The Department of Justice (DOJ) brought two separate groups of actions on Tuesday charging criminal and civil mortgage fraud. In the first, 285 criminal indictments were announced against 530 individuals including 172 executives for various schemes to defraud homeowners. In the second a civil action was announced against Wells Fargo Bank for allegedly filing fraudulent insurance claims against the Federal Housing Administration (FHA).
The criminal indictments were the result of the Distressed Homeowner Initiative launched on October 1, 2011 by the FBI. The year-long initiative focused on fraud targeting homeowners, such as foreclosure rescue schemes in which typically the homeowners is told he can save his home if the scammer purchases the mortgage or the owner transfers title to the home to another person complicit in the scheme. In the end the homeowner loses the home. Other examples are loan modification schemes where homeowners pay up front for bogus programs to negotiate more favorable mortgage terms.
The indictments were announced by Attorney General Eric Holder, Department of Housing and Urban Development (HUD) Secretary Shaun Donovan, FBI Associate Deputy Director Kevin L. Perkins and Federal Trade Commission (FTC) Chairman Jon Leibowitz. Donovan said of the indictments, "With home price increases helping homeowners get back above water and billions of dollars in new resources for families still at risk through the recent mortgage servicing settlement, borrowers are finally beginning to see the light at the end of the tunnel. We know, however, that too many families are still facing threats to sharing in that recovery. The Financial Fraud Enforcement Task Force has made important progress through its Mortgage Fraud Working Group to crack down on some of the same types of scam artists that got us into this crisis in the first place-pushing predatory or fraudulent loans on families who simply wanted to own a home, and now pushing false hope for modification of those loans- often preying upon the trust families have in HUD and the Federal Housing Administration. With actions like those announced today, we send a very clear message: if you don't operate ethically, transparently, and within the boundaries of the law, we will not hesitate to act."
"We recognize the negative impact that mortgage fraud and foreclosures have on our economy and on our communities, the FBI's Perkins said. "We cannot merely investigate after the fact. We must use intelligence and sophisticated techniques to identify and stop those who seek to defraud American homeowners. We will continue to work with our partners across the country to ensure the integrity of the housing market, and to keep our communities safe."
The suit against Wells Fargo charges the company defrauded the Federal Housing Administration (FHA) by submitting improper claims for reimbursement on government insured loans. The suit, filed by Manhattan U.S. Attorney Prett Bharara, seeks damages and civil penalties, claiming that the bank has collected millions of dollars through fraudulent claims.
"As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," Bharara said.
Wells, the largest U.S. mortgage lender and fourth largest bank by assets, denied the allegations, saying its FHA delinquency rates were lower than the industry average and that many of the complaints had been previously addressed with the Department of Housing and Urban Development (HUD). Wells said in a statement it believes it acted in good faith and in compliance with FHA and U.S. Department of Housing and Urban Development rules. The bank said its FHA delinquency rates have been as low as half the industry average.
The charges were filed under the False Claims Act, which provides penalties for fraud against the government, and under the Financial Institutions Reform, Recovery, and Enforcement Act, or FIRREA, a law that was originally passed in the wake of the savings and loan crises in the late 1980s but has been recently used in several civil suits.
According to a story filed by Reuters, DOJ claims that Wells Fargo, an FHA approved lender, certified more than 100,000 loans for FHA insurance between May 2001 and October 2005. Neither FHA nor HUD reviews a loan before approving it for FHA insurance, relying on their lenders to insure compliance with program rules. During a seven-month period in 2002, at least 42 percent of these FHA backed loans would not have qualified had the program guidelines been followed. FHA guidelines allow for a 5 percent variance.
Reuters said that Wells Fargo kept the defective loans secret from FHA even as it internally identified more than 6,000 loans as materially deficient over a nine year period. Half of these loans had defaulted within the first six months. Prior to 2005 the bank did not self-report a single bad loan and over the entire period from 2002 to 2010 it reported only 238 loans although it had separately filed suspicious activities reports with the FBI on some it suspected were fraudulent.
The complaint also charges that the bank failed to properly train its staff, used temporary workers, and improperly encouraged underwriters through bonuses to approve as many loans as possible.
The complaint seeks treble damages and penalties for hundreds of millions of dollars in insurance claims already paid to Wells Fargo, as well as penalties on claims HUD may pay in the future. The complaint also includes specific allegations that the lender failed to report another $190 million in loans it should have flagged as potentially problematic to HUD. This could increase the eventual payout from the bank.
DOJ also announced that its Financial Fraud Enforcement Task Force's Victims' Rights Committee, is partnering with the Certified Financial Planning Board and the Foundation for Financial Planning to offer pro-bono financial planning assistance to the victims of a foreclosure rescue scheme for which indictments were brought by the U.S. Attorney's Office for the Central District of California. All 4,000 victims of the scheme, many of whom lost their homes as a result of the fraud, have been invited to attend a free financial planning workshop in Riverside, California where they will receive financial information and education to assist them in recovering from the devastating effects the crime had on their lives and to help them plan for the future.
