketer will forward the customer to one of our
local branches or origination centers. The mortgage analyst at the local branch
or origination center may complete the application over the telephone, or
schedule an appointment in the retail loan office most conveniently located to
the customer or in the customer's home, depending on the customer's needs. The
mortgage analyst assists the applicant in completing the loan application,
ensures that an
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appraisal has been ordered from an independent third party appraisal company,
orders a credit report from an independent, nationally recognized credit
reporting agency and performs various other tasks in connection with the
completion of the loan package. Our mortgage analysts are trained to structure
loans that meet the applicant's needs while satisfying our lending guidelines.
The loan package is underwritten for loan approval on a centralized basis. If
the loan package is approved, we will fund the loan.
POOLING OF LOANS PRIOR TO SALE. After we close or fund a loan, we typically
pledge the loan as collateral under a warehouse line of credit to obtain
financing against that loan. By doing so, we replenish our capital so we can
make new loans. Typically, loans are financed through warehouse lines of credit
for only a limited time - generally not more than three months - until such time
as we can pool enough loans and sell the pool of loans either through
securitization or on a whole loan basis. During this time, we earn interest paid
by the borrower as income, but this income is offset in part by the interest we
pay to the warehouse creditors for providing us with financing.
SALE OF LOANS. We derive the majority of our revenues and cash flows from
selling mortgage loans through one of two outlets: (i) securitization, which
involves the public offering by a securitization trust of asset-backed
pass-through securities (and related interests including securitization
servicing rights on newly-originated pools of mortgage loans); and (ii) whole
loan sales, which includes the sale of pools of individual loans to
institutional investors, banks, and consumer finance-related companies on a
servicing released basis. We select the outlet depending on market conditions,
relative profitability and cash flows. We generally realize higher gain on sale
when we securitize than we do when we sell whole loans. We apply the proceeds
from loan sales, whether through securitizations or whole loan basis, to repay
our warehouse lines of credit - in order to make available capacity under these
facilities for future funding of mortgage loans - and utilize any additional
funds for working capital.
In 2002, securitizations and whole loan sales comprised approximately 89% and
11%, respectively, of our loan sales. Going forward, we expect to continue to
use a combination of securitizations and whole loan sales, with the amounts of
each dependent upon the marketplace and our goal of maximizing earnings and
liquidity.
The following table sets forth certain information regarding the Company's
securitizations and whole loan sales during the periods presented:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
2002 2001 2000
------------------------------------
Loan securitizations $ 850,000 $ 345,000 $ 840,000
Whole loan sales 102,947 261,110 58,321
------------------------------------
Total securitizations
and loans sold $ 952,947 $ 606,110 $ 898,321
====================================
In 2002, we securitized the majority of our loans in four securitizations
totaling $850 million, of which we delivered a total of $819 million of mortgage
loans during 2002 (and delivered the remaining $31 million of mortgage loans in
January 2003, pursuant to a pre-funding mechanism). We plan to continue to
utilize a combination of securitization and whole loan sales for the foreseeable
future.
SECURITIZATION. Securitizations are off balance sheet transactions that
effectively provide us with a source of long-term financing.
In a securitization, we pool together loans, typically each quarter, and sell
these loans to a securitization trust, which is a qualified special purpose
entity or QSPE. The securitization trust raises money to purchase the mortgage
loans from us by selling securities to the public - known as asset-backed
pass-through securities that are secured by the pool of mortgage loans held by
the securitization trust. These asset-backed securities or senior certificates,
which are usually purchased for cash by insurance companies, mutual funds and/or
other institutional investors, represent senior interests in the cash flows from
the mortgage loans in the trust. We carry no contractual obligation related to
these trusts or the loans sold to them, nor do we have any direct or contingent
liability related to the trusts, except for the standard representations and
warranties made in conjunction with each securitization trust. Furthermore, we
provide no guarantees to investors with respect to cash flow or performance for
these trusts. These entities represent qualified special purpose entities and
are therefore not consolidated for financial reporting purposes in accordance
with SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities". Following the securitization, the
securitization trust issues senior certificates, which entitles the holders of
these senior certificates to receive the principal collected, including
prepayments of principal, on the mortgage loans in the trust. In addition,
holders receive a portion of the interest on the loans in the trust equal to the
pass-through interest rate on the remaining principal balance. The
securitization trust also issues a subordinate certificate
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or a BIO certificate (referred to as an excess cashflow certificate), which
entitles the holder to receive the excess cash flows after making all required
payments to all other securities issued by the securitization trust, covering
losses incurred by the trust and other costs and expenses of the trust. In
addition, the securitization trust also issues a P certificate (representing the
right to receive prepayment penalties from borrowers who payoff their loans
early in their life). In each of our 2002 securitizations, we sold the excess
cashflow certificate and P certificate (which entitles the holder to all
prepayment penalties collected by the servicer of the underlying securitization
trust) to a net interest margin trust, or NIM trust (QSPE), which in turn,
issued interest-bearing NIM note(s) and a NIM owner trust certificate. We sell
the excess cashflow certificate and P certificate without recourse except that
we provide normal representations and warranties to the NIM trust. One or more
investors purchase the NIM note(s) for a cash price and we receive the proceeds
of the sale of the note(s), together with the NIM owner trust certificate in
consideration of our selling the excess cashflow certificate and P certificates
to the NIM Trust. The NIM note(s) entitles the holder(s) to receive all cash
flows generated by the excess cashflow certificate and P certificate owned by
the NIM trust, until the holder(s) are paid in full (all principal and
interest). The NIM owner trust certificates entitle the holder to all cash flows
generated by the excess cashflow certificate and P certificate after the NIM
note(s) have been paid in full.
At the time we completed the 2002 securitizations, we recognized as revenue
the following three economic interests:
o The cash purchase price from the sale of the NIM note(s) issued by a NIM
Trust;
o The value of the excess cashflow certificates (initially, the NIM owner
trust certificate) that we retained; and
o The cash premium we received from selling the right to service the
loans being securitized.
These economic interests were recorded as net gain on sale of mortgage loans
on our consolidated statement of operations.
WHOLE LOAN SALES WITHOUT RECOURSE. We also sell loans, without retaining the
right to service the loans, in exchange for a cash premium. The premiums we
receive from the loans sales are recorded as revenue under net gain on sale of
mortgage loans at the time of sale. The cash premiums ranged between 2.0% to
5.5% of the principal amount of mortgage loans sold in 2002.
OTHER. In addition to the income and cash flows we earn from securitizations
and whole loan sales, we also earn income and generate cash flows from:
o the net interest spread earned on mortgage loans while we hold the
mortgage loans for sale (the difference between the interest rate on the
mortgage loan paid by the underlying borrower less the financing costs we
pay to our warehouse lenders to fund our loans);
o net loan origination fees on brokered loans and retail loans; and
o retained excess cashflow certificates and distributions from Delta
Funding Residual Exchange Company LLC (the "LLC") (described below in
"-Debt Modification and Debt Restructuring").
BUSINESS STRATEGY
Our core business strategy is to continue to increase profitability and
generate cash revenues in excess of our cash expenses through an increase in our
overall loan production and average loan size, such that we can continue to
maintain our profitability and operate on a cash flow neutral to positive basis.
We believe we have the infrastructure in place to expand loan production
significantly (on a percentage basis) in both our wholesale and retail channels,
without having to invest significantly in our infrastructure. We plan to
increase loan production by:
o increasing the number of commissioned-based account executives
responsible for generating new wholesale business;
o continuing to provide top quality service to our network of brokers and
retail clients;
o maintaining our loan underwriting standards;
o penetrating further our established and recently-entered markets and
expanding into new geographic markets;
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o expanding our retail loan origination capabilities through larger call
centers; and
o continuing to leverage off of our proprietary web-based and workflow
technology platform.
CORPORATE RESTRUCTURING, DEBT MODIFICATION AND DEBT RESTRUCTURING
In 2000, we began a corporate restructuring - by reducing our workforce and
modifying the terms of the indenture governing our senior notes due 2004 (the
"senior notes") - as part of our continuing efforts to improve operating
efficiencies and to address our negative cash flow from operations. Entering
2001, management still had several concerns, which we believed needed to be
addressed for us to remain a viable company. Our principal concerns were:
o the cash drain created by our ongoing monthly delinquency and servicing
advance requirements as servicer for securitization trusts (known as
"securitization advances");
o the high cost of servicing a seasoned loan portfolio, including the
capital charges associated with making securitization advances;
o our ability to make timely interest payments on our senior notes and
senior secured notes due 2004 (the "senior secured notes"); and
o our ability to effectuate a successful business model given the
overhang of corporate ratings of "Caa2" by Moody's and "CC" by Fitch.
Therefore in the first quarter of 2001, we embarked upon a business plan
aimed at alleviating some of these concerns and issues.
CORPORATE RESTRUCTURING
In January 2001, we announced that we had entered into an agreement with
Ocwen Financial Corporation ("Ocwen") to transfer our servicing portfolio to
Ocwen. In May 2001, we physically transferred our entire servicing portfolio to
Ocwen, and laid-off the majority of our servicing staff - a total of 128
employees. We recorded a $0.5 million pre-tax charge related to this
restructuring, which is included in the line item called "restructuring and
other special charges" on our consolidated statements of operations. This charge
relates to employee severance associated with closing our servicing operations.
We no longer service loans nor do we have a servicing operation.
