Compliance

A Columbus, Ohio restaurant owner, Gihan Ahmed Ismail Zalat, was sentenced to four years in prison for her role in a mortgage flipping scheme. Zalat pleaded guilty to three counts of engaging in a pattern of corrupt activity and five counts of money laundering. Zalat was indicted in February 2008 for a mortgage fraud scheme involving several Ohio properties. Zalat is a former co-owner of the Happy Greek restaurant, South Campus Gateway, Ohio. The scheme took place between 2005 and 2007 and involved false documentation and misrepresentations in loan applications, property flips, using inflated appraisals and unauthorized kickbacks disguised as construction monies for home improvement.

William Athan of Shelton, Conn., waived his right to indictment and pleaded guilty before U.S. District Judge Vanessa L. Bryant to his role in a $3.6 million mortgage fraud scheme. According to public statements and documents filed with the court, Athan, Jose Guzman, Brian Guimond and others participated in a real estate and mortgage fraud scheme that arranged for individuals to purchase properties and fund mortgages of houses located in Connecticut. Athan, Guzman and another individual created a New London-based real estate investment company, which was engaged in both the business of buying and selling real estate properties and the mortgage origination business. Through this scheme, the conspirators arranged for and assisted in arranging for various straw borrowers to obtain funding from various lenders.

Financial institutions last year filed 62,084 mortgage-related "suspicious activity reports" with government regulators -- a 44% increase from the prior year, according to new figures released by the Financial Crimes Enforcement Network. FinCEN director James H. Fries said one trend the agency found "is the increase in mortgage fraud detection in connection with mortgage purchasers sending home loans back to originators for repurchase." FinCEN also is seeing an increase in foreclosure-related fraud. The SARs figures cover reports filed for the 12-month period ending June 30, 2008.

Anne Justesen of Stillwater, Minnesota, former vice president of Jennings State Bank, pleaded guilty in U.S. District Court in Minneapolis to one count of mortgage fraud through identify theft. According to court documents, in November 2005, Justesen forged her husband's signature on documents for a $200,000 mortgage for a lake home near Luck, Wis., owned by Justesen and her husband. As a result of the forged mortgage documents, Jennings State Bank was left with inadequate collateral. The bank discovered the fraud during a routine examination of its documents. According to Jennings State Bank, an employee found a document that looked unusual and confronted Justesen about it, which triggered the investigation.

Micah Bowens of Henderson, Nev., was sentenced to 48 months in prison for leading a mortgage fraud scheme in Phoenix, San Diego and Las Vegas. Jennifer Sellers, a real estate agent from Las Vegas, was sentenced to 24 months in prison and Alonzo Love of San Diego was sentenced to 14 months. All three pleaded guilty to charges related to their participation in a five-year conspiracy involving the purchase of 19 properties using fraudulent loan documents. Seven other co-conspirators have pleaded guilty for their involvement and will be sentenced over the next few months. According to Diane J. Humetewa, U.S. attorney for the District of Arizona, from May 2002 through May 2007 Bowens, Sellers, Love and others conspired to commit mortgage fraud in Phoenix, San Diego and Las Vegas by fraudulently submitting mortgage loan applications on behalf of straw buyers under false pretenses, obtaining and disbursing the proceeds of fraudulently obtained loans, including directing portions of the proceeds to bank accounts in Bowen's, Seller's, Love's and other defendants' control. The trio used the proceeds to purchase expensive homes, luxury vehicles, jewelry and other personal expenses. The conspiracy resulted in a loss to lending institutions of approximately $2.5 million.

