NewYorkTimes: Gretchen Morgenson-Score One for the Bank Whistle-Blowers Fair Game

DISCONNECT BETWEEN HIGH FINANCE, REALITY AND LAWSUITS

WHAT IS THE EFFECT OF SETTLEMENTS, BUY-BACKS AND FEDERAL RESERVE BUYOUTS?

We hear these stories of settlements, purchases by the Fed, buybacks — but what they are buying and which mortgages are affected is never disclosed. Meanwhile the marketplace and the judicial system are functioning as though none of this activity was happening.
First of all it is never clear exactly what is being purchased. It does not appear as though the mortgages themselves have been purchased —  although that appears to be the claim when Fannie and Freddie are involved. If it is the mortgage bond that is being purchased or settled we don’t know whether all of the mortgage bonds issued by a particular alleged “asset pool” were purchased by the Federal Reserve or if they were the subject of a settlement with investors or regulatory authorities. We don’t know if the asset pool still exists. We don’t know how the money was applied and whether the bond receivable account was satisfied as to the asset pool or the investors.
 But we do know that each mortgage bond purports to convey an indivisible interest in the loans claimed by the asset pool, regardless of whether the loan actually made it into the pool or not. And we know that while the settlements are mostly proportional settlements in which less than 100 cents on the dollar was paid, the Federal Reserve is paying 100 cents on the dollar when the bond is sold. And to add to the complexity, we don’t know the terms of the settlement and whether the banks that are claiming to sell these worthless bonds to the Federal Reserve acquired any evidence of title to the bonds.
In the marketplace, banks are accepting payoffs on mortgages they sold. Then they are executing satisfactions of mortgages they don’t own — and never did own. And in court they are filing Foreclosures on the same mortgages and submitting credit bids on mortgages in which they lack ownership of any type of account receivable in which they fulfill the requirements of a definition of creditor who can submit a credit bid instead of cash. So the deed is issued on foreclosure without any sale having occurred because the property went to the credit bidder. And then the right to redeem  is further corrupted because nobody has bothered to require the production of documents showing the true balance of the receivable account (if there is one) after adjustments for receipt of loss mitigation payments.

UBS settles US mortgage lawsuit
http://www.news.com.au/business/breaking-news/ubs-settles-us-mortgage-lawsuit/story-e6frfkur-1226683410294

Bank Of America Calls Foreclosure Whistleblowers Liars
http://www.huffingtonpost.com/2013/07/12/bank-of-america-foreclosure-whistleblower_n_3588374.html

PRACTICE HINT: DO NOT LEAD WITH QUIET TITLE. YOU CAN’T GET THERE ANYWAY UNTIL AFTER YOU PROVE YOUR CASE THAT THE FORECLOSURE WAS WRONGFULLY BROUGHT. LEAVE THE BURDEN ON THE BANK. Attorney Argues “Produce the Note” and Makes a Bad Situation Worse for Homeowners Facing Foreclosure
http://implode-explode.com/viewnews/2013-07-17_AttorneyArguesProducetheNoteandMakesaBadSituationWorseforHomeown.html

OccupyHomes Rallies Around Homeowners Facing Foreclosure
http://www.truth-out.org/news/item/17579-occupyhomes-rallies-around-citizens-facing-foreclosure

JPMorgan Chase Loses Foreclosure Case in Oregon Jury Trial
http://247wallst.com/housing/2013/07/19/jpmorgan-chase-loses-foreclosure-case-in-oregon-jury-trial/

Who Can Help Me with Mortgage Problems?

A number of people have been contacting me about the work of people other than my company that produces reports and analysis and expert witnesses and my law firm, Garfield, Gwaltney, Kelley and White based in Tallahassee.

My first rule is that I don’t attack or smear anyone who might provide some service that has any chance of helping someone with a consumer debt, mortgage problem, foreclosure etc. Everyone is invited to the party and with more than 5 million foreclosures behind us and another 5 million projected into the future, there is plenty of room for everyone to take a share of the market.

My second rule is that this should be a collaborative effort in which anyone with an idea should have a platform to put forth their ideas.

And my third rule is that I don’t recommend anyone unless I have seen their work, examined their credentials (education, licenses and experience) and discussed their approach with them. Their are many approaches that work for a while then stop working because the banks change their tactics in response. There are many legal theories that are correct but the Judges refuse to apply them. What is important is that you develop a strategy for NOW, with those tactics and strategies, defenses and causes of action that are getting traction with Judges.

CAVEAT: There are many people and companies that are offering bogus relief programs — some with a lot of cash to do advertising and marketing. Be careful and ask questions. If you must take their word for it because they have no historical presence in the bank scam arena be extra careful. What I mean is how have they been contributing to the assistance of distressed consumers and homeowners?

