Compliance

Calyx Software has expanded The Calyx Network with an interface update that provides links to new compliance, fraud prevention and verification vendors. The Calyx Network allows users of the Calyx Point LOS application to connect directly with lenders and mortgage service providers, automating data exchange. The May update contains a new connection to three new mortgage service providers including fraud detection and compliance vendor Interthinx Inc., product and pricing vendor Mortgage Pricing System and verification services T Transcript Processing. The Calyx Network interface update is automatically installed into Point versions 7.0 and higher when users open their software and connect to the Internet.

The Senate Tuesday rejected an attempt to strike from the regulatory reform bill new authority for state attorneys general to take enforcement actions against national banks for violations of federal consumer protection laws. The amendment by Sen. Bob Corker, R-Tenn., to keep state AGs out of national banks failed on a 55-43 vote. Corker also wanted to strike a section of the bill (S. 3127) that rolls back the Office of the Comptroller of the Currency's powers to pre-empt state consumer protection laws. The Senate went on to pass an amendment by Sen. Tom Carper, D-Del., that clarifies the state AG has the authority to enforce rules promulgated by the proposed Consumer Financial Protection Bureau which will have oversight over residential lending. "It preserves the state attorneys general role in protecting their citizens from abusive practices," said Sen. Chris Dodd, D-Conn. The Carper amendment clarifies that the AGs can enforce the CFPA rules to prevent unfair, deceptive and abusive lending practices, but AGs cannot use their own interpretations of the underlying statutes. The Senate approved the Carper amendment by an 80-18 vote.

Federal prosecutors in Newark are negotiating guilty pleas with at least three more executives of U.S. Mortgage/CU National Mortgage in the fraudulent sale of $140 million of credit union mortgages to Fannie Mae, according to sources close to the case. Court records in last week's guilty plea by Leroy Hayden, the former servicing manager at U.S. Mortgage, name three other co-conspirators who have yet to be charged in the case. Sentencing for Michael McGrath, the company's president who allegedly masterminded the huge fraud, has been delayed until July while other suspects negotiate guilty pleas, several sources told The Credit Union Journal. Hayden told authorities that he provided reports to credit unions falsely stating that loans that had been sold were still in the credit unions' portfolios. He also allegedly falsified records, at McGrath's direction, to conceal these fraudulent sales. Hayden also admitted that he modified data in U.S. Mortgage's servicing system to help carry out the scheme. As many as 28 CUs in the mid Atlantic stand to lose as much as $125 million in the case and are frantically negotiating with Fannie Mae for the return of their mortgages. CUJ is an affiliate of National Mortgage News.

The former servicing manager of U.S. Mortgage Corp./CU National Mortgage has pleaded guilty to conspiring to defraud credit unions and Fannie Mae in the $140 million mortgage scandal. Leroy Hayden, 47, was convicted of conspiracy to assist U.S. Mortgage/CU National president Michael McGrath in his scheme to fraudulently sell Fannie Mae mortgages that the company was servicing on behalf of credit unions. "Frauds of this magnitude don't happen without someone to cook the books and push the paper," said U.S. Attorney Paul Fishman of Newark, N.J. "Leroy Hayden had to decide whether to go along with his boss' fraud or alert law enforcement to the scheme. Unfortunately, he made the criminal choice." Hayden told authorities he provided numerous reports to credit unions falsely stating that loans that had been sold were still in the credit unions' portfolios, and falsified records, at McGrath's direction, to conceal these fraudulent sales. Hayden also admitted that he modified data in U.S. Mortgage's servicing system to help carry out the scheme. As many as 28 credit unions in the Mid Atlantic states stand to lose as much as $125 million in the case and are frantically negotiating with Fannie Mae for the return of their mortgages. Several of the credit unions are also in litigation with their insurer, CUNA Mutual Group's CUMIS Insurance Society over coverage of the fraud. McGrath pleaded guilty last June and is scheduled to be sentenced in July.

The National Credit Union Administration, as liquidating agent for the failed Heritage West Federal Credit Union, has filed suit against several member/borrowers of the defunct Salt Lake City CU, claiming they defaulted on millions of dollars in speculative real estate loans only to buy the properties back at steep discounts in foreclosure sales. The suits, removed to a federal court, are the latest in a variety of legal actions surrounding a troubled Salt Lake City residential development called Castle Stone Homes that was tied closely to the one-time $330 million credit union. Dozens of the project's borrowers, who were promised high returns, obtained loans through the credit union, which was acquired by Virginia's Chartway Federal Credit Union in a December supervisory merger engineered by NCUA. The case is reminiscent of those involving two big credit union failures: Norlarco Credit Union, and Huron River Area Credit Union, that financed speculative real estate projects in Florida's Gulf Coast. In the Salt Lake City case, the members claim that HeritageWest engaged in a variety of schemes to make loans readily available for the residential development. According to various courts documents, between 2005 and 2007 Castle Stone solicited individual investors with high credit scores to participate in their residential development designed to appeal to first-time investors that would provide big profits. After one of the initial lenders for the project, America First CU backed out, HeritageWest agreed to provide capital for the investors. Lawyers for Castle Stone did not return phone calls. NCUA declined to comment, saying it does not discuss cases in litigation.

