DOJ Brings Major Civil, Criminal Actions for Mortgage Fraud

by devteam October 11th, 2012 | Share

The Department of Justice (DOJ) brought twornseparate groups of actions on Tuesday charging criminal and civil mortgagernfraud.   In the first, 285 criminal indictments werernannounced against 530 individuals including 172 executives for various schemes torndefraud homeowners.  In the second arncivil action was announced against Wells Fargo Bank for allegedly filingrnfraudulent insurance claims against the Federal Housing Administration (FHA). </p

The criminal indictments were the resultrnof the Distressed Homeowner Initiative launched on October 1, 2011 by thernFBI.  The year-long initiative focused onrnfraud targeting homeowners, such as foreclosure rescue schemes in whichrntypically the homeowners is told he can save his home if the scammer purchasesrnthe mortgage or the owner transfers title to the home to another person complicitrnin the scheme.   In the end the homeownerrnloses the home.  Other examples are loanrnmodification schemes where homeowners pay up front for bogus programs tornnegotiate more favorable mortgage terms. </p

The indictments were announced byrnAttorney General Eric Holder, Department of Housing and Urban Development (HUD)rnSecretary Shaun Donovan, FBI Associate Deputy Director Kevin L. Perkins andrnFederal Trade Commission (FTC) Chairman Jon Leibowitz.   Donovan said of the indictments, “With homernprice increases helping homeowners get back above water and billions of dollarsrnin new resources for families still at risk through the recent mortgagernservicing settlement, borrowers are finally beginning to see the light at thernend of the tunnel.  We know, however,rnthat too many families are still facing threats to sharing in that recovery. ThernFinancial Fraud Enforcement Task Force has made important progress through itsrnMortgage Fraud Working Group to crack down on some of the same types of scamrnartists that got us into this crisis in the first place-pushing predatory orrnfraudulent loans on families who simply wanted to own a home, and now pushingrnfalse hope for modification of those loans- often preying upon the trustrnfamilies have in HUD and the Federal Housing Administration. With actions likernthose announced today, we send a very clear message: if you don’t operaternethically, transparently, and within the boundaries of the law, we will notrnhesitate to act.”     </p

“We recognize the negative impactrnthat mortgage fraud and foreclosures have on our economy and on ourrncommunities, the FBI’s Perkins said.  “We cannot merely investigate afterrnthe fact.  We must use intelligence and sophisticated techniques tornidentify and stop those who seek to defraud American homeowners.  We willrncontinue to work with our partners across the country to ensure the integrityrnof the housing market, and to keep our communities safe.” </p

The suit against Wells Fargo charges therncompany defrauded the Federal Housing Administration (FHA) by submittingrnimproper claims for reimbursement on government insured loans.  The suit, filed by Manhattan U.S. AttorneyrnPrett Bharara, seeks damages and civil penalties, claiming that the bank has collectedrnmillions of dollars through fraudulent claims. </p

“As the complaint alleges, yet another major bank has engaged in arnlongstanding and reckless trifecta of deficient training, deficientrnunderwriting and deficient disclosure, all while relying on the convenientrnbackstop of government insurance,” Bharara said.</p

Wells, the largest U.S. mortgage lender and fourth largest bank by assets,rndenied the allegations, saying its FHA delinquency rates were lower than thernindustry average and that many of the complaints had been previously addressedrnwith the Department of Housing and Urban Development (HUD).   Wells saidrnin a statement it believes it acted in good faith and in compliance with FHArnand U.S. Department of Housing and Urban Development rules. The bank said itsrnFHA delinquency rates have been as low as half the industry average.</p

The charges were filed under the False Claims Act, which provides penaltiesrnfor fraud against the government, and under the Financial Institutions Reform,rnRecovery, and Enforcement Act, or FIRREA, a law that was originally passed inrnthe wake of the savings and loan crises in the late 1980s but has been recentlyrnused in several civil suits. </p

According to a story filed by Reuters, DOJ claims that Wells Fargo, an FHArnapproved lender, certified more than 100,000 loans for FHA insurance betweenrnMay 2001 and October 2005.  Neither FHArnnor HUD reviews a loan before approving it for FHA insurance, relying on theirrnlenders to insure compliance with program rules.  During a seven-month period in 2002, at leastrn42 percent of these FHA backed loans would not have qualified had the programrnguidelines been followed.  FHA guidelinesrnallow for a 5 percent variance.  </p

Reuters said that Wells Fargo kept the defective loans secret from FHA evenrnas it internally identified more than 6,000 loans as materially deficient overrna nine year period.  Half of these loans hadrndefaulted within the first six months.  Priorrnto 2005 the bank did not self-report a single bad loan and over the entirernperiod from 2002 to 2010 it reported only 238 loans although it had separatelyrnfiled suspicious activities reports with the FBI on some it suspected werernfraudulent. </p

The complaint also charges that the bank failed to properly train its staff,rnused temporary workers, and improperly encouraged underwriters through bonuses tornapprove as many loans as possible.   </p

The complaint seeks treble damages and penalties for hundreds of millions ofrndollars in insurance claims already paid to Wells Fargo, as well as penaltiesrnon claims HUD may pay in the future. The complaint also includes specificrnallegations that the lender failed to report another $190 million in loans itrnshould have flagged as potentially problematic to HUD.  This could increase the eventual payout fromrnthe bank.</p

DOJ also announced that its FinancialrnFraud Enforcement Task Force’s Victims’ Rights Committee, is partnering withrnthe Certified Financial Planning Board and the Foundation for FinancialrnPlanning to offer pro-bono financial planning assistance to the victims of arnforeclosure rescue scheme for which indictments were brought by the U.S.rnAttorney’s Office for the Central District of California. All 4,000 victims ofrnthe scheme, many of whom lost their homes as a result of the fraud, have beenrninvited to attend a free financial planning workshop in Riverside, Californiarnwhere they will receive financial information and education to assist them inrnrecovering from the devastating effects the crime had on their lives and tornhelp them plan for the future.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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