With that in mind, here are some general guidelines for who can help and who might be well intended but ineffectual in achieving a satisfactory result. People that might possibly be of assistance include the following:

  1. LAWYERS: Simply because in the final analysis these are legal problems that usually end up in court where rules of procedure and rules of evidence usually determine the outcome. Within this category are lawyers with foreclosure defense experience, bankruptcy lawyers, property lawyers, and civil litigation lawyers. Anyone without a lot of trial experience should only be used for advice.
  2. HUD COUNSELORS: often overlooked, these people have relationships with the banks that neither lawyers nor forensic examiners have and can often ferret out facts that might not be available even through the process of legal discovery. The good ones have a pretty good track record of settling or modifying loans. AND they usually have relationships with lawyers, real estate brokers, appraisers, investigators, mortgage brokers, hard money lenders. They are licensed and regulated the same as lawyers, brokers, appraisers, and investigators.
  3. FORENSIC ANALYSTS: Very few of the people who perform this work can claim any credentials as an expert witness whose credibility will be accepted by the court. But on the other hand they often have become very adept at ferreting out information of value to your lawyer or whoever is helping you.
  4. EXPERT WITNESSES: Almost anyone will be allowed to testify as an expert witness these days because the rules are so relaxed. But the Judge is not going to give their testimony any weight unless the expert can clearly explain the facts, opinions and conclusions in a compelling way. An expert witness who is not licensed in any relevant field, possessing no academic degrees relating to a relevant field, who has no experience in the relevant field (e.g. a current or former banker, investment banker, broker etc.) might be allowed to testify but nobody is listening. On the other hand, such a witness can testify as a FACT witness rather than an opinion witness as to the results of their forensic examination of the loan, assignments or current status of the alleged loan. There are very few expert witnesses who can testify as to all aspects of securitization but many who can testify as to parts of it. You might need more than one. Lastly, even an unqualified expert witness with little credibility might give you or your lawyer an idea that had escaped your attention so there is no harm in talking or consulting with someone, even if they appear on paper to have few attributes of an actual expert.
  5. BROKERS: REAL ESTATE AND MORTGAGE: Firstly, as licensed, educated, experienced individuals they command some attention. They might have their own agenda they are pushing but when asked the right questions they can be worth the fee if they are able to describe past and current practices and their opinion of certain transactions alleged by your opposition. Keep in mind that real estate and mortgage brokers have a stake in the marketplace — to keep things moving, buying and selling, borrowing and refinancing.
  6. APPRAISERS: Usually licensed and experienced with many years behind them, they can provide very helpful insights as to whether the property was really worth anywhere near the loan value and the current fair market value. They could be a key ingredient, where it applies, to showing that that the originator was not acting as a lender because custom and practice in the industry was to take a lower appraisal righter than a higher one and that custom and practice was to “go back to the well” several times where the market appeared volatile — all things that were absent in the “underwriting” practices of the time. It was the the appraisers in 2005 who warned of the coming catastrophe and many of them suffered by getting no business because they refused to sign off on an appraisal that was misleading.
  7. INVESTMENT BANKERS: Lots of them exist, very few are willing to testify. But they obviously know a lot of shocking details if they were involved in the bundling and sale of mortgages. But remember there are several moving parts in securitization and some investment bankers might know nothing of value to your case. Only a few people at the top truly know what happened to the money and what decisions were made as to fabrication of paperwork to cover up the misappropriation of funds, title and rights to enforce.
  8. MORTGAGE ORIGINATORS: Lots of them exist, few are willing to testify. But there are some. They can tell you that they were never at risk on the Loan” and how the money came from a source outside the circle of parties at the loan closing table. TILA and RESPA claims can be corroborated with their testimony as well as questions regarding title and thee right to enforce.
  9. WHISTLE-BLOWERS: Like “experts” anyone can claim to be one. But if the person has information that can be corroborated they can be an excellent guide through the maze of curtains and obstacles that currently prevent most borrowers from figuring out and proving what is really going on.
  10. LOAN MODIFICATION PROGRAMS: As greater regulation and enforcement is starting to get some traction, so has the possibility of modification or settlement. Keep in mind that with so many successful illegal foreclosures behind them, the banks are more likely to seek finality to the situation since we have passed the half way mark and the possibilities of liability for buy-backs and refunds are declining. Be careful about anyone who tells you that you should stop paying the payments — a strategic default is something you should thoroughly examine and research and get advice before doing it. That includes especially the banks who are doing that as a matter of policy. If you do enter into a modification program make sure that the end result is going to be a modification and not just another excuse to foreclose on you with more information about you than they had before. And make sure you clear up title as well as the debt. Without that you are raising the probability that you will be fighting title issues later in court.

There are no doubt many other types of people who can or want to help. I can only mention the ones I know about. Be careful and don’t let desperation get the better of you.

FOOTNOTE: I am besieged by people trying to bait me into a “discussion” where I defend the strategies and tactics I use and describe on my blog. I won’t enter into such a discussion for the same reason that a judge would ignore what an “expert” says who has no credibility and no credentials. The only place where I will defend is in court for the benefit of clients. If someone doesn’t like my views because they think it discredits them or their services, then maybe they should do more research into what they are doing.

BOA, Urban Lending Sued for Rackateering on Fraudulent “Modification” Program

In a case that may have far-reaching consequences, a lawsuit was filed in federal court in Colorado accusing Bank of America of racketeering, which is what borrowers have been screaming about for years. It was a game to the bank. They intentionally lured people into what they thought was a good faith modification program, encouraged people to get deeper and deeper into “debt”, and then foreclosed when they were sure that the person could not reinstate nor exercise a right of redemption. A key player in this scheme was Urban Lending Solutions.

In a case that I am currently litigating, Bank of America at first denied any knowledge of Urban Lending Solutions. When confronted with correspondence issued from urban lending solutions under the letterhead of Bank of America, they finally conceded that they knew who who the company was.  In a Massachusetts case depositions were taken and it is quite clear that this affiliate of Bank of America had their employees working off of Scripts and that anyone who went off the reservation would be disciplined or fired. Going off the reservation merely meant that they actually tried to help a borrower achieve a modification.