DEBT MODIFICATION AND DEBT RESTRUCTURING
In August 2000, we announced an agreement to modify the terms of the
indenture governing our senior notes (the "Debt Modification"). With the consent
of the holders of greater than fifty percent of our senior notes, we modified a
negative pledge covenant in the senior notes indenture, which had previously
prevented us from selling or otherwise obtaining financing by using our excess
cashflow certificates as collateral. In consideration for the senior
noteholders' consent, we agreed, in an exchange offer (the "First Exchange
Offer"), to offer then current holders the opportunity to exchange their then
existing senior notes for (a) new senior secured notes and (b) ten-year warrants
to buy approximately 1.6 million shares of common stock, at an initial exercise
price of $9.10 per share, subject to upward or downward adjustment in certain
circumstances. In December 2002, the exercise price for the warrants issued by
us was adjusted downward to $0.01 per share in accordance with the agreement.
The senior secured notes have the same coupon, face amount and maturity date as
the senior notes and, up until the Second Debt Restructuring (see below) were
secured by at least $165 million of our excess cashflow certificates. The First
Exchange Offer was consummated in December 2000, with holders of greater than
$148 million (of $150 million) of senior notes tendering in the exchange.
In February 2001, we entered into a letter of intent with the beneficial
holders of over fifty percent of our senior secured notes to restructure, and
ultimately extinguish, the senior secured notes (the "Second Debt
Restructuring"). In March 2001, we obtained the formal consent of these
beneficial holders of the senior secured notes through a consent solicitation
that modified certain provisions of the senior secured notes indenture to, among
other things, allow for the release of two excess cashflow certificates then
securing the senior secured notes. We were able to first finance and ultimately
sell the excess cashflow certificates underlying five securitizations (including
two excess cashflow certificates that were released as part of the Second Debt
Restructuring) for a $15 million cash purchase price to provide working capital.
In consideration for their consent, we agreed to offer the holders of the
senior secured notes (and the senior notes, collectively, the "notes"), an
opportunity to exchange their notes for new securities described immediately
4
below (the "Second Exchange Offer"). The Second Exchange Offer was consummated
on August 29, 2001, pursuant to which holders of approximately $138.1 million
(of $148.2 million) in principal amount of our senior secured notes and $1.1
million (of $1.8 million) in principal amount of our senior notes, exchanged
their notes for commensurate interests in:
o voting membership interests in the LLC, a newly-formed limited
liability company (unaffiliated with us), to which we transferred all of
the mortgage-related securities previously securing the senior secured
notes (primarily comprised of excess cashflow certificates);
o shares of common stock of a newly-formed management corporation that will
manage the LLC's assets; and
o shares of our newly-issued Series A preferred stock having an aggregate
preference amount of $13.9 million.
The LLC is controlled by the former noteholders that now hold all the voting
membership interests in the LLC. As part of the transaction, we obtained a
non-voting membership interest in the LLC, which entitles us to receive 15% of
the net cash flows from the LLC for the first three years (through June 2004)
and, thereafter, 10% of the net cash flows from the LLC. The net cash flows from
the LLC are equal to the total cash flows generated by the assets held by the
LLC for a particular period, less (a) all expenses of the LLC, (b) certain
related income tax payments, and (c) the New York State Banking Department (the
"NYSBD") subsidy payments (See "Regulations"). We began receiving distributions
from the LLC in the first quarter of 2002 from a fourth quarter 2001
distribution.
As part of the Second Exchange Offer, all tendering noteholders waived their
right to receive any future interest coupon payments on the tendered notes
beginning with the August 2001 interest coupon payment. With the closing of the
Second Exchange Offer, we recorded a charge of $19.3 million related to the
extinguishment of debt and paid the August 2001 interest coupon payment on the
approximately $10.8 million of notes that did not tender in the Second Exchange
Offer. The notes bear interest at a rate of 9.5% per annum, payable
semi-annually (on February 1st and August 1st) and a maturity date of August 1,
2004 when all outstanding principal is due.
By extinguishing substantially all of our long-term debt, the rating agencies
that previously rated us and our long-term debt have withdrawn their corporate
ratings.
HOME EQUITY LENDING OPERATIONS
OVERVIEW
Our consumer finance activities consist of originating, securitizing, selling
(and, prior to May 2001, servicing) non-conforming mortgage loans. These loans
are primarily secured by first mortgages on one- to four-family residences. Once
loan applications have been received, the underwriting process completed and the
loans funded or purchased, we typically package the loans in a portfolio and
sell the loan portfolio through a securitization or on a whole loan, servicing
released basis.
We provide our customers with an array of loan products designed to meet
their needs, using a risk-based pricing strategy to develop products for various
risk categories. Historically, we have offered fixed-rate loan products and, to
date, the majority of our loan production is fixed-rate. As we have expanded
geographically, we have expanded our product offerings to include hybrid
mortgages, in which the interest rate remains fixed for the first two or three
years and then adjusts thereafter.
We primarily conduct our broker lending operations out of our Woodbury, New
York headquarters. Final underwriting approval for brokered loans is centralized
and required from the Woodbury, New York headquarters. We conduct our retail
operations out of 4 call centers, 7 retail offices and a telemarketing hub,
located in eight states. Final underwriting approval for retail loans is
required from either our retail underwriting office in Cincinnati, Ohio, which
has full underwriting authority or from our Woodbury, New York headquarters.
We adhere to our Best Practice Lending Program aimed at ensuring the
origination of quality loans and helping to better protect consumers. This Best
Practice Lending Program includes:
o fair lending initiatives aimed at ensuring all borrowers are treated
fairly and similarly regardless of race, color, creed, religion, national
origin, sex, sexual orientation, marital status, age, disability, and the
applicant's exercise, in good faith, of any right under the Consumer
Credit Protection Act;
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o increased oversight of mortgage brokers and closing agents;
o enhanced fraud detection and protection;
o enhanced plain English disclosures; and
o other originations and underwriting initiatives which we believe help
protect consumers.
LOAN ORIGINATIONS AND PURCHASES
Our loan originations increased by 40% to $872 million in 2002 from $622
million in 2001. The following table shows certain data regarding our loans,
presented by channel of loan originations, for the years shown:
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Broker:
Principal balance....................... $ 534,999 $ 345,916 $ 603,616
Average principal balance per loan.... $ 116 $ 79 $ 74
Combined weighted average initial loan-
to-value ratio(1)................... 74.6% 71.7% 71.1%
Weighted average interest rate........ 9.5% 11.1% 11.7%
Weighted average credit score........... 601 584 587
Retail:
Principal balance..................... $ 337,191 $ 275,799 $ 260,388
Average principal balance per loan.... $ 97 $ 82 $ 67
Combined weighted average initial loan-
to-value ratio(1)................... 79.5% 77.4% 76.9%
Weighted average interest rate........ 9.1% 9.8% 10.6%
Weighted average credit score........... 631 633 617
Correspondent (2):
Principal balance..................... -- -- $ 69,434
Average principal balance per loan.... -- -- $ 75
Combined weighted average initial loan-
to-value ratio(1)................ -- -- 70.5%
Weighted average interest rate........ -- -- 11.5%
Weighted average credit score........... -- -- 599
Total loan purchases and originations:
Principal balance..................... $ 872,190 $ 621,715 $ 933,438
Average principal balance per loan.... $ 108 $ 81 $ 72
Combined weighted average initial loan-
to-value ratio(1)................... 76.5% 74.2% 72.7%
Weighted average interest rate........ 9.4% 10.5% 11.4%
Weighted average credit score........... 613 606 596
Percentage of loans secured by:
First mortgage........................ 96.3% 94.1% 90.9%
- ---------------
(1) We determine the weighted average initial loan-to-value ratio of a loan
secured by a first mortgage by dividing the amount of the loan by the lesser
of the purchase price or the appraised value of the mortgage property at
origination. We determine the weighted average initial loan-to-value ratio
of a loan secured by a second mortgage by taking the sum of the loan secured
by the first and second mortgages and dividing by the lesser of the purchase
price or the appraised value of the mortgage property at origination.
(2) We discontinued our correspondent operations in July 2000 to focus on our
less cash intensive broker and retail channels.
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The following table shows certain data regarding our loans, presented by
channel of loan originations, on a quarterly basis for 2002:
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
--------- -------- ---------- ------------
(DOLLARS IN THOUSANDS)
Broker:
Number of brokered Loans............. 1,162 1,301 1,100 1,048
Principal balance.................... $ 122,758 $ 141,039 $ 126,651 $ 144,551
Average principal balance per loan... $ 106 $ 108 $ 115 $ 138
Combined weighted average initial loan-
to-value ratio(1).................. 74.3% 73.4% 74.9% 75.7%
Weighted average interest rate....... 9.9% 9.9% 9.5% 8.9%
Weighted average credit score.......... 599 598 596 610
Retail:
Number of retail loans............... 713 793 882 1,078
Principal balance.................... $ 67,235 $ 69,095 $ 87,717 $ 13,144
Average principal balance per loan... $ 94 $ 87 $ 99 $ 105
Combined weighted average initial loan-
to-value ratio(1).................. 78.4% 77.7% 80.3% 80.5%
Weighted average interest rate....... 9.3% 9.5% 9.0% 8.7%
Weighted average credit score.......... 631 628 633 631
Total loan originations:
Total number of loans................ 1,875 2,094 1,982 2,126
Principal balance.................... $ 189,993 $ 210,134 $ 214,368 $ 257,695
Average principal balance per loan... $101 $100 $108 $121
Combined weighted average initial loan-
to-value ratio(1).................. 75.8% 74.8% 77.1% 77.8%
Weighted average interest rate....... 9.7% 9.8% 9.3% 8.8%
Weighted average credit score.......... 610 608 611 620
- ---------------
(1) We determine the weighted average initial loan-to-value ratio of a loan
secured by a first mortgage by dividing the amount of the loan by the lesser
of the purchase price or the appraised value of the mortgage property at
origination. We determine the weighted average initial loan-to-value ratio
of a loan secured by a second mortgage by taking the sum of the loan secured
by the first and second mortgages and dividing by the lesser of the purchase
price or the appraised value of the mortgage property at origination.
