Compliance

The National Reverse Mortgage Lenders Association is in the final stages of "publicly naming" an overly aggressive third-party lead generation company which has consistently violated the group's ethics and standards policies. A public naming is the last of six different sanctions that NRMLA can place against its members. The company, which still has the opportunity to appeal, already has been placed on probation, then suspended and finally expelled from the group, according to President Peter Bell, who declined to reveal the identity of the rogue company. "Now we're ready to report (the company) to the authorities and alert our members," he said. Four to six cases a month come before NRMLA's ethics panel, 70% because of problems with their advertising, the NRMLA leader told the conference.

"Several dozen" of the 1,200 to 1,500 fraud investigations currently underway within the Department of Housing and Urban Development's Inspector General's Office involve home equity conversion mortgages, a group of reverse mortgage specialists meeting in San Diego were told. Some cases involve a single loan; others, hundreds of loans, and they run the gamut of industry practitioners - from single loan officers to big companies, according to Michael Stolworthy, the assistant special agent in charge of mortgage crime investigations in the IG's office, which is the law enforcement arm of HUD. "I'm not saying fraud is widespread, but some of these are not just fly-by-night outfits," Mr. Stolworthy told the National Reverse Mortgage Lenders Conference. "This is not an industry permeated with fraud, but it's not perfect either." The mortgage cop didn't name names, but he said one miscreant's name has popped up on straw buyer cases involving more than 300 properties. In another investigation that involved the well-known Crips gang of street thugs, 25 seniors were sold highly inflated properties using the popular HECM for purchase program. Despite these ongoing investigations, Mr. Stolworthy extolled the virtues of reverse mortgages. "I'm a big supporter; HECM is an excellent product," he said. "But an industry that's often on the defensive doesn't need this kind of black eye."

A college professor in Tennessee has been sentenced to a year and a day in jail following her conviction early this year for mortgage fraud. Pamela Gail Holder was convicted by a jury on charges of bank fraud and wire fraud. Holder, a professor of nursing at Middle Tennessee State University, was accused of orchestrating a multi-million dollar mortgage fraud scheme that involved a straw buyer" with a good credit score. This buyer was deceived by Holder into borrowing $2.4 million for the purpose of purchasing a $1.5 million dollar home in Hendersonville, Tenn. Holder helped prepare or send false documents that, among other things, falsely claimed that the straw buyer was president of "Team Fat Man," an automotive-sales business owned by her deceased husband, and greatly inflated the straw buyer's income. The scheme involved loans obtained at Bank of Nashville, Countrywide Home Loans and First Tennessee Bank. The loan went into default and the property was foreclosed upon.

The Department of Housing and Urban Development will soon publish an advance notice of rule making concerning reverse mortgages that the agency's official who oversees the Home Equity Conversion Mortgage program says "a lot of people may find disconcerting." The notice, which is awaiting approval from the Office of Management and Budget, "asks some very serious questions," Meg Burns, the director of the office of single-family program development at the Federal Housing Administration, said at the National Reverse Mortgage Lenders Association's annual conference in San Diego. One "straight out" question that will be asked is whether borrowers should be allowed to pocket the proceeds of a reverse loan and use the money as the basis of an annuity against falling prices. Another question is whether or not a limit should be placed on how the proceeds are used by the borrower, and a third is whether draws should be limited unless the borrower has an immediate need. "We think it's appropriate to ask these questions because these are the issues the come up all the time with lawmakers," Ms. Burns told the conference. She added HUD would soon publish a proposed regulation that would require all reverse mortgage lenders to determine if the income of a would-be borrower is enough to meet his and/or her current obligations. If so, HUD may place restrictions on how much of the loan proceeds a borrower can draw. Yet another idea on the table at HUD is what's called a "HECM Mini" in which borrowers whose equity in their homes was more than needed would tell the lender what percentage of the value they wanted and the maximum claim limits would be adjusted accordingly.

A former Washington area stripper who ran a foreclosure rescue scam in and around the nation's capitol has been sentenced to 12 years in prison after being convicted of stealing millions from struggling homeowners. Joy Jenise Jackson, former president of Lanham, Md.-based Metropolitan Money Store, also was ordered to pay $16.9 million in restitution. MMS operated as a loan brokerage firm, using table funding from such subprime lenders and New Century Financial Corp. and Argent Mortgage, both of which are no longer in business. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, Jackson co-founded MMS, which offered foreclosure consultation and credit services to financially distressed homeowners. From September 2004 to June 2007, Jackson and others fraudulently promised to help homeowners avoid foreclosure and repair their damaged credit. But instead they took title to their victims' homes, and engaged in an equity skimming scheme that resulted in foreclosure for many. To date, ten defendants have pleaded guilty in the MMS case.