There are at least six whistleblowers who have executed sworn affidavits stating that the modification program was a sham. I think we might be getting closer to the point where whistleblowers tell us that the origination of the loan was a sham and that the so-called sales of loans were also sham transactions. Those employees of Bank of America or their affiliates who were successful in throwing homeowners into foreclosure were rewarded with $500 gift certificates to Target and other stores.

The claims against Bank of America are using laws that were designed to target organized crime. For seven years experts and laymen have been claiming that the banks were engaged in organized crime in the  the sale of mortgage mines, origination of loans, the assignment of loans, the recording of unperfected mortgage liens, wrongful foreclosures, illegal foreclosure sales in which the property was sold without any cash being paid, interference  in the right of the borrower to reinstate, modify, or redeem.

We are just around the corner from the key question, to wit: why would the banks engage in organized crime to create foreclosures when it is painfully obvious to homeowners and local government officials across the country that the banks have no interest in acquiring the property but only causing the sale of the property at a foreclosure auction?  Why would the banks delay the prosecution of their cases for years? Why would the banks argue against expediting discovery against them and against the borrower? Why would the banks argue for less money in foreclosure rather than more money in modification?

The answer to all of those questions is simply that there is more money in this scheme than has been divulged.  In the coming weeks and months the revelations about the true nature of these transactions will shock the conscience of the country and cause voters and politicians to rethink their position regarding the ability of regulators and courts to clawback illegally obtained proceeds that started with the transactions originated with the money of investors and somehow ended up with the banks growing by 30% despite a failing economy and a diving housing market.

We are now at the point where filing RICO charges against the banks is likely to gain traction whereas in prior years it was considered overkill for what appeared to be negligence in paperwork caused by the volume of mortgages and foreclosures. Volume had nothing to do with it. The banks made a ton of money selling those mortgage bonds.  Out the money they made selling the mortgage bonds was dwarfed by the amount they made when they received insurance, credit default swap proceeds, and taxpayer money on investments owned by the investors and not by the banks. So far more than 5 million foreclosures have proceeded illegally which means that 5 million families have been disrupted in some cases beyond repair. Recent estimates suggest that another 5 million foreclosures will be added to the list unless the banks are required to conform with their regulations and the laws of the federal and state government.

BOA and Urban Lending Sued on Racketeering Charges

Forcing Modification on a Reluctant Servicer

DON’T FORGET THAT THERE IS A DIFFERENCE BETWEEN THE SERVICER WITH WHOM YOU ARE DEALING (THE SUBSERVICER) AND THE MASTER SERVICER WHO IS CALLING THE SHOTS ON BEHALF FOR THE INVESTMENT BANKER. DEMAND PROOF OF WHO IS HANDLING THE MODIFICATION, WHO IS ASSIGNED AND WHO THEY CONSULTED.

After interviewing Danielle Kelley on the issue of modification, there is a lot of red meat that can be used to bring relief to the homeowner and sanctions against the servicer that was negligently or intentionally avoiding its responsibilities under HAMP. Danielle points out that according to the DOJ judgment against BOA, there seems to be direct guidelines (which BOA has intentionally breached as a matter of policy) that under HAMP, the servicer is required to submit the proposal for underwriting prior to offering a trial payment plan. This would suggest something that is certain to be attractive to the Judge who neither wants to throw anyone out of their home nor let the borrower off the hook because there is a coffee stain on the documents.

It may be presumed that the servicer HAS submitted the plan for underwriting if they offer a trial modification. That means the borrower has been twice approved for the loan — first at origination and then under the trial modification. No more documents or financial statements, no more “consideration,” and no more denials based upon nothing. If the bank refuses, then the appropriate motion would be to enforce a settlement agreement — which is the way I would entitle it. And the argument would be that if the trial modification is not a gateway to permanent modification after underwriting twice the same borrower and after accepting trial payments, then what is it — a survey?

As we have already seen in a recent case litigated by Danielle Kelley the Judge didn’t buy the argument that the permanent modification is not automatic even if the borrower fulfills all requirements under the trial modification. remember, this borrower has already been qualified in the loan origination. Use that against the bank, saying that you approved them twice and now you want to deny them a modification after they have demonstrated the loan is viable by making the actual payments?

If the situation gets hairy then go into discovery and identify all the actual people who were involved, who they contacted, what computers they used, what software and what criteria they used in approving the trial modification. You will find they contacted nobody and did not actually underwrite the trial modification at all even though they were required to do so before the trial modification was offered by them. That’s their choice. If they want to approve trial modifications the same way they approved loans — without conforming to industry underwriting standards — they have made their election. They do not now have the excuse or basis for denying the permanent modification or demanding that the loan modification process begin all over again.

Once again we are confronted with a bank that doesn’t want the money, doesn’t want the loan reinstated, and who refuses to mitigate their damages, electing instead to push the borrower into foreclosure where both the investor/creditor (who probably knows nothing about the situation because they were never contacted, contrary to the condition precedent in HAMP and the DOJ judgment) and the borrower end up screwed.

This is only now coming out through whistle blowers. I have been predicting that this would be revealed for years and most people thought I was nuts. Maybe I am nuts but I am still right. The servicers and investment bankers have painted themselves into a corner. The truth is that none of them has any authority to negotiate the terms of the modification, nor to pursue foreclosure because not even they know if there is an actual balance left on the old loan receivable which has long since been converted into something else thanks to payment by a third party who expressly waived their right of substitution, subrogation or contribution against the borrower.