A civil lawsuit filed against CU National Mortgage last week - hours before the company filed for bankruptcy - charges that the owner and CEO of CUNM masqueraded as an executive vice president of another credit union and approved "allonges," assigning millions of dollars of that credit union's mortgages to Fannie Mae as part of a wide-ranging fraud scheme that may involve hundreds of millions of dollars of credit union loans. CUNM was a private-label lender/servicer for more than a dozen credit unions. During a hearing last week in U.S. bankruptcy court (where CUNM and its parent U.S. Mortgage of Pinebrook, N.J. filed for protection), lawyers for the other CU, Picatinny FCU of Dover, N.J., said CUNM may have sold as much as $14 million of its loans to Fannie Mae without authorization and without sending the receipts to the credit union. "[USM CEO Michael] McGrath endorsed Picatinny's name to a note which assigned the mortgages to Fannie Mae," said James Forte, Picatinny's lawyer in the case. "These loans were sold without our authorization." Picatinny and dozens of other CUs are currently working with officials of USM/CUNM for the return of tens of millions of mortgages sold to Fannie Mae without their authorization, according to a report in Credit Union Journal. Lawyers for Mr. McGrath did not return telephone calls about the matter. The FBI is now investigating the collapse of USM and CUNM.

William Montelle Loyd III of Raleigh, N.C., has been sentenced to 84 months' imprisonment followed by three years of supervised release for conspiring to commit mail fraud, wire fraud, and aggravated identity theft. The court also ordered Lloyd to pay more than $1.26 million in restitution. From November 2002 through December 2006, Loyd entered into a conspiracy with others to obtain 16 loans from an online mortgage company worth approximately $2.6 million by submitting false documentation regarding employment, salary, appraisals and tax information during the course of securing the loans. The investigation revealed that Loyd utilized his father's and his brother's identities and Social Security numbers to obtain loans in their names without their authorization or knowledge.

The FBI is investigating claims of a massive fraud at U.S. Mortgage Corp., Pinebrook, N.J., the privately held owner of Credit Union National Mortgage, which has filed for bankruptcy. More than three dozen credit unions allege the failed mortgage company owes them more than $110 million of loan proceeds it had collected for them as a servicer. The company's attorney said he is working with the U.S. Justice Department, the National Credit Union Administration, and regulators in several states in investigating the case. Lawyers for U.S. Mortgage could not be reached for comment. In documents filed earlier this week with the U.S. Bankruptcy Court, Picatinny FCU claims CU Mortgage sold more than $14 million worth of its mortgages to Fannie Mae without its knowledge and without paying the Dover, N.J.-based credit union the proceeds of the sale. Picatinny is one of more than three-dozen credit unions that have filed claims against the troubled lender. The largest unsecured claim is by Fannie Mae for $99.2 million, but the next 19 largest unsecured claims are all credit unions -- including the Treasury Department's CU.

NEWARK, N.J. The FBI is investigating claims of a massive fraud at U.S. Mortgage Corp., the privately held owner of C.U. National Mortgage, which filed for bankruptcy earlier this week. More than three dozen credit unions are claiming the failed mortgage company owes them more than $110 million of loan proceeds it had collected for them as a servicer. In documents filed yesterday with the U.S. Bankruptcy Court, Picatinny FCU claims C.U. Mortgage sold more than $14 million worth of its mortgages to Fannie Mae without its knowledge and without paying the Dover, N.J., credit union the proceeds of the sale. Picatinny is one of more than three dozen credit unions that filed claims against the troubled lender this week. The largest unsecured claim is by Fannie Mae for $99.2 million, but the next 19 largest unsecured claims are from credit unions, including: Suffolk FCU ($33.8 million); Proponent FCU ($21.6 million); Sperry Associates FCU ($9.2 million); Treasury Department FCU ($8.7 million); Novartis FCU ($3.1 million); Educational Systems FCU ($3.1 million); County Educators FCU ($ 2.8 million); Energy FCU ($2.6 million); Rutgers FCU ($2.2 million)_ Piedmont Aviation FCU ($2.1 million); Pinnacle FCU ($1.8 million); Velocity County FCU ($1.5 million); TCT FCU ($1 million) as, well as Picatinny FCU. Also: Lassen County FCU ($832,000); JM Associates FCU ($502,000); Miami Firefighters FCU ($490,000); First Florida CU ($448,000) and Newark Board of Education Employees CU ($440,000). Other creditors include Harland Financial, Wolters Kluwer and PrimeAliance. Picatinny FCU said after it learned of the sale of its loans to Fannie Mae it demanded the loan files back so it could sell the servicing rights to another provider, but U.S. Mortgage refused the request. As proof of its claims, Picatinny FCU filed a Feb. 12 letter with the bankruptcy court from U.S. Mortgage's general counsel Andrew Liput explaining that $9.5 million worth of its mortgages "appeared to have been sold without your authority to Fannie Mae and the sales proceeds subsequently diverted." The company's attorney said he is working with the U.S. Justice Department, NCUA and regulators in several states in investigating the case. Lawyers for U.S. Mortgage could not be reached for comment yesterday. The owners of the privately held company are: Michael McGrath, Jr., a 35.6% stake; Brian McGrath, 7.6%; Thomas McGrath, 7.6%; James and Lori McGrath, 3%; and Labranche Inc., of New York City, 39.9%. Credit Union Journal

