Compliance

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.

The Office of Thrift Supervision was more focused on blocking the Federal Deposit Insurance Corp. from reining in Washington Mutual Bank than it was in regulating the thrift company itself, congressional investigators and two watchdogs said Thursday. A day before officials representing both agencies are scheduled to answer for the biggest failure in U.S. history, Sen. Carl Levin, released a scathing report on Wamu's 's oversight, asserting that the OTS viewed the Seattle company as a "constituent," repeatedly ignored its own examiners' findings about Wamu's risky strategy and responded to the FDIC's more aggressive tone by fighting a turf war. "Bank regulators are supposed to be our first line of defense against unsafe and unsound banking practices, but OTS didn't defend us," the Michigan Democrat told reporters ahead of Friday's hearing of the Permanent Subcommittee on Investigations. "Instead, although OTS repeatedly identified serious problems with Wamu, it failed to act based on the problems that it itself saw. These agencies, in particular the OTS, are supposed to be like a fire inspector to protect us ... but instead stood and watched idly while the incendiary threat grew higher and higher." Ahead of the hearing, Levin released a raft of documents, including internal FDIC and OTS memos that documented their arguments during Wamu's final days. Earlier this week, Levin also released internal Wamu documents detailing the company's risky lending practices and held a contentious hearing with its former CEO Kerry Killinger.

The Securities and Exchange Commission on Friday accused Goldman Sachs & Co., of civil fraud, charging that the firm created a synthetic CDO -- with the help of a hedge fund that was shorting the same bond -- and then marketed the RMBS to investors who eventually lost an alleged $1 billion on the deal. The suit, however, has just two defendants: Goldman and company vice president, Fabrice Tourre, 31, who the SEC says devised the bond known as ABACUS 2007-AC1 which came to market in 2007. At press time the hedge fund involved in the alleged scheme -- Paulson & Co. -- said it would not comment. Goldman Sachs denied the charges, saying it would "vigorously" defend itself. In a statement Robert Khuzami, director of the SEC's enforcement division, called the CDO -- which was backed by subprime loans -- "new and complex but the deception and conflicts are old and simple: Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party." Since the collapse of financial markets in 2008, Paulson & Co. has made headlines worldwide for earning billions by shorting the subprime market, in particular the ABX Index, which represents the value of outstanding subprime MBS. During the height of the subprime boom, Goldman -- unlike many other Street firms -- did not own any large B&C lenders, nor was it a top ranked issuer of subprime MBS. The agency is seeking to recoup profits reaped on the deal.

Former Washington Mutual CEO Kerry Killinger on Tuesday blamed federal regulators and an insular Wall Street culture for the demise of the mega thrift, saying that firms that were "too clubby to fail" were protected during the financial crisis of 2008. The Seattle-based thrift, once the nation's largest, was a top-ranked subprime and payment-option ARM lender. Last decade, it grew rapidly by purchasing prime and nonprime shops, including A- to D lender, Long Beach Mortgage, a firm controlled by subprime magnate Roland Arnall. Killinger, in prepared testimony before the Senate Homeland Security and Governmental Affairs Committee, complained of "unfair treatment" of WaMu, the largest thrift (or bank) failure in history in 2008, when it was seized by the government and then sold to JPMorgan Chase. Killinger, who was forced out prior to the JPM sale, argued that the seizure "was unnecessary" and said the company "should have been given a chance to work through the crisis." However, committee chairman Carl Levin said the thrift's subprime loans were rife with fraud and may make a criminal referral to the Justice Department. Levin is holding four hearings on the financial crisis. Based on an 18-month investigation, Levin said, he believes that certain provisions of pending financial reform legislation, such as the creation of a consumer protection agency and a requirement that lenders maintain a stake in loans they sell to the secondary market, could have helped avoid, or lessen the impact of, the thrift's failure. "A lot of proposed reforms will gain additional support, we believe, from these findings," Levin said. "It is my hope that these hearings, these findings, give a boost, a momentum to strong regulatory reform in many, many different ways."

A pair of guilty pleas has been entered in a Georgia case where the defendants were accused of defrauding reverse mortgage lenders and the Federal Housing Administration. Kelsey Torrey Hull and Jonathan Alfred Kimpson admitted to charges that they faked the downpayment required for seniors to qualify for a purchase-money reverse mortgage. They created bogus gift letters from "relatives" for amounts ranging between $50,000 and $105,000. They also used fake HUD-1 settlement statements which purported to show the sale of nonexistent assets. The defendants provided the downpayment funds-not the senior citizen borrowers. Prosecutors said inflated appraisals were involved as well. Kimpson pleaded guilty to an additional charge of aggravated identity theft for stealing the identity of Realtors and their passwords to access the Georgia Multiple Listing Service and create fake property listings and sales at inflated amounts. Hull also was guilty of transferring properties into seniors' names to obtain reverse mortgages through the refinance portion of the Home Equity Conversion Mortgage program. He diverted these loan proceeds to his shell companies. Hull faces up to 30 years in jail and a fine up to $1 million on each of the conspiracy and bank fraud counts. Kimpson faces similar jail time, plus an additional two years in jail and a fine up to $250,000 for the identity theft conviction. Both are scheduled to be sentenced on July 16.