This is not theory — it is about the facts. Why would you take a document handed to you by the bank or attached to a pleading or recording be assumed by the attorney for the homeowner to be true and correct. We know it isn’t. So it is the lawyer’s job to probe through discovery down to see what transactions occurred, when they occurred and who were the parties to the transaction, as well as the terms of the transaction. Then the lawyer should compare the actual transactions, (shown by canceled checks, wire transfer receipts or other indicia of payment that can be corroborated through the national payments systems), with the documents proffered by the forecloser who is now pretending to modify when in fact they are steering the borrower into foreclosure, contrary to normal banking practice of maximizing the mitigation of damages such that the bank loses nothing or close to nothing. Listen to any seminar, as late as the last year, on foreclosure defaults and the seminar is all about workouts because that is the best answer for both the bank and the borrower. Now they would rather lose more money than less.  Why?

Workouts are the furthest thing from the bankers’ minds because the dirty secret they are hiding is that at all times they were dealing with investor money, much of which they stole. The assets on the balance sheet, the proceeds of insurance, CDS proceeds, and subservicer continuing payments after default (thus curing the default) all tell the story that has yet to be told in Court. Now with me practicing again with great lawyers like Danielle Kelley, William Gwaltney and Ian White, the story will be told.

BANKS ARE NOT MITIGATING LOSSES. THEY ARE AVOIDING LIABILITY TO INVESTORS, INSURERS AND THE GOVERNMENT

The only hope for the banks is getting a foreclosure sale that gives the further appearance that the reason the investor, the insurer, the credit default swap counter party, the U.S. Treasury and the Federal Reserve lost money was because of the vast number of defaults on mortgages. But even with the banks tricking and pushing borrowers into “default” [from a script written by BOA officers and lawyers — “you have to be 3 months behind in your payments before we can consider modification” — a criteria ABSENT from HAMP], the number of defaults and the amount the banks are reporting that investors lost don’t add up — and THAT is why you must be relentless in discovery..

The simple truth is that the banks that are dealing with the foreclosures and modifications stand to lose nothing if the loan results in a zero return to mitigate damages. They stand to lose everything if the loan is reinstated because of all that money they took from investors, insurers, CDS counterparties, the U.S. Treasury, and the Federal Reserve. BOA would not have made it a policy to lie, cheat and deceive borrowers until they ended up in foreclosure unless it was in their interest to do so. What reason would that be other than the one postulated by this paragraph?

“Servicer shall promptly send a final modification agreement to borrowers who have enrolled in a trial period plan under current HAMP guidelines (or fully underwritten proprietary modification programs with a trial payment period) and who have made the required number of timely trial period payments, where the modification is underwritten prior to the trial period and has received any necessary investor, guarantor or insurer approvals. The borrower shall then be converted by Servicer to a permanent modification upon execution of the final modification documents, consistent with applicable program guidelines, absent evidence of fraud.” -HAMP

U.S. v BofA: Countrywide Eliminated Underwriting Standards

EDITOR’S NOTE:  The complaint below is from the United States Atty. for the Southern District of New York gives us a clear picture of the processing of loans without any underwriting standards at Countrywide and other aggregators across the country. The complaint is not authority, but it is a guide for what you can allege and what you can ask about in discovery.

It is time to ask the nuclear question, to wit: in light of the revelations that are already in the public domain with dozens of whistleblowers, is it not reasonable to assume that the aggregators not only knew about fabricated, forged and inaccurate loan applications, but actually intended that result. I ask that question because of the number of attempted prosecutions of people for mortgage fraud, when mortgage fraud was exactly what Countrywide wanted.  They clearly wanted the highest possible volume of loans approved under circumstances where it can only be assumed that they wanted those loans to fail, in order to be paid by insurers, counterparties on credit default swaps, the federal government in bailouts and now the Federal Reserve which appears to be  buying $85 billion in worthless mortgage bonds from the financial industry every month.

  Thus Wall Street collected money from the investors (and took a share of that and put it in their pocket), collected money from borrowers (and took a share of that and put it in their pocket), collected money from insurers which went only into their pockets, collected money from the proceeds of credit default swaps which went only into their pockets,  collected money from the government in the bank bailouts, collected money from the government sponsored entities who guarantee the loans, and are collecting money from the Federal Reserve who are buying worthless mortgage bonds which have little or no interest in any secured loan, residential or otherwise. On top of all of that Wall Street has taken the homes of more than 5 million families and is expected to take the homes of another 5 million families —  supposedly to cover the “loss”  on mortgage bonds they never owned and mortgage loans they never owned.

And then you have the real question, to wit: why would banks create a scheme that originated loans, most of which were destined to fail in one fashion or another? And the answer is unavoidable and incontestable: they did it because that was the way they could make the most money.

And then the second real question, to wit: why would banks want foreclosures but not want the property?  And the related question is why would they want a foreclosure under circumstances where a modification would produce far greater proceeds to mitigate the loss on a loan that a foreclosure? And the related question to that is why would the largest bank in the world adopt a policy of fraud in order to guide people into foreclosure deceiving them into thinking that they were getting a modification? And the final question related to all of that is why with the modification not become permanent after the borrower has done everything correctly during the trial period?  The answer is extremely simple: the foreclosure process is the largest cover-up in history for the largest economic crime in history; it provides cover for all of the defects, multiple payments that were already received and never disclosed, and the diversion of money and property from investors and homeowners.