The following table shows lien position, weighted average interest rates and
loan-to-value ratios for the years shown:
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
FIRST MORTGAGE:
Percentage of total purchases and originations 96.3% 94.1% 90.9%
Weighted average interest rate........ 9.3% 10.5% 11.4%
Weighted average initial loan-to-value ratio(1) 76.4% 74.2% 73.1%
SECOND MORTGAGE:
Percentage of total purchases and originations 3.7% 5.9% 9.1%
Weighted average interest rate........ 10.5% 11.1% 11.5%
Weighted average initial loan-to-value ratio(1) 79.3% 75.4% 71.1%
- ---------------
(1) We determine the weighted average initial loan-to-value ratio of a loan
secured by a first mortgage by dividing the amount of the loan by the lesser
of the purchase price or the appraised value of the mortgage property at
origination. We determine the weighted average initial loan-to-value ratio
of a loan secured by a second mortgage by taking the sum of the loan secured
by the first and second mortgages and dividing by the lesser of the purchase
price or the appraised value of the mortgage property at origination.
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The following table shows the geographic distribution of loan purchases and
originations for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2000 2001 2002
REGION PERCENTAGE DOLLAR VALUE PERCENTAGE DOLLAR VALUE PERCENTAGE DOLLAR VALUE
- ------ ---------- ------------ ---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
NY, NJ and PA........ 43.9% $ 409.7 40.0% $ 248.4 43.1% $ 376.1
Midwest.............. 27.7 258.7 34.1 212.2 25.5 222.1
Mid-Atlantic*........ 10.5 97.6 11.8 73.1 13.5 118.2
Southeast............ 9.4 87.5 7.5 46.8 9.5 82.5
New England.......... 7.1 66.6 5.6 34.9 7.3 64.0
West................. 1.4 13.3 1.0 6.3 1.1 9.3
- ------------
* Excluding New York (NY), New Jersey (NJ) and Pennsylvania (PA).
WHOLESALE MARKETING. Throughout our history, we have established and
maintained relationships with brokers (and, prior to July 2000, correspondents)
offering non-conforming mortgage products.
Typically, we initiate contact with a broker through our Business Development
Department, supervised by a senior officer with over ten years of sales and
marketing experience in the industry. We usually hire business development
representatives, or account executives, who have contacts with brokers that
originate non-conforming mortgage loans within their geographic territory. The
account executives are responsible for developing and maintaining our broker
network within their geographic territory by frequently visiting the broker,
communicating our underwriting guidelines, disseminating new product information
and pricing changes, and by demonstrating a continuing commitment to
understanding the needs of the customer. The account executives attend industry
trade shows and inform us about the products and pricing being offered by
competitors and new market entrants. This information assists us in refining our
programs and product offerings in order to remain competitive. Account
executives are compensated with a base salary and commissions based on the
volume of loans originated as a result of their efforts.
APPROVAL PROCESS. Before a broker becomes part of our network, it must go
through an approval process. Once approved, brokers may begin submitting
applications and/or loans to us.
To be approved, a broker must:
o demonstrate that it is properly licensed and registered in the state in
which it seeks to transact business;
o submit to and pass a credit check; and
o sign a standard broker agreement with us that requires brokers to, among
other things:
>> abide by our fair lending policy;
>> follow the National Association of Mortgage Brokers Best Practices
Policies;
>> comply with all state and federal laws; and
>> submit only true and accurate documents and disclosures.
We also perform searches on all new brokers using a third party database that
contains public and nonpublic information on individuals and companies that have
incidents of potential fraud and misrepresentation. In addition, we regularly
review the performance of loans originated through our brokers.
BROKERED LOANS. For the year ended December 31, 2002, our broker network
accounted for $535.0 million, or 61%, of our loan originations, compared to
$345.9 million, or 56%, of our loan originations for the year ended December 31,
2001 and $603.6 million, or 65%, of our loan purchases and originations for the
year ended December 31, 2000. No single broker contributed more than 2.2%, 1.3%
or 2.0% of our total loan production in the years ended December 31, 2002, 2001
and 2000, respectively.
Once approved, a broker may submit loan applications for prospective
borrowers. To process broker submissions, our broker originations channel is
organized by geographic regions and into teams, each consisting of account
executives, account managers and processors, which are generally assigned to
specific brokers. Because we
8
operate in a highly competitive environment where brokers often submit the same
loan application to several prospective lenders simultaneously, we strive to
provide brokers with a rapid and informed response. Account executives analyze
the application and provide the broker with a preliminary approval, subject to
final underwriting approval, or a denial, typically within one business day. The
application is logged into our proprietary originations software program -
called Click & Close - which automatically queues the loan over to an
underwriter from the team covering that geographic area and/or broker. If the
application is approved by our underwriter, a "conditional approval" will be
issued to the broker with a list of specific conditions to be met and additional
documents to be supplied prior to funding the loan. The file is then queued back
to the account manager and processor, who work directly with the submitting
broker to collect the requested information, meet all underwriting conditions
and send out all appropriate documentation and disclosures. In most cases, we
fund loans within 14 to 21 days after preliminary approval of the loan
application. In the case of a denial, we will make all reasonable attempts to
ensure that there is no missing information concerning the borrower or the
application that might change the decision on the loan.
We compensate our account executives, who are the primary relationship
contacts with the brokers, predominantly on a commission basis. We strive to
have our account executives maintain the level of knowledge and experience
integral to our commitment to providing the highest quality service for brokers.
We believe that by maintaining an efficient, trained and experienced staff, we
have addressed four central factors that determine where a broker sends its
business:
o the service and support a lender provides;
o product offerings and pricing;
o the turn-around time, or speed with which a lender closes loans; and
o the lender's knowledge concerning the broker and his business.
RETAIL LOANS. We develop retail loan leads primarily through our automated
telemarketing system and our network of 4 call centers and 7 retail offices
located in eight states. For the year ended December 31, 2002, the retail
channel accounted for $337.2 million, or 39%, of our loan originations, compared
to $275.8 million, or 44%, of our loan originations for the year ended December
31, 2001 and $260.4 million, or 28%, of our loan purchases and originations for
the year ended December 31, 2000. Through our marketing efforts, the retail loan
channel is able to identify, locate and focus on individuals who, based on
historic customer profiles, are likely customers for our products. Our
telemarketing representatives identify interested customers and forward these
potential borrowers to a branch manager through our Click & Close system. The
branch managers, in turn, distribute these leads to mortgage analysts via Click
& Close by queuing the loan to a mortgage analyst's to do list in Click & Close.
The assigned mortgage analyst discusses the applicant's qualifications and
available loan products, negotiates loan terms with the borrower and processes
the loan through completion. Click & Close is utilized to queue the loan to
underwriters at the appropriate times for approvals and help facilitate the loan
application process through closing.
We compensate our mortgage analysts, who are the primary relationship
contacts with our borrowers, predominantly on a commission basis.
CORRESPONDENT LOANS. We discontinued our correspondent operations in July
2000 to focus on our less cash intensive broker and retail channels. As such, we
had no correspondent purchases in 2002 or 2001. For the year ended December 31,
2000, our correspondent network accounted for $69.4 million, or 7%, of our loan
purchases and originations. No single correspondent contributed more than 1.5%
of our total loan production in 2000.
LOAN UNDERWRITING
We maintain written underwriting guidelines that are utilized by all
employees associated with the underwriting process. Throughout our 21 years in
existence, these guidelines have been continually reviewed and updated by senior
underwriters and the head of risk management. We provide our underwriting
guidelines to all of the brokers from whom we accept loan applications. Loan
applications received from brokers are classified according to particular
characteristics including, but not limited to, the applicant's:
o ability to pay;
o credit history (with emphasis on the applicant's existing mortgage
payment history);
o credit score;
o income documentation type;
9
o lien position;
o loan-to-value ratio;
o property type; and
o general stability, in terms of employment history, time in residence,
occupancy and condition and location of the collateral.
We have established classifications with respect to the credit profile of the
applicant, and each loan is placed into one of four letter ratings "A" through
"D," with subratings within those categories. Terms of loans that we make, as
well as maximum loan-to-value ratios and debt-to-income ratios, vary depending
on the classification of the applicant and the borrower's credit score. Loan
applicants with less favorable credit ratings and/or lower credit scores are
generally offered loans with higher interest rates and lower loan-to-value
ratios than applicants with more favorable credit ratings and/or higher credit
scores. The general criteria our underwriting staff uses in classifying loan
applicants are set forth in the following table.
