Compliance

Dominick Devito has been sentenced to 51 months in prison and ordered to forfeit $1.4 million for mortgage fraud and other charges. According to the U.S. attorney's office for the Southern District of New York, Devito was the leader of a fraudulent real estate investment scheme that purchased multimillion-dollar residential properties around Westchester County , N.Y., from January 2002 through November 2004 and used false and misleading information to obtain loans from banks and other lenders. Devito identified properties for sale, orchestrated the purchase of the properties, and performed construction work at the properties. Devito's co-defendant John Liscio was sentenced in March to 12 months in prison and three years of supervised release and ordered to pay $50,000 in restitution. Devito's other co-defendant, Robert Didonato, was sentenced in April to 18 months in prison and three years of supervised release and ordered to pay $18,000 in restitution and to forfeit $112,000. The last remaining defendant, Louis Cordasco, Jr., is scheduled for sentencing on May 27.

The Department of Housing and Urban Development has kicked 102 lenders out of the Federal Housing Administration single-family program for various violations and the new housing secretary is promising to get tough on lenders that do not meet the highest standards of conduct. "We expect that when they deal with an FHA-approved lender, they're dealing with a lender they can trust," HUD secretary Shaun Donovan said. In one action, HUD's Mortgagee Review Board suspended Hogar Mortgage and Financial Services from making FHA loans for five years and imposed a $151,000 civil money penalty on the Montvale, N.J. lender. The company could not be reached for comment. The Mortgagee Board determined that Hogar committed serious violations of FHA underwriting requirements. Prior to its suspension in late January, the New Jersey lender had originated 680 FHA loans over the previous two years with 19 defaulting or resulting in a claim. The average FHA default and claim rate is 4.43%, according to the FHA's Neighborhood Watch early warning system. The housing bill (S. 896) that President Obama signed on Thursday imposes stricter reviews of lenders seeking to become FHA-approved lenders. It allows HUD to levy CMP against non-approved lenders participating in FHA originations. The new law requires all FHA lenders to use their official names on advertisements as a way to deter and detect deceptive advertising.

President Barack Obama has signed two housing bills that will provide relief for troubled homeowners that need to refinance, and will crack down on mortgage fraud. The Helping Families Save Their Homes Act addresses the "administrative and technical hurdles" that make it difficult for families with underwater mortgages to use the Hope for Homeowners program and refinance into Federal Housing Administration loans, according to the President. "This bill removes those hurdles, getting folks into sustainable and affordable mortgages, and more importantly, keeping them in their homes," he said at a White House signing ceremony. The bill (S. 896) also shields mortgage servicers that modify loans from investor lawsuits. The President also praised the mortgage fraud bill (S. 386), which doubles the resources of the FBI to pursue mortgage fraud and other financial crimes. He noted the bill expands the federal bank fraud and false claims statutes to cover independent mortgage companies and mortgage brokers. "It expands the Department of Justice's authority to prosecute fraud that takes place in many of the private institutions not covered under current federal bank fraud criminal statutes - institutions where more than half of all subprime mortgages came from as recently as four years ago," Pres. Obama said.

Three South Florida residents and a real estate brokerage firm have been charged with participating in a mortgage fraud scheme designed to launder drug money. Garry Souffrant, his wife, Yvonne Souffrant, his brother, Gamaliel Souffrant and Progressive Real Estate of Broward Inc., have been charged in a 59 count indictment, according to the U.S. attorney's office for the Southern District of Florida. The indictment alleges that from 2002 to 2008, Garry Souffrant, Yvonne Souffrant and Gamaliel Souffrant used Progressive Real Estate of Broward to launder millions of dollars in drug proceeds through an extensive mortgage fraud scheme by allegedly assisting drug traffickers in purchasing homes and luxury automobiles, including a 2004 Rolls Royce Phantom. The defendants allegedly arranged for and/or acted as straw buyers on behalf of the drug traffickers, which allowed the traffickers to use their drug proceeds to purchase homes and lease automobiles while concealing the source of the income. The defendants also allegedly diverted several million dollars of mortgage loan proceeds to continue to fund the scheme and for their personal use. The defendants made their initial appearances in federal court on May 18 before Federal Magistrate Judge Ted E. Bandstra in Miami. Defendant Garry Souffrant was ordered detained pending trial. The court set bond for defendants Yvonne Souffrant and Gamaliel Souffrant. All three individuals could not be reached for comment and all phone numbers listed for Progressive Real Estate of Broward have been disconnected.