Here are some relevant allegations in the complaint:

HUSTLE: A PLAN TO DESTROY HOMEOWNERS AND DEFRAUD INVESTORS: The U.S. Government in its complaint filed against Bank of America details the specific ways in which Countrywide was operating when loans were originated.

“Countrywide rolled out a new streamlined loan origination model is called the “hustle.”

In order to increase the speed at which it originated and sold loans to the GSES,  countrywide eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud and other serious lung defects all while countrywide was informing the GSES that it had tightened its underwriting guidelines.”

Countrywide eliminated underwriter review even from many high risk loans. In lieu of underwriter review, countrywide assigned critical underwriting tasks to loan processors who were previously considered unqualified even to answer borrower questions. At the same time, countrywide or eliminated previously mandatory checklists that provided instructions on how to perform these underwriting tasks. Under the Hustle, such instructions on proper underwriting were considered nothing more than unnecessary forms that would slow the swim lane down.

Countrywide also eliminated the position of compliance specialist, an individual previously responsible for conducting a final, independent check on alone to ensure that all conditions on the loans approval were satisfied prior to funding.

The Hustle began in full force in approximately August 2007.

Countrywide also concealed the quality control reports on Hustle loans demonstrating that instances of fraud and other material defects (i.e. defects making the loans in eligible for investors sell) were legion. Countrywide’s own quality control reports identified material defect rate of nearly 40% in certain months, rates that were nearly 10 times the industry-standard defect rate of approximately 4%.

U.S. v. BOA False Claims Act complaint, SDNY 10-25-2012

ENCORE BANK v. BOA, NA (2013) Effective as of July 1, 2008, the parent company of BofA, Bank of America Corporation, acquired the parent corporation of Countrywide, Countrywide Financial Corporatio

 

WHISTLEBLOWERS AT BANKS TERMINATED AND HARASSED

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“workers joked that bogus documents were being produced in the “art department.”

Supervisors’ behavior degenerated from vulgar to threatening, she claimed, when she started complaining about inflated property appraisals and other misconduct. Managers often forged borrowers’ signatures on loan documents and made up fake verification of employment forms, her lawsuit said. One manager, the suit said, had an arrangement with a friendly business owner who was willing to falsely claim that the manager’s loan customers were on his payroll.”

“Parmer isn’t alone in claiming she was punished for objecting to fraud in the midst of the nation’s home-loan boom. iWatch News has identified 63 former employees at 20 financial institutions who say they were fired or demoted for reporting fraud or refusing to commit fraud. Their stories were disclosed in whistleblower claims with the U.S. Department of Labor, court documents or interviews with iWatch News.”

“These ex-employees’ accounts provide evidence that the muzzling of whistleblowers played an important role in allowing corruption to flourish as mortgage lenders and their patrons on Wall Street pumped up loan volume and profits. Codes of silence at many lenders, former employees claim, helped discourage media, regulators and policymakers from taking a hard look at illegal practices that ultimately harmed borrowers, investors and the economy.”

Whistleblowers ignored, punished by lenders, dozens of former employees say

WHISTLEBLOWERS GET BLOWN AWAY

Mortgage fraud involved many lenders, former employees say

By Michael Hudson

 

 

Darcy Parmer ran into trouble soon after she started her job as a fraud analyst at Wells Fargo Bank. Her bosses, she later claimed, were upset that she was, well, finding fraud.

Company officials, she alleged in a lawsuit, berated her for reporting that sales staffers were pushing through mortgage deals based on made-up borrower incomes and other distortions, telling her that she didn’t “see the big picture” and that “it is not your job to fix Wells Fargo.” Management, she claimed, ordered her to stop contacting the company’s ethics hotline.

In the end, she said, Wells Fargo forced her out of her job.

Parmer isn’t alone in claiming she was punished for objecting to fraud in the midst of the nation’s home-loan boom. iWatch News has identified 63 former employees at 20 financial institutions who say they were fired or demoted for reporting fraud or refusing to commit fraud. Their stories were disclosed in whistleblower claims with the U.S. Department of Labor, court documents or interviews with iWatch News.

“We did our jobs. We had integrity,” said Ed Parker, former fraud investigations manager at now-defunct Ameriquest Mortgage Co., a leading subprime lender. “But we were not welcome because we affected the bottom line.”

These ex-employees’ accounts provide evidence that the muzzling of whistleblowers played an important role in allowing corruption to flourish as mortgage lenders and their patrons on Wall Street pumped up loan volume and profits. Codes of silence at many lenders, former employees claim, helped discourage media, regulators and policymakers from taking a hard look at illegal practices that ultimately harmed borrowers, investors and the economy.

Whistleblower advocates say weak federal and state laws also helped prevent finance industry workers from being heard. Congress passed tougher laws in the wake of the financial crisis, but whistleblowers and their advocates say labor-law enforcers, securities-law cops and banking regulators need to do more to ensure that banking workers can safely report fraud and other abuses.

For their part, banking industry representatives reject the idea that employees were punished for reporting problems.

In court documents, Wells Fargo denied Parmer’s charges that management interfered with in-house fraud watchdogs. The bank said Parmer was never prohibited from calling the ethics line and that its internal investigation showed that no one retaliated against her and that “no fraudulent activity occurred.”