Seven individuals have been charged for their roles in a mortgage fraud scheme that involved more than 100 properties in Northern California. The indictment charges Amy Schloemann, Karim Akil, Wonda Louise Kidd, Michelle McGuire, Kaska Clay, James Ross and Darnell Thomas with conspiracy to commit wire fraud, wire fraud and money laundering. According to Joseph P. Russoniello, U.S. attorney for the Eastern District of California, the defendants, who were unavailable for comment, allegedly participated in a fraud scheme involving the fraudulent purchase of more than 100 properties through the use of straw buyers, real estate appraisers, notaries and escrow agents, and the laundering of profits. The defendants allegedly directed straw buyers to sign loan applications containing false information and allegedly hired notary publics to fraudulently notarize documents. The defendants allegedly increased their profits on the purchase of properties by submitting false documents to lenders. Once the properties were purchased, the defendants allegedly split the proceeds and failed to make payments on the properties, causing lenders to foreclose.

Lenders trying to comply with a new RESPA rule that goes into January 1 will not have to worry about being slapped with an enforcement action if they fall short during the first few months, according to the Department of Housing and Urban Development. HUD has instructed its staff to exercise restraint in taking enforcement actions against Federal Housing Administration-approved lenders during the first 120 days. HUD also is urging other federal and state enforcement agencies to go easy on other lenders that are making a good faith effort to implement the new Real Estate Settlement Procedures Act rule. "We will work with those who are making an honest effort to work with us as we implement these important new consumer protections," said HUD Secretary Shaun Donovan. Lenders and certain other settlement services groups have been urging HUD to delay the implemention date for a few months. But HUD has refused. "While we will not delay implementation of RESPA's new requirements, we are sensitive to the concerns of the industry as it integrates these new rules into their day-to-day business practices," secretary Donovan said.

Jeffrey Todd Crandell, a mortgage broker from Mesa, Ariz., pleaded guilty to running a sophisticated cash-back mortgage fraud scheme in the state. Sentencing is scheduled for Feb. 22, 2010, before U.S. District Judge G. Murray Snow. According to Dennis K. Burke, U.S. Attorney for the District of Arizona, in 2005, Crandell obtained the rights to various parcels of real estate in Queen Creek, obscured his interest in those properties and recruited others to buy the properties for significantly inflated prices. Crandell also acted as the mortgage broker for each transaction. In preparing the buyers' loan applications, Crandell inflated their incomes and assets and falsely stated that the buyers would be making the downpayment. At closing, Crandell supplied the downpayment on the buyers' behalf, providing them with a cash kickback. The properties eventually went into foreclosure. Crandell's conviction is part of "Operation Cash Back," an initiative in which 40 defendants were indicted and arrested in June 2008. To date, 30 have been convicted through guilty pleas or following trial.

Over the past two months the Federal Housing Administration has suspended or "eliminated" at least eight mortgage banking firms from using its insurance program, according to Assistant Housing Secretary David Stevens. Mr. Stevens told reporters at a press conference that the eight firms — which were not identified — "were originating a poor quality book of business." He noted that mortgage banking firms that were approved to do business with the agency between 2005 to 2009 account for just 5% of its overall business. "A vast majority" of FHA's $685 billion book of business consists of what Mr. Stevens called "long tendered institutions." One mortgage banking source told National Mortgage News that the government is now looking into a large number of early payment defaults at a New Jersey-based FHA lender. No further details were available. On Thursday HUD released an audit showing that at the end of September the FHA's Mutual Mortgage Insurance fund had a razor thin capital cushion of just $3.6 billion, or 0.53% of its entire coverage universe. HUD is considering raising premiums to bolster the fund. HUD officials say that despite the thin capital base of the MMI, the fund is constantly bringing in new cash through premiums and that almost 30% of borrowers using the program in fiscal 2009 had a credit score of 720 or better, an all-time high. Four years ago just 12.6% of FHA borrowers had a credit score that high.

U.S. District Judge Lynn N. Hughes sentenced Clarence Lewis III, a licensed mortgage and real estate broker from Houston, to 15 years in federal prison without parole, followed by three years of supervised release, for running a mortgage fraud scheme. Judge Hughes also ordered Lewis to pay restitution, the amount of which will be determined early next year. According to Tim Johnson, U.S. attorney for the Southern District of Texas, Lewis operated Motown Mortgage Group and Lewis and Associates Realtors and used an assumed name business, Astro Construction, to extract loan proceeds from the real estate closings. The loans on the majority of the properties obtained by fraud fell into default and the properties were foreclosed. Lewis obtained more than $12 million in fraudulent residential mortgage loans during the course of his five-year mortgage fraud scheme beginning in 2002.