REST OF PAGE INTENTIONALLY LEFT BLANK
10
DELTA FUNDING CORPORATION
UNDERWRITING GUIDELINE MATRIX
- ------------------------------- ----------------------------------------------------------------------------------------------
FIRST MORTGAGE
- ------------------------------- ------------------------------------------------ ---------------------------------------------
OWNER OCCUPIED NON OWNER OCCUPIED
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
CREDIT MIN FULL LIMITED INCOME FULL LIMITED
PROGRAM CREDIT INCOME & NO INCOME INCOME INCOME & NO
~ MAX LOAN AMOUNT SCORE CHECK CHECK AS STATED CHECK INCOME CHECK AS STATED
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
LTV >80%:
LTV >90%: LTV >85%: LTV >80%: 1-4 FAMILY
PROPERTY 1-2 FAMILY 1-2 FAMILY 1-2 FAMILY LTV >85%:
RESTRICTIONS DETACHED DETACHED DETACHED 1-2 FAMILY
& CONDO'S & CONDO'S & CONDO'S DETACHED
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
A+ 675 100% 1st Mtg 95% 1st Mtg 90% 1st Mtg 90% 1st Mtg 75% 1st Mtg 70% 1st Mtg
650 100% 1st Mtg 90% 1st Mtg 85% 1st Mtg 85% 1st Mtg 75% 1st Mtg 70% 1st Mtg
625 95% 1st Mtg 90% 1st Mtg 85% 1st Mtg 85% 1st Mtg 75% 1st Mtg 70% 1st Mtg
~ UP TO $600,000 550 90% 1st Mtg 85% 1st Mtg 80% 1st Mtg 80% 1st Mtg 75% 1st Mtg 70% 1st Mtg
525 85% 1st Mtg 80% 1st Mtg NA 80% 1st Mtg 70% 1st Mtg NA
500 80% 1st Mtg 75% 1st Mtg NA 75% 1st Mtg 65% 1st Mtg NA
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
A1 675 100% 1st Mtg 95% 1st Mtg 90% 1st Mtg 90% 1st Mtg 75% 1st Mtg 70% 1st Mtg
650 100% 1st Mtg 90% 1st Mtg 85% 1st Mtg 85% 1st Mtg 75% 1st Mtg 70% 1st Mtg
625 95% 1st Mtg 90% 1st Mtg 85% 1st Mtg 85% 1st Mtg 75% 1st Mtg 70% 1st Mtg
~ UP TO $600,000 550 90% 1st Mtg 85% 1st Mtg 80% 1st Mtg 80% 1st Mtg 75% 1st Mtg 70% 1st Mtg
525 85% 1st Mtg 75% 1st Mtg NA 75% 1st Mtg 65% 1st Mtg NA
500 80% 1st Mtg 70% 1st Mtg NA 70% 1st Mtg 60% 1st Mtg NA
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
575 90% 1st Mtg 85% 1st Mtg 80% 1st Mtg 80% 1st Mtg 75% 1st Mtg 70% 1st Mtg
A2 550 85% 1st Mtg 80% 1st Mtg 75% 1st Mtg 80% 1st Mtg 70% 1st Mtg 65% 1st Mtg
~ UP TO $500,000 525 80% 1st Mtg 75% 1st Mtg NA 75% 1st Mtg 65% 1st Mtg NA
500 75% 1st Mtg 70% 1st Mtg NA 70% 1st Mtg 60% 1st Mtg NA
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
600 90% 1st Mtg 80% 1st Mtg 75% 1st Mtg 80% 1st Mtg 70% 1st Mtg
B1 575 85% 1st Mtg 80% 1st Mtg 75% 1st Mtg 80% 1st Mtg 70% 1st Mtg
~ UP TO $450,000 550 85% 1st Mtg 75% 1st Mtg 70% 1st Mtg 75% 1st Mtg 65% 1st Mtg
525 80% 1st Mtg NA NA NA NA
500 75% 1st Mtg NA NA NA NA
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
B2 575 85% 1st Mtg 75% 1st Mtg 70% 1st Mtg 75% 1st Mtg
~ UP TO $450,000 550 80% 1st Mtg 70% 1st Mtg 70% 1st Mtg 70% 1st Mtg
525 75% 1st Mtg NA NA NA
500 70% 1st Mtg NA NA NA
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
575 80% 1st Mtg 75% 1st Mtg 75% 1st Mtg
C1 550 80% 1st Mtg 75% 1st Mtg 70% 1st Mtg
~ UP TO $300,000 525 75% 1st Mtg NA NA
500 70% 1st Mtg NA NA
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
C2 550 75% 1st Mtg
~ UP TO $300,000 525 70% 1st Mtg
500 65% 1st Mtg
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
D1 550 70% 1st Mtg
~ UP TO $250,000 500 65% 1st Mtg
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
***D2 525 65% 1st Mtg
~ UP TO $250,000 500 60% 1st Mtg
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
***D3 550 60% 1st Mtg
~ UP TO $250,000
- -------------------- ---------- ---------------- ---------------- -------------- ---------------- -------------- -------------
BANKRUPTCY
DTI MORTGAGE PAYMENT HISTORY INFORMATION
-------- -------------------------------------------- -----------------------------
**55% EXCELLENT MORTGAGE HISTORY 0x30 on *** MINIMUM 3 YEARS OLD
mortgages within last 12 months. * For Chapter 7 discharge or
extended LTV's with credit score < 575, Chapter 13 filing. Chapter
0x60 months 13 to 24. No foreclosures 13 discharge must be 1 year
last 3 years. old at closing
-------- -------------------------------------------- -----------------------------
**55% EXCELLENT MORTGAGE HISTORY 1x30 on *** MINIMUM 3 YEARS OLD
mortgages within last 12 months. * For Chapter 7 discharge or
extended LTV's with credit score < 575, Chapter 13 filing. Chapter
0x60 months 13 to 24. No foreclosures last 13 discharge must be 1 year
3 years. old at closing
-------- -------------------------------------------- -----------------------------
EXCELLENT MORTGAGE HISTORY 2x30 on *** MINIMUM 2 YEARS OLD
mortgages within last 12 months. * For Chapter 7 discharge or
**55% extended LTV's with credit score < 575, Chapter 13 filing. Chapter
0x90 months 13 to 24. No foreclosures last 13 must be discharged
2 years. before closing.
-------- -------------------------------------------- -----------------------------
**55% GOOD MORTGAGE HISTORY *** MINIMUM 2 YEARS OLD
3x30 on mortgages within last 12 months. Chapter 7 discharge or
No foreclosures last 2 years. If mortgage Chapter 13 filing. Chapter
history(s) for the past 12 months is 0x30, 13 must be discharged
the foreclosure/NOD restriction will be before closing.
lowered to 18 months.
-------- -------------------------------------------- -----------------------------
**55% GOOD MORTGAGE HISTORY *** MINIMUM 18 MONTHS OLD
2x30 & 1x60 or Unlimited 30's, 0x60 on Chapter 7 discharge or
mortgages within last 12 months. No Chapter 13 filing. Open
foreclosures last 18 months. If mortgage Chapter 13 considered.
history(s) for the past 12 months is 0x30, Mortgage must be paid as
the foreclosure/NOD restriction will be agreed since filing.
lowered to 12 months.
-------- -------------------------------------------- -----------------------------
**55% FAIR MORTGAGE HISTORY *** MINIMUM 1 YEAR OLD
0x90 on mortgages within last 12 months. Chapter 7 discharge or
No worse than D-30 at closing. No Chapter 13 filing. No late
foreclosures last 12 months. payments on mortgages since
Chapter 7 or 13 filing.
-------- -------------------------------------------- -----------------------------
**55% FAIR MORTGAGE HISTORY Chapter 7 must be
1x90 on mortgages within last 12 months. discharged by closing. Open
No worse than D-60 at closing. Chapter 13 considered.
-------- -------------------------------------------- -----------------------------
POOR MORTGAGE HISTORY Chapter 7 must be
**55% 1x120 on mortgages within last 12 months. discharged by closing. Open
No worse than D-90 at closing. Chapter 13 considered.
-------- -------------------------------------------- -----------------------------
POOR MORTGAGE HISTORY Chapter 7 must be
**55% No worse than D-119 at closing. Mortgage discharged by closing.
NOT in foreclosure. Open Chapter 13 considered.
-------- -------------------------------------------- -----------------------------
Chapter 7 must be
**55% POOR MORTGAGE HISTORY discharged by closing. Open
Open foreclosures considered case-by-case Chapter 13 considered.
-------- -------------------------------------------- -----------------------------
- - MAXIMUM LOAN AMOUNTS AVAILABLE ARE SUBJECT TO LTV, INCOME CLASSIFICATION AND OCCUPANCY REQUIREMENTS.
NOTE: MINIMUM 2 YEARS EMPLOYMENT HISTORY FOR PROGRAMS A+ THROUGH B2.
NOTE: Minimum MARKET VALUE for: OO FIC, LIC & NIC > 90%, OO As Stated > 85% and NOO FIC > 85% is $80,000.
- ------------------------------------------------------------------------------------------------------------------------------
* Extended LTV's are defined as: OO > 80% and NOO > 75%. For Credit Programs A+ through A2, if Credit Score is < 575,
must obtain 24 month mortgage history.
If mortgage history is not reporting and Credit Score is > = 575, must obtain 12 months mortgage history.
For LTV's > 90%, As Stated > 85%, All NOO's > 85%, months 13-24 must be 0x60 if reporting to credit.
- ------------------------------------------------------------------------------------------------------------------------------
** For LTV's above 80% and/or income under $25K/yr, maximum DTI = 50% for programs A+ through D3.
- ------------------------------------------------------------------------------------------------------------------------------
*** Lower LTV by 5% for programs D2 & D3 in: Connecticut, Idaho, Illinois, Indiana, Iowa, Maine, Massachusetts, New Jersey,
New York, Oklahoma, Vermont & Wisconsin.
