Compliance

Michael Hershkowitz, a Manhattan real estate developer, pleaded guilty in federal court to participating in a $27 million mail and wire fraud conspiracy.According to documents filed in this case, as well as statements made during the plea, Hershkowitz, working through a Manhattan real estate development company, the Kingsland Group, and related entities, fraudulently induced 70 individuals to lend the Kingsland Group more than $27 million, purportedly to fund the renovation of 16 multi-family apartment buildings located in upper Manhattan. Hershkowitz and co-conspirator Ivy Woolf-Turk falsely represented that the lenders would hold, as collateral for the loans, interests in first mortgages in the various properties in which they thought they were investing. However, the lenders did not hold recorded, first mortgages in the properties but instead were provided with forged documents falsely reflecting that the mortgages had been properly recorded with New York City. Interest was paid on the loans for some years after they were first made, but ultimately the principal on the loans was not repaid when due. It was determined that the lenders did not have valid first mortgages on the properties in question.

To protect consumers from aggressive lending practices, Congress should consider "curtailing" the powers of federal banking regulators to preempt state consumer protection laws, according to FDIC chairman Sheila Bair.In testimony submitted to the Senate Banking Committee, Ms. Bair said federal preemption was seen as a way to improve efficiencies for federally chartered banks and lower costs for consumers. "While that may have been true in the short run, it has now become clear that abrogating sound state laws, particularly consumer protection laws, created an opportunity for regulatory arbitrage that frankly resulted in a 'race-to-the-bottom' mentality," she said. The Comptroller of the Currency and Office of Thrift Supervision routinely preempted state predatory lending laws during the subprime lending boom. The FDIC chairman said setting a "floor" for consumer protection, based on state and federal laws, would be better than current system of establishing a "ceiling" at the federal level. She suggested that Congress could use a newly proposed financial products safety commission to establish the appropriate floor for consumer protection.

After pleading guilty to bank fraud in connection with a mortgage fraud scheme, Robert C. Culp of New Carlisle, Ind., a police officer, was sentenced to 54 months imprisonment, followed by three years of supervised release and was ordered to pay $1.19 million in restitution. Culp was charged with devising and executing a scheme to defraud mortgage lenders and to obtain money, funds, credits and other property owned by or under the custody or control of mortgage lenders by fraudulent pretenses and representations. According to his plea, Culp purchased inexpensive homes, frequently in need of substantial repair and renovation and then arranged to sell these properties at inflated amounts to persons who obtained mortgage loans based upon falsified mortgage loan applications. Culp, who remains on release, must begin serving the sentence on April 24.

The Financial Accounting Standards Board has proposed changes to its "other-than-temporary impairment" rules that should relieve many institutions from taking sharp losses on their holdings of mortgage-backed securities. For debt securities institutions are holding and do not expect to sell, only credit losses would be reported in earnings and the remainder of the impairment would be reported in "other comprehensive income," according to newly proposed OTTI guidance. "The new guidance makes it clear that effects on income are limited to actual credit losses. Notice that the new FASB guidance on OTTI accounting has little effect on capital," according to credit strategists at Bank of America/Merrill Lynch. Currently, FASB has a tougher ability-to-hold standard and the entire estimated impairment is reported as a loss. The comment period on the FASB guidance ends April 1. FASB also is seeking comment on changes to its fair value rules for determining distressed and inactive markets.

Mortgage-related fraud may have cost the industry between $15 billion and $25 billion last year, according to an estimate made by the Mortgage Asset Research Institute. Speaking at a fraud prevention conference in Las Vegas, MARI's Merle Sharick told the audience, "Mortgage fraud is a giant and growing cause of losses." Speakers at the conference said fraud might be a bigger drain on the mortgage business than most executives realize. The last official FBI count put the industry's annual loss due to mortgage fraud at $5 billion. But Scott Broshears, the special agent in charge of uncovering and prosecuting the crime, said his agency is "probably easily investigating" crimes valued at double that amount. Lending further credence to the belief that much of the fraud for profit taking place is doing so at the hands of organized crime, James Freis, director of the Financial Crimes Enforcement Network, a division of the U.S. Treasury, said his agency has noticed a direct link between mortgage fraud and money laundering. "Mortgage fraud is a highly moving target that requires the disposition of large sums of cash," he said. "These are often interconnected. These are not separate things. Profits need to be integrated into the financial system." Scott Brower, the U.S. attorney for Nevada, told the conference that even with the change in administrations in Washington, mortgage fraud "will be on our radar screens for the foreseeable future." He said, "We're trying to get ahead of the problem, but I'm not sure anybody in law enforcement can. We're just scratching the surface. We're likely to be very, very busy for months and years to come."