Two former managers in charge of Bear Stearns hedge funds that invested in subprime bonds and derivatives were found not guilty of fraud charges Tuesday afternoon in New York. A jury in Federal District Court in Brooklyn acquitted former Bear executives Ralph Cioffi and Matthew Tannin, believing the two men did not lie to investors by presenting an upbeat picture without disclosing that the two funds they managed were plummeting in value. In particular, Mr. Cioffi was found not guilty of insider trading charges on accusations that he moved $2 million he had invested in one of the failing subprime hedge funds to another less risky fund while telling investors he was adding to his position. The government accused them of defrauding at least 300 investors out of $1.6 billion. The two had been charged with three counts of securities fraud and two counts of wire fraud. They still face civil damages in regard to the hedge funds. Massachusetts sued Bear Stearns Asset Management, accusing Mr. Cioffi of making hundreds of trades on behalf of the hedge fund with the approval of the fund's independent directors. In late 2007 Bear disclosed in an SEC filing that the funds were the subject of a criminal investigation. Bear, which collapsed in early 2008, was a major player in the subprime mortgage market. Previous to its collapse, Bear operated a trading desk and a warehouse unit, and also owned a mortgage banking firm called Encore Credit. (Photos: Bloomberg News)

Kawana Latrell Melvin of Atlanta pleaded guilty in Superior Court of Clayton County in Georgia to felony charges that she operated a mortgage banking business without a license. She also admitted to making a false statement with respect to her eligibility to work in the state's residential mortgage industry. The Georgia Department of Banking and Finance referred this matter to the State Attorney General's Office after learning she continued to work a as mortgage loan processor for a residential mortgage licensee in violation of a final cease and desist order. Melvin used a false document purportedly written by the Commissioner of the Department that provided that she was not prohibited from engaging in residential mortgage activities. Melvin has been placed on probation for a period of three years and must pay a fine in the amount of $2,000. While on probation, she is prohibited from obtaining employment in any real estate or mortgage business and cannot apply for or obtain professional licenses in either of these industries.

William Everett Nichols of Alexandria, La., president and sole shareholder of First Fidelity Mortgage, pleaded guilty to defrauding Sabine State Bank out of $2.9 million. Sentencing is scheduled for Feb. 4, 2010. According to Donald W. Washington, U.S. attorney for the Western District of Louisiana, Sabine State Bank provided a line of credit to First Fidelity Mortgage, monies that were in turn used by First Fidelity to fund mortgages for its customers. The customer notes pledged by First Fidelity secured this line of credit at Sabine State Bank. Nichols devised a scheme by which he prepared fraudulent notes by forging signatures of borrowers and notaries public, and would then deliver them to Sabine State Bank as collateral in order to cause the bank to deposit more money into First Fidelity Mortgage's account. When the bank would deposit funds into the account to fund these loans, Nichols just kept the money for himself. In total, Nichols defrauded the bank out of $2.9 million. Nichols has been detained without bond since his arrest in July.

Fraud continues to flourish in unstable metro areas in Arizona, Nevada, Southern California and Florida and is popping up in surprise locations like Bend, Ore., according to panelists at the SourceMedia Loan Modification Conference in Dallas. Ann Fulmer, vice president of business relations at Interthinx, said fraud is increasing in these markets among distressed borrowers through foreclosure rescue and loan mod scams. The industry is seeing illegal flipping of REO properties, false appraisals, tarnished broker price opinions and loan reductions in short sales. "There is no training in fraud recognition for servicers. They are pressed for time," she told conference attendees. It is crucial to find ways to train key loss mit staff and to verify a property's listing history, the speakers stressed. Lenders and servicers should create a red flag list within the shop of what to look out for, including a list of other parties and companies they work with on a regular basis, and identify borrowers with multiple loans for properties. In Dallas alone, Chris Day, a special agent in mortgage fraud from the FBI, said there are 75 cases of fraud, each one with at least $1 million in losses, and Dallas "isn't even a fraud hot spot." It is members of the industry who will correct this problem, he said. "Separate each transaction out. Identify things that don't fit. False companies and associations to maybe another case."

Edward William Farley, a former mortgage broker from Georgia, pleaded guilty in federal district court to charges stemming from a mortgage fraud scheme and a related real estate investment Ponzi scam involving more than 150 victims. According to Sally Quillian Yates, acting U.S. attorney for the Northern District of Georgia, Farley, operating through numerous mortgage firms, defrauded mortgage lenders through same-day property flips throughout the state. He paid an appraiser to fraudulently inflate the value of each property by $50,000 to $100,000 and recruited unqualified borrowers to purchase them from one of his companies. However, Farley did not purchase the properties until the fraudulently obtained loan proceeds on the second purchase had been disbursed. In the real estate investment-Ponzi part of the scheme, Farley then began to operate under the name Alliance Resource Management to conceal his new source of income from prior victims. Real estate investors and lenders were induced through false promises that their investments and loans were fully secured. The same property was used to "fully secure" multiple investors and lenders, causing losses in excess of $20 million. Sentencing is scheduled for Feb. 3, 2010.