A Wells Fargo spokeswoman told iWatch News that the bank has extensive protections for internal whistleblowers and that it is the responsibility of all employees to raise concerns about ethics breaches or law violations.

“We have a strict code of ethics and a no-retaliation policy,” Wells Fargo spokeswoman Vickee Adams said. “We take responsibility for our actions, and when there’s evidence of a mistake and there’s something that’s needs to be corrected, we take action.”

‘Zero tolerance’

iWatch News has reported on former employees of Countrywide Financial Corp. who claimed the company retaliated against them for objecting to falsified mortgage documents and other fraud. In September the Labor Department ruled that Bank of America Corp., which bought Countrywide in 2008, had fired Eileen Foster, the mortgage lender’s fraud investigations chief, as punishment for finding widespread fraud and for trying to protect other whistleblowers within the company.

Further investigation reveals that concerns about the abuse of whistleblowers weren’t limited to Countrywide.­

Most of the workers who claimed they were punished for trying to fight fraud worked at giant firms such as Wells Fargo or Washington Mutual (WaMu). Others worked at smaller lenders that joined the rush to sell home loans during the boom years.

Wherever they worked, their accounts are similar. Many claim that commission-hungry workers falsified loan applicants’ incomes and bank statements, pushed appraisers to exaggerate property values and, in some instances, forged consumers’ signatures on documents.

In many cases, the former employees say, management encouraged the fraud and protected the fraudsters.

Parker, the former Ameriquest fraud investigations chief, claims that he had few problems when he did “ones” and “twos” — investigating cases that involved an employee or two who could cause only limited damage, he said. But things changed, he said, when he tried to fight systemic fraud by focusing on branches or regions where fraud was so prevalent, workers joked that bogus documents were being produced in the “art department.”

Management instructed his unit to limit its investigations by reducing the number of loan files it pulled when it went into a branch, Parker said. He was left out of meetings and key decisions and, eventually, squeezed out of his job, he claimed.

Ameriquest later agreed to pay $325 million to settle loan-fraud allegations by authorities in 49 states and the District of Columbia. It stopped making loans in 2007.

The company said previously in a written statement that Parker was a “disgruntled former employee” who lost his wrongful dismissal claim against the company before an arbitrator. In a 2007 opinion, the arbitrator ruled Parker hadn’t been able to prove that the company’s treatment of him was connected to his reports about fraud, adding that it “stretches the imagination” to think a company would retaliate against a fraud investigator for “doing his job.”

More generally, Ameriquest said it “had a policy of zero tolerance for fraud. When problems were discovered, the company addressed them, including immediately terminating the employee or vendor and pursuing civil and criminal action against them.”

‘Fraud is fraud’

At a White House press conference in October, ABC News correspondent Jake Tapper asked President Obama why his administration hadn’t pursued criminal cases more aggressively in the aftermath of disasters at Lehman Brothers and other banks.

“I don’t think any Wall Street executives have gone to jail, despite the rampant corruption and malfeasance that did take place,” Tapper said.

Obama replied that in many instances the government might have trouble making criminal charges stick, because “a lot of that stuff wasn’t necessarily illegal. It was just immoral or inappropriate or reckless.”

Obama isn’t alone in suggesting that criminal fraud by banks wasn’t the main cause of the nation’s financial disaster. Bankers have cited unpredictable market conditions, the federal government and borrowers as being among the chief culprits.

In congressional testimony, former Washington Mutual chief executive Kerry Killinger blamed borrowers for misleading WaMu about their incomes and other details in their loan applications.

“I’m certainly very disappointed to think about my customers lying to me, because that’s fraud and it shouldn’t happen,” Killinger said. “But I think an objective look at things is that there must have been situations where people did not tell the truth on their applications.”

Many whistleblowers who worked inside major banks counter that it was fraud by lenders — not borrowers — that was the driving force in the growth of toxic loans that caused the mortgage meltdown.

“Fraud is fraud,” Parker said. “It’s fraud if someone changes information in a loan file without the borrower’s knowledge or does anything deceptive to get a loan approved and passed through. How can you say those are not criminal acts?”

Parker and other former mortgage workers say some borrowers did take part in the fraud, but they usually did so with coaching from sales representatives who knew how to work the system to get deals done. And in many cases, Parker and others say, borrowers weren’t aware of the deception and were fooled by bait-and-switch salesmanship and other tactics used by the mortgage professionals who controlled the process.

A two-year U.S. Senate investigation found that senior management at Washington Mutual ignored clear evidence that bank employees were engaging in fraud.

In a report released in April, Senate investigators noted that an internal WaMu review of a high-volume loan center in Southern California found that as many as 83 percent of the loans it booked contained fraud. Despite in-house gatekeepers’ warnings about fraud at that location and other loan centers, WaMu executives took “no discernable actions” to deal with problem, the Senate report said.

Top sales managers suspected of fraud, the report said, were allowed to continue to produce huge volumes of loans and win trips to Hawaii as members of WaMu’s “President’s Club.”

WaMu collapsed in September 2008, a $300 billion institution buried in bad loans. It was the largest bank failure in American history — and one of the biggest casualties of risky practices and missed warning signs stretching back to the start of the last decade.

Early warnings

In the spring and summer of 2001, Matthew Lee was a busy man.

A fair-lending activist and blogger on innercitypress.org, Lee was fielding a growing number of emails and phone messages from people who worked at Citigroup’s subprime lending unit, CitiFinancial. The lender, they told Lee, was using slippery methods to trap borrowers in cycles of overpriced debt.

