More Proof of DoJ Lack of Interest in Enforcing the Law: The Case of the Kickback-Demanding Banks
By Yves Smith
In this world of rampant banking miscreance, it may seem hard to get worked up about $6 billion in impermissible kickbacks. But this is a case of a clear-cut legal violation, with the particulars sent to the Department of Justice by the HUD Inspector General’s office on a silver platter. And one of the alleged big bad actors was the ever-sanctimonious Wells Fargo.
American Banker has a detailed write-up of a kickback scheme between major banks who were mortgage originators, in particular Wells, Citigroup, Countrywide, and SunTrust and mortgage insurers.
The mortgage insurance was to insure the riskier portion of a highly geared mortgage. The borrower would pay a higher rate to compensate for the lack of a large (or much of any) down payment. The kickback was dressed up as reinsurance, meaning the mortgage insurer was laying off some of the risk to the originator and paying a fee to do so. But what instead happened was that fees were paid but the deals were structured so that no risk was shifted over to the banks.
The violations were uncovered by HUD’s Inspector General office. IGs are tasked to prevent and uncover fraud, waste, and abuse. Its budget is separate from the rest of HUD. It has substantial law enforcement powers and can subpoena documents but not witnesses.
Not surprisingly, this isn’t the first time that significant HUD IG finding has been ignored. The IG’s office found substantial evidence that the biggest servicers had defrauded taxpayers (with Wells again a particularly bad actor) But since that report contradicted the “see no evil” Foreclosure Task Force findings, nothing has been done.
The overview from the American Banker story:
“In exchange for the their business, companies such as Citigroup Inc, Wells Fargo & Co, SunTrust Banks Inc. and Countrywide allegedly required reinsurance partnerships on generous terms that violated the Real Estate Settlement Procedures Act, a 1974 law prohibiting abusive home sales practices.
“During a two-day presentation in the summer of 2009, HUD’s team presented DOJ attorneys with a thick binder of evidence that major banks had engineered a decade-long kickback scheme, people familiar with the investigation say.
“Documents from the investigation show that the inspector general’s staff concluded that banks and insurance companies had created elaborate financial structures that had the appearance of reinsurance but failed to transfer significant amounts of risk to their bank underwriters.
“Some of the deals were designed to return a 400% profit on a bank’s investment during good years and remain profitable even in the event of a real estate collapse.
“Making matters worse, banks allegedly forced unknowing consumers to buy more insurance than they needed and failed to properly disclose the reinsurance agreements, another RESPA violation…
“Wells Fargo and Bank of America Corp. have settled class action cases alleging the same sort of misconduct flagged by HUD, and internal documents show that banks and insurers viewed the arrangements as a thinly veiled pay-to-play scheme. Even as insurers complained they couldn’t afford the escalating cost of the reinsurance payments, banks threatened or punished companies that balked at providing them, documents obtained by American Banker show.
“Wells Fargo & Co told one insurer that it should consider giving Wells such deals if it wanted business referrals. After insurer MGIC Investment Corp. announced plans to cut back on banks’ share of premiums in 2003, Countrywide executives complained to an MGIC executive and told him that they were shifting Countrywide’s business to MGIC’s competitors.”
The article provides far more in the way of supporting detail. Former members of the mortgage industry have also confirmed that the banks were aggressively demanding kickbacks. Yet look what then transpired:
“HUD Inspector General Ken Donohue — and his deputy, Mike Stephens, who succeeded him last year — were confident that they had a case…
“The DOJ said it wanted take the matter on, according to Inspector General Stephens and others. Six months later, HUD’s attorneys formally referred its case to prosecutors, effectively ending the housing agency’s involvement. Investigators believed a speedy settlement in the hundreds of millions of dollars was likely, and HUD’s investigators even suggested that the proceeds should be used to pay for mortgage counseling for borrowers who were allegedly victims of kickback schemes.
“Major banks deny that their reinsurance agreements were illegal, but they have not been eager to defend them in court.
“More than a year and a half after the Department of Justice took over the case, no settlement has been reached and there is serious doubt as to whether the case even remains active.”
So why is the Department of Justice’s excuse for sitting on its hands? The excuse made is that it lacks the needed accounting skills.
If you believe that, I have a bridge I’d like to sell you. Actions speak louder than words, and the evidence is overwhelming that the DoJ has no interest in inconveniencing anyone influential, particularly banks.