Compliance

The Federal Trade Commission has filed complaints against two loan modification companies for allegedly making false claims that they could obtain a mortgage modification in virtually all cases. One complaint, filed in the U.S. District Court for the District of Columbia, charges Nations Housing Modification Center and its principals, Michael A. Trap, Glenn S. Rosofsky, and Bryan P. Rosenberg, with violating the FTC Act and the FTC's Telemarketing Sales Rule by allegedly misrepresenting themselves as a government agency and falsely claiming to obtain mortgage mods for consumers. The FTC alleges that very few homeowners got mods and the defendants accepted advance fees for their services. The other complaint, filed in the U.S. District Court for the Central District of California's Southern Division, charges Infinity Group Services and its president, Kahram Zamani, with violating the FTC Act by falsely representing that they would obtain a loan modification in all instances and would allegedly obtain loan refinancing for an up-front fee. The FTC alleges that the company often failed to obtain loan mods and either failed to answer or return consumers' telephone calls or update them about their status. The defendants were unavailable for comment.

The country has seen a "drastic increase" in mortgage fraud cases as a result of the upheaval in the housing market, according to FBI director Robert Mueller. FBI agents are investigating 2,600 mortgage fraud cases as of July 31, up from 1,600 for all of 2008. Many of these investigations are focused on fraud perpetrated by industry insiders and most of the pending mortgage fraud cases involve losses of more than $1 million, Mr. Mueller told the Senate Judiciary Committee. "To meet this growing challenge, we have redirected investigative resources and assigned approximately 300 special agents the task of investigating mortgage fraud. In addition, we direct 15 task forces and 59 working groups that target mortgage fraud," he said. Mr. Mueller pointed out that the FBI is using innovative ways to generate new cases, "We employ statistical correlations and other advanced computer technology to identify patterns in the search for companies and persons engaged in activity that is indicative of fraud." FBI agents also analyze data compiled through Suspicious Activity Reports filed by financial institutions and through HUD-OIG reports.

Prosecutors in Vermont have secured the fifth conviction in a scheme that cost mortgage lenders over $11 million. Benjamin Osmanson of California and Sarita, Texas, pleaded guilty to charges related to his scheme to defraud mortgage lenders by submitting false loan applications in the names of "investors." According to the U.S. attorney's office for the District of Vermont, from at least as early as January 2006 through at least April 2007, he and co-defendant Jillian Protzman orchestrated the purchase of at least 50 properties in California, Florida, Kentucky and Vermont in the names of at least 10 investors, obtaining more than $26 million in loans to support the purchases. Osmanson recruited friends, family members and acquaintances to "invest" in real estate. He and Protzman then allegedly submitted fraudulent loan applications in the names of the investors to obtain loans. Osmanson, Protzman and others sought loans from multiple lenders and were said to have closed the loans for each investor within a short period of time in order to preserve the appearance of the investor's good credit until the transactions were complete. The defendants enriched themselves with commissions connected to the fraudulent property purchases and continued to recruit investors and submit applications for new loans, the investigation showed. During the plea hearing, Osmanson admitted his scheme caused more than $11 million in losses to the mortgage lenders as the properties went into foreclosure. Protzman pleaded guilty in August. Two mortgage brokers involved in the scheme, Mike Otis and Chris Whitfield, pleaded guilty earlier this year in the Western District of Kentucky. Florida realtor Margaret Giresi recently pleaded guilty in Vermont for her role in the scheme. Sentencing for Osmanson has not yet been scheduled.

