Written by Biloxi
A major bombshell hit this week. Two new probes are being deeply looked into the banks' securitization and servicing practices. My hat is off to the HUD Inspector General Office for taking the initiative to report fraud by the banks when the federal regulators and the current administration are showing less results and more skepticism to the public. Shahien Nasiripour of Huffington Post reported the story this week:
A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, four officials briefed on the findings told The Huffington Post.
The five separate investigations were conducted by the Department of Housing and Urban Development’s inspector general and examined Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, the sources said.
The audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March, the sources said. The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges….
The resulting reports read like veritable indictments of major lenders, the sources said. State officials are now wielding the documents as leverage in their ongoing talks with mortgage companies aimed at forcing the firms to agree to pay fines to resolve allegations of routine violations in their handling of foreclosures.
The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.
Although the False Claim Act was a Civil War era law, the law has been revised three times. In 1943, The False Claims Act was amended to reduce the whistleblower's share of the recovered proceeds. The law was again amended in 1986 by President Ronald Reagan. President Reagan revised the law to be used against the defense contractors because Reagan saw vast amount of government spending being misused through waste and fraud. But, in 2009, President Barack Obama amended the False Claim Act to include a bill that he signed in law called Fraud Enforcement and Recovery Act of 2009, or FERA.
Fraud Enforcement and Recovery Act of 2009 is:
An act to improve enforcement of mortgage fraud, securities fraud and commodities fraud, financial institution fraud, and other frauds related to Federal assistance and relief programs, for the recovery of funds lost to these frauds, and for other purposes. President Obama signed the FERA law as well as the Helping Families Save Their Homes Act of 2009, a bill that dealt with mortgage foreclosure prevention.
As President Obama said, FERA expands the Department of Justice's authority to prosecute fraud:
And that's why this bill nearly doubles the FBI's mortgage and financial fraud program, allowing it to better target fraud in hard-hit areas. That's why it provides the resources necessary for other law enforcement and federal agencies, from the Department of Justice to the SEC to the Secret Service, to pursue these criminals, bring them to justice, and protect hardworking Americans affected most by these crimes. It's also why it expands DOJ's authority to prosecute fraud that takes place in many of the private institutions not covered under current federal bank fraud criminal statutes -- institutions where more than half of all subprime mortgages came from as recently as four years ago.
Department of Justice will be closely watched to see whether they will prosecute executives in the bank for violating the False Claim Act.
In addition, New York Attorney General Eric T. Schneiderman said this week that he will be probing three major banks apparently regarding the institution's securitization activities prior to the financial crisis. The New York Attorney General's investigation into the banks and HUD Inspector General's audit findings against the five banks certainly made the federal regulators', Office of Comptroller of Currency and Federal Reserve, probe against the banks look weak. After all, Office of Comptroller of Currency found compliance weakness from the banks according to the sample examination of only 2,800 foreclosures. And Federal Reserve report in March found no wrongful foreclosures by banks. And how many loan files the Federal Reserve examined for this report? Just 500! And by the way, the Federal Reserve's report had not been released to the public. This week, ironically, Office of Comptroller of Currency will have the independent reviews in mortgage servicer consent orders to stay sealed. Under the consent orders that the fourteen mortgage servicers signed last month, the mortgage servicers were required to hire outside firms to conduct and "look back" evaluations of questionable foreclosure practices.
It is amazing that the HUD Inspector General Office finds extensive documentation errors when it comes to foreclosed properties through audits, yet two federal regulators used small sample of foreclosed properties: One found compliance weakness, and the other found no wrongful foreclosures. If HUD Inspector General Office investigation results in prosecutions of bank executives or individuals, the leadership and trust of the federal regulators will come into question.
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