Compliance

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.

A federal court in Newark has rescheduled next week's sentencing for U.S. Mortgage President Michael McGrath in the $140 million fraud at CU National Mortgage until April, when the one-time mortgage executive is expected to be given a long prison sentence. Prosecutors and McGrath have agreed to a sentence of 12 to 20 years in prison, according to sources familiar with the case. The sentence must be accepted by the judge. Meantime, two more of the 28 credit unions defrauded in the scheme, TCT FCU in Ballston Spa, N.Y., and Velocity Community CU of Palm Beach Gardens, Fla., have settled their claims with Fannie Mae, which bought their mortgages from McGrath under false pretenses. That makes at least three credit unions that have settled with Fannie, as they join Educational Systems FCU in Maryland. But several other credit unions, some with large claims, are vowing to continue to contest the ownership of their mortgages and of money with Fannie Mae. McGrath pleaded guilty last June to selling as much as $140 million of credit union mortgages to Fannie Mae without the credit unions' authorization and keeping the money. Under his plea agreement, McGrath has agreed to forfeit about $13 million in assets. He apparently lost the remaining funds in the stock market, leaving as much as $125 million of credit unions funds missing. At least two more executives in the company, an accountant and the head of servicing, are also expected to plead guilty in the coming days to being accomplices to the fraud.

The Federal Home Loan Bank of San Francisco has sued nine securities dealers that sold the government sponsored enterprise nearly $20 billion in private-label mortgage backed securities. The San Francisco bank, like other FHLBs, suffered losses due to its investment in AAA-rated private-label MBS. The complaint filed in Superior Court in the County of San Francisco, alleges that the dealers made "untrue or misleading statements" about the characteristics and quality of the mortgage loans underlying the securities. The San Francisco FHLB is seeking to rescind those MBS purchases, which originally cost $19.1 billion. In February, the Seattle FHLB filed a similar lawsuit against issuers to compel them to buy back $4 billion in private-label MBS.

A federal judge has dismissed a shareholder lawsuit against Canadian Imperial Bank of Commerce and four executives for allegedly misleading investors about the bank's exposure to securities backed by subprime mortgages. Dow Jones reported that in an order Wednesday, U.S. District Judge William H. Pauley III in Manhattan threw out the case, saying a number of major financial institutions failed to anticipate a meltdown in the mortgage market and the plaintiffs failed to demonstrate that CIBC and its executives received information that was contrary to their public statements. "Looking back, a full turn of the wheel would have been appropriate. That CIBC chose an incremental measured response, while erroneous in hindsight, is as plausible an explanation for the losses as an inference of fraud," the judge said. "CIBC, like so many other institutions, could not have been expected to anticipate the crisis with the accuracy plaintiff enjoys in hindsight." A lawyer for the lead plaintiff didn't immediately return a phone call seeking comment.

Nationwide, one in every 200 funded residential loans is fraudulent, according to new figures released by First American CoreLogic. FACL analyzed 80 million loans provided through its "Mortgage Fraud Consortium" and identified trends, according to a report in The Orange County Register. The company's findings will come out at the end of this month, but in the meantime, the firm has released some key findings, including figures showing that the fraud rate has been decreasing since 2007 and is now about 25% lower than when it peaked in the third quarter of that year. Since then, lenders have been more aggressive in curtailing mortgage fraud. "In 2010, 2011 and 2012 you won't see nearly the amount of (fraud) reports that you're seeing today," said Tim Grace, senior vice president of fraud analytics. The states where the highest number of fraudulent loans were found include California, Florida, Georgia, North Carolina and South Carolina.

Appraisers are raising alarms that the Treasury Department's decision to use broker price opinions (BPOs) for its new short sales program will exacerbate mortgage fraud and property "flopping." Three appraiser groups are urging Treasury to review the Home Affordable Foreclosure Alternatives program guidelines and prohibit the use of BPOs for property valuations on short sales. Their letter to Treasury secretary Timothy Geithner points to a new trend in sales of distressed properties: "flopping," whereby the value of a home is artificially deflated using a BPO and sold to a related party of the real estate agent who quickly sells that property for a profit. "Generally speaking, real estate agents and brokers are not independent or properly trained valuation specialists. They have an inherent bias toward quick results which produce a fee for themselves, irrespective of whether the lender/servicer/property owner/borrower gets a fair return on a short sale," the March 8 letter says. The Appraisal Institute, American Society of Appraisers and National Association of Independent Fee Appraisers signed the letter. Property "flipping" (as opposed to "flopping") usually involves the quick sale of real estate using straw borrowers (and payoffs to these borrowers) to artificially inflate a home for quick profit or some type of equity stripping scheme. Inflated appraisals play a key role in flipping schemes.