A group of state and federal officials met in Washington to discuss trends and improve coordination in the efforts to combat mortgage fraud. Treasury Secretary Timothy Geithner hosted Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, Federal Trade Commission Chairman Jon Leibowitz, Financial Crimes Enforcement Network Director Jim Freis and attorneys general from 12 states. They also spoke about proactive strategies to combat fraud against consumers in the housing markets as well as best practices to bolster coordination across state and federal agencies. This meeting follows up on an announcement by the Obama Administration in April of a multi-agency crackdown on foreclosure rescue scams and loan modification fraud designed to protect homeowners from predatory financial practices. "A clear lesson of this financial crisis is that American consumers need better protection against fraud," said Mr. Geithner, adding that government agencies "will not wait for problems to peak before we respond." Treasury, FinCEN and DOJ, HUD and FTC are working on taking proactive measures to curb abuse by coordinating information and resources across agencies to maximize targeting and efficiency in fraud investigations. Secretary Donovan announced that HUD has requested $37 million in its 2010 budget to combat fraud. FTC Chairman Leibowitz announced two new law enforcement actions in a continuing crackdown on mortgage foreclosure rescue and loan modification scams, bringing to 22 the number of these cases the Commission has filed since the housing crisis began. The FTC also announced developments in similar pending mortgage-related actions, several of which have involved coordinated casework from FinCEN.

Charles E. Townsend of Columbus, Ohio, pleaded guilty to money laundering in connection to a mortgage fraud scheme that exaggerated the values of properties in primarily low income neighborhoods in Columbus in order to secure funding from investors. According to William E. Hunt, acting U.S. attorney for the Southern District of Ohio, Townsend helped two co-conspirators, Aryeh Schottenstein and Jeffery Lieberman, fraudulently secure funding from Stillwater Investments Group of New York for real estate transactions involving Columbus properties. Townsend grossly exaggerated the value of properties in order to induce Stillwater to fund the real estate transactions and falsely promised to use certain funds provided by Stillwater to renovate houses involved in those transactions. In some of these transactions, Townsend also retained funds as purported "consulting fees" when no services were performed. Schottenstein pleaded guilty in May 2008 and was sentenced to 42 months in prison, followed by three years of supervised release. Lieberman pleaded guilty in April 2008 and was sentenced to 16 months in prison, followed by three years of supervised release. Sentencing for Townsend has not yet been scheduled.

The Shadow Financial Regulatory Committee is "sympathetic" to the Obama administration's plan to consolidate the consumer protection function of banking regulators into a new agency that would set the rules for depositories and non-banks alike. The academic group noted that the federal banking regulators did not do a "great job" of protecting consumers during the subprime lending crisis, and consumer protection will never be a "core mission" for the bank regulators. It will always take a "back seat" to safety and soundness concerns, committee member Robert Litan said. The Brooking Institutions senior fellow noted, however, that his group would make several changes to the Consumer Financial Protection Agency bill that has been introduced in the House. One important change would give the CFPA's lending rules preemption over state rules. The current bill allows the states to enact and enforce tougher rules. "At least in rulemaking, there ought to be [federal] preemption," Mr. Litan said. The bill also gives the CFPA authority to prevent unfair and deceptive and abusive practices. According to Mr. Litan, unfair and deceptive practices are well defined in case law, but abusive practices is new and should be dropped. "We think it is unnecessary and gives too much discretion to the agency," he added.

A federal grand jury has returned an indictment against a Mississippi real estate investor in connection with an allegedly fraudulent mortgage loan scheme. According to Stan Harris, U.S. attorney for the Southern District of Mississippi, Earline Y. Rawls is accused of devising a scheme that began in August 2006 and continued through March 2007, involving the purchase of four residential properties in Madison and Hinds County. The indictment alleges that the primary objective of the conspiracy was to induce approval, funding and distribution of more than $1 million in loan proceeds through the deceptive submission of fraudulent representations to Merchants and Farmers Bank, Community Bank of Mississippi and BancorpSouth. Prosecutors say Ms. Rawls, doing business as Heavenly Homes, manufactured fraudulent documents indicating business revenues of $1.3 million and a profit of $271,530 from January 2006 through November 2006. Ms. Rawls, who could not be reached for comment, allegedly submitted this information in furtherance of her scheme with non-indicted co-conspirators.

Rosario Divins, a self-proclaimed foreclosure prevention specialist from San Antonio, was sentenced to 350 months in federal prison, followed by three years of supervised release, for criminal contempt and mail fraud. In addition to the prison term, U.S. District Judge Fred Biery ordered that Divins pay $83,600 restitution to her victims. According to John E. Murphy, acting U.S. attorney for the Western District of Texas, Divins was convicted in June of seven counts each of criminal contempt and mail fraud. The jury found that since January 2000, Divins engaged in a fraudulent foreclosure prevention scheme. Testimony during the three-day trial revealed that Divins collected more than $80,000 in cash from individuals in desperate financial situations who responded to her mail-out offering to stop their residential foreclosures. Divins continued to implement her scheme despite three separate sanctions from the U.S. Bankruptcy Court for the Western District of Texas ordering her to stop misrepresenting herself and making false promises to her clients.

