Compliance

The House Financial Services Committee is holding a hearing April 23 on a regulatory reform bill that would restrict nonprime mortgage lending and lender compensation. Committee chairman Barney Frank, D- Mass., originally wanted the committee to mark up and approve the bill (H.R. 1728) before Congress left April 6 for its two-week break. But the chairman agreed to postpone the markup due to objections by committee Republicans and industry groups. Now it appears the committee markup will be April 28 or April 29. The mortgage reform bill (H.R. 1728) requires lenders to retain 5% of the credit risk when they sell single-family loans that are not prime fixed-rate mortgages to investors. Lenders say the 5% is too high and they are looking for some middle on the risk retention issue. H.R. 1728 also restricts yield spread premiums and mortgage bankers are concerned the language is ambiguous and could restrict servicing release premiums.

Kamal J. Gregory of Centerville, Ohio, pleaded guilty in U.S. District Court to charges on an extensive mortgage fraud scheme affecting 210 residential properties, of which 205 are located in Montgomery County, Ohio. The scheme affected 63 investors and led to foreclosure against owners of more than 90% of the properties. Gregory admitted that, while working as a loan officer under between March 2002 and June 2008, he along with 11 other co-conspirators prepared and submitted mortgage loan application packages to lending institutions on behalf of purchasers/investors. The applications made fraudulent claims involving the income of the borrowers and values of the properties involved, most of which were dilapidated. The application packages artificially inflated the properties¹ worth above legitimate fair-market values. Gregory and his co-conspirators created the fraudulent loans as a way of making money for their own benefit. He admitted to participating in 46 separate fraudulent real estate closings. The net fraudulent loan amounts associated with these closings exceeded $4.2 million. Two of Gregory¹s co-conspirators, Julian M. Hickman and Robert Mitchell, have previously pleaded guilty to related charges and await sentencing.

The Senate is expected to vote on a bill next week to expand bank fraud statutes to cover independent mortgage companies and mortgage brokers for the first time.The new definitions for "financial institution" and "mortgage lending business" will ensure that mortgage brokers and mortgage companies are held fully accountable under the federal fraud laws, according to a summary of the bill (S. 386). The Senate Judiciary Committee approved the bill by unanimous vote on March 5. Senate Majority Leader Harry Reid, D-Nev., filed a cloture motion just before Congress left for its two-week spring break to counter any attempt to filibuster or block Senate consideration of the mortgage fraud bill when Congress returns next week. The Fraud Enforcement and Recovery Act also authorizes $165 million in appropriations to fund mortgage fraud investigations by the Justice Department, HUD inspector general and U.S. Secret Service.

After claiming for years that bankers were filing ever more suspicious activity reports in response to regulatory pressure, experts are attributing the latest spike to a dramatic rise in actual financial crime.The number of reports filed by depository institutions last year rose nearly 13% from a year earlier — the largest increase in three years — to 733,529, according to a report to be released next month by the Financial Crimes Enforcement Network. It also was the 12th consecutive year, since FinCen started keeping records in 1996, that SARs hit a new high. "When there are difficult economic times, financial fraud becomes the growth industry," Peter Djinis, a lawyer in Sarasota, Fla., and a former FinCen official told The American Banker. "Financial institutions are clearly paying more attention there. They are now being more liberal in reporting not just active fraud but attempted fraud." Until the financial crisis hit, suspicious activity reports were a top source of complaint from bankers, who called them overly burdensome and of little value to law enforcement officials. After lawmakers criticized regulators in 2004 for failure to enforce anti-laundering laws, the agencies put a new emphasis on SAR reporting. The result was a huge increase in filings.