Defunct FHA lender Lend America and its "chief business strategist," Michael Ashley -- who controlled the company -- have effectively been barred from the mortgage industry, according to newly released court documents. The ban springs from a civil suit brought by the Justice Department on behalf of the FHA against the Melville, N.Y.-based nonbank and Mr. Ashley. Amid investigations against the company, LendAmerica closed its doors in early December. FHA found that the company had violated numerous underwriting guidelines and according to interviews conducted by NMN the company was refinancing some loans without paying off the prior liens. In agreeing to a ban from mortgage banking, Mr. Ashley, 44, did not admit liability, according to the agreement filed recently in federal court in Central Islip. In return, anything tied to federal-related loans is off limits -- from appraising properties and marketing mortgages to working as a consultant or housing counselor, Newsday reported. "I'm beyond thrilled to be done with the mortgage business," Mr. Ashley said. "I've had it with the mortgage business. I'm done with everybody chasing me around."

Two subsidiaries of the government-owned AIG have agreed to pay at least $6.1 million to resolve charges that they discriminated against African American borrowers by failing to monitor loan brokers that charged excessive fees. The loans in question were funded through the wholesale channel by AIG Federal Savings Bank, and an affiliate, Wilmington Finance Inc. Neither is still active in wholesale lending. According to the Department of Justice, AIG FSB and WFI "failed to supervise or monitor brokers in setting broker fees. This practice had a disparate impact on African American borrowers, who were charged higher broker fees than white, non-Hispanic borrowers on thousands of such loans from July 2003 until May 2006." American International Group - whose empire includes mortgage firms and a mortgage insurance company - was placed under government control in the fall of 2008. It has received upwards of $150 billion in financial aid and guarantees. The settlement, brought under the Fair Housing and Equal Credit Opportunity Acts, was filed Thursday in conjunction with a complaint made by DOJ in U.S. District Court in Delaware. The settlement, which is subject to court approval, stipulates that the AIG affiliates will pay up to $6.1 million to African American customers who were charged higher broker fees than similarly-situated, non-Hispanic white customers. The two also will invest at least $1 million in consumer financial education efforts. AIG is in the process of liquidating its $20 billion nonprime whole loan portfolio.

The Mortgage Bankers Association says the new good faith estimate disclosures should be given enough time to affect market behavior before the Federal Reserve Board moves ahead with a rule restricting certain forms of lender compensation. The Department of Housing and Urban Development's redesigned GFE went into effect Jan. 1, providing mortgage applicants with new disclosures on lender and originations fees. "We need to give it a chance to work," said MBA regulatory counsel Ken Markison. "The right move is for the Federal Reserve, at this time, to let nature takes its course," he said, speaking at a broker conference. Fed officials are currently reviewing 4,000 comment letters on its Truth in Lending Act proposal to curb abusive yield spread premiums and prevent loan officers and brokers from steering borrowers into more expensive loans. If the Fed decides to move ahead with its TILA rule, prime mortgages should be exempt from the new restrictions on commission-based compensation, Mr. Markison said. In addition, "We don't think the FHA and VA markets need or require" these new TILA regulations, he said.

A second insurer - a Lloyd's of London syndicate - is trying to escape liability in the massive U.S. Mortgage/CU National Mortgage fraud for which almost 30 credit unions are seeking recompense of as much as $125 million. The Lloyd's syndicate has filed suit in federal court in Newark seeking to block any potential insurance claims against it by three CUs: Picatinny Federal Credit Union, Suffolk Federal Credit Union and Sperry Associates Federal Credit Union. The CUs were swindled out of more than $50 million by U.S. Mortgage President Michael McGrath. The syndicate claims the fidelity bond it held for U.S. Mortgage and McGrath should be rescinded because of the fraud McGrath has confessed to. The group is the second insurer seeking to block claims in the case. The first was CUNA Mutual Group, which is seeking a court order declaring that the bond it holds for 23 of the U.S. Mortgage credit union victims does not cover the McGrath fraud. Four of the credit unions are counter-suing CUNA Mutual to secure coverage for their losses. The Lloyd's syndicate holds a Mortgage Bankers and Mortgage Brokers Professional Liability Insurance Policy and a Mortgage Bankers Fidelity Bond on U.S. Mortgage, which filed for bankruptcy a year ago in the face of the fraud probe into McGrath's actions. Since then, McGrath has pleaded guilty to fraudulently selling as much as $140 million of mortgages he held on behalf of credit unions to Fannie Mae and keeping the funds. After almost $15 million in assets to be forfeited by McGrath, credit unions are still out almost $125 million.

At least 1,000 victims have lost more than $100 million in cases of real estate fraud — including loan modification scams — referred to a special unit of the Orange County District Attorney's office, according to a new report. "The number of referrals has been overwhelming, with more than 346 referrals to date," says a report issued by the DA's office. (The unit that investigates RE fraud was launched last year.) The report's findings were first published by The Orange County Register. The DA says a "vast majority" of referrals have come directly from victims of real estate fraud directly to its office. A "significant number" of cases involve loan modification schemes, it said. Several cases were cited, including one in which three men were charged with 101 counts of fraud in a loan modification scheme.