Issues that arose from the North Carolina Office of the Commissioner of Banks' examination of 2007 originations by a mortgage unit that Beazer Homes shuttered last year have been settled. Under the settlement agreement, Beazer Mortgage consented, without admitting the alleged violations, to the entry of a consent order which provides approximately $2.5 million in restitution to certain borrowers in respect of the alleged violations. This amount was included in the approximately $13 million of expense Beazer previously disclosed it had recognized in the quarter ended March 31 for estimated payments related to governmental investigations, including those involving the unit. Beazer Mortgage voluntarily ceased operations in February 2008. Beazer also has had several related discussions with the U.S. Attorney for the Western District of North Carolina to negotiate a resolution of its separate investigation into Beazer Mortgage issues. The negotiations with the U.S. Attorney are continuing and Beazer said the two parties have not reached an agreement yet. "There can be no assurance that the company can conclude an agreement with the U.S. Attorney on financial or non-financial terms that are mutually acceptable," said the homebuilder in a press release.

The president and majority owner of US Mortgage Corp. and its CU National unit is preparing to plead guilty to fraud and conspiracy charges relating to the transfer of as much as $160 million of credit union mortgages being serviced by the company for Fannie Mae, according to a report in Credit Union Journal. A hearing in the case had been scheduled for May 6 when Michael McGrath was expected to plead guilty to the charges, several sources involved in the case told CUJ, a sister publication to National Mortgage News. The hearing was adjourned and is expected to be rescheduled over the next few weeks. McGrath, whose family controlled the Pine Brook, N.J., mortgage company, allegedly posed as an officer of dozens of credit unions and sold the mortgages to Fannie Mae without their knowledge and without passing on the funds. Several other US Mortgage executives are reportedly in plea negotiations with federal prosecutors. Lawyers for McGrath did not return phone calls seeking comment. The scheme started to unravel when credit union executives inquired about their mortgages, forcing the company to file for bankruptcy in February. Separately, Fannie Mae, which is being sued by the credit unions, has refused to return the mortgages, claiming they have no proof that McGrath was not acting on their behalf when he signed documents transferring the mortgages to Fannie Mae.

The House approved final passage of the Fraud Enforcement and Recovery Act, which will increase the resources of the Federal Bureau of Investigation and other law enforcement agencies to pursue mortgage fraud cases and other white collar crimes. The bill (S. 386) also expands the federal bank fraud and false claims statutes to cover independent mortgage companies and mortgage brokers. Senate Judiciary Committee chairman Patrick Leahy, D-Vt., said the bill will "rebuild" the nation's fraud enforcement capacity and authorizes $245 million over the next two years to hire more than 300 federal agents, 200 prosecutors and 200 forensic experts and support staff. He noted the FBI currently has fewer than 250 special agents assigned to financial fraud cases, which is only a quarter of the agents the FBI had at the time of the savings and loan crisis. "We need to restore our capacity to fight fraud in these hard economics times and this bill will do that," Sen. Leahy said. The fraud enforcement bill, which President Obama is expected to sign, also creates an independent commission appointed by Congress to investigate the causes of the current financial crisis.

Wilbur Ballesteros, a licensed real estate agent from Lanham, Md., pleaded guilty to his role in the Metropolitan Money Store mortgage fraud scheme that targeted D.C. area homeowners facing foreclosure. Ballesteros, the ninth defendant to plead guilty in this case, conspired with others at the Lanham-based MMS to fraudulently promise homeowners help with avoiding foreclosure and repairing their credit, according to prosecutors. The homeowners were directed to allow title to their homes to be put in straw buyers' names for a year, during which time MMS promised to improve the homeowners' credit ratings, help them obtain more favorable mortgages, and eventually return title to them. The homeowners were told that the equity withdrawn from the properties would be used to pay the mortgages and expenses on their homes — and to repair their credit. Using the homeowners' 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 in the straw buyers' names. At settlements, the conspirators imposed numerous fees for services that weren't performed, disclosed or explained to the homeowners. The conspirators also transferred the sale proceeds out of the escrow accounts into their own bank accounts for personal use. Ballesteros served as a closing agent on more than 60 straw buyer properties, securing title insurance, facilitating the real estate settlements and submitting fraudulent closing documentation to the lenders. He allegedly often altered or created multiple settlement statements for some properties to disburse the homeowners' proceeds to himself and MMS employees and was paid more than $100,000 in kickbacks. The total loss attributable to Ballesteros is said to be $16.9 million. Sentencing is scheduled for December.