U.S. District Judge William C. O'Kelley sentenced Andrew John Smith of Cleveland, Ga., to serve three and a half years in prison, followed by five years of supervised release on charges arising from a mortgage fraud scheme. The court also ordered Smith to pay restitution but has not yet set a final amount. According to the information presented in court, in early 2007, Smith was employed as a part-time loan officer at a Buford, Ga.-based mortgage firm when he originated a fraudulent loan for his own residence. An alleged co-conspirator not named in the indictment later recruited Smith to refinance loans with other lenders, as well as to sell foreclosed properties on which construction was not complete to unqualified straw borrowers funded by other lenders, according to court information. Smith's own loan for his residence had been included in the company's portfolio of nonperforming loans facing imminent foreclosure. In June 2008, Smith and his alleged co-conspirator were caught in an FBI sting after Smith had arranged for the sales price of a property to be inflated to $4 million from $2 million. Prior to his arrest, Smith submitted fraudulent documents to federally insured banks to arrange a $3.2 million purchase money mortgage loan to finance the purchase of the property. Smith then allegedly negotiated a side agreement with the sellers who were, unbeknownst to Smith, cooperating with the FBI, for a $2 million kickback to his shell company. Federal agents at the property arrested Smith during a subsequent meeting to negotiate his multi-million dollar kickback for the fraudulent deal. The property was sold for its true market value of $1.8 million immediately upon conclusion of the FBI's sting operation. The FBI's investigation is ongoing.

The Department of Justice is moving closer to forming a national mortgage fraud task force to investigate and prosecute real estate and mortgage related crimes, according to government officials familiar with the matter. The effort, if it comes to fruition, would involve state and local and federal prosecutors working together "to find trends and bring cases," said one government official talking on background. Presently, DOJ has a "working group" on mortgage fraud that is an informal effort and focuses more on mortgage issues and trends, as opposed to specific cases. David Fleck, who recently stepped down as deputy District Attorney in charge of real estate fraud for Los Angeles, said he has talked to DOJ about the task force, but noted that the agency has yet to make a final decision. (Once Lanny Breuer is confirmed by the Senate to head DOJ's criminal division a final decision on the task force is anticipated.) Speaking at SourceMedia's servicing show in Dallas this week, Mr. Fleck noted that Los Angeles has 20 detectives working on real estate fraud related investigations but added that, "We're just scratching the surface."

There now have been eight convictions in a Maryland case involving a fraud that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. Kurt Fordham of Fort Washington, Md., pleaded guilty to charges in connection with the activities at Metropolitan Money Store, Lanham, Md. In May 2005, Joy Jackson, Fordham's wife, along with co-conspirator Jennifer McCall, incorporated MMS, which fraudulently promised to help troubled homeowners avoid foreclosure and repair their damaged credit. The homeowners were directed to allow title to their homes to be put in the names of third party purchasers for a year, during which time MMS promised to improve the homeowners' credit ratings and eventually return title to their homes to them. 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 straw buyers' names. At settlements, the conspirators imposed numerous fees and required seller contributions that were far in excess of industry standards and imposed fees for services that were not performed. They also transferred the sale proceeds out of the escrow accounts into the conspirators' business and personal bank accounts and converted a substantial portion of those funds to their personal use. In addition to directing straw buyers to participate in the scheme, Fordham served as straw buyer on at least six properties. As a result of this scheme, the total loss attributable to Fordham is $13.6 million. Fordham is the eighth defendant to plead guilty in this scheme. Sentencing for Fordham if scheduled for July 10. Jackson and McCall also have entered guilty pleas.

Federal and state authorities announced a new joint effort to stop scam artists who target troubled owners struggling to hold onto their homes. "If you prey on vulnerable homeowners," U.S. attorney general Eric Holder said at a press conference, "we will find you and we will punish you." As part of the initiative, the Treasury Department's Financial Crimes Enforcement Network has issued an advisory to help financial institutions spot questionable loan modification schemes and report that information to the authorities. FinCEN, working with other law enforcement agencies and regulators, will identify possible suspects for civil and criminal investigations. "We will shut down fraudulent companies more quickly than before," said Treasury secretary Timothy Geithner, vowing to target "companies that otherwise would have gone unnoticed under the radar." Calling perpetrators of fraudulent rescue schemes "bottom feeders," Federal Trade Commission chairman Jon Leibowitz said five new cases have been brought against companies who "kick people when they are down, sabotaging" their efforts to save their homes. Four of the cases name outfits which use "copy-cat names and logos" to try to trick homeowners into thinking they are working with legitimate government agencies, while the fifth calls itself the "Federal Loan Modification Center" even though it has no federal connection. The FTC also has sent warning letters to 71 additional possible scam artists who promise to stop foreclosures, save people's houses and claim a 97% success rate of doing so. Such companies "will promise" to do these things "but they don't," said Illinois attorney general Lisa Madigan. "All they do is take your money."

