Fraud and Prevention

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The Department of Justice is forming a special Fair Lending Unit which is expected to aggressively pursue residential lenders and brokers that engage in what the government calls "toxic and discriminatory" loans. The new FLU "will pursue cases of reverse redlining — where predatory lenders have targeted toxic products to minority communities, resulting in unprecedented numbers of foreclosures and the resulting disinvestment and blight," DOJ assistant secretary Thomas Perez said recently. The new unit also will review Home Affordable Modification Program data to see if servicers are treating minorities fairly and providing them with access to modifications and appropriate reductions in monthly payments. The Senate confirmed Mr. Perez several months ago to run the Civil Rights Division. "It is really ramping up now that he is there," said Paul Hancock, a partner at K&L Gates. The former Civil Rights Division attorney said it is important for lenders to be prepared and develop their own defenses to the type of claims that might be coming. "We expect this is going to be a very aggressive administration and push the envelope as much as they can to challenge lenders," Mr. Hancock said.

Security Atlantic Mortgage of New Jersey, one of 15 lenders subpoenaed by the government two weeks ago, is telling mortgage brokers that it has stopped taking new applications while transferring unclosed loan files to Real Estate Mortgage Network, a nearby lender. The 17-year old company said it made the decision to shut its pipeline in "the wake of unfavorable publicity created by the recent unorthodox HUD press conference and the concerns this press conference has raised with our lenders and investors." As National Mortgage News Online went on deadline, company officials had not returned telephone calls about the matter. SAM said REMN is "actively recruiting" its existing operational staff, including underwriters and closers to fill positions in a new operations center." In an announcement on its website, SAM said it funded more than 17,000 loans, many of them in "government-designated disadvantaged neighborhoods, representing nearly 60% of our production." It added that "it has always been our mission to serve those qualified families most in need of the FHA program." In mid-January HUD subpoenaed 15 mortgage companies, seeking out possible fraud in an effort to stem losses on FHA loans. While publicizing the subpoenas, the agency noted that they had not yet found any evidence of wrongdoing at the firms, and were singling out those with the highest default rates, including SAM.

Orange County prosecutors arrested two Ladera Ranch men - and issued a warrant for a third - accusing them of defrauding more than 400 homeowners in an alleged $1.25 million loan modification scam, according to a report in The Orange County Register. Christopher Lee Diener, 42, Terrence Green Sr. 43, and Stefano Joseph Marrero, 40, are each charged with a felony count of conspiracy and 97 felony grand theft counts, according to the Orange County District Attorney's office. Messrs. Diener and Green were taken into custody and are each being held on $1.5 million bail. They will be arraigned by midweek, at the latest. The business partners are accused of getting upfront fees from homeowners, and falsely promising they can get them loans with cheaper payments in less than 90 days and offering a 100 percent money-back guarantee, prosecutors said.

The Department of Housing and Urban Development on Monday stopped three lenders from originating Federal Housing Administration loans and suspended another as part of a continuing effort to weed out firms that do not follow its underwriting rules. The HUD Mortgagee Review Board permanently withdrew FHA approval from Strategic Mortgage Corp., Oklahoma City, ProMortgage Inc., Claremore, Okla., and Americare Investment Group Inc., Arlington, Texas. FHA also suspended Home Mortgage Inc., of Burr Ridge, Ill., for six months. Strategic Mortgage had a 14.7% early default and claim rate and FHA said it charged borrowers impermissible or excessive fees and submitted a false certification to HUD. The MRB also levied a $71,000 civil money penalty against the Oklahoma City company. ProMortgage had a 7.3% early default and claim rate and HUD said it failed to comply with numerous FHA requirements such as reviews of early defaulted loans, verifying borrower income and reporting employee compensation on appropriate forms. The MRB levied a $124,000 CMP against the firm. HUD terminated Americare for failing to make monthly payments on a settlement involving a $124,000 civil money penalty.

The Department of Housing and Urban Development wants Mortgage Counseling Services of Georgia to indemnify it against potential losses on FHA loans it originated, citing the lender for quality control violations. In a newly released audit, HUD's Office of Inspector General said MCS "did not follow HUD requirements when underwriting eight of 16 FHA loans. HUD insured the eight loans that unnecessarily placed the FHA insurance fund at risk for more than $433,000." HUD said it is recommending that FHA take "appropriate action" against the company "for its noncompliance in closing two loans." A woman working at MCS said she could not comment and referred calls to company CEO Mary Ann White. Ms. White had not returned a telephone call as National Mortgage News went to press. HUD presented the lender with its final audit results in late November, noting that company officials generally disagreed with its findings.

The reporting of suspected mortgage fraud by financial institutions appears to be leveling off, according to new figures released by the Financial Crimes Enforcement Network, a division of the Treasury Department. During the first six months of 2009, firms reported 32,926 suspected cases of mortgage fraud, a slight 1% increase from the same period a year earlier. Still, FinCEN notes that mortgage fraud cases "remain at a historically high level" after six straight years of double-digit growth. The department also says the reporting of mortgage fraud by depositories (as opposed to nonbanks) is continuing to rise. "FinCEN remains focused on its proactive efforts to assist state, local and federal investigators in efforts to use SARs to crack down on mortgage fraud and foreclosure rescue scams, and to identify other emerging trends and patterns," said FinCEN director James H. Freis. "Fraudulent and criminal activity is seldom static and predictable."

