New York Bank Indicted for Mortgage Fraud

June 11th, 2012
in econ_news

Econintersect:  Last week Manhattan District Attorney Cy Vance filed charges against Abacus Federal Savings Bank and 19 former employees for committing mortgage fraud. Does this mean abacusSMALLmore prosecutions of other banks for crimes committed prior to the housing crisis?  There will probably not be more, according to William K. Black, former regulator and current professor at University of Missouri-Kansas City.

Black tells Bloomberg Law's Lee Pacchia (video follows below) that there is a profound lack of resources in state and federal government to investigate and prosecute banks and employees for mortgage fraud despite substantial evidence of criminal activity.  Black also claims that Treasury Secretary Timothy Geithner has discouraged regulators and prosecutors from pursuing large banks for malfeasance and fraud.

Follow up:

Black says that what has happened with Abacus does not represent the start of a wider investigation into what he says were millions of lender instigated fraudulent loans, so-called liars’ loans.  He says that there have been insignificant resources applied to be able to make any substantial effort to bring charges against the perpetrators of these frauds.  However, he does not rule the possibility that one high profile case could be brought in the heat of the fall presidential campaign.

Black has a professional history as a bank regulator, having had a leading role in the investigation and criminal prosecution during the Savings and Loan scandal of the late 1980s and early 1990s.  He is now a professor of law and economics at the University of Missouri Kansas City and one of the nation’s leading experts on white collar crime.  He is the author of the book The Best Way to Rob a Bank is to Own One.

Bill Black is a frequent contributor to Global Economic Intersection including a thorough analysis of liar’s loans in the fall of 2011.

Here is a video of the press conference announcing the indictment:



Watch the Lou Pacchia Bloomberg Law interview of Bill Black:



Below is the indictment press release from the DA’s office:


Employees and Managers Charged With Routinely Submitting False Documents to Fannie Mae

Prosecution Marks the First Time a Bank Has Been Indicted in Manhattan Since 1991

Manhattan District Attorney Cyrus R. Vance, Jr., today announced the indictment of ABACUS FEDERAL SAVINGS BANK (“ABACUS” or the “Bank”) and eleven of its former employees in a false document mortgage fraud scheme resulting in the sale of hundreds of millions of dollars worth of fraudulent loans to the Federal National Mortgage Association, commonly known as “Fannie Mae.” The District Attorney also announced that an additional eight former employees have already waived indictment and admitted their guilt in connection with this conspiracy.

The 184-count indictment charges eleven individuals and ABACUS itself with residential mortgage fraud, securities fraud, grand larceny, conspiracy, and falsifying business records, among other related charges.[1] The defendants include former senior managers, as well as former employees who worked in various capacities for the Bank’s lending business. Each defendant faces charges related to his or her involvement in the criminal conspiracy, which the indictment charges occurred between May 2005 and February 2010.

“The lessons of the financial crisis are still being learned,” said District Attorney Vance. “The public must have confidence that when a bank issues a loan that it later re-sells to Fannie Mae, and by extension the nation’s investors, it will engage in honest and ethical practices and follow the rules set by regulators,” said District Attorney Vance. “Loan schemes based on fraud inevitably will unravel, as this one did. Today’s indictment re-affirms our commitment to transparency and straight dealing in the financial markets. We cannot settle for less.”

Steve A. Linick, Inspector General of the Federal Housing Finance Agency, said: “We are proud to have contributed to this effort, which to date has produced multiple indictments of individuals who allegedly engaged in this significant fraud scheme. My office is committed to ferreting out fraud throughout the housing system, and partnering with law enforcement agencies making a similar commitment.”

Charles R. Pine, Director of Field Operations for IRS-Criminal Investigation, said: “The public has the right to expect security and integrity from the banks they entrust their money to, regardless of their size. The protection of the nation’s financial system remains a top priority for IRS-Criminal Investigation.”

The indictment, representing the culmination of a two-and-a-half-year investigation, charges that ABACUS, its employees, and its managers engaged in a conspiracy involving the regular and systematic falsification of residential mortgage application documents. The defendants falsified these documents so that they could earn commissions and fees by ensuring that otherwise unqualified borrowers would receive loans, which ABACUS then sold to Fannie Mae pursuant to an ongoing agreement. After purchasing these fraudulent mortgages, Fannie Mae repackaged them into mortgage-backed securities and sold them to outside investors. As a result of the hundreds of millions of dollars in charged fraudulent loans, ABACUS earned many millions of dollars in loan origination, purchasing, and servicing fees over the five-year period covered by the indictment.     Continue reading . . .


Here is the press release from Abacus Federal Savings and Loan responding to the indictment:


NEW YORK, NY (May 31, 2012) – We are greatly disappointed to learn that the D.A.'s

Office has decided to indict Abacus Federal Savings Bank. We never imagined our bank would be the target of this investigation, since it is indisputable that the bank itself discovered, investigated and reported the results of its investigation to law enforcement authorities, its regulator, and Fannie Mae. Senior executives at the bank took the immediate, decisive action that initiated this investigation, and there is no evidence that any senior executive at the bank engaged in illegal behavior. Moreover, the only victim in this matter is the bank itself. Neither Fannie Mae nor the borrowers were ever harmed.

The alleged misconduct that occurred is not tolerated by our bank’s policies and ethical standards. The public should understand that, unlike many other banks, Abacus Federal

Savings did not participate in generating subprime loans or other risky lending practices.

As result, the bank’s loan default rate continues to be one of the lowest in the nation: less than one-half of one percent (0.50%), compared to the current national average of more than five percent (5%). The bank has consistently provided high-quality, plain vanilla mortgages to Fannie Mae, which has yielded Fannie Mae and its investors more than $100 million in income over the past several years. In the process, the bank provided low-cost mortgages to an underserved community. This has greatly contributed to the stability and prosperity of New York City and surrounding areas.

The public should also know that it was the bank that uncovered the irregularities more than two years ago. After the discovery, the bank immediately conducted an internal investigation. The employees we determined to be involved were either discharged or resigned. The bank also reported the incident and the results of its investigation to its regulator, Fannie Mae and law enforcement authorities.

The bank does not permit its employees to violate banking regulations or internal ethical standards, both of which are embedded in all of our related policies and procedures. The bank has taken this matter very seriously and has worked very closely with its regulator and Fannie Mae over this time period to ensure that such misconduct does not occur again. Our conduct in this regard has been exemplary.

The bank feels that a grave injustice has occurred, and that the D.A.’s Office is overreaching in trying to make a case against the bank. We do not understand why our community bank -- which is the only victim in this case -- would be targeted for prosecution when many other banks that contributed to the national economic crisis remain untouched.

John Lounsbury


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