Tyler Cassity, the chief executive of Utah Financial Inc., and his wife, Olivia Cassity, have been charged with 18 felony counts for allegedly running a mortgage fraud scheme.According to the Utah Attorney General's Office, the Cassitys prepared their own appraisals using the name of a separate licensed appraiser and substituting photos of more lavish homes as part of those appraisals to inflate the value of the real estate described in those appraisals. They then allegedly used straw buyers to obtain loans far in excess of the true value of the properties. Equity was then allegedly skimmed from the properties in order to gain tax advantages and buy other properties. The alleged scheme may have netted several million dollars. The Attorney General's Office has asked a judge to freeze the assets of the defendants and is seeking criminal forfeiture of their business and their home in Salt Lake City. Prosecutors asked that bail be set at $500,000 for each defendant.

Tyler Cassity, the chief executive of Midvale, Utah-based Utah Financial Inc., and his wife, Olivia Cassity, have been charged with 18 felony counts for allegedly running a mortgage fraud scheme. According to the Utah Attorney General's Office, the Cassitys allegedly prepared their own appraisals using the name of a separate licensed appraiser and substituting photos of more lavish homes as part of those appraisals to inflate the value of the real estate described in those appraisals. They then allegedly used straw buyers to obtain loans far in excess of the true value of the properties. Equity was then allegedly skimmed from the properties in order to gain tax advantages and buy other properties. The alleged scheme may have netted several million dollars. The Attorney General's Office has asked a judge to freeze the assets of the defendants and is seeking criminal forfeiture of their business and their home in Salt Lake City. Prosecutors asked that bail be set at $500,000 for each defendant.

A New Jersey nonprofit organization said it will pay $5.4 million to buy mortgages from JPMorgan Chase that originally were part of a fraud scheme. The Orange, N.J. nonprofit, Housing and Neighborhood Development Services Inc., is buying the mortgages on 47 vacant homes in the greater Newark area. HANDS plans to renovate the homes — many of which are run down — and turn them into affordable housing. The loans, which HANDS bought in bulk, were part of a fraud scheme involving one real estate investor who received financing from Washington Mutual. JPMorgan Chase bought WaMu with federal aid.

The trustee for bankrupt subprime giant New Century Financial Corp. is suing the lender's auditor, KPMG, for $1 billion in damages, charging that it abetted the firm in misstating its true financial condition. Among other things, the trustee accuses the auditor with negligence noting that KPMG "did not act as a watchdog." The bankruptcy trustee is represented by the California law firm of Thomas, Alexander & Forrester, which filed claims in New York and California. New Century, whose shares once traded as high as $55, collapsed in the spring of 2007, wiping out shareholders. At its peak, the nation's second largest subprime lender had a market capitalization of almost $3 billion. KPMG issued a statement denying that it was responsible for New Century's collapse, saying it acted "in accordance with professional standards." The accounting firm said it would vigorously fight the lawsuits. A report issued last summer said creditors of NCFC are owed as much as $1.6 billion. KPMG's predecessor firms were sued for negligence by federal regulators during the S&L crisis. Some of those claims were settled out of court.

John Wanek of Phoenix, Arizona, and Robert Swanigan of Mesa, Ariz., have been indicted by the Franklin County, Ohio Grand Jury for allegedly having perpetrated a mortgage fraud scheme in Franklin County, Ohio. The defendants were arrested March 30 in Arizona. According to the indictment, the case alleges that Mr. Wanek orchestrated commercial loan fraud through his Arizona companies. Mr. Swanigan was Mr. Wanek's operations manager. Investigators said that in the past six years Mr. Wanek allegedly obtained commercial loans in the Columbus, Ohio area through the use of false statements and forged documents. Mr. Wanek also obtained loans for the purchase of six Columbus apartment complexes and one Indianapolis apartment complex. Mr. Wanek then defaulted on the loans. Mr. Wanek had been indicted in March 2008 in a case alleging mortgage fraud on Franklin County properties worth more than $15 million. That case was due to go to trial this month. The new indictment incorporates the previous case and adds mortgage fraud allegations concerning properties worth an additional $23 million dollars. No trial date has yet been set. Neither defendant could be reached for comment.