Beginning June 1, lenders originating mortgages being sold to Fannie Mae will have to pull a second credit report just before the loan closes. The new quality control requirement is designed to prevent a type of mortgage fraud called "shotgunning," but the guidelines could occasionally send lenders on wild goose chases. By pulling a second credit report, lenders can find out whether other creditors have recently requested information about the mortgage applicant-a red flag indicating someone might be trying to obtain several loans (from multiple, unwitting lenders) on the same property. Typically, a shotgun fraudster skips town with the proceeds of all his loans. Most of the lenders do not recoup a cent because their mortgages are subordinate to the first one recorded and the home will not fetch enough in a sale to cover the junior liens. Will Dillard, a vice president of operations at SettlementOne Credit Corp., a San Diego reseller of credit data, told American Banker that pulling a second credit report would help stop such frauds but that lenders might also waste time checking out false alarms. "If they see another inquiry, Fannie would like to see lenders query those creditors," Dillard said. "If you're at the funding table ready to fund and you see a new inquiry popping up, the question is, do you send your underwriter out...to track down Honda Motor if the borrower is also trying to buy a new car?"

A risk analysis firm said it is helping mortgage professionals access tax return amendment data that more common industry tax form verification efforts do not include in order to head off a growing fraud concern. The National Credit-Reporting System Inc. (NCS)/Credit Central, Egg Harbor, NJ, said it has added to its report that summarizes tax return transcripts a summary of the IRS's Record of Account transcript. The IRS Tax Return Transcript more commonly used by the industry does not provide information on amendments to returns, said Cecil Bowman, an NCS senior vice president and former IRS senior manager. The company instead recommends data from the Record of Account transcript that does include this information along with taxpayer identification number verification.

Fannie Mae during 2008-2009 found the highest amount of fraud was in the Southeast at 32%, followed by the Midwest, California and the Northeast. "The Northeast region has increased dramatically in the last couple of years. We've seen rings with inflated values, undisclosed liabilities or 'shot-gunning,' and fraud involved with closings and settlement companies," Amy Heinz, director, mortgage fraud program, at Fannie Mae told attendees at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago. Florida accounts for more fraud than in any single region, she said. Fannie also is seeing a trend toward back-to-back property flips perpetrated by individuals who buy low and then convince lenders to sell at inflated prices. After these sales, the properties default, Heinz said.

The full Senate is closer to taking up the financial services regulatory reform bill now that Sen. Richard Shelby, R-Ala., has declared an impasse in his negotiations with Sen. Christopher Dodd, D-Conn. Sen. Shelby noted that the Dodd bill goes too far in regulating derivatives and creating a consumer protection agency with "unchecked authority." But he can no longer expect his fellow Republicans to block consideration of the bill by the full Senate. "Now that my negotiations with chairman Dodd have reached an impasse, I thank my Republican colleagues for their support and defer to their individual judgments on whether the Senate begins debate on this bill," Sen. Shelby said. Senate Democrats tried three times this week to bring the Dodd bill to the Senate floor and start the amendment process but the Republicans blocked it. Senate debate on the reform bill is slated to start Thursday afternoon. "It has been obvious for some time that we are going to have a banking bill this year and this moves it one step closer," said lobbyist Jim Butera of Butera & Andrews.

Residential originations rose last year and along with them, the industry experienced an uptick in appraisal and valuation fraud, according to LexisNexis Mortgage Asset Research Institute. The most troubling fraud trends include fake tax returns and income and application misrepresentation, the company said in its annual fraud report. Speaking at a press conference during the Mortgage Bankers Association's fraud show, LNMARI noted that Florida is leading the nation in suspected fraud followed by New York and California. In 2009, 33% of all reported frauds involve appraisal misrepresentation, up from 22% in 2008. States experiencing noticeable gains in fraud include Arizona, New Jersey and Virginia. "Loss mitigation distractions have opened the door for opportunistic fraudsters to take advantage of desperation, confusion and complacency," said Denise James, director of real estate solutions for LNMARI. "As lenders try to stave off mounting losses on nonperforming loans, they are trying to modify loans that have been falling into default," said James. "Fraudsters are taking advantage of desperate and confused consumers." Foreclosure rescue and loan modification scams are increasing, and the company is seeing a significant rise in short sale scams.