A few days after the HUD secretary said he will implement a RESPA rule next year, industry groups headed straight to Capitol Hill in an attempt to block it. Seven financial services and settlement services providers groups are backing an amendment that would require HUD to withdraw the Real Estate Settlement Procedures Act regulation. These groups hope Sen. David Vitter, R-La., will offer the amendment to a credit card or a housing bill soon. If adopted, the Vitter amendment would block the RESPA rule and direct the Department of Housing and Urban Development to work with the Federal Reserve Board in developing compatible RESPA and Truth in Lending Act mortgage disclosures. The Vitter amendment is based on an amendment co-sponsored by Rep. Judy Biggert, R-Ill., that the House passed recently as part of a mortgage reform bill (H.R. 1728). HUD is "ignoring" congressional intent in moving ahead with the "flawed" RESPA rule, Rep. Biggert said. "HUD must suspend this rule and work with the Federal Reserve to create disclosures that work for consumers and provide the clearest and most concise information possible," she said. Meanwhile, 12 industry groups have appealed directly to HUD secretary Shaun Donovan to reverse his decision and suspend the RESPA reform, which is set to go into effect January 1, 2010.

A federal judge has found Clarence Lewis III guilty of defrauding residential mortgage lenders following a trial in Houston. Lewis held a mortgage broker license and operated Motown Mortgage Group in addition to holding a real estate broker license and operating Lewis & Associates Realtors. U.S. District Judge Lynn Hughes found Lewis guilty following a non-jury trial. Lewis and his co-conspirators used both companies to defraud residential mortgage lenders by recruiting individuals with good credit to apply for mortgage loans, many of whom were promised money for signing loan documents and attending the real estate closing at the title company where the mortgage notes were signed. Lewis further induced them to act as borrowers by stating he would ensure the notes were paid and that the property was managed until it could be resold. From January 2002 to January 2008, Lewis is alleged to have obtained more than $12 million in fraudulently obtained loans. Sentencing is scheduled for Aug. 17.

The Minnesota Department of Commerce has revoked Michael Prieskorn's mortgage originator license and fined him $2.2 million for his involvement in the allegedly fraudulent sale of homes in high-growth areas including Eagan, Buffalo, Rochester and St. Cloud. The department charges that Mr. Prieskorn participated in a "builder bailout" scheme where he persuaded investors to purchase 220 homes at substantially inflated prices, allowing the sellers to make profits and Mr. Prieskorn to collect "management fees" ranging from $22,000 to $105,000. Instead of keeping up on the mortgage and utility payments, the department charges that Mr. Prieskorn spent the money himself. In April 2007, Mr. Prieskorn allegedly emptied his bank accounts, stopped making payments and failed to purchase any of the investors' homes as promised. Most of the homes have fallen into foreclosure. Mr. Prieskorn has been at large since he failed to appear at an administrative hearing on the matter in December 2008 and could not be reached for comment. Bill Walsh, a spokesman for the department, said this "looks like criminal activity" and the department has often seen cases like this result in criminal investigations. But he said he was not aware of any criminal investigation into the activity and referred questions as to whether there was one to the U.S. attorney's office. A spokesman for the U.S. attorney's office said he could neither confirm nor deny the existence of a criminal investigation into the matter.

A Florida man who operated and worked with companies that sold sex toys and pornographic videos this week pleaded guilty to his involvement in a mortgage fraud scheme. According to the Florida attorney general's office, between May 2007 and August 2007, Rory V. Porter of Columbia County, Fla., befriended homeowners whose homes were free of any liens, vacant and for sale. Using information he obtained from the homeowners and public records, Porter forged documents and recorded deeds to transfer the homes to his possession. He then located private lenders and borrowed money using the homes as collateral. The AG's office believes Porter stole homes in the Gainesville and Lake City areas worth more than $800,000 and obtained loans against those homes for more than $500,000. After obtaining the proceeds from the new home mortgages, Porter laundered the money through different banks and companies that he controlled or did business with, including companies that sold adult sex toys and pornographic videos. In just over two months, he laundered the proceeds through at least four banks and closed the accounts. Porter will be sentenced in June.