Gerald Carti of Oakland, N.J., a former loan officer, pleaded guilty to charges connected to a mortgage fraud and property-flipping scheme involving rental properties. Carti admitted to conspiring with his co-defendants and several others to fraudulently originate mortgage loans and to launder proceeds of the loans during 2002 through 2005. The loans were for two- and three-family homes in Paterson, N.J. Carti's guilty plea is one of 12 guilty pleas related to an investigation into fraudulent FHA-insured and conventional mortgage loans originated by various New Jersey mortgage companies.

Veronica DeGuzman, of San Antonio, has been sentenced to 75 months in federal prison for carrying out a mortgage fraud scheme involving three San Antonio and Spring Branch, Texas-based residential properties, three financial institutions and more than $1 million in foreseeable losses. In addition, U.S. District Judge Xavier Rodriguez ordered that DeGuzman pay $1.67 million in restitution to her victims and be placed under supervised release for a period of five years after completing her prison term. On Oct. 2, 2008, DeGuzman pleaded guilty to one count each of financial institution fraud and aggravated identity theft. Her husband, Fred DeGuzman pleaded guilty to the same charges on Nov. 18, 2008. Sentencing for Fred DeGuzman has been scheduled for March 20, 2009 before Judge Rodriguez. By pleading guilty, the defendants admitted that from June to November 2007, Fred DeGuzman, using an alias, and Veronica DeGuzman contacted individual sellers of residential property and enter agreements to purchase the property for an inflated price, with the excess of the stated price over the actual sales price being returned to a corporation owned and controlled by the defendants. Using the alias, as well as falsified employment and income information, Fred and Veronica DeGuzman applied for and obtained 100% financing. After one or two mortgage payments, the mortgage went into default causing losses to the lenders.

Financial institutions filed 62,084 Suspicious Activity Reports for mortgage loan fraud from the year spanning July 1, 2007 through June 30, 2008, according to a new report released by the Financial Crimes Enforcement Network. This is a 44% increase over the preceding year and constitutes 9% of all SAR submissions for the period. Mortgage loan fraud was the third most reported activity during this period. Nearly 900 filing institutions submitted mortgage loan fraud SARs. Of these, according to FinCEN, fewer than 200 institutions submitted 98% (60,800) of the total. The top 10 filing institutions submitted 57% (35,400) of these filings, compared to 30% for the top 10 filing institutions of all SARs. The top 25 filing institutions of mortgage loan fraud SARs submitted 82% (50,900) of filings. FinCEN believe this means there is a high concentration of a small number of depository institutions that account for most mortgage loan fraud filings, as compared to SARs generally.

A St. Louis man pleaded guilty in U.S. District Court for the Southern District of Illinois to making a false statement to a financial institution in connection with a mortgage fraud scheme. Keith L. Pittman was indicted in June 2008 as part of a nationwide crackdown on mortgage fraud. Pittman was one of more than 400 people charged nationwide in mortgage fraud cases that were identified as a result of a Department of Justice initiative known as "Operation Malicious Mortgage." Pittman and others participated in a scheme to obtain residential real estate for himself by making a series of false statements in connection with a series of fraudulent transactions designed to enable him to obtain real property without making an actual downpayment, while simultaneously exposing the lending institution to an undisclosed and increased risk of default. Pittman is scheduled to be sentenced on June 5, 2009.