Freddie Mac is seeing more REO property-flip fraud cases in which investors recruit people to pool money in an LLC and purchase bank-owned properties for cash, according to Martin Abad, associate director, Freddie Mac. "The logic behind it is that if you submit a cash offer, it's more likely to get approval from the bank, get a better deal and close quickly," Abad said at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago. Property theft is a new type of fraud, he told attendees at the general session on "Mortgage Fraud and the Secondary Market." When a lender or Fannie or Freddie takes a property back at REO, there are people who will record fake rent deeds and transfer title from the banks or GSE to an LLC, he said. "There is an online recording service where you can pay a fee and record any document you want. You don't have to go to the county recorder's office." In an active case he is currently working on, Abad said the fraudster listed the properties for rent on Craigslist and is now attempting to sell some of these properties. Half of the loans involved in Freddie Mac's fraud cases involved non-owner-occupied properties. What had been loan modification fraud is turning into short sale fraud, because scammers can make more money in a shorter period of time with the latter, he said. In 2009, short sale activity at Freddie Mac increased by 250% from the previous year. In the first three months of 2010, it has increased 65%.

The Goldman Sachs official at the center of an SEC civil fraud case against the company regarding a subprime CDO declared his innocence to a Senate subcommittee on Tuesday. The Goldman executive, Fabrice Tourre, was accused-along with Goldman-of selling a subprime CDO to investors in early 2007 without telling those investors that one of the firms helping pick the collateral was also shorting parts of the bond. Tourre told the Senate Permanent Committee on Investigations that all charges against him are false and that he will defend himself in court. He said the bond in question, which caused an estimated $1 billion in losses, "was not designed to fail."

The Federal Bureau of Investigation is currently juggling 3,000 open mortgage fraud cases, but is facing challenges managing its resources. Speakers at an industry trade show on mortgage fraud told attendees that rather than spend more money to prosecute fraud, government agencies must utilize their available resources to be as smart and as effective as possible. Ninety-three U.S. attorneys across the nation are working to determine enforcement efforts to fit the needs of individual cases in local communities, said John D. Arterberry, executive deputy and fraud chief of the Justice Department's criminal division. "Each U.S. attorney has the opportunity to tailor his or her enforcement," he said. "The needs in the Northern District of Illinois are going to be different than Fargo, N.D., compared to what is happening in Phoenix or Washington, D.C.," said Arterberry. Speaking at the same show, which was put together by the Mortgage Bankers Association, FHA officials said they are spending an increasing amount of their time focusing on risk while carefully reviewing early payment defaults for signs of fraud. Vicki Bott, deputy assistant secretary for single-family housing at FHA, said the agency is stepping up enforcement through its Mortgagee Review Board. "We are not afraid to take action on lenders who are doing fraudulent activity," she said. "We are looking at how principles of lenders jump around. We are really beefing up our process around loan-level review. We are bringing delinquencies into our cycle of reviewing."

Top executives at two credit rating agencies defended themselves Friday against charges that, to retain market share, they knowingly issued inflated ratings on mortgage-backed securities before the financial crisis and put off making needed changes in their standards. Officials from Moody's Investors Service and Standard & Poor's tried to rebut a congressional report regarding their actions, arguing that they had been public about flaws in the mortgage market and had made changes to better adjust to risk. "Moody's did see the escalating housing prices and the loosening of standards in subprime lending practices, we published on these observations, and we incorporated our more unfavorable views into the way we assigned ratings," said Raymond McDaniel, chairman and CEO of Moody's, in a hearing by the Senate Permanent Subcommittee on Investigations. But former employees of S&P and Moody's painted a much different picture, telling lawmakers that executives pressured analysts to maintain market share. They were discouraged, they said, from raising questions about the credit quality of some loans backed by mortgages. Eric Kolchinsky, a former director of Moody's derivatives group, testified that in October 2007, days after the firm downgraded $33 billion in subprime bonds, he was reprimanded by e-mail because quarterly market share fell to 94%, from 98%.

A senator from New York where several credit unions were victims of the $140 million U.S. Mortgage/CU National Mortgage fraud is calling on Fannie Mae's regulator to engineer a settlement on the disputed claims. In a letter to Edward DeMarco, director of the Federal Housing Finance Agency, Democrat Charles Schumer urges the agency and Fannie Mae to "work with the affected credit unions to come to a fair resolution of this dispute that does not threaten the viability of the credit unions." Schumer noted, "Ultimately, I am concerned about the fiscal well-being of thousands of my constituents who may suffer adverse financial impacts" because of U.S. Mortgage Corp. "The magnitude of this potential loss will have a significant adverse impact on these credit unions and their members, some of whom are employees of the U.S. government, as well as state and local governments." Schumer declined requests for further comment. The congressional intervention comes as Fannie Mae has begun mediation with several of the credit unions aimed at settling the dispute. Several New York credit unions, including Suffolk FCU, Sperry Associates FCU and TCT FCU, were among 28 credit unions that had their mortgages fraudulently sold to Fannie Mae by CU National president Michael McGrath. McGrath has pleaded guilty to the fraud and is scheduled to be sentenced next month.