Mario Bernadel, a real estate investor from Phoenix, has been convicted of running a mortgage fraud scheme involving at least 32 residential properties in the greater Phoenix area. According to John J. Tuchi, interim U.S. attorney for the District of Arizona, participants in the scheme recruited unqualified straw borrowers, submitted fraudulent loan applications on their behalf, obtained mortgage loans in excess of the selling price and then took the excess amount of the loans out through escrow. Bernadel recruited and trained mortgage brokers, straw buyers and an escrow officer in the scheme and, following the funding of the loans, received cash back. The homes purchased through the scheme have been foreclosed or sold at a loss. Seven other co-conspirators were also charged and have pleaded guilty and await sentencing. The scheme resulted in $20 million in loans obtained by fraud and a loss of more than $2 million. Bernadel's conviction is part of "Operation Cash Back," in which 40 defendants were indicted and arrested. Bernadel is the 20th defendant to date who has been convicted. U.S. District Judge Stephen M. McNamee set sentencing for Nov. 30.

David Findel, the president and CEO of Morganville, N.J.-based Worldwide Financial Resources, is facing charges in an alleged $11 million mortgage-reselling fraud scheme. According to the Newark, N.J. office of the FBI, Mr. Findel, from Colts Neck, N.J., surrendered himself to the FBI and made his initial appearance before Judge Mark Falk, who released Mr. Findel on a $1 million secured bond. Originally started as a financial planning company, Mr. Findel expanded Worldwide Financial Resources to include home mortgage origination and banking services. This allowed WFR to both initiate and fund mortgages for its clients by borrowing money from a warehouse lender. To repay the lender, WFR would resell each mortgage it originated in the secondary mortgage market. When WFR experienced a liquidity crisis in January 2008, Mr. Findel allegedly conducted a scheme to defraud mortgage banks by reselling the same mortgages to multiple financial institutions. Once WFR sold a mortgage, Mr. Findel would allegedly create a second set of fraudulent mortgage documents and resell the same mortgage to a different secondary market lender. The complaint alleges that Mr. Findel, who was unavailable for comment, obtained more than $11 million from secondary market lenders through this scheme.

Eugene Lockhart, Jr., a former player with the Dallas Cowboys, has been charged, along with eight others, with running an alleged mortgage fraud scheme in the Dallas area from 2001 through 2005. In addition to Mr. Lockhart, the following defendants named in the indictment include: Lendell Beacham; William Randolph Tisdale, Jr.; Hubert Jones, III; Patricia Ortega Suarez; Suzette Switzer Hinds; Michael Anthony Caldwell; Donna Lois Kneeland; and Bryan J. Moorman. According to James T. Jacks, U.S. attorney for the Northern District of Texas, the indictment alleges that the defendants, who were involved with several real estate entities, ran a scheme in which they located single-family residences for sale in the Dallas area -- including distressed and pre-foreclosure properties -- and negotiated a sales price with the seller. Prosecutors say they created surplus loan proceeds by inflating the sales price to an arbitrary amount more than the fair market value of the residence. The defendants, who were unavailable for comment, allegedly recruited straw borrowers and caused the loan applications for each straw borrower to include false financial information. The alleged scheme involved 54 fraudulent residential property loan closings resulting in the funding of $20.5 million in fraudulent loans.

A federal jury in Kalamazoo, Mich., found Patricia L. VanderZwaag and Daniel Lee VanderZwaag, both of Holland, guilty of charges related to filing fraudulent mortgage loan applications. According to Donald A. Davis, U.S. attorney for the Western District of Michigan, the defendants, who owned Mad Jac Corporation, also known as B & J Towing, provided false documentation and information to mortgage companies to obtain loan proceeds. Patricia VanderZwaag also used false information and documentation, including the Social Security Number of another person, to obtain a mortgage loan from National City Bank. She then transferred $16,000 of one of the mortgage company loans to another bank to launder the funds. Immediately after the return of the guilty verdicts, Chief U.S. District Court Judge Paul L. Maloney remanded both Vanderzwaags to the custody of the U.S. Marshal until sentencing. A date for the sentencing hearing has not yet been set.

