Documents confirm long line of problems at mortgage firm

The old saying "forewarned is forearmed" is one that dozens of investors wish the state of Nevada had honored when it began sniffing out problems at the now defunct Harley L. Harmon Mortgage Co.

At least seven years before the state made its findings public, investigators began tracking irregularities that eventually left many investors with pennies rather than tidy profits on their sizable investments.

State records indicate the mortgage company, whose license was revoked last year, had problems with incomplete investor files as far back as 1990.

A court-appointed receiver attempting to liquidate real estate assets connected to the loans acknowledged that many investors will be lucky if they get pennies on the dollar. Several investors and state legislators looking to improve mortgage-company regulations have criticized the state for failing to publicize its probe. That's because at least $3 million was invested with the company while it was under investigation.

Confidential reports from the Nevada Financial Institutions Division, obtained by the Sun under the federal Freedom of Information Act, revealed an uneven pattern of compliance by the company with state regulations throughout the 1990s.

As a long-standing policy, the division does not normally release its examination reports to the public.

The Las Vegas company, owned by former state Assemblyman Harley L. Harmon, handled investors' money in construction loans with promises of up to 15 percent interest in return. After a nearly yearlong probe, however, the state revoked the company's license last December after discovering extensive problems with the way Harmon handled investments and kept files.

At the time of its closure, the company was handling 44 loans totalling about $23.9 million worth of investments from 694 individuals. Many investors, ranging from wealthy local socialites and politicians to retirees who invested their life's savings, ended up losing everything. They charged the company used their investments to pay off other investors.

Like other mortgage companies, Harmon was subject to annual review by the state. Typically this involves examinations of loans handled by the company during the previous year.

Formed in 1981 by former Clark County Commissioner Harley E. Harmon, the company eventually was handed over to his son, Harley L. Harmon.

In May 1990, when the company was still owned by the father but managed by the son, the state gave it a '4,' the second-lowest rating on a 1-to-5 scale.

"The rating of '4' indicates the license and its management have demonstrated substantial lack of compliance with applicable statutes and regulations," the report stated. "Immediate remedial action to correct the noted deficiencies is required. Close regulatory supervision is also necessary."

That examination, which involved 10 loans, found that the company violated four state laws. Among them was that nine of 15 investors didn't have an "investor's acknowledgement of understanding" form in their files. Nine of the 10 loan files contained document violations.

Harmon by then had formed several limited partnerships to invest in land, with partial financing from the company.

The report said, "In at least one instance, the letter (to investors) instructed them to make their initial investment check payable to the mortgage company, although there is no evidence that the funds are run through the mortgage company account. Our concern is that the practice gives the appearance that the investment is through the mortgage company.

"Neither the mortgage company's bank account or name should be used in the solicitation or formation of these partnerships."

The report quoted the company as blaming the state violation on "poor office help."

The company did much better in its 1991 examination, rating a '2.' Harmon was commended for correcting problems from the previous year. But the state still found that some company files lacked required documents, such as copies of corporate resolutions, partnership authorizations and trust agreements.

In 1992 and 1993, the company retained its '2' rating. There remained missing required documents both years, however. In 1992, for instance, required risk-disclosure agreements either couldn't be found or were dated after loans were funded. Truth-in-lending disclosures also weren't found by examiners in 1993.

"Mr. (Harley L.) Harmon is knowledgeable with hard money lending principles and has a basic understanding of state statutes and regulations," the 1993 review stated.

The company's situation worsened in 1994, however, when it received a "less than satisfactory" rating of '3' for violating several state laws. In addition to missing documents, examiners found that the company "accepted checks from a person to acquire a beneficial interest in a loan without having the proper trust account."

Examiners were also concerned about a $2.8 million loan agreement with Canyon Development, a Nevada corporation. Harmon had disbursed only $2.31 million, about $500,000 less than agreed. The company informed the state that it obtained money from investors only when needed by the borrowing developer.

Harmon argued that giving the full loan to the builder at the onset would cost the borrower more in interest charges than the profit to be generated by the development.

"A question arises, however, as to the legitimacy of the mortgage company approving a loan and recording a DT (deed of trust) without all necessary monies on hand, or available to fund the loan," the state reported. "For a loan of this size, it is doubtful that any mortgage company would be able to obtain written commitments from its investors to fund the construction draw requests (for additional money)."

The 1994 report went on to note instances in violation of state law where funds that were supposed to be paid to an investor instead were forwarded to a title company to invest in another deed of trust. Another state law required Harmon to keep records of all money collected and disbursed, along with the amortized balance of each loan in which the investor had an interest. However, the company couldn't furnish the required records.

"Due to the number and severity of the violations noted, only a less than satisfactory rating can be assigned," the state concluded. "To have violations of this magnitude after managing (the company) for 13 years is unacceptable."

Harmon's roller-coaster ride with state regulators improved in 1995 with a '2' rating and a commendation for correcting previous problems. But the state found the company in complete turmoil during an examination that extended from November 1996 to January 1997. Harmon was slapped with the state's lowest rating, a '5.'

"Mr. Harmon does not appear to be knowledgeable of all aspects of mortgage lending or of state statutes," the report concluded.

Examiners noted that the son had taken over his father's business, adding his middle initial to the company previously known as Harley Harmon Mortgage. But the state found "no authorizations from the investors to transfer accounts to the new company."

Signs that investors were growing unhappy with Harmon also cropped up in this report. The state noted it had received two written complaints and numerous verbal complaints about the company since the 1995 examination.

There were also indications that Harmon planned to fight back, including threats of suing another mortgage company and two investors for slander and defamation of character. Harmon also told regulators he was considering complaining about the investors' attorney to the local bar association.

In its review of 16 loans, the state found the company violated state laws by falsely reporting the months in which loans were made, by possessing certain investor forms that were not signed or dated, and by failing to record investor assignments in mortgages with the county recorder's office.

Other document violations also were cited, as was a finding that Harmon repaid certain investors when he received partial repayment of loans, rather than divide the money on a pro rata basis among all investors involved.

Examiners were particularly concerned about the lack of written information kept by Harmon. They found no information on the status of the borrowers or their projects and no correspondence with investors.

"No written information is held indicating the investors have been informed of anything since the loan's inception, and no investor approvals are held for any subsequent actions taken by the licensee (Harmon) in regard to any loan," the state reported.

"This lack of information did not improve for borrowers or loans which Mr. Harmon indicated had problems, including financial difficulties, foreclosures or bankruptcies. The licensee indicated that he maintains verbal contact with his borrowers and investors, but that written reports or information are not generated or maintained."

Examiners also expressed concern that Harmon continued making construction loans that were not fully funded at inception, a practice the state had criticized in the past.

Harmon vowed to correct the deficiencies. He even promised to invest $100,000 of his own money to help fund a project known as Briarwood Patio Homes Ltd. phase 5, which was going through foreclosure.

But in February 1997, Burns Baker, deputy commissioner of the state division, recommended that Harmon's license be suspended. That it took the state nine more months of hearings and investigations to revoke the company's license is why many investors remain upset today.

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