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Originally published Sunday, December 3, 2006 at 12:00 AM

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The party's over at Kirkland mortgage company

Former Huskies football player Scott Greenlaw led the mortgage company he founded to dizzying heights. Now he's selling his house to avoid bankruptcy as creditors line up with lawsuits.

Seattle Times business reporter

Former Washington Huskies football player Scott Greenlaw led the mortgage company he founded to dizzying heights — 400 employees, a sprawling new headquarters and kegs of beer at staff meetings. Now he's selling his house to avoid bankruptcy as creditors line up with lawsuits.

Merit Financial was barely shut this spring before founder Scott Greenlaw and his top executives opened new mortgage businesses.

But vowing to put the past behind them has turned out to be not so easy. The sudden demise in May of one of Washington's largest mortgage brokerages has left a trail of angry ex-employees, expensive lawsuits, unpaid taxes and government investigations.

"I'm not walking out of here penniless; I'm walking out of here with a huge debt load," Greenlaw, 34, confided days before he relinquished Merit Financial's sprawling Kirkland headquarters to its former owner rather than losing the building through foreclosure.

Now, the man whose business was built on financing homes for others may be forced to sell his own. Greenlaw is trying to avoid bankruptcy by selling his $4 million waterfront home to pay his debts.

It seems a quick turn of events for a former college football star who'd cobbled together $225,000 to start a company in 2001 that grew to more than 400 employees. Merit claimed to write more than $2 billion in loans and Greenlaw basked in its glow as it made him a millionaire publicity magnet.

Now all of that is gone. However, pointed questions about his lack of leadership and poor judgment, including his buying kegs of beer for business meetings, remain.

Some wonder if the company's demise hinged on its practice of hiring jocks and stunning but inexperienced young loan officers and managing them loosely. Still others questioned whether Greenlaw's litigious and financially draining divorce and his romance with another woman distracted him.

Ambition meets opportunity

The story of Greenlaw's rise and fall starts, as many do, on a high note.

The Issaquah native was a cornerback for the Washington Huskies from 1992 to 1995, playing in the 1993 Rose Bowl. With a UW business degree in hand and days in Lambda Chi Alpha fraternity behind him, he entered the mortgage business in 1998. He opened Merit three years later. With interest rates falling to 30-year lows, the timing was excellent.

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"We had all these leads coming in," Greenlaw recalled. "So we hired more loan officers. I hired a lot of like-minded individuals — Washington State, UW graduates who'd been in fraternities and played sports. We formed a strong brotherhood."

By early 2004, Merit was such a powerhouse that Greenlaw spent $13.5 million to buy a headquarters, complete with a gym and a waterfall, in a Kirkland office park. In the lobby, a photo mural captured the company's spirit. On one side, under the caption "That was then," was a dowdy couple in a stiff dance embrace. On the other, under the words "This is Merit," were a scantily clad dancer and her partner bending in a sensual tango move.

A self-confident blond with a dazzling smile, Greenlaw would arrive at work wearing pinstripes and a Rolex. When the Puget Sound Business Journal recognized Greenlaw as an up-and-coming businessman, he told the paper his favorite film was "Wall Street." The movie contained the famous line, "Greed ... is good." "Maverick" and "motivator"were the words he used to describe himself.

Greenlaw was one of many mortgage-business newcomers who saw gold in doing refinances. His target clients: tarnished borrowers whose credit problems qualified them only for expensive — and highly profitable — subprime loans.

Merit enticed them with mass mailings announcing "Interest Rate Reduction Notification" from the "Department of Loan Reprocessing" in big print and Merit only as a tiny footnote. Mailings also bore an official-looking eagle emblem that smacked of a government mailing.

Such tactics constitute deceptive and misleading trade practices, according to a Washington State Department of Financial Institutions. But Merit was never penalized.

Merit also hired telemarketers to cold-call homeowners, sometimes repeatedly reaching people on the national Do Not Call Registry. That drew the wrath of Oregon's attorney general, who fined Merit $3,000.

With Merit's business skyrocketing, Greenlaw decided to delegate the day-to-day operations. He chose his close buddy, Anthony J. "Tony" Nelson, for the No. 2 position, chief operating officer.

A Central Washington University dropout, Nelson was an employment recruiter and salesman with no mortgage or management experience.

Where Greenlaw appeared to be liked by his employees, Nelson had a reputation for rudeness, accosting new employees with a blunt: "Do you know who I am?"

"He'd get mad if they didn't," recalled former loan officer Nick Barry.