Thomas Hastert of Nevada City, Calif., pleaded guilty to 59 felony counts related to orchestrating a $20 million real estate scheme. According to California Attorney General Edmund G. Brown Jr., between September 2004 and September 2007, Hastert brokered more than 270 hard-money loans in Nevada, Sacramento, Sutter, Butte, Placer and Yolo Counties for real estate development projects. He secured $20 million from several investors, using the funds to broker hard-money loans to borrowers seeking to develop homes on real estate. He told investors that the borrowers had excellent credit scores and were capable of repaying the loans, when in fact many had poor credit scores, didn't make regular loan payments and held properties in foreclosure. Rather than place the loans he brokered into a special trust account overseen by a third-party escrow firm to ensure the project was being built, Hastert instead used the money to pay his office expenses and other development projects. Though he told investors he'd personally oversee the development of the land, investors once asked Hastert to drive them to a property supposedly under development and he was unable to find it. To keep concerned investors at bay, Hastert set up fake investors/straw men. If a legitimate investor tried to initiate foreclosure proceedings, he'd contend that the supposed majority owner opposed the action. He also took all his fees up-front as if the loans were fully funded, when in fact some loans never fully funded and others took more than a year to fully fund. Hastert will be sentenced on June 25 in Nevada County Superior Court.

A man responsible for digging up Social Security numbers and other personal data that was used to siphon millions of phony home equity lines of credit from credit unions and banks was convicted on bank fraud charges last week. Yomi Jagunna, a 44-year-old Nigerian immigrant, is one of a handful of small players to plead guilty in this international scheme, which stole as much as $5 million from U.S. credit unions and banks and wired the proceeds overseas, beyond the reach of U.S. law enforcement. Jagunna, who held back tears during last week's plea hearing, told authorities he set up a sham collection agency to gain access to a commercial database. He admitted selling 39 Social Security numbers for $30 a piece, but authorities said he had access to a database of more than 100,000 Social Security numbers. Jagunna is one of 17 individuals charged in the nationwide HELOC scheme that fooled credit union and bank employees into transferring funds to accounts in at least seven countries, authorities said.

Five people have been indicted in connection with a $14 million mortgage fraud scheme in Wisconsin. According to the U.S. attorney's office for the Eastern District of Wisconsin, Paul J. Zaleski and Robert Farrell, both formerly of Richmond, Ill.; Michael Pembroke of Twin Lakes, Wisc.; John F. Hochrek, Jr., of Spring Grove, Ill.; and Patricia Lynn Kay of Kenosha, Wisc., have been charged in a 24-count indictment, accused of wire fraud and money laundering. The indictment alleges that Mr. Zaleski orchestrated the purchase of at least 40 real estate properties by straw buyers who were led to believe that they were members of an investment group. In order to secure mortgage loans, Messrs. Zaleski and Farrell, working as loan originators in Kenosha, Wisc., allegedly prepared fraudulent loan applications containing inflated appraisals in the names of the buyers. Mortgage lenders advanced more than $14 million in loans. The mortgages subsequently went into default and then foreclosure. An initial appearance for Mr. Pembroke, Mr. Hochrek and Ms. Kay has been scheduled for May 14 before Judge William E. Callahan. Mr. Zaleski and Mr. Farrell have been arrested in California and are awaiting return to Wisconsin.

Education and existing law might be better ways to tackle loan modification fraud than new legislation, given the potential for "unexpected interpretations" of the latter, a Mortgage Bankers Association executive testified before a House subcommittee. The House Financial Services Subcommittee on Housing and Community Opportunity held a hearing in Washington Wednesday to examine the need for federal legislation to prevent foreclosure rescue fraud and loan modification scams. MBA chairman-elect Robert E. Story, Jr., testified before the subcommittee, stating that — although the MBA shares the subcommittee's concerns about the rapid rise in loan mod and foreclosure rescue scams — it does not believe that new laws are needed to investigate and prosecute these fraud schemes. "Unlike new legislation, which always carries with it the risk of unexpected interpretations, existing law is tested by years of judicial precedent and can be applied by federal law enforcement officers with confidence," he said. According to Mr. Story, the MBA believes educating borrowers on how to identify and avoid foreclosure rescue scams and increasing law enforcement officials' level of resources will be more effective. "MBA believes the first way to stop this fraud is by raising awareness of these scams," said Mr. Story.