Larry J. Lupton, a real estate broker from Brookfield, Wisconsin, has been found guilty of soliciting a kickback in connection with the state's attempted sale of a $30 million office building in downtown Madison.After hearing testimony and receiving evidence during a court trial earlier this month, U.S. District Judge Lynn Adelman found Lupton guilty on all four counts charged in the indictment: bribery, wire fraud and two counts of making false statements to an FBI agent. Lupton solicited a payment from a particular buyer's broker in exchange for steering the sale to that broker's client. Lupton asked the broker for a $75,000 kickback and suggested to the broker that the payment could be in the form of cash paid directly to Lupton or a consulting fee paid to a defunct company that he owned. Either form of payment would allow Lupton to conceal it from the state and from Equis Corporation, the real estate firm that had retained Lupton as an independent contractor. Sentencing has not yet been scheduled.

Renato Gonzales Quiazon of Hayward, Calif., pleaded guilty to fraud charges arising from a loan kickback scheme. Specifically, Quiazon pled guilty to one of the 11 counts of wire fraud and four counts of filing false tax returns. Quiazon is alleged to have devised a scheme to fraudulently obtain payments of loan kickbacks, commissions and cash outs/extraneous line items from borrowers' escrow accounts. Beginning about January 2000 through October 2004, the defendant was employed as a loan officer with New Century Mortgage in Emeryville, Calif. During this time, Quiazon entered into an agreement with an independent mortgage broker to use his name and broker's license on loans that the defendant processed as the loan officer. By using the mortgage broker's identity on these particular loans, New Century Mortgage issued a 1% commission (1% of the total loan amount) to the mortgage broker. As part of the agreement with the mortgage broker, the mortgage broker was to retain 20% of the commissions and pay Quiazon a kickback of 80% of the commissions, he admitted. In contrast to his arrangement with the mortgage broker, in about 2002, the defendant started to get the commission checks directly and forged the mortgage broker's signature on the back and deposited the checks into his bank account. Quiazon also filed false individual income tax returns for the tax years 2001, 2002, 2003 and 2004. The defendant admitted he deducted expenses that did not exist and failed to report the loan kickbacks and other payments that he received which totaled approximately $430,661 for the period under investigation. New Century did not respond to requests for comment.

Craig Tengowski, a licensed appraiser from Pittsburgh, Pennsylvania, pleaded guilty to wire fraud in connection with a mortgage fraud conspiracy involving inflated appraisals.An interagency Mortgage Fraud Task Force that includes the FBI and other federal, state and local law enforcement agencies conducted the investigation that led to Tengowski's prosecution. Chief U.S. District Judge Donetta Ambrose has scheduled sentencing for Sept. 18.

Operation Madhouse, a federal undercover investigation in which undercover law enforcement agents posed as straw buyers of houses seeking assistance in financing and closing fraudulent mortgage transactions, has resulted in charging 24 defendants for mortgage fraud in the Chicago area. In each of the cases, multiple real estate professionals worked to carry out the frauds. Each case involved a different fraudulent mortgage loan arranged by a different group of defendants based in the Chicago area. Those defendants' alleged roles in the fraudulent transactions included: fraudulently preparing loan applications and other documents; creating fraudulent banking information; fabricating income tax returns; creating fictitious verifications of employment and rental income; creating false appraisals; and submitting the bogus applications and supporting documents to the lenders. In each of the undercover transactions, a cooperating individual allegedly represented that he was selling a house to a nominee buyer who intended to walk away from the property and default on the mortgage after the transaction closed. In reality, the nominee buyers were undercover agents, as were paralegals that assisted in closing the real estate transactions. The houses bought with the fraudulently obtained mortgage loans were actually owned by the federal government. Instead of defaulting on the fraudulently obtained loans after the closings, the government fully repaid the lenders after each transaction closed. The loans involved in the undercover project totaled approximately $1.4 million. In a related case, which did not result from the undercover investigation, the defendants are alleged to have fraudulently obtained approximately $4.2 million in loans, causing losses in excess of approximately $1.1 million. The following individuals have been charged: Mohammed Ali Moallem, Bahidad Javid, Abe Karn, Donna Books, Hichem Julani, Daniel Lietz, Marwan Atieh, Ruwaida Dabbouseh, Khalil Qandil, Khaja Moinuddin, Mohammed Nasir, Louis L. Javell, Aysha M. Arroyo, Juan Gil, Michael Salem, Hakim A. Jaradat, Robert Goldberg, Oscar Paredes, Maryam Khan, Babajan Khoshabe, Sunil Kaushal, James Kotz, Siamak Safavi Fard and Noel Parmar.