Edward J. Safdie of Madison, Conn., was sentenced to 51 months in prison for conducting a fraud scheme in which he received funding from multiple sources to purchase a Chester, Conn.-based inn. According to Nora R. Dannehy, U.S. attorney for the District of Connecticut, Safdie submitted false documents to Acorn Capital overstating his personal wealth to receive a $1 million loan to secure financing to purchase The Inn at Chester. He then told Citizens Bank, also submitting false documents to the lender, that the $1 million loan from Acorn was his own and that he was using the funds for a downpayment on the inn. Operating through 318 Main LLC, Safdie purchased the inn for $2.4 million. On the same day, he caused 318 Main LLC to sell the inn to Quantum 318 LLC, which he also controlled, using $3.5 million in loan proceeds obtained from Citizens Bank. He then used the proceeds from the Citizens Bank loan to pay back the original $1 million Acorn loan. Thereafter, Safdie convinced Acorn to provide him with a $2 million revolving loan facility, of which he drew down $1.1 million. He continued to provide fabricated brokerage account statements to Acorn. Using the inn as security, Safdie refinanced the Inn and, through the refied mortgage, received $4.5 million from Beal Bank. Safdie then used most of the funds to repay the fraudulently obtained Citizens Bank loan. After failing to repay the Beal Bank loan, Beal Bank foreclosed on the inn.

Mario Tolisano and Celestino Orta, both of Bronx, N.Y., have been charged with allegedly bilking three people out of more than $1.3 million in a scam involving selling property the defendants neither owned nor were authorized to sell. According to Bronx district attorney Robert T. Johnson, the defendants, who were unavailable for comment, allegedly offered to sell various properties to two real estate investors, which Mr. Orta allegedly falsely claimed he had either bought or was in the process of buying. The investors allegedly examined the real estate and agreed on a purchase price of $710,000, to be paid up front. Later, the victims were allegedly offered additional properties in the Bronx, Brooklyn, and Queens, for which they paid another $502,000. The defendants then allegedly approached a third victim, who made a $70,000 downpayment for a vacant lot. The victims eventually filed complaints against the defendants, alleging multiple attempts to schedule closings on the properties were ignored, since the defendants never had ownership of the properties nor had authorization to sell them. Mr. Tolisano was arraigned before State Supreme Court Justice Margaret Clancy, who set bail at $250,000. Arraignment for Mr. Orta, who is currently in custody on an unrelated matter, is scheduled for Sept. 3.

A former employee at the now defunct Taylor, Bean & Whitaker faces charges he allegedly stole more than $1.6 million from the company by depositing the funds into accounts he controlled at Navy FCU of Virginia. Victor Cedeno, who was a loss mitigation negotiator in the loan resolution management department at the Ocala, Fla.-based company allegedly deposited checks made out to Taylor, Bean & Whitaker into this account from July 17, 2008, until as recently as Aug. 10 of this year, according to a criminal complaint filed by the U.S. Attorney's office. A spokesman for the U.S. Attorney office said Mr. Cedeno is still being sought by authorities. He could not be reached for comment. The scheme allegedly began July 16, 2008, when Mr. Cedeno opened an account at Navy Fed's branch in Winter Park under the name, "Tailor Bean W." The name "Tailor Whitaker" was listed as primary account holder. A total of 58 checks worth $1.6 million were allegedly funneled into the "Tailor Bean W." account.

James Whitaker, a former Orchard Lake, Mich., resident, pleaded guilty before U.S. District Judge Bernard A. Friedman to filing fraudulent bankruptcy petitions to defraud his mortgage lender and forestall foreclosure on his mortgage and take possession of his property. According to Terrence Berg, U.S. attorney for the Eastern District of Michigan, in 2007 Whitaker's mortgage holder, Deutsche Bank, began foreclosure proceedings on a $970,000 mortgage Whitaker had obtained on the residence he occupied. However, he held title to the property in his sister-in-law's name. When the bank began eviction proceedings to take possession of the property, Whitaker had a bankruptcy petition preparer file several bankruptcy petitions in his sister-in-law's name to halt eviction action. By doing this, the value of the property substantially decreased. Sentencing for Mr. Whitaker is scheduled for Nov. 17.