After conning thousands of dollars from seniors and homeowners facing foreclosure in a loan modification scam, Anna Santos of Los Angeles County pleaded guilty to mortgage fraud. Santos was arrested in March after using forged documents to convince victims to hand over thousands of dollars for nonexistent loan mod services. According to the California Attorney General's office, Santos obtained a fictitious business permit through Los Angeles for "Payment Processing Department," opened several bank accounts and two post office boxes under that name and then mailed flyers to vulnerable homeowners appearing to be from victims' lenders or a government agency. The flyer advised homeowners that they qualified for a special program to save their home from foreclosure. After signing up for "loan modification services," homeowners then received phony confirmation that their lender had been notified and forged loan mod documents that falsely appeared to be from their lender. The victims were informed they had been placed in a probationary program and their payments should be sent to a given post office box address, none of which were credited to the victims' home loans, but were instead retrieved by Santos and deposited into the bank accounts she had opened. The AG's office believes she scammed more than 100 victims, who lost on average $3,000. "Santos conned thousands of dollars from homeowners trying to save their homes through a cruel and sophisticated scam," said AG Edmund G. Brown, Jr., in a statement. "She held out hope, but in reality did not provide an ounce of loan modification, leaving her victims in far worse straits." Santos, who is currently out on bail, is scheduled for sentencing on May 20 in Los Angeles Superior Court.

An MBIA Inc. subsidiary and LaCrosse Financial Products LLC have filed a lawsuit against two Merrill Lynch entities for misrepresentation and breach of contract in connection with credit default swaps tied to subprime residential mortgages.A spokesman for Merrill, which is now owned by Bank of America, declined to comment on the lawsuit which was filed in New York State Supreme Court. The plaintiffs are seeking rescission and damages. MBIA alleges in the suit that Merrill's "effort to market the CDS contracts to MBIA was part of a deliberate strategy to offload billions of dollars in deteriorating U.S. subprime residential mortgages that Merrill held on its books by packaging them into collateralized debt obligations or hedging their exposure through swaps guaranteed by insurers." The plaintiffs charge that "as a direct result of Merrill Lynch's misrepresentations" and breaches of contract, MBIA now faces expected losses of almost $700 million on four CDOs.

The Georgia Department of Banking and Finance issued Cease and Desist Orders to two mortgage companies that were unlicensed to do business in the state. The first order was issued to Kalle Kivinen, doing business as Loan Restructuring Solutions in Chandler, Ariz. The second order went to Atlanta Loan Modifications Inc. of Alpharetta, Ga. Both of these orders were issued after the Department obtained evidence that both Atlanta Loan Modifications and Mr. Kivinen through Loan Restructuring Solutions were engaged in mortgage broker/lending activities without a license. According to Rod Carnes, deputy commissioner for non-depository financial institutions, these orders "only indicate that they were not licensed in the state. This action is just for Georgia." Mr. Carnes would not comment on how investigations of these two companies came about, nor would he comment on whether the entities were engaged in fraudulent activity. Mr. Kivinen, who is still doing business through Loan Restructuring Solutions — though not in Georgia — did not return calls seeking comment.

U.S. District Judge James S. Moody has sentenced a St. Petersburg, Fla. mortgage broker who pled guilty to fraud charges to five years in federal prison. The broker, Victor Thomas Clavizzao, also was sentenced to pay more than $2 million in restitution, as well as to forfeit an additional $6 million. According to court documents, Clavizzao acted as mortgage broker in the purchase of 13 different properties and conspired with Mark Lepzinski, a property flipper from Clearwater, Fla., to submit false and fraudulent information to various lenders in order to induce the lenders to fund bad loans. U.S. District Judge James D. Whittemore previously sentenced Lepzinski to 13 months in prison for his role in the conspiracy.