After pleading guilty in December 2008 to participating in the fraudulent sale of residential property located in Coral Gables and Miami, Florida, Samuel Morejon was sentenced to 27 months in federal prison, followed by three years of supervised release. According to documents filed with the court, the Coral Gables property was flipped three times within about two years, more than doubling the price of the property from $550,000 to $1.2 million. Morejon served as the straw buyer in the second sale of this property and submitted false loan applications to obtain $850,000 in financing to purchase the property. Once the final sale closed, the individual posing as the buyer in the third sale, co-defendant Jose Martinez, allegedly failed to make a single payment on the mortgage and the property ultimately went into foreclosure resulting in a significant loss to the lender. On the same date Morejon posed as a buyer for the Coral Gables property, he served as a straw buyer in the purchase of another residential property in Miami, Florida. Based on fraudulent misrepresentations in the loan application, Morejon obtained $835,000 of financing to purchase this property. He never made a single payment on the mortgage and the property went into foreclosure resulting in a significant loss to the lender. Additionally, U.S. District Court Judge Marcia Cooke ordered a hearing to determine the restitution to be paid by Morejon, which is scheduled for March 18, 2009.

Larry P. Nardelli of Tampa, Florida, was found guilty of six of the eight counts in which he was named as a defendant in a 47-count indictment. According to evidence presented at trial, Nardelli, who was indicted in July 2008 along with three other co-defendants, entered into several bogus purchase/sale contracts, with co-defendant Michael A. Tringali. They pretended that Nardelli had made downpayments totaling $21.5 million to purchase properties owned by Tringali, all for the fraudulent purpose of providing an apparent source of funds. The conspirators allegedly created a scheme in which they agreed that co-defendant Neil Mohammed Husani would enter into a contract with a seller to purchase vacant land in the Sarasota, Florida area and then would immediately flip the property to Tringali at double the price. Tringali then applied for a loan to obtain funding for the purchase. Relying on the sham contracts entered into with defendant Nardelli, Tringali falsely represented to the various banks that he had the required equity to contribute toward the purchase of the property. Tringali also submitted false financial information about himself and his company. Co-defendant John A. Yanchek, in his capacity as the closing attorney for the conspirators, prepared false escrow letters and closing documents. As a result of the criminal activities of the conspirators, the victim banks unwittingly loaned Tringali money totaling approximately 140% of the value of the land. The conspirators purchased the vacant land from the seller and distributed the excess funds among themselves in various amounts. Ultimately, Tringali was unable to pay off the loans. The total face amount of the commercial loans fraudulently obtained from seven banks was $82.7 million. Yanchek pleaded guilty in February 2009 to related charges and awaits sentencing. Tringali pleaded guilty in November 2008 to related charges and is scheduled for sentencing on March 9, 2009. Mr. Husani is a fugitive who was recently arrested in Jordan. Efforts are underway to have him extradited back to the Middle District of Florida. Nardelli's sentencing hearing is scheduled for June 15, 2009.

Four New Yorkers have been indicted for allegedly orchestrating a fraud scheme involving more than $10 million in subprime mortgage loans. Sharmon Howell of Queens, N.Y., was arrested and pleaded not guilty in Manhattan federal court. June Persaud of Brooklyn, N.Y., surrendered to authorities and also pleaded not guilty. David Moore of Brooklyn and Oscar Ancrum of New York, N.Y., remain at large. According to the indictment, from 2006 through 2007, Mr. Howell allegedly led a scheme to obtain dozens of home mortgage loans by submitting applications and supporting documentation containing false and misleading information to various banks and lenders, ultimately obtaining more than $10 million in subprime mortgages. To further the scheme, the defendants allegedly recruited straw buyers from, among other places, a halfway house in New York City that served ex-convicts and a public housing complex in Brooklyn, to purchase properties in and around New York City. The defendants allegedly obtained mortgages on behalf of the straw buyers for amounts greater than the actual sale price of the homes. To do so, the defendants allegedly obtained fraudulent appraisals for the homes and misrepresented various material facts about the straw buyers' income, assets, debts and intent to live in the properties. After obtaining these mortgages, the defendants allegedly distributed the difference between the price of the house and the inflated value of the mortgage among themselves. Currently the vast majority of the mortgages obtained by the defendants are in default and/or foreclosure.