Some 41 people and four companies have been indicted for engaging in a massive mortgage fraud scheme to purchase 453 homes using $44 million worth of fraudulent loans. The state charges are the result of an 18-month investigation by the Cuyahoga County Mortgage Fraud Task Force in conjunction with the Ohio Organized Crime Investigations Commission. Ohio attorney general Richard Cordray singled out Uri Gofman of Beachwood, Ohio, as the scam's ringleader, saying he enlisted family, friends and others to invest in his real estate company, Real Asset Fund, with promises of profit. Mr. Gofman's alleged enterprise began with seed money from an investor who transferred funds from a bank account in Latvia. The scheme involved using straw buyers to purchase homes, falsely claiming home improvements were performed on houses in order to refinance them and then selling houses to unqualified buyers with the assistance of real estate agents, mortgage brokers and title companies. The defendants, who were unavailable for comment, allegedly siphoned off more than $31 million in profits from their criminal enterprise. Eventually, 358 of the homes fell into foreclosure. The Cuyahoga County Mortgage Fraud Task Force was formed in December 2007. To date, 289 defendants have been indicted on mortgage fraud charges involving $111 million in loans on 812 homes, 616 of which are now in foreclosure.

Federal regulators are seeking information from banks and thrifts on how a new accounting rule on securitized assets will impact their balance sheets and capital levels. Financial Accounting Standards 166 and 167 can trigger consolidation of securitized assets on the balance sheet if a bank controls the servicing or provides support for assets in the trusts. "It will require institutions to bring a lot more assets on the balance sheet," Comptroller of the Currency John Dugan said at a Federal Deposit Insurance Corp. board of directors meeting. As part of the proposed rulemaking, the FDIC is seeking information on what assets will likely be consolidated and how it will impact lending and securitization activities. The proposal also asks whether a phase-in of risk-based capital requirements over four quarters is needed. Comments are due in 30 days. The new accounting rule goes into effect at the yearend. Separately, the FDIC agreed to extend its Temporary Liquidity Guarantee Program until June 30, 2010. This program provides unlimited insurance for servicer accounts and other non-interest bearing accounts.

In a few weeks California will move to implement the federal Secure and Fair Enforcement for Mortgage Licensing Act which means individuals will have to obtain their own licenses if they want to operate as loan brokers. According to the California Mortgage Bankers Association, individual loan officers can no longer latch onto a company license and must obtain their own. A spokesman for the trade group noted the "act should pass here in the next few weeks, which will be a much bigger change than in some other states that already individually license LOs." California also is working on major legislation to reorganize and consolidate all the financial/real estate agencies and departments, and create a new consumer-focused department but no further action is expected until next year.

The Federal Reserve Board is now seeking public comment on a Truth in Lending Act proposal that could completely change the way most mortgage brokers and loan officers are compensated. The proposed rule pushes the industry toward paying originators a flat fee that is stated upfront and cannot be increased due to changes in the interest rate or changes to other loan terms. Consumers can still finance closing costs and origination fees, "provided this does not affect the amount the originator receives for the transaction," the Fed says. If finalized, the TILA proposal will "dramatically alter compensation for all mortgage originators, whether they are loan officers in retail operations or mortgage brokers," said Brian Chappelle, a mortgage banking consultant with Potomac Partners in Washington. Compensation based on loan volume, the performance of loans delivered by an originator or hourly wages is permissible under the proposal. The Fed is specifically seeking comment on whether it should allow compensation based on the loan amount, which is not an uncommon practice. The comment period on the 195-page proposal ends Dec. 24. The Fed also issued a separate TILA proposal that would create an entirely new disclosure regime for home-equity lines of credit and new safeguards for consumers. The comment period on the HELOC proposal also ends on Dec. 24.