By Christopher Maag
Major American banks engaged in a decade-long kickback scheme that allegedly netted them $6 billion in fraudulent profits, and increased the cost of homeownership for millions of families, according to an investigation by federal regulators.
The investigation has not been made public, and a spokesman with the department of Housing and Urban Development declined to comment. Details of the scheme were leaked to American Banker.
According to the publication’s report, lenders including Citigroup, Wells Fargo and Countrywide allegedly ran the kickback scheme. In return for referring new mortgages to insurance companies, the lenders demanded a cut of the profits. Such a pay-to-play scheme is illegal under the Real Estate Settlement Procedures Act (RESPA).
Federal officials expressed outrage that the scheme had lasted so long, and that the Department of Justice has so far failed to prosecuted anyone associated.
“(T)his thing has been going on for too damn long,” Michael Stephens, HUD’s acting inspector general, told American Banker.
During the housing boom, many people bought homes with downpayments of less than 20%. These borrowers were required to buy mortgage insurance to protect the lender in case they defaulted. Beginning in the mid-1990s, many lenders set up new subsidiaries to sell reinsurance on those homes.
There’s nothing illegal about reinsurance. If done properly, a second insurance policy simply offers more protection for all the parties involved, at little extra cost to the buyer.
But federal regulators soon noticed something fishy about these reinsurance arrangements. The contracts gave most of the upfront profits to the banks, while sticking the insurance companies with most of the risk in cases where the borrowers defaulted. Since mortgage insurance companies’ entire business depended on referrals from lenders, they were forced to go along. Such kickback schemes in return for business referrals are illegal under RESPA.
And since banks were now making money from insuring their own mortgages, they forced most borrowers to pay more for insurance than they should have.
“Nearly all loan files reviewed show borrowers with excessive coverage placed on their loan,” according to a presentation by HUD’s inspector general to the Department of Justice, which was leaked to American Banker.
While most of the banks alleged to have been involved in the scam did not comment, Wells Fargo told American Banker, “It is simply not true that Wells Fargo has ever been the subject of a HUD investigation involving either our captive reinsurance programs or our relationships with any private mortgage insurance company.”
Meanwhile, Bank of America took another hit recently concerning allegations of widespread fraud during the mortgage boom. The company bought Countrywide Financial in 2008. Shortly thereafter, Bank of America fired a whistleblower in Countrywide’s Los Angeles office who had led internal investigations into pervasive wire, mail and bank fraud by Countrywide employees.
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Firing whistleblowers is a big no-no under the Sarbanes-Oxley Act. The labour Department ordered Bank of America to rehire the employee, and pay the employee $930,000 in back wages, attorneys fees and damages.
“It’s clear from our investigation that Bank of America used illegal retaliatory tactics against this employee,” David Michaels, assistant secretary of the labour department’s Occupational Safety and Health Administration, said in a press release. “This employee showed great courage reporting potential fraud and standing up for the rights of other employees to do the same.”
The employee’s name and gender were not revealed. Bank of America said it plans to challenge the order to rehire, as its firing of the worker was “solely based on issues with the employee’s management style and in no way related to the employee’s complaints and the allegations made in the complaint,” the company said in a statement.
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