Compliance

Joseph Silvestro and his wife Julie Silvestro pleaded guilty before U.S. District Judge Ortrie D. Smith to their roles in a mortgage fraud scheme. According to Matt J. Whitworth, acting U.S. attorney for the Western District of Missouri, the Silvestros defrauded mortgage lenders by obtaining larger loans from lenders than the actual sale price associated with a particular property. These loans were based on material false and fraudulent representations, and by concealing material facts. The Silvestros arranged for mortgage documents that often included payment of fictitious and fraudulent invoices to their company, Taylor Investments, as part of the settlement statement. The plea agreements cite three properties — two in Kansas City, Mo., and one in Kansas City, Kans. — in which the Silvestros fraudulently claimed invoices for Taylor Investments, ranging from $20,000 to $37,000. The government believes that the loss attributed to the Silvestros totaled more than $567,000, though the defendants have reserved the right to contest the amount of loss at their sentencing hearings, which will be scheduled after the United States Probation Office completes its pre-sentence investigation. Under federal statutes, the Silvestros are each subject to a sentence of up to five years in federal prison without parole, plus a fine up to $250,000 and an order of restitution.

Robert Ratkovich of New Castle, Pa., pleaded guilty before Senior U.S. District Judge Gustave Diamond in federal court to fraud and money laundering charges connected to his scheme to defraud a bank and affordable housing entity. The board of directors of Affordable Housing of Lawrence County hired Ratkovich as a consultant to advise the board of which properties that it should purchase and at what price, according to Mary Beth Buchanan, U.S. attorney for the Western District of Pennsylvania. Rather than do a diligent search, Ratkovich advised the board to purchase seven properties that were all owned or associated with an individual known to the U.S. attorney. To purchase the properties, Affordable Housing of Lawrence County received a loan from First Commonwealth bank to finance the purchase. Ratkovich and others allegedly made misrepresentations to First Commonwealth Bank regarding the financial status of Affordable Housing of Lawrence County and submitted fraudulently inflated appraisals. Judge Diamond scheduled sentencing for Oct. 28.

Howard Edwards and John Foster, both formerly of Rancho Cucamonga, Calif., were sentenced to 20 years, four months in prison and 10 years, four months in prison, respectively, for real estate fraud crimes. The two defendants befriended unsuspecting victims on an Internet chat line. Their personal information was used to obtain loans on luxury cars and real estate in Fontana, Calif. The victims were then liable for these loans. The loan proceeds were transferred to a phony escrow company. The defendants falsified several real estate deeds and forged the signatures and stamps of several notary publics. The defendants then sold a house in Gardena, Calif., without the owner's permission and knowledge for an additional $560,000. The victims, who had been living at the residence since 1971, first found out about it when a lending institution attempted to foreclose on the property. The defendants used the personal information of a man living in Massachusetts to obtain the loans. Edwards and Foster were extradited from Georgia and Illinois, respectively, in 2008. The San Bernardino County District Attorney's Real Estate Fraud Unit investigated, prosecuted and provided the information about this case.

After pleading guilty to a $1 million scheme involving the approval and disbursement of two fraudulent home equity loans, four individuals, including two bank insiders, were sentenced to prison. U.S. District Judge Alan S. Gold sentenced Ramon Puentes to 57 months in prison and five years of supervised release, Jorge Nobrega to 27 months and five years of supervised release and Jorge Arrieta to 22 months and five years of supervised release. Sebastian Kishinevsky, who cooperated with the government and assisted with the investigation, received a sentence of six months in prison, six months of home confinement and three years of supervised release. Judge Gold also ordered Puentes and Nobrega to each pay $796,700 in restitution, Arrieta $470,000 and Kishinevsky $326,700. According to Jeffrey H. Sloman, U.S attorney for the Southern District of Florida, the defendants obtained two fraudulent loans, one from Bank of America and one from Wachovia, for $500,000 each. They submitted the loan applications using the stolen identification information of one of the defendant's mother-in-law and supported by fraudulent documents. Each application listed the mother-in-law as the borrower and a home owned by the mother-in-law as collateral. The Bank of America application was submitted to Arrieta, a personal banker at Bank of America. The Wachovia application was submitted to Kishinevsky, a financial specialist at Wachovia. After the loans were approved, the defendants disbursed and shared the proceeds.