A federal bankruptcy court in Newark has approved the hiring of a criminal attorney by CU National Mortgage of New Jersey, as a federal investigation into allegations made against the failed mortgage lender spread.The bankruptcy court, where CU National and its parent US Mortgage Corp., landed last week, has approved the hiring of Gibbons PC as special criminal counsel for the company, and the payment of a $21,178 retainer to the Newark firm. The action comes as a federal grand jury is investigating allegations that the company defrauded dozens of credit unions by selling their mortgages to Fannie Mae without authorization and keeping the proceeds. As many as 30 credit unions in the mid-Atlantic region believe as much as $160 million of their loans may have been fraudulently sold to Fannie Mae.

Reported incidents of mortgage fraud in the U.S. increased by 26% in 2008 from 2007, an all-time high, according to a new report issued by the Mortgage Asset Research Institute. For the first time, Rhode Island ranked first in the nation in regard to mortgage fraud. Released in Las Vegas at the MBA's annual National Fraud Issues Conference, the report found that fraud activity based on the book of business originated in the Ocean State was three times the national average. "Future reports will tell if this is a statistical anomaly," said MARI spokesman Merle Sharick. "But for now, current data suggests that the state has emerged with a problematic and heretofore unnoticed mortgage fraud problem." Rhode Island's rise up the ladder from the fourth position last year knocked Florida down to the second spot. But Nevada and Utah have dropped out of the top10 altogether. California, too, has dropped, from fourth among the list of hot spots for fraud last year to eighth this year. The position changes suggests that there might not be any more money to made in those places hit hardest by the housing downturn, so scam artists are taking their talents elsewhere.

Congressional Democrats and Obama administration officials want to make consumer protection an integral part of any reforms to the mortgage finance system. Consumer protection needs to be at the "very heart of our system of mortgage finance, not an after-thought or relegated to second class status," said Michael Barr, counselor to the White House National Economic Council. Consumers and investors should be able to "rely on the fact that underwriting is being conducted appropriately," Mr. Barr told a mortgage reform forum sponsored by the Center for American Progress. Meanwhile, the Mortgage Bankers Association is working on reform proposals to restore confidence in the system by establishing more effective consumer protections. "We know that these proposals will constrain some in the industry, but they will also help our members and their customers in the long-run," MBA chairman David Kittle told a congressional panel last week.

Three defendants have been sentenced for their involvement in a straw borrower fraud scheme to obtain residential construction loans, defrauding Zions Bank of $20 million. Christopher A. Upchurch, a building contractor from Meridian, Idaho, was sentenced to 33 months in prison, followed by five years of supervised release and ordered to pay $633,634 in restitution to Zions Bank. Barbara L. Cobos, a Zions Bank loan officer from Mountain Home, Idaho, who received $125,000 in kickbacks from Upchurch in order to assure funding of fraudulent loan applications, was sentenced to 18 months in prison, followed by five years of supervised release and ordered to pay $125,000 in restitution. Nicholas R. Gossi of Boise, Idaho, who worked first for a bank and later as a mortgage broker, pleaded guilty to submitting a false loan application to a mortgage lender and was sentenced to six months in prison, followed by six months of home detention and five years of supervised release and to pay restitution to National City Bank in an amount to be determined later. The scheme began in October 2004 and lasted until November 2005. Once straw buyers were located, their information was used as the borrowers' on residential construction loan applications. In many cases, the loan applications overstated the "borrower's" income and credit and falsely said that they were planning to build "owner-occupied" homes. Upchurch and others also forged the borrowers' names on loan documents. The applications were not reviewed or approved by supervisory officials at Zions Bank. Once the fraudulent loans were approved, Upchurch had the straw borrowers sign blank draw requests so he could draw on the loans at any time. He then filled out the draw requests for specific construction purposes, but diverted many of the loan proceeds for his own benefit. The bank did not return a call for comment.

Michael Gee, a Mooresville, N.C-based real estate appraiser, pleaded guilty in connection with his participation in a mortgage fraud scheme involving about $15 million in loans and more than 200 properties. Gee, along with Victoria L. Sprouse and Michael D. Pahutski, both of Charlotte, N.C., were charged in a superseding indictment in Federal District Court for the Western District of North Carolina with perjury, conspiracy to commit money laundering, mail, wire and bank fraud. Ms. Sprouse, a licensed North Carolina real estate attorney, and Pahutski, a mortgage broker, were alleged in the indictment to have participated in a scheme from 2001 through September 2002, in Mecklenburg County, N.C, to obtain money and property by means of false and fraudulent pretenses, representations and artifices to defraud financial institutions of money and their right to honest services. Specifically, Ms. Sprouse and Pahutski were accused of preparing materially false mortgage applications and supporting documents to submit to lenders for approval. The defendants also allegedly prepared and signed materially false HUD-1 settlement statements, appraisals and accepted downpayment checks from persons other than the buyers listed in the HUD-1 settlement statements. Pahutski pleaded guilty and awaits sentencing. Ms. Sprouse has pleaded not guilty and is scheduled to go on trial March 23. She could not be reached for comment at press time.