"He was very arrogant," added a former company executive, who, like others, wouldn't be quoted by name because he said he's afraid of Nelson. "No one understood what he did. The only sense I had was he was the best friend of the owner, and he was collecting a hefty paycheck."

Nelson repeatedly declined to comment.

The fast money lure

While Nelson ran daily loan operations, Greenlaw concentrated on building a stellar firm — one that brought recognition in 2004 from Washington CEO magazine. The magazine named Merit one of the best firms in the state to work for, alongside Starbucks and Costco. The following year the Business Journal named Merit a finalist for its Eastside Business of the Year award.

The problem with much of mortgage lending, Greenlaw told the Business Journal, was that loan officers lacked sufficient training and accountability.

"You could be selling shoes yesterday and making loans tomorrow," he said in a 2004 interview. "Ninety percent of our population has the majority of their money in their home, yet we have people out there who are uneducated, who do not have a lot of experience in the business, who are not being managed correctly."

Some loan officers, including Kerrie Saulness, came to Merit with years of loan experience. However, many had none and got their jobs by word of mouth along the Eastside club scene's grapevine.

The lure was fast money. Recent high-school graduates with scant work experience but a flair for phone sales could earn $100,000 or more a year in commissions.

Conversely, those with lesser sales ability could work for weeks and earn nothing — in violation of federal and state labor laws. Nonetheless, Greenlaw defended Merit's pay structure as the industry standard. Turnover was high.

Washington state does not require mortgage loan officers to have training or be licensed; that will change Jan. 1.

Merit did put loan officers through a 19-step program. "Loan Officer 101" was 15 minutes long, as was "Mortgage Glossary." Thirty minutes were devoted to "10 Step Loan Flow."

Saulness wasn't impressed. She sat next to two 18-year-old loan officers.

"They didn't even know how to read a credit report," she said.

Barry said wryly that many "had no idea what product they were selling, but they knew how much money they could make."

Merit employees proudly posted their résumés, plus photos of their luxury cars and drinking parties, on various Web sites. One loan officer had come to work fresh from being a Hooters Girl. Another solicited clients for two endeavors: writing mortgages for Merit and selling marijuana paraphernalia on the side.

Indeed, several Merit loan officers boasted online that doing drugs was a favorite pastime.

"Let's get hopped up and make some bad decisions," wrote one beside a photo of himself grinning broadly.

Numerous former employees, including loan officer Sunny Hoppe, described working at Merit as a raucous — sometimes lewd — frat party.

It was "young, hip, drugs and drinking," Hoppe said, and that was at work. Former employees also said Merit regularly provided a keg of beer for some staff meetings, but Greenlaw said that, no, it was actually two kegs, and employees were free to bring in six-packs on Fridays.

Asked about rumors of drug use in the office, Greenlaw said, "We just never checked."

Still, Greenlaw dismissed partying as an issue and initially said Merit's demise boiled down to a simple scenario: Its business was built on mortgage refinances.

When interest rates rose and the lucrative refinance business slowed significantly, Greenlaw gambled that he could increase revenue by adding loan officers who could complete more complex loans. That didn't work, and the overhead sank him, he said.

Was it really that simple? Pressed, Greenlaw admitted it wasn't.

"Buybacks were high," Greenlaw said, without giving details.

In other words, Merit's loan officers executed mortgages that were so flawed that the investors who bought the loans from Merit forced them to buy them back.

A longtime broker not affiliated with Merit said such buybacks are "extremely rare."

"It will bankrupt most mortgage brokers because most don't have the resources to pay off a loan that is purchased by a lender and bounces back," the broker said.

Complaints pour in

The 42 complaints received by state agencies and the Better Business Bureau give insight into Merit's problems. Addressed individually, none was serious enough to shut the company down.

In one, the state ordered Merit to refund a borrower's fees — $11,422 — after finding that the company had violated nine federal and state laws and processed the loan without getting the borrower's signatures on required forms.

Merit also drew complaints that it charged excessive fees, failed to provide federally required loan documents, failed to disclose fees and terms, harassed customers and repeatedly forged documents.

One complaint came from Lynnzel Hernandez Valdez-Nabua. A first-time homebuyer from Everett, she complained that Merit forged her sister's signature, originally provided as a reference, to say it was her employer's.

The company that bought Valdez-Nabua's loan from Merit apparently discovered the forgery when it contacted her employer for verification. She was fired because she could not conclusively prove she didn't commit the deed.

Valdez-Nabua said she called Merit repeatedly to complain and got no response.

Shown a stack of customer complaints, Greenlaw said he didn't know about them. However, he stressed that shady or illegal practices were not condoned.

