A new racketeering lawsuit claims two Hallmark Home Mortgage employees aided a homebuilder in a construction Ponzi scheme that affected hundreds of customers. 

Florida resident Reynel Suarez named the lender and its parent, Fairway Home Mortgage, among a dozen defendants in his class action late last month. The plaintiff says Hallmark disbursed millions of victims' mortgage dollars to Steel X Homes in kickbacks and fraudulent construction draws, for work that was never completed. 

The complaint was first reported by Mortgage Professional America.

Richard Rivera, owner of Steel X, has previously faced complaints for not delivering homes. The lawsuit claims Rivera's purported wife Catalina Rebolledo, a mortgage loan originator at Hallmark, and Kaye Flanagan, another employee, helped orchestrate the fraud. 

Victims of the ruse complained to their lender that construction was abandoned, but Hallmark began foreclosure proceedings on them, the suit said. Attorneys for Suarez said they're still ascertaining the size of the class, but they believe tens of millions of dollars in home loans were caught up in the scheme. 

A spokesperson for Fairway, which bought Hallmark last summer, declined to comment on the litigation but emphasized the loans in question were not originated, nor owned by Fairway. Rebolledo, when reached by National Mortgage News, said she was not aware of the lawsuit and declined to comment. 

An attorney for Suarez told NMN that clients have informed him that Rivera is running another business with a similar scheme. 

Rivera shared a lengthy statement with NMN refuting all the claims, stating that Steel X never offered construction services to customers nor received any payments from Hallmark. His company rather provided schematics, while plaintiffs worked with a separate contractor, he said. 

"The complaint is built on distortion, omission, and outright falsehood," his statement read. "It weaponizes litigation to extract unjust settlements and tarnish reputations." 

"A classic wolf in the henhouse situation"

The since-defunct Steel X claimed to customers it could build homes in a year, but did not maintain a construction license, according to the complaint. The builder told its customers Hallmark was its preferred lender, and offered a 6% construction price discount. However, Hallmark allegedly secretly inflated those loan contracts by 6%, which the lender later paid to Steel X as commission. 

Rivera funneled customers to his wife, although the couple hid their relationship to clients. Rebolledo allegedly structured home loans with specific construction benchmarks, and Steel X passed around valuable building materials from project to project to facilitate the Ponzi scheme. Steel X used new investors' funds to pay actual contractors to build earlier buyers' homes. 

While earlier victims saw some construction completed, later victims did not see construction begin whatsoever, the suit claims. 

The Steel X operator suggested projects had failed in recent years because of macroeconomic factors. 

The lender and insurer get involved

Homeowners noticed their sites were vandalized, and the second Hallmark employee, Flanagan, told homeowners to report the theft to their insurers for reimbursement.  However, the suit claims Flanagan directed contractors to steal the project materials for other Hallmark-financed homes, and replace them at the original site via the insurance proceeds. 

Although victims' construction was sputtering, both Rebolledo and Flanagan later told homeowners to refinance their homes, or waive all claims against the lenders, otherwise Hallmark would move to foreclose. Attorneys say the offer of a blanket waiver of claims suggests Hallmark knew of the scheme. 

The lawsuit accuses Hallmark of violating the Real Estate Settlement Procedures Act for profiting off the scheme via loan fees, interest and kickbacks. 

Other named defendants include a Steel X associate who posed as an architect, and a since disbarred attorney who served as a settlement agent but transferred different monetary amounts than what was signed for between buyers, Steel X and Hallmark. 

RICO case just getting started

Summons in the Florida federal court were issued Dec. 30, and none of the defendants have formally responded to the complaint. 

In addition to a civil racketeering count, plaintiffs accuse the parties of violating the Florida Deceptive and Unfair Trade Practices Act. Suarez is seeking to certify a class of Hallmark borrowers with Steel X construction contracts, and a subclass of those impacted borrowers who had waived all claims against Hallmark. 

Rivera in his statement contested that lender disbursements were made directly to subcontractors and other parties, and suggests plaintiffs are seeking to pressure the lenders into settlements.

The parties are the latest builder affiliates to face a racketeering lawsuit, after D.R. Horton was hit with two separate actions late last year. One of those lawsuits alleges widespread shoddy construction in Alabama, while another alleges a more complex scheme by the builder's lending arm to lure borrowers into sharply rising escrows.