The Department of Housing and Urban Development's Mortgagee Review Board is imposing civil money penalties totaling $27,000 on two Federal Housing Administration-approved lenders in Wisconsin and Connecticut for a variety of violations of FHA lending and marketing standards. In the first action, HUD imposed $20,000 in penalties against Green Bay, Wis.-based 1st Rate Mortgage Corp. for allegedly violating HUD/FHA's third-party origination restrictions, making false certifications concerning the compliance with these restrictions and failing to maintain a quality control plan in accordance with HUD/FHA requirements. In the second action, HUD imposed $7,000 in penalties against New Haven, Conn.-based Access Mortgage Corp. for allegedly violating HUD/FHA requirements by improperly using the official FHA logo and failing to notify HUD of a change in its "doing business as" name. Each lender, neither of which responded to requests for comment, will have an opportunity to challenge the imposition of civil money penalties and seek a hearing before an administrative law judge. In addition, HUD reached tentative settlements with four other lenders — Irvine, Calif.-based Nations Direct Mortgage, Grand Rapids, Mich.-based VanDyk Mortgage Corp., Minneapolis-based U.S. Bank NA and Cerritos, Calif.-based Sun West Mortgage Co. — and issued a letter of reprimand to Community Lender Inc. of Boise, Idaho, for allegedly violating HUD regulations.

Tahmeane Elrod of Tyler, Texas, has pleaded guilty to conspiracy to commit wire fraud in connection with a mortgage fraud scheme. According to John Malcolm Bales, U.S. attorney for the Eastern District of Texas, in September 2007 Elrod devised a scheme to defraud mortgage financing companies by submitting false documents in order to qualify for mortgages for the purchase of a residential property. Elrod falsely inflated levels of earned income and forged signatures on a Request for Verification of Employment form as part of a loan application package. Sentencing has not yet been scheduled.

A nine-month investigation done as part of a Florida fraud crackdown has resulted in charges against more than 100 defendants with allegations concerning over $400 million in loans and more than 700 properties. According to A. Brian Albritton, U.S. attorney for the Middle District of Florida, there are currently mortgage fraud-related charges pending against approximately 500 defendants in federal mortgage fraud cases around the nation. The cases concern both mortgage schemes designed to defraud mortgage lenders and "foreclosure rescue schemes" which prey on distressed homeowners. Florida's Mortgage Fraud Surge crackdown was launched in January 2009 in response to the epidemic of mortgage fraud throughout the state, which began during Florida's real estate boom earlier this decade.

A federal judge rejected a request by Angelo Mozilo, the former CEO and founder of Countrywide Financial Corp., to dismiss a Securities and Exchange Commission lawsuit accusing him of securities fraud and insider trading. Mr. Mozilo's lawyer David Siegel called the court's order "disappointing" but added he was confident Mr. Mozilo eventually "will be vindicated." In a court filing, U.S. District Judge John Walter in Los Angeles also rejected requests by David Sambol and Eric Sieracki, respectively Countrywide's former chief operating officer and former chief financial officer, to dismiss related SEC charges. In June the three were slapped with a massive civil fraud suit, accusing them of deliberately misleading investors in the company's stock and engaging in insider trading. They could not be reached for comment. Two years ago CFC's shares were trading in the $40 range. By the time Bank of America bought the firm in the summer of 2008, its stock was trading as low as $3. Investors lost billions on CFC.

Uto Essien, the ringleader of a Colorado based multimillion-dollar mortgage fraud operation, was sentenced to 30 years in the Colorado Department of Corrections. Essien, a Nigerian national, will be deported upon completion of his sentence. An Adams County jury convicted Essien in July after a seven-day trial on four felony charges all related to the use of shell corporations and false invoices to skim money off the top of nearly three-dozen real estate transactions. According to Colorado attorney general John Suthers, Essien and his colleagues fraudulently obtained $10.9 million in mortgages to buy 34 properties in Adams, Arapahoe, Denver and Jefferson counties between April 28, 2004 and Dec. 29, 2006. Essien and his colleagues then skimmed $1.1 million from the transactions to pay for repairs to the properties that the defendants' shell corporations never completed. While acting as a real estate broker, Essien negotiated the property acquisitions and directed the buyers to create the shell corporations. Nine of Essien's co-defendants in the mortgage fraud ring have either pleaded guilty or been convicted.