Loan officer Hoppe said she had a different experience. Ordered to complete a loan for an elderly homeowner who was incapable of understanding it, she said she refused.

"Merit's whole attitude was, 'Get the deal,' " Hoppe said.

Saulness said she also tangled with her boss.

"It was highly promoted that you overcharged the customer because they're subprime and they deserve it," Saulness said.

Meanwhile, Greenlaw's divorce appeared to distract him, several insiders said.

He and his first wife, Lisa, wed in 1996. Their first home purchase was a $90,900 Bellevue condominium.

By 2004, when they divorced, the couple owned Merit Financial, a fledgling development company, part of an escrow company, two waterfront houses, artwork, a boat, a BMW and a Porsche.

According to court documents, Scott Greenlaw had ample income to support this lifestyle: some $1.8 million in 2005.

Lisa Greenlaw agreed to sign over her interest in the couple's Kirkland home on Lake Washington. Scott gave her a promissory note for $1 million. As long as he paid her $100,000 every six months for five years, the note carried no interest.

Greenlaw missed the first two payments. Taken to court, he argued that he shouldn't have to honor the agreement because he hadn't understood it when he signed it.

But the real crunch was this: Greenlaw was in love and wanted to remodel his Lake Washington property for his new wife, Debbie Sumstad, whom he'd made co-chairwoman of his new Merit Foundation to aid children.

Lenders were unwilling to loan him the $2.35 million he needed as long as the $1 million obligation to his ex-wife hung over his head. He wanted out of it.

Merit's slide revealed

After intensive legal maneuvering, the former couple turned to binding arbitration. Arbitrator J. Kathleen Learned's written report, filed with the court, revealed factors that may have exacerbated Merit's slide.

According to the report, corporate officers asserted that Greenlaw "was behaving financially irrationally and taking money out of the companies against their advice." There were also reports of his "lavish spending" — his new home's media room, for example, cost a reported $300,000 — and "acting rashly under the influence of alcohol."

Learned said she couldn't attest to the truth of these claims, but she was concerned. So the binding settlement agreement carried serious stipulations. Scott Greenlaw must pay his ex-wife the $1 million, and he could receive no more than $30,000 a month in gross income from Merit.

Most tellingly, this past January, the agreement forced him to turn over control of Merit's financial and management decisions to his executive team.

Two members of that team, Justin Andrews and Brady Yeager, said Greenlaw didn't do that, and he was at Merit's helm when it imploded in May.

The state Department of Revenue soon slapped Merit Financial with a lien for $351,294 in unpaid business and occupation tax and froze its accounts. That meant there was no money to pay the 300 or so employees thrown out of work in one of the largest wage defaults in recent state history.

Investigations into worker pay were launched by the state Department of Labor and Industries and the federal Department of Labor. Neither will comment pending the outcomes.

All summer long creditors filed lawsuits against Greenlaw and Merit. Wells Fargo Bank sued for $249,033. First American Credco, which provided mortgage customers' credit reports, sued for $228,249.

A limousine service sued to recover $31,210, and another service provider, Lava Concepts, sued for $12,594, alleging in court documents that Greenlaw "engaged in self dealing, overpaying himself and looting the company coffers."

"As a direct result of his actions, Merit is unable to fulfill its promises," Lava Concepts said in its lawsuit.

Employees seek back pay

Meanwhile, an angry Saulness, denied her last month's pay, organized an effort to launch a class-action lawsuit to recover employees' lost wages. Initially, Seattle attorney Marianne Meeker, of Blair & Meeker, was eager to proceed, and final paychecks weren't her only target.

Meeker was confident that Merit wrongly denied some employees minimum wage and overtime pay. She also said the firm owes loan officers possibly hundreds of thousands it deducted from their paychecks to pay state business and occupation tax — the tax the state said was in arrears. Merit, not its employees, was responsible for that tax, Meeker said.

After several months of inquiry, Meeker has decided, at least temporarily, against a class-action lawsuit because there may be no money to recover.

Saulness understands, but she's furious.

"It's amazing this man can do this, and nothing happens to him," she fumed.

Within days of shutting its doors, Merit's execs were in the home-loan business again.

Nelson, Andrews and Yeager broke with Greenlaw to form Elite Real Estate Group in Kirkland.

Scott Greenlaw went into business with a couple of Merit buddies, but soon left that to work on his own.

"Merit was great fun for five years, but now it's time to move on and give it another shot," Greenlaw said. "I'm looking forward to the challenge of coming back and proving to people who Scott Greenlaw really is."

Elizabeth Rhodes: 206-464-2306; erhodes@seattletimes.com

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