Colonial BancGroup Inc., Montgomery, Ala., has confirmed that federal agents affiliated with the special inspector general for the Trouble Asset Relief Program executed a search warrant at the company's mortgage warehouse lending division in Orlando on Monday. The company's statement said it was cooperating with the investigation and is conducting business as usual. There are press reports that federal agents also executed a search warrant on Colonial's former merger partner, Taylor, Whitaker and Bean, a mortgage wholesaler based in Orlando. A call to TBW was not returned by deadline. The raid on Monday (Aug. 3) came on the same day Colonial disclosed that a $300 million investment in the bank by TBW would not take place. The deal was believed to be necessary for Colonial to receive a $550 million capital infuson in TARP funds.

After allegedly preparing fraudulent notes by forging the signatures of borrowers, William Everett Nichols of Alexandria, Louisiana, has been indicted and arrested on federal fraud charges. According to Donald W. Washington, U.S. attorney for the Western District of Louisiana, the indictment alleges that Mr. Nichols, who is the president and sole shareholder of First Fidelity Mortgage Inc., knowingly and willfully conspired to devise a scheme to defraud Sabine State Bank and obtain money to which Mr. Nichols was not entitled. The defendant and others allegedly prepared fraudulent notes by forging signatures of borrowers and notaries public and delivered them to Sabine State Bank as collateral in order to cause the bank to deposit money into an account of First Fidelity Mortgage, which Mr. Nichols controlled. Mr. Nichols was unavailable for comment.

The California real estate commissioner said he would oppose increases in mortgage broker licensing fees that the state Legislature is considering as part of a regulatory reform package. Commissioner Jeff Davi told attendees at the California Association of Mortgage Brokers convention in San Diego he would fight to insure the new regulatory scheme would not drive up the costs for mortgage broker licenses. Higher fees could impact the ability of some brokers to stay in business, he said. The state Legislature is considering a bill to create a financial services regulator that would oversee the mortgage industry and brokers. Right now, mortgage brokers are licensed as real estate brokers.

Standard & Poor's Ratings Services has lowered several of Colonial BancGroup's ratings, citing risks linked primarily to its consent to a cease-and-desist order by its regulators. "The rating downgrade largely results from our view that regulatory risk has increased following the company's announcement that it has consented to an order to cease and desist by the Federal Reserve, its primary federal regulator, and the Alabama State Banking Department," S&P credit analyst Robert Hansen said. S&P noted that the cease-and-desist order states that the "company cannot pay any dividends or make any distributions of interest or principal on subordinated debt or trust-preferred securities without the prior written permission of these two regulators. If Colonial BancGroup is not granted permission by these regulators to make interest payments and subsequently misses an interest payment on its subordinated debt, the company's rating would be lowered [to default level]." The company's counterparty credit rating fell to CC from CCC. Its rating on the company's preferred shares fell to C from CC. And its long-term counterparty credit ratings on its subsidiaries fell to CCC- from B-. All short-term ratings on the company and its primary bank remain at C. All ratings remain on CreditWatch with negative implications.

After running a scheme that enticed victims to participate in a bogus real estate investment opportunity in order to get rid of their personal mortgages, Rodney McGill, a radio talk show host and pastor of New Hope Outreach Center in Jensen Beach, Fla., and his wife, Shalonda McGill, a mortgage broker, have been convicted by a jury in Martin County, Fla. According to the Florida attorney general's office, Rodney McGill used his radio program to advertise a contest to become the "Fabulous Five," five "winners" who would receive advice from the pastor on making millions through real estate investments. At least three victims called the radio station and provided their Social Security numbers and other financial information. The McGills showed their victims the properties that had been "selected" especially for them, but the scheme carefully concealed the fact that the McGills owned each of the properties offered up as potential investments. The McGills also encouraged their victims to lie about their income to obtain the mortgages. The defendants stole more than $1 million from banks, paid down their debts and left their straw buyers with ruined credit. Rodney and Shalonda McGill were arrested in September 2008. They will be sentenced in September 2009.

Reed Kyle Diehl, a former player with the Tennessee Titans from Coto de Caza, Calif., pleaded guilty in U.S. District Court to federal fraud charges related to a scheme in which he collected funds with false promises of high rates of returns on investments in condominium projects in Mexico. According to the U.S. attorney's office for the Central District of California, Diehl fraudulently collected deposits for lines of credit for people who desired financing for construction and development projects in Mexico. Despite paying him sometimes millions of dollars, none of the victims ever obtained a line of credit. Diehl caused losses of more than $5 million. Judge David O. Carter has scheduled sentencing for Sept. 28. Diehl was initially charged and arrested in this case in March 2008. After being freed on bond, Diehl's bond was revoked in January after he attempted to enter into a real estate transaction for a $3.5 million house using a false name and someone else's Social Security number.