The Obama administration is still standing behind a Real Estate Settlement Procedures Act rule and urged a U.S. district court to dismiss a legal challenge to the rule with "prejudice." Department of Justice attorneys did not present a defense or any praise of the RESPA rule, which the National Association of Mortgage Brokers claims in a lawsuit would place brokers at a "permanent disadvantage in the marketplace." Opponents of the RESPA rule noted that the DOJ response was expected and the new administration still has time to reconsider its position, since the main provisions of the final rule do not go into effect until January 10, 2010. "We hope the new administration will pull back the RESPA rule as they are doing with other regulations that were put into effect by the Bush administration after the election," said Matt Dolan, a NAMB consultant with the Federal Policy Group. The Department of Housing and Urban Development issued the RESPA rule in November. It requires lenders to provide a standardized and expanded good faith estimate disclosure to borrowers shortly after they file a mortgage action. The GFE includes a disclosure of the mortgage broker's compensation, which NAMB claims is unfair - since other originators don't have to disclose their compensation.

The National Association of Mortgage Brokers has filed suit against the Federal Housing Finance Agency to block implementation of a new GSE appraisal rule, claiming it could put brokers out of business and allow appraisal management firms to profit at the expense of independent appraisers and consumers. The new 'Home Valuation Code of Conduct,' which goes into effect May 1, prohibits loan officers and mortgage brokers from directly ordering appraisals. NAMB claims the code has a "bias toward mortgage lenders" and that major banks are already requiring brokers to order appraisals through their affiliated appraisal management companies. The trade groups says the new code of conduct is a result of an investigation led by New York Attorney General Andrew Cuomo into the relationship between an appraisal management company (AMC) and the now defunct Washington Mutual, which sold mortgages to Fannie Mae and Freddie Mac. "Although the WaMu lawsuit ostensibly related to how WaMu's relationship with its AMC generated fraudulent appraisals and contributed to WaMu's financial demise, the resulting agreements focused on mortgage brokers, which had nothing to do with the claims alleged in the WaMu lawsuit," NAMB says. The new appraisal code stems from a GSE/FHFA settlement with the New York AG. The valuation code's "abolition on broker-ordered appraisals will force mortgage brokers and customers to rely on lenders and their affiliates for home value appraisals, disrupting the established business practices of mortgage brokers, decreasing the efficiency of the marketplace and increasing the costs to consumers," NAMB says.

For the second consecutive year, Stewart Information Services Corp., Houston, has posted a full year loss, but a fair amount of the loss is due to agent fraud. The title company lost $234.5 million ($13.37 per share) for the full year 2008, compared with a loss of $40.2 million ($2.21 per share) for 2007. In the fourth quarter 2008, Stewart lost $158.0 million ($8.72 per share), vs. a loss of $31.3 million ($1.74 per share) one year prior Included in the losses are a strengthening of policy reserves by $32.0 million as a result of unusually large claims payments related to policies issued in 2005, 2006 and 2007. An additional $41.7 million of charges are related to large title losses and defalcations attributable to independent agents of the company. "This difficult economy placed significant financial pressures on owners of independent title agencies which resulted in increased escrow fund defalcations and, therefore, higher title losses for us," said Malcolm S. Morris, chairman and co-chief executive. "To address this, and to reduce the overhead costs associated with low-premium volume agents, we cancelled more than 2,500 agencies during 2008. This action, while lowering revenues an insignificant amount, results in an improved risk profile and profit potential for us in future periods."

Joseph A. Baumeister of St. Louis pleaded guilty to one felony count of bank fraud in a mortgage scheme involving 16 area properties. According to court documents, between January 2007 and October 2008, Baumeister operated a scheme to defraud several mortgage lenders through his development company by using straw purchasers to buy 16 residential properties based on misrepresentations to lenders. He then took money from the closings of the properties by artificially inflating the sales price or by falsely claiming that various home improvements had been made. After the closings on these properties, Baumeister found tenants for the properties, collected rent, and made mortgage payments on occasion. Eventually, mortgage payments fell behind or were not made and the majority of these properties went into foreclosure. The funds Baumeister extracted from the closings totaled $364,523. Sentencing is scheduled for May 1.