The more he reported the whistleblowers’ information on his website, the more whistleblowers contacted him. “I can’t count the number of times people called me and said: ‘It’s actually worse than you described. Let me tell you about it,’” Lee recalled.

In all, Lee estimates, he talked with three dozen current and former CitiFinancial employees.

One continued helping Lee even after he lost his job at Citi, digging through trash bins outside CitiFinancial branches around Tennessee and rescuing internal memos and other documents that, in Lee’s view, provided evidence of the lender’s “pervasive lawlessness.” The documents would arrive via overnight mail, often damp and smelling of used coffee grounds.

One former CitiFinancial employee, Steve Toomey, agreed to go on the record, signing a statement that said managers pushed workers to mislead borrowers about the costs of their loans and to falsify information in borrowers’ files. Lee filed Toomey’s affidavit and other documents with banking regulators at the Federal Reserve.

CitiFinancial immediately denied the allegations against the company, asserting, for example, that Toomey had only raised questions after “he concluded that the company would not pay him monies that he demanded to resolve an employment dispute.”

With the pressure building, Citigroup went out of its way to warn other current and former employees to keep quiet about what went on at CitiFinancial, according to Reuters news service.

Citigroup, Reuters said, hired a famed litigator “to help fight allegations of illegal lending practices and prevent former employees from bad-mouthing the financial services giant.” Mitchell Ettinger, one of Bill Clinton’s lawyers in the Paula Jones case, met with at least 15 current or former employees, reminding the ex-employees that Citigroup would enforce the “non-disparagement clauses” in their severance agreements with the company, Reuters said.

Lee charged that this was an attempt to paper over evidence of misconduct inside CitiFinancial. Why, he argued, would Citigroup dispatch a partner from Skadden Arps, described by Forbes magazine as “Wall Street’s most powerful law firm,” to talk with low-level employees?

Citigroup told Reuters the bank had acted properly. It added that the standard non-disparagement clause in the bank’s severance agreements wouldn’t prevent ex-employees from reporting illegalities.

Ettinger did not respond to requests for comment from iWatch News. A Citigroup spokesman declined to answer specific questions from iWatch News about former employees’ complaints. He said “issues from that time period” were “investigated and responded to appropriately by the company.”

The Federal Reserve eventually fined CitiFinancial $70 million for regulatory violations. Lee said that the Fed focused mainly on technical issues, however, and did nothing to protect whistleblowers from intimidation by the bank.

That, Lee said, made it less likely that more employees would come forward in the future with information about misconduct at Citi — or at other financial institutions that wanted to keep misbehavior secret.

“When people do step forward and put themselves at risk, you need to aggressively say to them, ‘If you’ve received any threats from the company, let us know,’” Lee said.

A spokeswoman said the Federal Reserve couldn’t comment on issues involving individual banks.

‘Their integrity … failed’

As whistleblowers were drawing scrutiny to Citigroup, then the nation’s largest commercial bank, others were raising questions about Washington Mutual, the nation’s largest savings and loan.

One of them was Theresa Hagman, a vice president in WaMu’s custom home-construction lending division. In 2003, Hagman spotted an increase in the number of construction loans going into default. She believed this was happening because loans were being pushed through without proper documentation, in violation of federal lending laws.

But when she pressed the issue with a high-level sales manager, Hagman later testified in a Labor Department hearing, he jumped out of his chair and charged her, screaming at her as his face purpled and veins popped in his neck. (In his testimony, the manager conceded he’d had disagreements with Hagman but denied they’d had heated confrontations.)

As an internal investigation proceeded, a senior vice president wrote: “If this wasn’t a good example of a need for a Fraud team, then I can’t find one. This poor individual is feeling like she is getting no support from her management.”

The senior executive’s concerns weren’t enough to protect her from more retaliation, Hagman said.

“I was being brutalized, and they knew it,” Hagman testified. “I was sharing the emails with everybody, pleading for protection. … We had borrowers that were being damaged and employees that were scared and crying.”

In March 2004, WaMu fired her.

Hagman filed a claim for federal whistleblower protection under the Sarbanes-Oxley Act, the corporate reform law passed in response to accounting frauds at Enron Corp. and other big companies.

Hagman told an administrative law judge that there were “senior-level people in this organization who are still there today who did not tell the truth. Their integrity and their honor … without question failed.”

WaMu maintained that there was no retaliation, only miscommunication between Hagman and her bosses. It said she hadn’t been fired, she’d simply been let go as part of a restructuring.

The judge sided with Hagman. He ordered that WaMu pay her more than $1 million.

‘Silent treatment’

The whistleblower affairs at Citigroup and WaMu came as the mortgage market was beginning to gain steam, recovering from a late 1990s credit crisis that had put dozens of subprime lenders out of business.

By 2004, mortgage industry production and profits were exploding. As the push to book loans grew to a near frenzy, industry insiders recall, the atmosphere at many mortgage-sales operations devolved into a cross between a “boiler room” operation and a frat-house blowout.

At Citizens Financial Mortgage Inc., a small Pennsylvania-headquartered lender, the out-of-control behavior included an ugly mix of sexual harassment and fraud, a lawsuit filed by a former loan processor at the company charged.

Gina La Vitola claimed one manager at her branch in Essex County, N.J., ranted and cursed and gambled on sports during office hours, even getting a visit from a bookie delivering a wad of cash. On several occasions, she said in her lawsuit, the manager picked her up, threw her over his shoulder and then used her “as a weight bar to see how many squats he could do.”