The Federal Reserve Board will consider amendments to the Truth in Lending Act placing new restrictions on mortgage broker compensation. "The proposal will include new rules governing mortgage originator compensation," Fed governor Elizabeth Duke said. The proposed rule — which the Fed will take up on July 23 — also includes "re-redesign, consumer tested disclosures and rule changes for closed-end mortgages and home-equity lines of credit," Ms. Duke told a congressional panel. The Fed punted on regulating broker compensation and yield-spread premiums last July when it approved a Home Ownership and Equity Protection Act rule to clamp down on abusive lending practices that led to the subprime meltdown. However, Fed chairman Ben Bernanke directed staff to continue their efforts to address the issue. He noted YSPs that brokers receive from lenders are based on the interest rate, which "on its face seems to be an incentive for steering borrowers into higher price loans."

After pleading guilty to mortgage fraud, U.S. District Judge Sarah E. Barker sentenced Marvin G. Hampton of Noblesville, Ind., to 12 months' home confinement, followed by one year supervised release. Judge Barker also ordered Hampton to pay $262,424 in restitution. According to Timothy M. Morrison, U.S. attorney for the Southern District of Indiana, between 2003 and 2005, Hampton operated a real estate company, Glen Mar Land & Home Corp., which purchased distressed homes in for $5,000-$30,000. Hampton then performed minimal repairs and sold the properties for $60,000-$70,000. He recruited investors to purchase the properties, promising to pay the down payments and giving them $1,500 incentive fees. Hampton set the prices instead of the prices being arm's length transactions. None of these facts were disclosed to the lenders. As additional enticements to the investors, Hampton also promised that he'd find renters and make up missed payments for the first six months. Nearly all the properties are now in foreclosure. Hampton walked away with an average of $20,000 profit on each property.

U.S. District Judge Roger W. Titus sentenced Kurt Fordham of Ft. Washington, Md., to 10 years in prison, followed by five years of supervised release, for his involvement in the Metropolitan Money Store mortgage fraud scheme that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. Judge Titus also ordered Fordham to pay $13.13 million in restitution and forfeit three residential properties and three vehicles. Fordham aided his wife, Joy Jackson and others with MMS to fraudulently promise to help homeowners avoid foreclosure by convincing them to put title to their homes in the names of straw buyers for a year, during which time MMS promised to improve the homeowners' credit ratings and help them obtain more favorable mortgages. Using the properties, the conspirators applied for mortgages to extract the maximum available equity from the homes and submitted fraudulent loan applications to lenders to obtain inflated loans on the properties. Fordham also served as straw buyer on at least six properties. Nine other defendants have pleaded guilty in this case, including Jackson and McCall.

Prosecutors in New York City have indicted 13 individuals and a mortgage origination company for allegedly perpetrating more than $100 million in mortgage fraud over four years in the metropolitan area. According to Manhattan district attorney Robert M. Morgenthau, AFG Financial Group, Aaron Hand, Eugene Culbreath, Eric Shields, Matthew McDermott, Marc Zirogiannis, Kenneth Law, Kathleen Scanlon, Jeffrey Phelan, Jerry Strklja, Marilyn Mateo, Darlita Bostic, Allyson Hinds and Rajmohan Autar have been charged. In addition, 12 individuals have already waived indictment and pleaded guilty to felonies relating to their participation in the mortgage fraud scheme. According to the indictment, AFG Financial Group, along with a network of co-conspirators and accomplices, allegedly located distressed residential real estate properties in New York City and surrounding counties and then schemed to steal millions of dollars from lending banks in Manhattan and elsewhere using sham sales of those properties. The conspirators, who were unavailable for comment, are alleged to have caused the banks to front millions of dollars to finance purchases of the properties. They then allegedly walked away with most of the cash, leaving behind over-valued properties and worthless mortgage papers.

Mortgage fraud-related Suspicious Activity Reports referred to law enforcement increased 36% to 63,713 during 2008, compared to 46,717 reports in 2007, according to the Federal Bureau of Investigation's 2008 Mortgage Fraud Report. While the total dollar loss attributed to mortgage fraud is unknown, financial institutions reported losses of at least $1.4 billion, an increase of 83.4% from 2007. The report showed that more than 3.1 million foreclosure filings were reported on approximately 2.3 million properties nationally during 2008, up 81% from 2007 and 225% from 2006. As of 2008, the Western region of the U.S. had the most pending FBI mortgage fraud-related investigations. According to the FBI's report, the top 10 mortgage fraud states for 2008 were California, Illinois, Texas, Georgia, Ohio, Colorado, Maryland, Florida, Missouri and New York. Rhode Island, Massachusetts, Pennsylvania and the District of Columbia were newly identified as having significant mortgage fraud problems.