First American CoreLogic, a provider of advanced property and ownership information, analytics and services, is partnering with The Prieston Group to offer a comprehensive fraud prevention and insurance solution to mortgage lenders. The solution combines First American CoreLogic's pattern-recognition fraud tool with TPG's risk management services, indemnity programs and training. Through this partnership, TPG will help lenders establish business rules and guidelines and employ the First American CoreLogic LoanSafe Fraud Manager tool to enforce those policies in the lender's daily operations. Lenders who use this joint solution will be insured against fraud losses by Lloyd's of London, which has a special relationship with TPG. The anti-fraud tool integrates patented pattern-recognition technology with a national property and fraud database. Tim Grace, senior vice president of fraud solutions at First American CoreLogic, said fraud is a $13 billion problem for the lending and investor communities. "This partnership will help lenders focus on best practices, products and processes and provide enterprise- and loan-level metrics to measure results. Our new joint effort will improve loan quality and rebuild confidence levels among lenders and investors," added Arthur Prieston, TPG's chairman.

Pennsylvania is cracking down on misleading marketing tactics from residential lenders that are hunting for refinancing opportunities. The Department of Banking's Office of Consumer Services said that some homeowners are receiving letters that look like they come from their lender or the federal government. In some cases, the company that sent the letter only has its name mentioned in fine print. Consumers call the number on the solicitation thinking they are talking with their lender or the federal government, but discover they are actually speaking with a competing lender. "These communications are brazenly misleading and intended to frighten and confuse consumers," said secretary of banking Steve Kaplan. "We are contacting the offending institutions as well as their marketing companies and ordering them to put an end to this practice."

The Justice Department is seeking a permanent injunction against Lend America and a top executive who controlled the company, Michael Ashley-but no monetary penalties-for defrauding the Federal Housing Administration. A privately held nonbank based in Melville, N.Y., Lend America closed its doors in December, though it has not filed for bankruptcy protection, an event expected by many vendors and third parties that once did business with the company. "Rather than seeking monetary relief, the United States seeks equitable relief barring Lend America from engaging in conduct to defraud the United States," said assistant U.S. attorney John Vagelatos of the Eastern District of New York in a new "notice of motion for default judgment." In a civil suit filed last October, Vagelatos' office won a preliminary injunction to stop Lend America from originating FHA-insured loans. The U.S. Attorney's office is now seeking a default judgment because Lend America and its principals have not appeared for hearings or hired attorneys to represent them. If Lend America does not contest the default judgment by April 30, Vagelatos will ask the judge to impose a permanent injunction on Lend America, its agents and employees from originating, underwriting or endorsing FHA-insured loans. (However, for all intents and purposes, Lend America has no employees left and is out of business.) The AUSA also will ask the court to permanently enjoin those individuals from "advertising, marketing to the public or otherwise soliciting business to originate or otherwise make federally related loans or federally-insured home loans, including but not limited to, those loans defined in the Real Estate Settlement Procedures Act." Vagelatos filed the motion for default judgment on April 19 with the U.S. District Court for the Eastern District of New York.

Enforcement of fair lending laws is a "top priority" of the Justice Department, a top DOJ official told a Senate panel on Tuesday. Assistant attorney general Thomas Perez noted that the agency's civil rights division is working on 39 lending discrimination cases -- 29 of which were referred to DOJ by the federal banking regulators. In the Obama Administration, the civil rights division formed a special Fair Lending Unit, appointing Eric Halperin, a former chief litigator for the Center for Responsible Lending, to head the effort. In March, DOJ reached a $6 million settlement with American International Group to settle allegations that AIG allowed mortgage brokers to charge African Americans "excessive fees" on home mortgages. Mr. Perez testified that this "landmark case" sends a "clear signal to lenders that they must take steps to ensure that brokers with whom they partner do not engage in discrimination."

Goldman Sachs, its image tarnished by a new subprime-related legal action brought by the government, on Monday made additional comments on the case, including a revelation that it too lost money on the CDO transaction in question. Goldman now claims the firm lost more than $90 million on the deal, which is still paltry compared to almost $1 billion in estimated losses suffered by investors. In answering allegations levied by the Securities and Exchange Commission, the Wall Street firm says it made "extensive" disclosures to investors IKB, a large German Bank, and ACA Capital Management, which it called "sophisticated CDO market" participants. Goldman says the "risk associated with the securities was known to these investors." On Friday the SEC accused Goldman and an executive involved in the transaction of misleading clients on a subprime bond known as ABACUS 2007-AC1. Goldman marketed the offering in 2007. The SEC accused the firm of civil fraud, saying it created the CDO with the help of a hedge fund that was shorting the same bond but did not disclose the relationship to investors.