- ------------------------------------------------------------------------------------------------------------------------------
**** Chapter 13 involuntary dismissal date follows same guidelines as Chapter 7 discharge.
- ------------------------------------------------------------------------------------------------------------------------------
11
DELTA FUNDING CORPORATION
UNDERWRITING GUIDELINE MATRIX
- -------------------------------------------- ------------------------------------------------------------------------------
SECOND MORTGAGE
- -------------------------------------------- ---------------------------------------------------- -------------------------
OWNER OCCUPIED NON OWNER OCCUPIED
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
CREDIT PROGRAM MIN CREDIT FULL INCOME LIMITED INCOME & NO
~ MAX LOAN AMOUNT SCORE CHECK INCOME CHECK FULL INCOME CHECK
- --------------------------- ---------------- ------------------------------------------------------------------------------
PROPERTY RESTRICTIONS 2ND MORTGAGES NOT AVAILABLE FOR: SCORES < 550, AS STATED LOANS, NPO LOANS,
MIXED USE/MULTI-FAMILY & DOUBLE WIDE MANUFACTURED HOMES OR "UNIQUE
PROPERTIES".
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
A+ 675 #100% 2ND MTG 80% 2nd Mtg 75% 2nd Mtg
650 #100% 2ND MTG 80% 2nd Mtg 75% 2nd Mtg
625 90% 2nd Mtg 80% 2nd Mtg 75% 2nd Mtg
550 85% 2nd Mtg 80% 2nd Mtg 75% 2nd Mtg
~ UP TO $600,000 525 NA NA NA
500 NA NA NA
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
A1 675 #100% 2ND MTG 80% 2nd Mtg 75% 2nd Mtg
650 #100% 2ND MTG 80% 2nd Mtg 75% 2nd Mtg
625 90% 2nd Mtg 80% 2nd Mtg 75% 2nd Mtg
550 85% 2nd Mtg 80% 2nd Mtg 75% 2nd Mtg
~ UP TO $600,000 525 NA NA NA
500 NA NA NA
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
A2 575 85% 2nd Mtg 80% 2nd Mtg 75% 2nd Mtg
550 85% 2nd Mtg 80% 2nd Mtg 75% 2nd Mtg
525 NA NA NA
500 NA NA NA
~ UP TO $500,000
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
600 80% 2nd Mtg 80% 2nd Mtg 70% 2nd Mtg
B1 575 80% 2nd Mtg 80% 2nd Mtg 70% 2nd Mtg
~ UP TO $450,000 550 80% 2nd Mtg 75% 2nd Mtg 70% 2nd Mtg
525 NA NA NA
500 NA NA NA
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
B2 575 80% 2nd Mtg
~ UP TO $450,000 550 80% 2nd Mtg
525 NA
500 NA
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
575 75% 2nd Mtg
C1 550 75% 2nd Mtg
~ UP TO $300,000 525 NA
500 NA
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
C2 550
~ UP TO $300,000 525
500
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
D1 550
~ UP TO $250,000 500
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
***D2 525
~ UP TO $250,000 500
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
***D3 550
~ UP TO $250,000
- --------------------------- ---------------- ------------------------ --------------------------- -------------------------
DTI MORTGAGE PAYMENT HISTORY BANKRUPTCY INFORMATION
---------- --------------------------------------- -----------------------------------
**55% EXCELLENT MORTGAGE HISTORY *** MINIMUM 3 YEARS OLD
0x30 on mortgages within last 12 Chapter 7 discharge or Chapter 13
months. filing.
* For extended LTV's with credit Chapter 13 discharge must be
score < 575, 1 year old at closing
0X60 months 13 to 24.
No foreclosures last 3 years.
---------- --------------------------------------- -----------------------------------
**55% EXCELLENT MORTGAGE HISTORY *** MINIMUM 3 YEARS OLD
1x30 on mortgages within last 12 Chapter 7 discharge or Chapter 13
months. filing.
* For extended LTV's with credit Chapter 13 discharge must be 1
score < 575, year old at closing
0X60 months 13 to 24.
No foreclosures last 3 years.
---------- --------------------------------------- -----------------------------------
**55% EXCELLENT MORTGAGE HISTORY *** MINIMUM 2 YEARS OLD
2x30 on mortgages within last 12 Chapter 7 discharge or Chapter 13
months. filing.
* For extended LTV's with credit Chapter 13 must be discharged
score < 575, before closing.
0X90 months 13 to 24.
No foreclosures last 3 years.
---------- --------------------------------------- -----------------------------------
GOOD MORTGAGE HISTORY *** MINIMUM 2 YEARS OLD
3X30 on mortgages within last 12 Chapter 7 discharge or Chapter 13
months. filing.
No foreclosures last 2 years. Chapter 13 must be discharged
**55% IF MORTGAGE HISTORY(S) FOR THE PAST before closing.
12 MONTHS IS 0X30, THE FORECLOSURE/NOD
RESTRICTION WILL BE LOWERED TO 18
MONTHS.
---------- --------------------------------------- -----------------------------------
**55% GOOD MORTGAGE HISTORY *** MINIMUM 18 MONTHS OLD
2x30 & 1x60 or Unlimited 30's, 0x60 Chapter 7 discharge or Chapter 13
on mortgages within last 12 months. filing.
No foreclosures last 18 months. Open Chapter 13 considered.
IF MORTGAGE HISTORY(S) FOR THE PAST Mortgage must be paid as agreed
12 MONTHS IS 0X30, THE FORECLOSURE/NOD since filing.
RESTRICTION WILL BE LOWERED TO 12 months.
---------- --------------------------------------- -----------------------------------
FAIR MORTGAGE HISTORY *** MINIMUM 1 YEAR OLD
0x90 on mortgages within last 12 Chapter 7 discharge or Chapter 13
**55% months. filing.
No worse than D-30 at closing. No late payments on mortgages
No foreclosures last 12 months. since Chapter 7 or 13 filing.
---------- --------------------------------------- -----------------------------------
**55% FAIR MORTGAGE HISTORY
1x90 on mortgages within last 12 Chapter 7 must be discharged by
months. closing
No worse than D-60 at closing. Open Chapter 13 considered.
---------- --------------------------------------- -----------------------------------
POOR MORTGAGE HISTORY
1x120 on mortgages within last 12 Chapter 7 must be discharged by
**55% months. closing.
No worse than D-90 at closing. Open Chapter 13 considered.
---------- --------------------------------------- -----------------------------------
POOR MORTGAGE HISTORY Chapter 7 must be discharged by
**55% No worse than D-119 at closing. closing.
Mortgage NOT in foreclosure. Open Chapter 13 considered.
---------- --------------------------------------- -----------------------------------
POOR MORTGAGE HISTORY Chapter 7 must be discharged by
**55% Open foreclosures considered closing.
case-by-case Open Chapter 13 considered.
---------- --------------------------------------- -----------------------------------
#100% LTV 2ND MORTGAGE REQUIREMENTS ARE AS FOLLOWS: (SEE GUIDELINES FOR
ADDITIONAL REQUIREMENTS)
[] Minimum 650 middle credit score.
[] FIC only (24 month bank statements not allowed in this program).
[] Min 4 yrs bankruptcy discharge or foreclosure. Consumer Credit Counseling not
allowed in this program.
[] 1 family detached only. No condos.
[] REFINANCES only. No purchase money.
[] Minimum loan amount $40,000 as a stand alone 2nd. As a simultaneous 1st and
2nd, minimum $20,000.
[] Maximum loan amount $250,000.
[] Minimum market value $100,000.
[] 12 month mortgage history required. If 24 months reports to credit, 0x60 in
months 13-24.
- --------------------------------------------------------------------------------
12
We use these categories and characteristics as guidelines only. On a
case-by-case basis, we may determine that the prospective borrower warrants an
exception from the guidelines, if sufficient compensating factors exist.
Examples of compensating factors we consider are:
o low debt ratio;
o long-term stability of employment and/or residence;
o excellent payment history on past mortgages;
o a significant reduction in monthly expenses; or
o low loan-to-value ratio.
The following table sets forth certain information with respect to our
originations and purchases of first and second mortgage loans by borrower
classification, along with weighted average coupons, for the periods shown and
highlights the improved credit quality of our originations and purchases.
(DOLLARS IN THOUSANDS)
PERCENT
YEAR CREDIT TOTAL OF TOTAL WAC(1) WLTV(2)
- ---- ---- ---- ------ ----- ------
2002 A $ 752,920 86.3% 9.1% 78.1%
B 57,186 6.6 10.3 70.3
C 42,903 4.9 11.1 66.0
D 19,181 2.2 12.1 55.5
--------- ---- ---- ----
Totals $ 872,190 100.0% 9.4% 76.5%
=========== ====== ==== =====
2001 A $ 478,485 77.0% 10.0% 76.7%
B 59,729 9.6 11.5 68.6
C 61,498 9.9 12.2 66.7
D 22,003 3.5 13.2 57.4
--------- ---- ---- ----
Totals $ 621,715 100.0% 10.5% 74.2%
=========== ====== ===== =====
2000 A $ 596,946 63.9% 10.8% 75.7%
B 164,024 17.6 11.7 70.2
C 127,041 13.6 12.6 67.3
D 45,427 4.9 13.8 56.9
--------- ---- ---- ----
Totals $ 933,438 100.0% 11.4% 72.7%
=========== ====== ===== =====
- ------------------
(1) Weighted Average Coupon ("WAC").
(2) Weighted Average Initial Loan-to-Value Ratio ("WLTV").
