US Attorney Preet Bharara filed a civil suit [complaint] on Tuesday against Deutsche Bank [corporate website] in the US District Court for the Southern District of New York [official website] accusing the bank of engaging in mortgage fraud. Through the suit, the US seeks more than $1 billion [Reuters report], including punitive damages and fines. Specifically, the complaint alleges that, from 1999 to 2009, Deutsche Bank consistently lied to the Federal Housing Administration (FHA) [official website] in order to obtain and maintain the Direct Endorsement Lender (DEL) status of its subsidiary, MorrgageIT. Through the DEL program, private lenders are granted authority to endorse mortgages that are qualified for FHA insurance. As part of its participation in the program, a lender is responsible for carefully reviewing mortgages for eligibility and is required to implement a quality control plan to provide procedures for correcting any problems in a lender's underwriting operations. The US argues that during the 10-year period in which MortgageIT acted as a DEL, it endorsed more than 39,000 mortgages for FHA insurance while failing not only to abide by the eligibility rules set forth by the program, but also to implement quality control procedures:
For instance, Deutsche Bank and MortgageIT failed to audit MortgageIT's early payment defaults; Deutsche Bank and MortgageIT failed to dedicate sufficient staff to quality control; MortgageIT repeatedly failed to address dysfunctions in the quality control system, which were reported to upper management; MortgageIT took the only staff member dedicated to auditing FHA-insured mortgages, and reassigned him to increase production instead; and when an outside auditor provided findings to MortgageIT revealing serious problems, those findings were literally stuffed in a closet and left unread and unopened.The suit is being viewed as the latest attempt by the US to redress the financial crisis and punish those it views as responsible.
Last month, the US Department of Justice (DOJ) [official website] announced that the former CEO of mortgage company Taylor, Bean & Whitaker (TBW) [corporate website] pleaded guilty [JURIST report] on charges of fraud related to the Troubled Asset Relief Program (TARP) [materials; JURIST news archive]. Paul Allen pleaded guilty to making false statements and conspiring to commit bank and wire fraud for his role in a USD $1.5 billion fraud scheme that contributed to the failure of the mortgage company. Allen admitted that from 2005 through August 2009 he and other co-conspirators engaged in a scheme to defraud financial institutions that had invested in a lending facility called Ocala Funding. In an effort to cover up inadequate assets backing its commercial paper, Allen told a co-conspirator to produce fraudulent reports and knew that these reports were sent to Ocala Funding investors and other third parties. The cover-up led investors in Freddie Mac, Colonial Bank [corporate websites] and Ocala Funding to believe they had an undivided ownership interest in thousands of the same mortgage loans. Allen also admitted to making false statements in a letter to the US Department of Housing and Urban Development, omitting concerns raised by an independent auditor. Five other individuals have pleaded guilty for their roles in related fraud schemes. Allen, who faces a maximum penalty of five years in prison for each count, will be sentenced in June.