The state has closed the loan modification businesses of two Southern California men for allegedly lying to consumers about being supervised by attorneys, according to a report in The Orange County Register. The two operated firms under the trade names Guardian Credit Services, Green Credit Solutions, Green Credit Services, Erickson Law Group, Green Credit Law and PacWest Funding. The state bar, which acted with the Orange County Superior Court in the case, has worked with other state and local officials to crack down on companies promising homeowner aid but not delivering it, the newspaper said. The bar alleges Curtis Melone of Huntington Beach and Christopher Fox of Redondo Beach promised to help homeowners facing foreclosure keep their homes but did nothing. An attorney for the men was not immediately available for comment.

An Anchorage, Alaska-based title agency has settled Real Estate Settlement Procedure Act Section 8 kickback allegations made against it by the Department of Housing and Urban Development and the Alaska Division of Insurance. According to the settlement agreement posted on the HUD website, the regulators had alleged Alyeska Title Guaranty Agency had a sham employment agreement with Kirk Wickersham, the owner of FSBO System Inc., also of Anchorage. Mr. Wickersham was a "title marketer" for Alyeska, marketing the agency's services to FSBO. It is alleged the employment agreement was actually a way to pay referral fees to Mr. Wickersham, who supposedly did not provide any actual services for the payment. The relationship was terminated one year ago, on Jan. 14, 2009, and Alyeska has no other such relationships, the settlement agreement said. In the agreement Alyeska said it denied any RESPA or state law violations, and that entering into the agreement was not an admission of guilt. The agreement required Alyeska to pay $50,000 to both HUD and Alaska DOI ($25,000 each), within 30 days of the effective date; plus an additional $50,000 within one year. The agreement states the payments are not a civil money penalty or fine. There is a third payment totaling $55,000 that is scheduled to be made within two years. This payment will be waived if there are no further RESPA or state law violations and Alyeska remains in compliance with the settlement agreement. Mr. Wickersham is not a party to the agreement. He could not be reached for comment at deadline.

First Catholic Federal Credit Union, Taylor, Mich., has filed suit in federal court to terminate a mortgage servicing contract it has with CUSO Mortgage, claiming CUSO violated its agreement with the credit union by, among other things, failing to file Form 1098s with the Internal Revenue Service for its borrowers. "That's only one of the allegations," said Charles Holzman, a Southfield, Mich., attorney for Holzman Ritter & Corkery, which is representing the credit union in the case. He said the CU hopes to resolve the dispute with a minimum of public attention. In its lawsuit, the $146 million First Catholic claims it should not have to pay a 2% (of outstanding principal balance) termination fee for the servicing contract because the company (a subsidiary of Wescom Central CU of Pasadena, Calif.) failed to live up to the contract. The 2% termination fee is currently being held in an escrow account. Among other things, the suit claims that CUSO Mortgage, which provides servicing for as many as 100 credit unions, has failed to pay delinquent taxes for previous tax years. First Catholic claims its employees have had to perform many of the servicing chores that CUSO was supposed to handle. It is asking the court to release the 2% payment, and to order the transfer of the mortgages to a new servicer hired by the credit union. Representatives from CUSO Mortgage declined to comment.

The HUD Inspector General has subpoenaed 15 Federal Housing Administration direct-endorsement lenders as part of an investigation into why these firms have the highest default and claim rates in the nation. "We are not making any accusations at this time." said Department of Housing and Urban Development IG Kenneth Donohue. "We have no evidence of wrongdoing, but we will aggressively pursue indicators of fraud." Despite the subpoenas, the targeted lenders will continue to originate FHA-insured mortgages. This investigation is "focusing on many of the worst performers in the FHA portfolio," said FHA commissioner David Stevens at a Washington press conference. The FHA chief said he supports the IG's effort to determine why these lenders have such a high claim rate on mortgages that are only 30 months old. "I will be interested to see what comes out of the audit work," said Mr. Stevens. The lenders issued subpoenas include: First Tennessee Bank N.A., Memphis; Alethes LLC, Lakeway, Texas; Security Atlantic Mortgage, Edison, N.J.; Pine State Mortgage of Georgia; Birmingham Bancorp Mortgage, West Bloomfield, Mich.; Alacrity Financial Services, Southlake, Texas; Assurity Financial Services, Englewood, Colo.; D and R Mortgage Corp. Farmington, Mich.; Webster Bank, Cheshire, Conn.; Mac-Clair Mortgage Corp., Flint, Mich.; Americare Investment Group, Inc., Arlington, Texas; 1st Advantage Mortgage, Lombard, Ill.; American Sterling Bank, Independence, Mo.; Sterling National Mortgage, Great Neck, N.Y.; and Dell Franklin Financial, Columbia, Md. These lenders have originated at least 1,000 FHA loans and their claim rates exceed their peers by 200%, HUD said. FHA streamlined refinancings or loans approved by automated underwriting systems are excluded from the claims rate.