The NAACP has filed separate class action claims against Wells Fargo Home Mortgage, and HSBC Mortgage, accusing the two of discriminatory lending policies that unfairly placed African American in higher cost subprime loans.The civil rights group claims credit-worthy African Americans were steered into subprime mortgages when they could have qualified for prime loans. Wells Fargo provided mortgage brokers with incentives to steer consumers into subprime loans, according to the NAACP, and did not undertake a "meaningful review" of applications to determine if the applicants would qualify for a prime loan. "It is time for these lenders to be held accountable. We look forward to forcing real change and real relief through this lawsuit," said NAACP president Benjamin Jealous. In a statement, Wells Fargo said, "We intend to vigorously defend these unfounded allegations. We are confident we will prevail." HSBC said it does not comment on pending litigation. "We stand by our fair lending and consumer protection practices," it said. The London-based HSBC acquired Household Finance and its Beneficial Finance subprime affiliate earlier in the decade. Prior to that HSBC was not a subprime lender.

Jack Ferm, a former radio talk show host in Las Vegas, was arrested on two counts of felony theft and related charges in connection with the operation of U.S. Justice Foundation, a mortgage rescue firm. Mr. Ferm is the president and owner of U.S. Justice Foundation, a document preparation business that allegedly misled customers into believing his service would stop ongoing foreclosures on their homes without the need to retain an attorney. His company website indicates he has a participated in successful litigation against numerous large corporations. The Nevada Attorney General's office received numerous complaints about alleged misrepresentations made by Mr. Ferm, including several clients who paid thousands of dollars to the U.S. Justice Foundation with no legal documents having been prepared or filed on their behalf. In many cases, Mr. Ferm required the victims to pay a monthly charge — in addition to the original retainer.

A lawsuit filed by the National Association of Home Builders to block implementation of a RESPA rule has been put on hold while the Department of Housing and Urban Development reconsiders its position on prohibiting builders from tying price discounts to the use of their affiliated mortgage companies."All aspects of the litigation are put on hold until HUD completes its renewed public comment process," a NAHB spokeswoman said. A U.S district court judge was scheduled to hear arguments April 3 in NAHB's suit to overturn the new "required use" provision in the Real Estate Settlement Procedures Act rule that the Bush administration issued shortly after the November elections. On March 6, HUD said it will delay the implementation date until July 16, while it solicits public comment on whether to "withdraw" the required use rule. "Proposing to withdraw this rule is the right thing to do so that home builders can offer consumers the best possible deal on the purchase of a new home. We are hopeful that HUD will do what is right for consumers and take final action to strike the rule later this year," NAHB chairman John Robson said.

Kara McIntosh of Bethesda, Maryland, pleaded guilty to mail fraud related to the fraudulent purchase of properties in Maryland and Washington, D.C. using false mortgage documents. According to the plea agreement, McIntosh, Timothy Reed and others recruited straw buyers to purchase houses. McIntosh knew the straw purchasers were not planning to live in the properties and did not qualify for the mortgages. Some of the straw buyers purchased multiple properties at the same time. To enable straw buyers to purchase the properties, McIntosh was paid to prepare fraudulent mortgage applications, which misrepresented the straw buyers' income and assets. McIntosh also received part of the fraudulently obtained mortgage funds. For example, at one closing, McIntosh falsely claimed $109,600 for "renovations" that her company purportedly performed. No such renovations ever occurred. Beginning in 2006, this scheme involved fraudulent loans worth more than $19 million. More than 10 individuals and banks were harmed. The loss amount foreseeable to McIntosh is between $2.5 million and $7 million. Many of the purchased properties have been foreclosed upon. U.S. District Judge J. Frederick Motz has not yet scheduled her sentencing. Her co-conspirator, Reed, pleaded guilty on Feb. 10 to the same offense. No date has been scheduled for his sentencing. To date, four defendants have pleaded guilty to their participation in this scheme.

A former loan processor who was based in Houston has pleaded guilty to mail and wire fraud conspiracy charges before U.S. District Judge Nancy F. Atlas. The processor, Babette Jammer, admitted to conspiring with others to defraud residential mortgage lenders by misstating facts relevant to the lending decisions. Jammer assisted loan officers at two Houston area mortgage brokerage firms in preparing fraudulent documents used to induce lenders to provide 100% financing for homes the borrowers falsely claimed were to be their primary residences. Jammer created false IRS documents, including W-2 forms and tax returns, which were provided to the lenders.