The president of Metropolitan Money Store, Joy Jackson of Fort Washington, Md., pleaded guilty for her role in the company's massive mortgage fraud scheme that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. According to her plea agreement, Jackson helped incorporate MMS, which offered foreclosure consultation and credit services to financially distressed homeowners. From September 2004 to June 2007, Jackson and others conspired to fraudulently promise to help homeowners avoid foreclosure and repair their damaged credit. The homeowners were directed to allow title to their homes to be put in the names of straw buyers 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 their homes to them. The homeowners were told that the equity withdrawn from the properties would be used to pay the mortgage and expenses on their homes and to repair their credit. The straw buyers were paid up to $10,000 to participate in the scheme and allow the properties to be put in their names. Jackson also served as a straw buyer on several properties in Maryland. In addition, Jackson directed others to transfer the equity proceeds of homeowners into the general checking accounts of MMS as well as her personal accounts. She withdrew these funds and paid for goods and services for herself, including art, cars, clothing, credit card bills, homes, fur coats, furniture, airline trips, gambling expenses, jewelry, limousine services, student tuition and a luxury wedding for herself and an alleged conspirator. As a result of this scheme, the total loss attributable to Jackson, including the estimated losses to the mortgage lenders, is $16.88 million. Jackson is the seventh defendant to plead guilty in the MMS mortgage fraud scheme. Sentencing is scheduled for Nov. 16.

FBI director Robert S. Mueller told Congress that the growing number of mortgage fraud cases are "straining" the agency's resources and that the bureau now has 250 agents working on investigations — double the number from two years ago. In his prepared testimony Mr. Mueller said there are now 2,000 open mortgage fraud cases. Three years ago the agency had 700 open cases. "We have had to shift resources from other criminal programs to address the fiscal crisis," Mr. Mueller said. He noted that the agency is trying to combat mortgage fraud by using computer programs, including what he called "property flipping computer applications."

After being found guilty by a Navarro County jury for orchestrating a $3 million mortgage fraud scheme, Kandace Yancy Marriott of Gun Barrel City, Texas, was sentenced to 99 years in prison, according to a report from the Texas Attorney General's office. According to prosecutors, Marriott received monthly mortgage payments from her clients, failed to remit those payments to the lender and embezzled the homeowners' funds, causing her clients to default on their home loans. Marriott's conviction stems from her involvement in a complex mortgage fraud scheme that defrauded the federal government. The scheme's principal operators were said to be the defendant and her husband who sold manufactured homes through their company, One Way Home & Land. State investigators allege both defendants illegally forged homebuyers' signatures, inaccurately completed loan applications and falsified supporting documents, including the buyers' rent payment verification statements, proof of employment and Social Security Administration benefits data. The scheme involved predominantly low-income purchasers whose residential loans were guaranteed by the U.S. Department of Housing and Urban Development. As a result, when the unqualified buyers defaulted on their home loans, their lenders did not suffer financial losses. Instead, HUD had to cover the default costs. Investigators believe the defendants' scheme cost the taxpayers more than $3 million. The defendants closed the One Way Home & Land after litigation and investigations ensued in late 2005. As a result, they opened a Kaufman County firm under a different assumed name, and additional criminal charges in Kaufman County stem from that later operation.