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Fraud at the Bottom

May 14, 2010

This two-part report (Part 1 herePart 2 here) by Mike Hudson tracks down the fraud investigators at some of the major mortgage lenders and discovers that—surprise!—they were harassed, demoted, or fired for doing their jobs. (HT, Investigative Fund for the Nation Institute; ProPublica).

Many folks think banks and other lenders were the victims of rings of fraudsters (“predatory borrowers”) who falsified income and inflated appraisals. That happened, as the story makes clear, but it happened because the lenders invited it by looking the other way as loan officers and brokers forged signatures, falsified borrowers’ ages, and made up stratospheric incomes in order to close deals:

Steve Jernigan realized just how bad things were when he got a call from a real-estate appraiser in Indiana. Jernigan was a fraud investigator who worked in the Orange County headquarters of Argent Mortgage, Ameriquest’s sister company. He’d dispatched the appraiser to check on a subdivision that Argent had made loans on. The appraiser wanted to make sure he had the right location. “I’m standing in the middle of a cornfield,” he told Jernigan. The addresses on the loan applications, it turned out, were made up. The houses didn’t exist. Jernigan pulled the files and found that all of the original appraisal reports had been accompanied by a photo of the same house.

Using the time-tested philosophy of IBGYBG—“I’ll be gone, you’ll be gone”—mortgage brokers and their purported overseers at originators as big as Wells Fargo and Countrywide ginned up bogus paper in order to collect upfront fees, knowing that by the time it blew up they’d have enough money to retire on an island. The philosophy held from the lowest levels (the million-dollar-a-year assholes) all the way to the million–a-day princes at the top.

The banks deny everything:

In response to written questions, Wells Fargo and Ameriquest both said they had “zero tolerance” for fraud.

This is in marked contrast to the banks’ actual actions in, say, these examples I uncovered looking at Baltimore city’s case against Wells Fargo last year. One of the perps behind these perps, Jaipreet Sabharwaal, pleaded guilty in November to one count of making false statements on Freddie Mac and Fannie Mae loan applications in 2004 and 2005, and will be sentenced in June, according to court documents. The politically wired father and alleged mastermind of the fraud, Singh Sabarwaal, remains at large, and is believed to be in India.

Sparse prosecutions notwithstanding, “zero tolerance for fraud” seems to be the banks’ party line. It’s the same thing BB&T says about a $20 million pyramid-type scheme one of its loan officers apparently abetted. The scam cost the bank’s fraud investigator her job—not because she missed it, but because she caught it, according to her recently settled lawsuit. Want to know why we seldom hear from insiders blowing the whistle on fraud at the banks? Hudson has a suggestion:

The judge’s decision was a rare win for a whistleblower under the Sarbanes-Oxley Act. One study  found that in the first three years the law was in place, workers who claimed whistleblower protection under the act won relief just 3.6 percent of the time inside the Department of Labor’s bureaucracy, which adjudicated initial claims, and just 6.5 percent of the time on appeal.

So, go with the fraud and make big bucks or fight and get fired, earning the right to battle for your job back in court for five or six years, with a less-than-10-percent shot at winning.

Hudson, it should be noted, has been on this story for about two decades. He wrote one of the definitive early reports on the predatory lending business and its ties to the allegedly legitimate banking world. He’s got a new book coming out in a few months. Its title is The Monster.

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