Supervisors’ behavior degenerated from vulgar to threatening, she claimed, when she started complaining about inflated property appraisals and other misconduct. Managers often forged borrowers’ signatures on loan documents and made up fake verification of employment forms, her lawsuit said. One manager, the suit said, had an arrangement with a friendly business owner who was willing to falsely claim that the manager’s loan customers were on his payroll.

After she reported the problems to Citizens’ president, she claimed, she got “the silent treatment” from coworkers and her bosses drastically changed her work hours and duties.

Finally, she said, a manager telephoned her and explained that, since her complaint, the “vibe is not there” in the office. That was a problem, he said, because he was “big about vibe, energy.”

He told her the company was letting her go, she claimed.

The company strongly denied her allegations. The case was settled on undisclosed terms. A former company official confirmed to iWatch News that Citizens was no longer in business, but said he couldn’t comment on the lawsuit.

Fraud sleuths

As mortgage salespeople embraced creative methods for pushing mortgages through the system, they were being stalked by a band of internal watchdogs.

Financial institutions keep fraud investigators and other gatekeepers on staff in part because they need to show regulators and investors that they have solid controls in place.

Many of these watchdogs took their jobs seriously.

In the spring of 2005, Darcy Parmer joined a team at Wells Fargo that was working on a plan to create a fraud detection report.

By doing queries within the bank’s computerized mortgage-application system, Parmer said, she and other fraud sleuths found a large number of duplicate credit applications submitted to various branch offices and divisions within Wells Fargo. It appeared to Parmer that loan officers were helping borrowers who’d been turned down for loans resubmit their applications elsewhere within the bank, inflating their incomes from one application to the next by as much as 100 percent.

The report, Parmer believed, was a great tool for sniffing out fraud. In 2006, however, management terminated use of the fraud detection report, Parmer said.Nothing was put in place to replace it, she said.

It wasn’t the only time that higher ups interfered with internal watchdogs’ ability to do their jobs, according to Parmer’s lawsuit in federal court in Colorado. Her court filings described many instances in which she claimed sales people and executives circumvented fraud controls or turned a blind eye to “acts of criminal fraud.”

One case involved a borrower Parmer referred to in court papers as Ms. A. According to Parmer, a loan officer had claimed in the loan-underwriting system that Ms. A earned roughly $140,000 per year, but federal tax records indicated she earned less than half that much — barely $60,000 a year.

When she tried to stop the loan from going through, Parmer said, a manager chastised her: “This is what you do every time.” He ordered her to close her investigation, she said.

After months of harassment, she said in an affidavit, she was “mentally and emotionally unable to continue working” and had to take disability leave to get treatment for distress and depression. After a time, she said, the bank informed her that her job had been filled.

Wells Fargo said in court documents that it had never fired her and that she was simply “on an unapproved leave of absence.”

The bank’s attorneys also said that Wells Fargo had refused to fund “nearly ever loan” that Parmer had complained about, and those that had funded had been handled “consistent with Wells Fargo protocol.”

Parmer and the bank settled the case in 2009. The terms were confidential.

‘In the dark’

When Congress passed Sarbanes-Oxley in 2002, it raised hopes that more workers would be emboldened to come forward with information that would help prevent future corporate scandals. One legal scholar hailed the act — which gave federal labor officials the power to order companies to swiftly reinstate whistleblowers with back pay — as “the most important whistleblower protection law in the world.”

Things haven’t worked out as whistleblower advocates had hoped. Critics claim the Labor Department hasn’t done enough to protect financial whistleblowers.

In roughly the first nine years of the law — from 2002 through May 20 of this year — the agency issued merit findings in 21 whistleblower complaints and dismissed 1,211 others.

That record is just one example, whistleblower advocates say, of the trials that corporate whistleblowers go through when they try to do the right thing.

When whistleblowers seek help from government agencies or state and federal courts, they often face long delays and find themselves outgunned by their employers’ legal teams.

At the same time, employers are often successful at preventing whistleblowers from getting the word out to the wider world. When companies and employees negotiate severance contracts and legal settlements, confidentiality clauses often permanently silence whistleblowers. Companies also frequently force ex-employees with whistleblower claims into private arbitration, ensuring that many details of their cases will remain secret.

Judges in Los Angeles, for example, have booted three former WaMu employees out of court and ordered them to go before arbitrators to press their claims that the company pushed them out of their jobs in early 2008 because they refused to participate in fraud.

Some former mortgage-industry workers contacted by iWatch News declined to talk in more detail about their legal claims because they’re gagged by secrecy agreements. Others said they couldn’t talk on the record because they still work in banking and don’t want to get in trouble with their current employers, or because they’re looking for jobs and don’t want to be blacklisted.

“Hell, we want to work,” one mortgage fraud investigator said, explaining why he and many of his colleagues haven’t gone public with what they know.

Matthew Lee, the fair lending activist who clashed with Citigroup a decade ago, believes getting whistleblowers to come forward is crucial to preventing the next financial meltdown.

Fraud thrives in secret. If regulators are serious about holding banks accountable, Lee said, they should cultivate and protect whistleblowers and serve as a counterweight to the power of big banks and their armies of lawyers.

“They need to think through how they’re going to protect people in the industry who come forward with information,” Lee said. “If you don’t, you’re going to be in the dark.”

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