The mortgage loans we originate have amortization schedules ranging from 5
years to 30 years, generally bear interest at fixed rates and require equal
monthly payments which are due as of a scheduled day of each month which is
fixed at origination. Substantially all of our mortgage loans are fully
amortizing loans. We primarily originate fixed rate loans, which amortize over a
period not to exceed 30 years. The principal amounts of the loans we originate
generally range from a minimum of $25,000 to a maximum of $600,000 and we will
lend up to 100% of the combined loan-to-value ratio. Our loans are generally
secured by one- to four-family residences, including condominiums and
town-houses, and these properties are usually occupied by the owner. It is our
policy not to accept commercial properties or unimproved land as collateral.
However, we will accept mixed-use properties, such as a property where a portion
of the property is used for residential purposes and the balance is used for
commercial purposes, and will accept small multifamily properties of 5 to 8
units, both at reduced loan-to-value ratios. We do not originate loans where any
senior mortgage contains open-end advance, negative amortization or shared
appreciation provisions - all of which could have the effect of increasing the
amount of the senior mortgage, thereby increasing the combined LTV, and making
the loan more risky for us.
Our mortgage loan program includes:
o a full documentation program;
13
o a limited documentation program;
o a no income verification program for self-employed borrowers; and
o a stated income program.
Our borrowers' total monthly debt obligations - which include principal and
interest on the new loan and all other mortgages, loans, charge accounts and
scheduled indebtedness - generally are 50% or less of the borrower's monthly
gross income, although some of our borrowers will qualify using our maximum
debt-to-income ratio of 55%. For loans to borrowers who are salaried employees,
we require current employment information in addition to employment history. We
verify this information based on one or more of the following items: written
confirmation from employers, recent pay-stubs, recent W-2 tax forms, recent tax
returns, bank statements and telephone confirmation from the employer. For our
limited documentation program, we require either 6 months of bank statements or
a job letter to be submitted which contains substantially the same information
one would find on a standard verification of employment form, including:
o job position;
o length of time on job;
o current salary; and
o the job letter should appear on the employer's letterhead and include
the telephone number and signature of the individual completing the
letter on behalf of the employer.
For our no income verification program, we require proof of self-employment
in the same business for 2 years. We only offer our stated income program, which
represents a very small percentage of our loans, for better credit quality
borrowers where a telephone verification is done by an underwriter to verify
that the borrower is employed. We usually require lower combined loan-to-value
ratios with respect to loans made under programs other than the full
documentation program.
We assess a borrower's credit worthiness primarily based on his or her
mortgage history and credit score, and generally adjust our pricing and loan to
value ratios based on many other risk parameters. Our borrowers often have
either (a) mortgage or other credit delinquencies, (b) problems providing
documentation required by traditional lenders, and/or (c) collateral types that
traditional lenders will not lend against. As such, we employ experienced
non-conforming mortgage loan credit underwriters to review the applicant's
credit profile and to evaluate whether an impaired credit history is a result of
adverse circumstances or a continuing inability or unwillingness to meet credit
obligations in a timely manner. An applicant's credit record will often be
impaired by personal circumstances including divorce, family illnesses or deaths
and temporary job loss due to layoffs and corporate downsizing.
As part of our settlement agreements with New York State regulators - I.E.,
the Remediation Agreement and Stipulated Order on Consent - we agreed to modify
certain aspects of our underwriting guidelines. Even though these agreements
terminated in September 2002, we have not eliminated the underwriting changes we
agreed to and, in fact, intend to continue to originate loans in accordance with
these agreements.
We have a staff of 43 underwriters with an average of 11 years of
non-conforming lending experience. All underwriting functions for broker
originations are centralized in our Woodbury, New York headquarters. All
underwriting functions for retail originations are centralized in our retail
underwriting "hub," located in Cincinnati, Ohio, and our Woodbury, New York
headquarters. We do not delegate underwriting authority to any third party. Our
underwriting department functions independently of our business development and
sales departments and does not report to any individual directly involved in the
sales origination process. None of our underwriters are compensated on an
incentive or commission basis. Our underwriters are trained to review all
components of the loan to determine its compliance with our underwriting
guidelines.
We have instituted underwriting checks and balances that are designed to
ensure that loans are generally reviewed and approved by a minimum of two
underwriters. The Underwriting Department employs underwriters with different
levels of experience and authority and loans generally must receive a secondary
review by an underwriter of equal or higher rank. Although the most senior
underwriters do not require a secondary review in certain circumstances, the
vast majority of our loans are reviewed by at least two underwriters. Similarly,
maximum loan amount and loan-to-value approval authorities are assigned to each
level, ensuring that loans at the highest dollar or LTV-limits we offer are
reviewed and approved only by the Department's most senior members.
We underwrite every loan submitted by not only thoroughly reviewing credit,
but also by performing the following:
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o a separate appraisal review conducted by our underwriter and/or
appraisal review department; and
o a full compliance review, to ensure that all documents have been
properly prepared, all applicable disclosures given in a timely
fashion, and proper compliance with all federal and state
regulations.
We require appraisals to be performed by third party, fee-based appraisers or
by our approved appraisers and to conform generally to current Fannie Mae and
Freddie Mac secondary market requirements for residential property appraisals.
Each appraisal includes, among other things, an inspection of both the exterior
and interior of the subject property and data from sales within the preceding 12
months of similar properties within the same general location as the subject
property. We perform an appraisal review on each loan prior to closing. We do
not believe that the general quality control practices of many conventional
mortgage lenders, which is to perform only drive-by appraisals after closings,
provides sufficient protection. As such, in addition to reviewing each appraisal
for accuracy, we access alternate sources to validate sales used in the
appraisal to determine market value. These sources include:
o Multiple Listing Services;
o assessment and sales services, such as Comps, Inc., Pace, 1st
American and Transamerica;
o on-line internet services such as Realtor.com; and
o other sources for verification, including broker price opinions and
market analyses by local real estate agents.
We actively track and grade (based upon criteria that we have developed over
time) all appraisers from which we accept appraisals for quality control
purposes and do not accept work from appraisers who have not conformed to our
review standards.
After completing the underwriting and processing of a brokered loan, we
schedule the closing of the loan with an approved closing attorney or settlement
agent. We hold the closing attorney or settlement agent responsible for
completing the loan closing transaction in accordance with applicable law and
our operating procedures. We also require title insurance that insures our
interest as mortgagee and evidence of adequate homeowner's insurance naming us
as an additional insured party on all loans.
We perform a post-funding quality control review to monitor and evaluate our
loan origination policies and procedures. The quality control department is
separate from the underwriting department and reports directly to a member of
senior management.
We subject at least 10% of all loan originations to a full quality control
re-underwriting and review, the results of which are reported to senior
management on a quarterly basis. On a daily basis, should the need arise, the
AVP in charge of QC Underwriting will e-mail senior management any critical loan
findings. The sample of loans reviewed are selected in the following manner:
o All early default payments and customer complaints;
o At least 5% of the loans received are randomly sample; and
o Targets which may be based on sources of business (both internal
branches/teams and external brokers, areas or other third parties)
and products (perceived riskier products and newly offered products).
If any discrepancies are discovered during the review process, a senior
quality control underwriter re-reviews the loan and proceeds with any necessary
follow-up actions. Discrepancies noted by the review are analyzed and corrective
actions are instituted. A typical quality control underwriting review currently
includes:
o obtaining a new verification of value and/or photo for each property;
o re-verifying the credit report;
o reviewing loan applications for completeness, signatures, and for
consistency with other processing documents;
o obtaining new written and/or verbal verification of income and
employment from employer;
o obtaining new written and/or verbal verification of mortgage to
re-verify any outstanding mortgages, if necessary; and
o analyzing the underwriting and program selection decisions.
We update the quality control process from time to time as our policies and
procedures change.
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CLICK & CLOSE. Click & Close is a proprietary web-based system that we
developed internally to streamline and integrate our origination's process.
Click & Close, or C&C, opens an online channel of communications between us,
brokers, borrowers and a wide range of other mortgage information sources. We
already utilize C&C to automate and facilitate many of our origination
processes, including but not limited to:
o logging in and tracking applications in our retail and wholesale
channels;
o increasing the amount of internal loan origination processes that can
be handled electronically, thereby reducing paper flow between account
managers, loan processors and underwriters and allowing us to become
more paperless;
o generating pre-approvals utilizing our risk-based pricing model;
o generating stipulation sheets, preliminary disclosures and other
documents; and
o easy, real time supervisory oversight to ensure all applications are
being worked on in a timely manner.
We are continuing to work to improve C&C to further streamline our processes
and reduce the paper flow required throughout the mortgage origination process,
with a goal of ultimately lowering our cost to originate.
LOAN SALES
We sell virtually all the loans we originate through one of two outlets: (i)
securitizations, which involve the public offering by a securitization trust of
asset-backed pass-through securities; and (ii) whole loan sales, which include
the sale of pools of individual loans to institutional investors, banks, and
consumer finance-related companies on a servicing released basis. In 2002,
securitizations and whole loan sales comprised approximately 89% and 11%,
respectively, of our loan sales. Going forward, we expect to continue to use a
combination of securitizations and whole loan sales, with the amounts of each
dependent upon the marketplace and our goal of maximizing earnings and
liquidity.
SECURITIZATIONS. During 2002, we completed four securitizations totaling $850
million, of which we delivered a total of $819 million of mortgage loans during
2002 (and delivered the remaining $31 million of mortgage loans in January 2003,
pursuant to a pre-funding mechanism). During 2001, we completed two
securitizations totaling $345 million of mortgage loans. The following table
sets forth certain information with respect to our 2002 securitizations (all of
which contained ratings on various classes of securities ranging from AAA/Aaa to
BBB/Baa2 by S&P, Fitch, and Moody's, respectively) by offering size, which
includes pre-funded amounts, duration weighted average pass-through rate and
type of credit enhancement.