Jonathan Boxman, an owner and operator of New York-based real estate title insurance companies, was charged in federal court in Brooklyn with defrauding his companies' clients of more than $1.7 million. According to Benton J. Campbell, U.S. attorney for the Eastern District of New York, Mr. Boxman — who was unavailable for comment — controlled a real estate title insurance company in New York and other title abstract companies. Through his companies and bank accounts, Mr. Boxman received fees for recording mortgages and deeds, which, in turn, he was supposed to remit to the county where the deed or mortgage was recorded. However, instead of paying the fees to the counties, he allegedly transferred the money to accounts he controlled and used it to pay his companies' operating expenses and to cover thefts from prior victims of his scheme. As a result of his alleged scheme, several mortgages and deeds were never recorded.

Dyck-O'Neal of Arlington, Texas, a national debt collection agency, has been slapped with a cease and desist order by regulators in Georgia for engaging in loan brokering/lending activities without a license or obtaining the proper exemption. At press time the company had not returned a telephone call about the matter. Among its many services, Dyck-O'Neal purchases and serves as a collection agent on first and second mortgage liens.

After being convicted of 51 counts of conspiracy, fraud and money laundering in connection with a mortgage fraud scheme, Harold Stafford of Sumner County, Tenn., has been sentenced to eight years in prison, followed by three years of supervised release. His co-defendants, Miles Jackson Black and Jeffrey Dunn Hathcock, also from Sumner County, were each sentenced to a year and a day in prison, followed by five years of supervised release. All three defendants were ordered to jointly pay $1 million in restitution and a special assessment of $5,100. According to the U.S. attorney's office for the Middle District of Tennessee, Stafford engaged in a scheme that involved the purchase of 22 luxury homes in Hendersonville, Gallatin and Goodlettsville through unqualified straw buyers. Stafford, Black and Hathcock caused the submission of false mortgage loan applications to lenders that overstated the straw buyers' income, falsely stated that the homes would be the straw buyers' primary residences and failed to disclose other recent home purchases by the same straw buyers. All of these mortgage loans ended in default and foreclosure, resulting in losses to mortgage lenders, after foreclosure, totaling $2,214,700.

Beazer Homes USA Inc., Atlanta, has agreed to pay the United States $5 million, plus contingent payments of up to $48 million to be shared with victimized private homeowners, to resolve allegations that it and Beazer Mortgage Corp. were involved in fraudulent mortgage origination activities in connection with federally insured mortgages. The settlement resolves the following allegations: that, when Beazer Mortgage Corp. made Federal Housing Administration-insured mortgage loans for homes built by Beazer Homes, the companies fraudulently and improperly required purchasers to pay interest discount points at closing but then kept the cash and failed to reduce interest rates; that it provided cash gifts to home purchasers through certain charities so purchasers could come up with minimum required down payments, with assurances the gifts would not have to be repaid, and then increased home purchase prices to offset the amount of the gifts; that it obscured which of its branches made defaulting loans to avoid FHA detection of excessive default rates; and that it ignored stated income requirements in making loans to unqualified purchasers. Beazer Homes operates in at least 21 states.

After pleading guilty to wire fraud and money laundering charges in September 2008 in connection to organizing a large mortgage fraud scheme, Ronald Luczak of Cape Coral, Fla., has been sentenced to 22 years in federal prison and ordered to pay $5.9 million in restitution to his victims. According to court documents, between September 2005 and December 2006, Luczak and his company obtained more than $30 million worth of mortgages on at least 37 Cape Coral properties. His company recruited 33 straw buyers and reported on the mortgage applications that the straw buyers were purchasing the properties and falsely inflated the properties' values, fraudulently reported the purported buyers' incomes and occupations, provided false schedules of real estate and assets supposedly owned by the buyers and falsely stated that the buyers intended to use the properties for their primary residences. Luczak and the company received more than $5.8 million from the scheme. Luczak's wife, Lisa Luczak and Sandra Mainardi, a New Jersey loan processor, previously were sentenced to 46 months each for their part in the scheme.