Wells Fargo is the newest lender to implement First American CoreLogic's LoanSafe Fraud Manager in order to minimize loss from fraud and increase operational efficiency, according to First American Core Logic, Santa Ana, Calif. In addition to Wells Fargo, the technology tool is now in active evaluation with 10 other lenders, signaling significant market momentum for the solution and continued lender focus on solving the mortgage fraud problem. First American CoreLogic fraud scientists have created patented fraud models that assign each loan a fraud risk score spanning from one (lowest risk) to 999 (highest risk). By using these scores, lenders can realize revenue increases through quicker and more efficient underwriting and increase revenue by reducing default and foreclosure-related losses associated with fraud. The solution now also offers improved reporting with more loan information categories displayed and alerts grouped by likely fraud types. Additionally, this new fraud detection solution offers more input fields for greater functionality and tracking. The First American CoreLogic 2X guarantee promises that lenders will save twice as much in fraud losses as they did prior to using LoanSafe Fraud Manager and the savings will be at least twice as much as the cost of the solution.

The Department of Housing and Urban Development has taken actions against two lenders and banned them from making Federal Housing Administration-insured loans. HUD's Mortgagee Review Board permanently withdrew the privileges of RSA Financial Inc., Atlanta, and 1st Alliance Mortgage, Houston, to participate in the FHA program. The board also imposed a civil money penalty of $267,900 against 1st Alliance and a $15,000 CMP against RSA Financial. 1st Alliance allegedly used independent contractors to originate 708 FHA loans after certifying they were full-time employees. HUD also claims the Houston-based firm failed to properly ensure that fees "paid outside of closing" were listed on the borrower's HUD-1 settlement statement. HUD discovered that the owner of RSA Financial had a criminal conviction and had been debarred by HUD on two occasions. The MRB also claims that the Atlanta mortgage company was not properly licensed in Georgia. And RSA engaged in prohibited branch arrangements and violated other FHA standards, it found. HUD also reported that Franklin First Financial, Melville, New York agreed to pay a $413,500 civil money penalty and indemnify FHA for possible losses on 31 loans.

The Department of Housing and Urban Development has taken actions against two lenders and banned them from making Federal Housing Administration-insured loans. HUD's Mortgagee Review Board permanently withdrew the privileges of RSA Financial Inc., Atlanta, and 1st Alliance Mortgage, Houston, to participate in the FHA program. The board also imposed a civil money penalty of $267,900 against 1st Alliance and a $15,000 CMP against RSA Financial. 1st Alliance allegedly used independent contractors to originate 708 FHA loans after certifying they were full-time employees. HUD also claims the Houston-based firm failed to properly ensure that fees "paid outside of closing" were listed on the borrower's HUD-1 settlement statement. HUD discovered that the owner of RSA Financial had a criminal conviction and had been debarred by HUD on two occasions. The MRB also claims that the Atlanta mortgage company was not properly licensed in Georgia. And RSA engaged in prohibited branch arrangements and violated other FHA standards. HUD also reported that Franklin First Financial, Melville, New York agreed to pay a $413,500 civil money penalty and indemnify FHA for possible losses on 31 loans.

Wolters Kluwer Financial Services, Minneapolis, is marketing its new RESPA Post-Implementation Audit Service to banks and credit unions. The company said that since changes to the Real Estate Settlement Procedures Act went into effect on Jan. 1, 2010, financial institutions have found several common compliance challenges, including meeting the new fee tolerance and good-faith estimate redisclosure requirements. Another challenge is the lender responsibility to make certain their mortgage brokers and settlement agents are in compliance as well. The review includes an examination of an institution's lending, compliance, vendor management and staff training procedures. It also includes a loan file review that looks at GFEs and HUD-1 and HUD-1A forms for accuracy and adherence to all RESPA requirements. WKFS highlights any areas of potential concern and suggests ways in which policies, procedures and documentation can be improved.

CitiFinancial, a nonbank that was once a powerhouse in subprime lending, Wednesday agreed to pay a $1.25 million fine for not correctly reporting its residential origination data to the Federal Reserve via the Home Mortgage Disclosure Act. The settlement, however, was not between the Fed and CitiFinancial but instead was worked out by state banking supervisors who discovered the reporting problems as part of a probe into compliance with consumer protection laws. The deal was worked out between CitiFinancial, an affiliate of Citigroup, and The Conference of State Bank Supervisors/American Association of Residential Mortgage Regulators. (Roughly 35 states were party to the agreement.) The reporting violations occurred on 91,127 loans between 2004 and 2007. Prior to that, the lender was in compliance, regulators said. According to CSBS, CitiFinancial of Baltimore, failed to report the loans in its HMDA filings. The lapse was caused by "internal system errors" at the nonbank, said CSBS. CitiFinancial eventually submitted HMDA reports on the loans in question. Regulators said that even though the loans were omitted by CitiFinancial the lender's behavior "does not in any way demonstrate a pattern or practice of discriminatory lending." The loans accounted for about 10% of CitiFinancial's production volume during the time in question.

The California Attorney General over the weekend closed two companies engaged in what it calls "fraudulent foreclosure-assistance" scams that gave consumers "false hope after paying upfront fees for nonexistent loan-modification services." In closing U.S. Foreclosure Relief Corp. and H.E. Servicing, Inc., AG Edmund Brown secured $1 million in court ordered restitution against the firms and officers George Escalante and Cesar Lopez. The state had filed suit against the firms in a joint action brought with the Federal Trade Commission. The AG's office said an investigation found that "the defendants used aggressive telemarketing tactics to convince distressed homeowners to pay $1,800 to $2,800 in upfront fees for loan-modification services that included reductions in principal and lower interest rates." The AG claims that in sales calls, H.E. Servicing claimed it had successfully negotiated 10,000 loan modifications. However, a full review of internal records found the company opened only 2,960 loan-modification files and completed only 311. The state says California homeowners accounted for 15% to 20% of the company's opened loan-modification files. The two men could not be reached for comment at press time.