INITIAL DURATION
OFFERING SIZE WEIGHTED AVERAGE CREDIT
SECURITIZATION COMPLETED (MILLIONS) PASS-THROUGH RATE ENHANCEMENT
--------- --------- ------------ --------------------- -----------
2002-1........... 03/28/02 $175.0 4.08% Hybrid *
2002-2........... 06/27/02 $200.0 2.46% Senior/Sub
2002-3........... 09/27/02 $250.0 2.61% Hybrid *
2002-4........... 12/30/02 $225.0 2.73% Hybrid*
* SENIOR/SUB STRUCTURE WITH A "AAA" RATED MONOLINE INSURER INSURING THE SENIOR
OR "AAA" RATED PASS-THROUGH CERTIFICATES
When we securitize loans, we create trusts in the form of off-balance sheet
qualified special purpose entities, or QSPEs. These trusts are established for
the limited purpose of buying and reselling mortgage loans. Typically each
quarter, we pool together loans, and sell these loans to these securitization
trusts. We carry no contractual obligation related to these trusts or the loans
sold to them, nor do we have any direct or contingent liability related to the
trusts, except for the standard representations and warranties made in
conjunction with each securitization trust. Furthermore, we provide no
guarantees to investors with respect to cash flow or performance for these
trusts. These entities represent qualified special purpose entities and are
therefore not consolidated for financial reporting purposes in accordance with
SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities".
The securitization trust raises money to purchase the mortgage loans from us
by selling securities to the public - known as asset-backed pass-through
securities that are secured by the pool of mortgage loans held by the
securitization trust. These asset-backed securities or senior certificates,
which are usually purchased for cash by
16
insurance companies, mutual funds and/or other institutional investors,
represent senior interests in the cash flows from the mortgage loans in the
trust.
The securitization trust issues senior certificates, which entitles the
holders of these senior certificates to receive the principal collected,
including prepayments of principal, on the mortgage loans in the trust. In
addition, holders receive a portion of the interest on the loans in the trust
equal to the pass-through interest rate on the remaining principal balance. The
securitization trust also issues a subordinate certificate or BIO certificate
(referred to as an excess cashflow certificate), and a P certificate
(representing the right to receive prepayment penalties from borrowers who
payoff their loans early in their life). Each month, the P certificate holder is
entitled to receive prepayment penalties received from borrowers who payoff
their loans early in their life.
For any monthly distribution, the holder of an excess cashflow certificate
receives payments only after all required payments have been made on all the
other securities issued by the securitization trust. In addition, before the
holder of the excess cash flow certificate receives payments, cash flows from
such excess cashflow certificates are applied in a "waterfall" manner. (See "-
Management's Discussion & Analysis - Loan Securitizations" beginning on page 26
for a more complete discussion on the "waterfall" and securitizations in
general.)
A summary of the gain on sale and cash flow we received from our aggregate
securitizations in 2002 and 2001 is presented below. "Loans sold" represents the
amount of loans actually transferred to the respective securitization trusts
during each year:
YEAR ENDED DECEMBER 31,
2002 2001
---- ----
GAIN ON SALE SUMMARY (DOLLARS IN THOUSANDS)
- --------------------
Loans Sold $ 819,042 $ 345,000
NIM Proceeds, Net of the Upfront Overcollateralization 5.13% --%
Interest Only Certificate Proceeds........ --% 3.86%
Excess Cashflow Certificate (owner trust certificates)(1) 1.28% 3.21%
Mortgage Servicing Rights(2).............. 0.88% 1.51%
Less: Transaction Costs.................. (0.67%) (0.60%)
----------- ------------
Net gain on sale recorded.............. 6.62% 7.98%
=========== ============
CASH FLOW SUMMARY
- -----------------
NIM Proceeds, Net of the Upfront Overcollateralization 5.13% --%
Interest Only Certificate Proceeds........ --% 3.86%
Mortgage Servicing Rights (2)............. 0.88% 1.51%
Less: Transaction Costs................... (0.67%) (0.60%)
----------- -----------
Net Cash Flow at Closing............ 5.34% 4.77%
=========== ===========
- ----------
(1)The reduction in value of the excess cashflow certificates in 2002 compared
to 2001 is primarily due to changes we made to our fair value assumptions of
our excess cashflow certificates (see "- Excess Cashflow Certificate, Net").
(2)In 2001, the mortgage servicer purchased the P Certificate; in 2002, we
transferred the P Certificate to the NIM Trust, which accounts for the
reduced gain from the sale of mortgage servicing rights in 2002.
At the time we completed the 2002 securitizations, we recognized as revenue
each the economic interests listed above, which was recorded as net gain on sale
of mortgage loans on our consolidated statement of operations.
WHOLE LOAN SALES WITHOUT RECOURSE. We have found that, at times, we can
receive better economic results by selling certain mortgage loans on a whole
loan, without retaining servicing rights, generally in private transactions to
financial institutions or consumer finance companies. We recognize a gain or
loss when we sell loans on a whole loan basis equal to the difference between
the cash proceeds received for the loans and our investment in the loans,
including any unamortized loan origination fees and costs. We generally sell
these loans without recourse, except that we provide normal representations and
warranties to the purchasers of such loans.
In 2002 and 2001, we sold whole loans without recourse on a
servicing-released basis of $102.9 million and $261.1 million, respectively.
LOAN SERVICING
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Prior to May 2001, we serviced substantially all of the loans that we
originated and purchased since our inception in 1982.
In January 2001, we announced that we had entered into an agreement with
Ocwen to transfer our servicing portfolio to Ocwen. In May 2001, we physically
transferred our entire servicing portfolio to Ocwen, and laid-off our servicing
staff. We no longer service loans nor do we have a servicing operation. We do,
however, maintain several employees to assist third parties with delinquent and
defaulted loans, as well as portfolio retention.
COMPETITION
As an originator of mortgage loans, we face intense competition, primarily
from diversified consumer financial companies and other diversified financial
institutions, mortgage banking companies, commercial banks, credit unions,
savings and loans, credit card issuers and finance companies. Many of these
competitors in the financial services business are substantially larger and have
more capital and other resources than we do. Competition can take many forms,
including interest rates and costs of the loan, convenience in obtaining a loan,
service, marketing and distribution channels. Furthermore, the level of gains
realized by us and our competitors on the sale of the type of loans originated
has attracted additional competitors into this market with the effect of
lowering the gains that may be realized by us on future loan sales. In addition,
efficiencies in the asset-backed market have generally created a desire for even
larger transactions giving companies with greater volumes of originations a
competitive advantage.
Competition may be affected by fluctuations in interest rates and general
economic conditions. During periods of rising rates, competitors which have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit borrowers underlying our excess
cashflow certificates to refinance their loans. During economic slowdowns or
recessions, these borrowers may have new financial difficulties and may be
receptive to offers by our competitors.
Over the past several years, many of the independent mortgage banking
companies, which previously were among our most intense competitors, have either
gone out of business or been acquired by larger, more diversified national
financial institutions. At the same time, many larger finance companies,
financial institutions and conforming mortgage originators have adapted their
conforming origination programs and allocated resources to the origination of
non-conforming loans and/or have otherwise begun to offer products similar to
those offered by us, targeting customers similar to those we do. Fannie Mae and
Freddie Mac also have expressed interest in adapting their programs to include
products similar to those offered by us and have begun to expand their programs
and presence into the non-conforming market. The entrance of these larger and
better-capitalized competitors into our market may have a material adverse
effect on our results of operations and financial condition.
REGULATION
Our business is subject to extensive regulation, supervision and licensing by
federal, state and local governmental authorities and is subject to various laws
and judicial and administrative decisions imposing requirements and restrictions
on part or all of our operations. Our consumer lending activities are subject
to, among other laws and regulations:
o the Federal Truth-in-Lending Act and Regulation Z (including the Home
Ownership and Equity Protection Act of 1994);
o the Equal Credit Opportunity Act of 1974, as amended (ECOA);
o the Fair Credit Reporting Act of 1970, as amended;
o the Real Estate Settlement Procedures Act (RESPA), and Regulation X;
o the Home Mortgage Disclosure Act;
o the Federal Debt Collection Practices Act; and
o other federal, state and local statutes and regulations affecting our
activities.
We also are subject to the rules and regulations of, and examinations by the
Department of Housing and Urban Development ("HUD") and state regulatory
authorities with respect to originating, processing and underwriting loans (and
servicing loans prior to May 2001). These rules and regulations, among other
things:
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o impose licensing obligations on us;
o establish eligibility criteria for mortgage loans;
o prohibit discrimination;
o provide for inspections and appraisals of properties;
o require credit reports on loan applicants;
o regulate assessment, collection, foreclosure and claims handling,
investment and interest payments on escrow balances and payment
features;
o mandate certain disclosures and notices to borrowers; and
o in some cases, fix maximum interest rates, fees and mortgage loan
amounts.
Failure to comply with these requirements can lead to, among other things,
loss of approved status, demands for indemnification or mortgage loans
repurchases, certain rights of rescission for mortgage loans, class action and
other lawsuits, and administrative enforcement actions.