SigniaDocs, Houston, has integrated its electronic vault technology with Equifax's identity verification engine to address their respective users' interest in using secure automation to counter increasing ID fraud through means in line with new federal rules. The engine, which is called Equifax Secure's eIDverifier, verifies online mortgage applications and the company promises borrower identification that is compliant with the Federal Trade Commission's Fair and Accurate Credit Transactions Act red flag rules. The rules, which first went into effect in November 2008 and are set for full enforcement as of May 1, require companies to look out for and address potential indicators that may be signs of ID fraud. A February report by Javelin Strategy & Research, San Francisco, indicated that the number of identity fraud victims increased 22% to 9.9 million adults in the United States in 2008.

Central States Mortgage, Wauwatosa, Wisc., which provided residential origination services to more than 250 credit unions, shut its doors on Monday, the second closure of a major CU-related mortgage firm in as many months. CSM is owned by 25 credit unions and the Wisconsin Credit Union League. Central States originated $538 million in residential loans in 2008, compared to $707 million the year before. The lender has been embroiled in controversy over the past eight months - first with the firing of its CEO and founder Richard Jungen, then with a suit claiming Mr. Jungen defrauded it of $15 million through a secondary funding vehicle he owned called Interim Funding. (The alleged fraud took place while he was still managing Central States.) Members United Corporate FCU of Illinois, which provided a warehouse line of credit to Central States, is also preparing to write-off millions of dollars in loans to CSM. A message at the Central States switchboard this morning says the company has suspended operations. Mr. Jungen founded Central States in 1984, then sold a majority stake to the credit unions in 1997. He continued to head the operation until last July when he was fired.

Richard Shumway of Brewerton, NY, was sentenced in U.S. District Court in Burlington, Vermont, to 51 months of imprisonment followed by three years of supervised release following his guilty plea to a federal wire fraud charge. Chief U.S. District Judge William K. Sessions III also ordered that Shumway pay $1.34 million in restitution. Shumway skimmed a total of nearly $1 million from more than 200 loans he brokered while owning and operating TSC Funding, a South Burlington-based mortgage brokerage business, by means of payments taken outside of closing, without the knowledge of the borrower. As part of the scheme, Shumway arranged for Gerald Mullaney, formerly a licensed real estate appraiser in the Albany, N.Y., area, to prepare falsified appraisals for the homes the borrowers were purchasing. This enabled Shumway to induce the borrower to take out a larger loan than necessary to buy the home, and also enabled Shumway to divert some of the proceeds of each loan to his own benefit. Shumway misled borrowers into believing the extra fees were to be paid to the lending institution to obtain a lower interest rate. Nazzarra Bernardo of Syracuse, the owner of the title company that processed the closing paperwork on each loan and served as escrow agent, aided Shumway in this scheme. Mullaney and Bernardo have pleaded guilty to related charges and await sentencing.

Senior U.S. District Judge James C. Fox sentenced Kimberly Taylor of Fayetteville, North Carolina, to 70 months' imprisonment followed by five years of supervised release following Taylor pleading guilty to charges related to a mortgage fraud scheme. The court also ordered Taylor to pay $91,933 in restitution. A Federal Grand Jury returned a criminal indictment on October 24, 2007. At her arraignment Taylor pleaded guilty on July 10, 2008, to 10 counts of bank fraud and two counts of aggravated identity theft. Starting in June 2005 and continuing through June 2006, while working as a licensed mortgage broker, Taylor devised a scheme in which she took the identities of clients or potential clients, to include their names, social security numbers, and dates of birth, and submitted loan applications to RBC Centura to obtain loans totaling $184,400.

After pleading guilty to charges related to a scheme resulting in losses of more than $3.5 million to HUD, an unlicensed real estate agent and property investor was sentenced to 36 months in federal prison, followed by three years of supervised release, and ordered to pay restitution of $2.83 million. According to the plea agreement, between August 1993 and May 2001, Robert Duran, aided and abetted by others, caused the funding and insuring of approximately $11.45 million in fraudulent FHA-insured home mortgage loans on at least 73 properties in Los Angeles and Riverside counties, California. All the properties went into default and were resold at a loss to HUD of approximately $3.56 million. Duran worked as an unlicensed real estate agent and property investor for real estate and investment companies. As an investor, Duran provided false employment, credit and income documents to mortgage lenders, many of which were FHA-insured lenders. Duran also acted as a real estate agent on sales of property to either straw buyers, fictitious buyers or buyers that did not qualify for an FHA-insured mortgage loan. Duran would also assist investors in facilitating sales of property to non-qualifying buyers or would act as an investor himself. He caused fraudulent employment, income, credit and identification documents to be submitted to FHA and enlisted notaries to falsely notarize that they witnessed the signing of loan documents. Duran also used the notary books of others to falsely notarize loan documents without the knowledge of those notaries and placed downpayments into escrow on behalf of non-qualifying buyers.