Several states and local municipalities have recently enacted so-called "high
cost" mortgage laws and/or regulations. While many of these laws and regulations
contain some provisions that are similar to one another, there are a variety of
provisions that vary from state to state and municipality to municipality, which
has significantly increased the costs of compliance. In addition, dozens of
other state and local laws and regulations are currently under consideration,
with even more likely to be proposed on the horizon, that are intended to
further regulate our industry. Many of these laws and regulations seek to impose
broad restrictions on certain commonly accepted lending practices, including
some of our practices. There can be no assurance that these proposed laws, rules
and regulations, or other similar laws, rules or regulations, will not be
adopted in the future. Adoption of these laws, rules and regulations could have
a material adverse impact on our business by:
o substantially increasing the costs of compliance with a variety of
potentially inconsistent federal, state and local laws;
o substantially increasing the risk of litigation or administrative
action associated with complying with these proposed federal, state and
local laws, particularly those aspects of such proposed laws that
contain subjective (as opposed to objective) requirements, among other
things;
o restricting our ability to charge rates and fees adequate to compensate
us for the risk associated with certain loans; or
o if the law, rule or regulation is too onerous, potentially limiting our
ability or willingness to operate in a particular geographic area.
There are also several potential federal bills being proposed, at least one
of which may provide for federal preemption over these myriad existing and
proposed state and local laws and regulations. There can be no assurance that
any federal law will be passed addressing this matter, or that, if passed, it
will contain a provision that preempts these myriad state and local laws and
regulations.
In September 1999, we settled allegations by the NYSBD and a lawsuit by the
New York State Office of the Attorney General (the "NYOAG") alleging that we had
violated various state and federal lending laws. The global settlement was
evidenced by (a) a Remediation Agreement by and between Delta Funding and the
NYSBD, dated as of September 17, 1999 and (b) a 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, we, among other things, implemented agreed
upon changes to our lending practices; are providing reduced loan payments
aggregating $7.25 million to certain borrowers identified by the NYSBD; and have
created a fund managed by the NYSBD and financed by the grant of 525,000 shares
of Delta Financial's common stock.
Each month, on behalf of borrowers designated by the NYSBD, we make subsidy
payments to the related securitization trusts. These subsidy payments fund the
differential between the original loan payments and the reduced loan payments.
As part of the Second Exchange Offer we completed in August 2001 (see Note 2
"Summary of Regulatory Settlement" and Note 3 "Corporate Restructuring, Debt
Modification and Debt Restructuring" to Notes to the Consolidated Financial
Statements), the LLC - an unaffiliated, newly-formed entity, the voting
membership interests of which are owned by former holders of our notes - is
obligated to satisfy these
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payment subsidies out of the cash flows generated by the mortgage related
securities (primarily from the excess cashflow certificates) it owns. If the
LLC's cash flows are insufficient to pay this obligation, we remain responsible
to satisfy our obligations under the Remediation Agreement.
The proceeds of the stock fund will be used to pay borrowers and to finance a
variety of consumer educational and counseling programs. We do not manage the
fund created for this purpose. The number of shares of common stock deposited in
the fund does not adjust to account for fluctuations in the market price of our
common stock. Changes to the market price of these shares of common stock
deposited in the fund do not have any impact on our financial statements. We did
not make any additional financial commitments between the settlement date and
March 2000. The Stipulated Order on Consent and the Remediation Agreement both
terminated by their respective terms, in September 2002. We remain obligated as
discussed above to continue to make subsidy payments on behalf of borrowers
identified by the NYSBD for so long as such borrowers continue to make payments
under the mortgage loans.
We believe we are in compliance in all material respects with applicable
federal and state laws and regulations.
ENVIRONMENTAL MATTERS
To date, we have not been required to perform any investigation or clean up
activities, nor have we been subject to any environmental claims. There can be
no assurance, however, that this will remain the case in the future. Although we
primarily lend to owners of residential properties, in the course of our
business, we may acquire properties securing loans that are in default. There is
a risk that we could be required to investigate and clean-up hazardous or toxic
substances or chemical releases at such properties, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
EMPLOYEES
As of December 31, 2002, we had a total of 693 employees (full-time and
part-time). None of our employees are covered by a collective bargaining
agreement. We consider our relations with our employees to be good.
ITEM 2. PROPERTIES
Our executive and administrative offices are located at 1000 Woodbury Road,
Woodbury, New York 11797, where we lease approximately 107,000 square feet of
office space at an aggregate annual rent of approximately $2.0 million. The
lease provides for certain scheduled rent increases and expires in 2008.
We also maintain business development offices in New Jersey, Ohio,
Pennsylvania and Virginia. Our retail operation currently maintains four retail
call centers in Woodbury, New York, Pittsburgh, Pennsylvania, Charlotte, North
Carolina and Phoenix, Arizona, and seven retail mortgage origination offices in
Illinois, Missouri, Ohio (3), Pennsylvania and Tennessee. We also maintain one
telemarketing hub and one underwriting hub in Ohio. The terms of these leases
vary as to duration and escalation provisions, with the latest expiring in 2008.
ITEM 3. LEGAL PROCEEDINGS
Because the nature of our business involves the collection of numerous
accounts, the validity of liens and compliance with various state and federal
lending laws, we are subject, in the normal course of business, to numerous
claims and legal proceedings. Our lending practices have been the subject of
several lawsuits styled as class actions and of investigations by various
regulatory agencies including the NYSBD, the NYOAG and the United States
Department of Justice (the "DOJ"). The current status of these actions is
summarized below.
o In or about November 1998, we received notice that we 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 we had violated the Home Ownership and Equity
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, treble and
punitive damages (including attorneys' fees), (d) certain injunctive
relief, and (e)
20
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 us
from conducting foreclosure sales on 11 properties. The District Court
Judge ruled that in order to consider such a motion, plaintiff must
move to intervene on behalf of these 11 borrowers. Thereafter,
plaintiff moved to intervene on behalf of 3 of these 11 borrowers and
sought injunctive relief on their behalf. We 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 that enjoined us from proceeding with the
foreclosure sales of the three intervenors' properties. We filed a
motion for reconsideration of the December 23, 1998 order. In January
1999, we 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, we filed a motion to dismiss the
complaint, which was opposed by plaintiffs and, in June 2000, was
denied in part and granted in part by the Court. In or about October
1999, plaintiffs filed a motion seeking an order preventing us, our
attorneys and/or the NYSBD from issuing notices to certain of our
borrowers, in accordance with a settlement agreement entered into by
and between Delta and the NYSBD. In or about October 1999 and November
1999, respectively, we and the NYSBD submitted opposition to
plaintiffs' motion. In March 2000, the Court issued an order that
permitted us to issue an approved form of the notice. In September
1999, plaintiffs filed a motion for class certification, which we
opposed in February 2000, and was ultimately withdrawn without
prejudice by plaintiffs in January 2001. In February 2002, we executed
a settlement agreement with plaintiffs, pursuant to which we denied all
wrongdoing, but agreed to resolve the litigation on a class-wide basis.
The Court preliminarily approved the settlement and a fairness hearing
was held in May 2002. We are awaiting a decision from the Court on the
fairness hearing. We believe that the Court will approve the
settlement, but if it does not, we believe that we have meritorious
defenses and intend to defend this suit, but cannot estimate with any
certainty our ultimate legal or financial liability, if any, with
respect to the alleged claims.
o In or about March 1999, we received notice that we had been named in a
lawsuit filed in the Supreme Court of the State of New York, New York
County, alleging that we 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, we filed an answer to the complaint. In September 1999, we
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, we filed a motion to change venue and
plaintiffs opposed the motion. In July 1999, the Court denied the
motion to change venue. We appealed and in March 2000, the Appellate
Court granted our appeal to change venue from New York County to Nassau
County. In August 1999, plaintiffs filed a motion for class
certification, which we opposed in July 2000. In or about September
2000, the Court granted plaintiffs' motion for class certification,
from which we appealed. The Appellate Court denied our appeal in
December 2001. In or about June 2001, we filed a motion for summary
judgment to dismiss the complaint, which was denied by the Court in
October 2001. We appealed that decision, but the appellate court denied
our appeal in November 2002. We filed a motion to reargue in December
2002, which was denied by the Court in January 2003. Discovery will now
continue in the lower court. We believe that we have meritorious
defenses and intend to defend this suit, but cannot estimate with any
certainty our ultimate legal or financial liability, if any, with
respect to the alleged claims.
o In November 1999, we received notice that we 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
our initial public offering in 1996 and our reports subsequently filed
with the Securities and Exchange Commission. The complaint alleges that
the scope of the violations alleged in the consumer lawsuits and
regulatory actions brought in or around 1999 indicate a pervasive
pattern of action and risk that should have been more thoroughly
disclosed to investors in our common stock. In May 2000, the Court
consolidated this case and several other lawsuits that purportedly
contain the same or similar allegations against us and in August 2000
plaintiffs filed their Consolidated Amended Complaint. In October 2000,
we filed a motion to dismiss the Complaint in its entirety, which was
opposed by plaintiffs in November 2000, and denied by the Court in
September 2001. We reached an agreement in principal with plaintiffs'
counsel and our insurer to settle the action on a class-
21
wide basis in or about August 2002 and executed a settlement agreement
in January 2003 (pursuant to which we denied all wrongdoing). The
settlement has been preliminarily approved by the Court and a fairness
hearing has been scheduled for April 2003, at which time we further
anticipate that the Court will approve the settlement. In the event
that the settlement is not approved, we believe that we have
meritorious defenses and intend to defend this suit, but cannot
estimate with any certainty our ultimate legal or financial liability,
if any, with respect to the alleged claims.
o In or about April 2000, we received notice that we had been named in a
lawsuit filed in the Supreme Court of the State of New York, Nassau
County, alleging that we had improperly charged and collected from
borrowers certain fees when they paid off their mortgage loans with us.
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