Tag Archives: DoJ

Independent Foreclosure Review: Case Closed?

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The Federal Reserve Board issued its Independent Foreclosure Review. By way of background,

Between April 2011 and April 2012, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (“Federal Reserve”), and the Office of Thrift Supervision (OTS) issued formal enforcement actions against 16 mortgage servicing companies to address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing identified by examiners during reviews conducted from November 2010 to January 2011. Beginning in January 2013, 15 of the mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing reached agreements with the OCC and the Federal Reserve (collectively, the “regulators”) to provide approximately $3.9 billion in direct cash payments to borrowers and approximately $6.1 billion in other foreclosure prevention assistance, such as loan modifications and the forgiveness of deficiency judgments. For participating servicers, fulfillment of these agreements satisfies the foreclosure file review requirements of the enforcement actions issued by the OCC, the Federal Reserve, and the OTS in 2011 and 2012. (1)

The government’s actions regarding the Independent Foreclosure Review have been its controversial, with some believing that it was completed too hastily. I am less interested in that debate than in FRB’s sense of the the servicing sector going forward.

The report states that “the initial supervisory review of the servicer and holding company action plans has shown that the banking organizations under Consent Orders have implemented significant corrective actions with regard to their mortgage servicing and foreclosure processes, but that some additional actions need to be taken.” (24) Overall, the report reflects an optimism that endemic servicer problems are a thing of the past.

A drumbeat of reports and cases seems to be at odds with that assessment, although there is obviously a significant lag between the occurrence of  problems and the report of them in official sources. As a close observer of the mortgage industry, however, I am not yet convinced that regulators have their hands around the problems in the servicer industry. Careful monitoring remains the order of the day.

Reiss on Dimming of FIRREA

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Inside MBS & ABS quoted me in Judge Recommends Dismissal of DOJ’s Fraud Case Against BofA, But It May Not End FIRREA Claims (behind paywall). It reads,

A North Carolina federal magistrate has recommended that a Justice Department fraud case against Bank of America be dismissed, but he also said a separate Securities and Exchange Commission lawsuit against the bank based on a different federal law should proceed.

The DOJ last August filed suit against BofA under the Financial Institutions Reform, Recovery and Enforcement Act, accusing the bank of defrauding investors in the sale of $855 million of nonagency MBS. Last week, U.S. Magistrate David Cayer of the U.S. District Court for the Western District of North Carolina found that the government failed to prove the bank made “material” false statements to the former Federal Housing Finance Board.

The DOJ claimed that BofA “willfully” misled investors, including the Federal Home Loan Bank of San Francisco and Wachovia Corp. – now owned by Wells Fargo – about the risks in the 2008 offering by failing to fully disclose the risk of 1,191 jumbo adjustable-rate mortgages backing the deal.

FIRREA allows the government to seek civil penalties equal to losses suffered by federally insured financial institutions, with a maximum of $1.1 million per violation. The 1989 law was a little used relic of the savings and loan aftermath until government lawyers began recently to invoke it widely in addition to other charges.

The law gives agency lawyers the ability to tap grand jury material and to subpoena documents. FIRREA also has a 10-year statute of limitations, longer than the typical five years for fraud cases, allowing government lawyers more time to pursue cases related to the 2007-2008 financial crisis.

The magistrate rejected the government’s claim that BofA’s statements were in violation of FIRREA because the FHLBank of San Francisco was within the jurisdiction of the FHFB. Cayer found that policing such statements did not fall within the agency’s purview and there was no indication that either the FHFB or the FHLBank ever complained about the MBS.

The magistrate recommended the DOJ’s case be dismissed without prejudice, although District Judge Max Cogburn will have the final word. Cayer allowed a parallel complaint filed by the SEC to move forward.

David Reiss, a professor at Brooklyn Law School, noted that U.S. district judges often give deference to reports from magistrate judges. But even if Cogburn opts to dismiss the DOJ’s case, it’s less an indictment against the use of FIRREA and more an indication that the government filed its case incorrectly, he said.

“Is it a harbinger that all other judges are going to change their minds about the broad reading of FIRREA? I don’t see that at all,” Reiss told Inside MBS & ABS. “I see judges in New York and in other jurisdictions continuing to allow the government to broadly interpret FIRREA based on its plain language. They are reading the text of the statute and saying the government can act.”

Reiss on Snuffing out FIRREA

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Law360 quoting me in BofA Fight Won’t Blunt DOJ’s Favorite Bank Fraud Weapon (behind a paywall). It reads in part,

A federal magistrate judge on Thursday put a Justice Department case against Bank of America Corp. using a fraud statute from the 1980s in peril, but the case’s limited scope means the government is not likely to abandon its favorite financial fraud fighting tool, attorneys say.

Federal prosecutors have increasingly leaned on the Financial Institutions Reform, Recovery and Enforcement Act, a relic of the 1980s savings and loan crisis, as a vehicle for taking on banks and other financial institutions over alleged violations perpetrated during the housing bubble years.

*     *     *

Some banking analysts hailed the ruling as potentially the beginning of the end of the government’s pursuit of housing bubble-era violations.

“If the judge’s recommendation is accepted by the federal district court judge, then this development will represent a significant setback for the government’s legal efforts and likely mark the beginning of the end for crisis-era litigation,” Isaac Boltansky, a policy analyst at Compass Point Research & Trading LLC, said in a client note.

However, others say the government’s case was brought under relatively narrow claims that Bank of America did not properly value the securities to induce regulated banks to purchase securities they otherwise might not have.

That is a tougher case to bring than the broad wire fraud and mail fraud claims that were available to the government under FIRREA. The government has employed those tools with great success against Bank of America and Standard & Poor’s Financial Services LLC in other cases in far-flung jurisdictions, said Peter Vinella, a director at Berkeley Research Group.

“There was no issue about whether BofA did anything wrong or not. It’s just that the case was filed incorrectly. It was very narrowly defined,” he said.

It is not entirely clear that Bank of America is in the clear in this case, either.

U.S. district judges tend to give great deference to reports from magistrate judges, according to David Reiss, a professor at Brooklyn Law School.

But even if U.S. District Judge Max O. Cogburn Jr. accepts the recommendation, the Justice Department has already lodged a notice of appeal related to the report. And in the worst-case scenario, the government could amend its complaint.

A victory for Bank of America in the North Carolina case is unlikely to have a widespread impact, given the claims that are at stake. The government will still be able to bring its broader, and more powerful claims, under a law with a 10-year statute of limitations.

“It is one opinion that is going against a number of FIRREA precedents that have been decided in others parts of the country,” Reiss said. “It also appears that this case was brought and decided on much narrower grounds than those other cases, so I don’t think that it will halt the government’s use of the law.”

No Justice for Mortgage Fraud

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The Audit Division of the Department of Justice’s Office of the Inspector General has issued an Audit of the Department of Justice’s Efforts to Address Mortgage Fraud.  One word for it — DEPRESSING:

The Department’s inability to accurately collect data about its mortgage fraud efforts was starkly demonstrated when we sought to review the Distressed Homeowner Initiative. On October 9, 2012, the FFETF [Financial Fraud Enforcement Task Force] held a press conference to publicize the results of the initiative. During this press conference, the Attorney General announced that the initiative resulted in 530 criminal defendants being charged, including 172 executives, in 285 criminal indictments or informations filed in federal courts throughout the United States during the previous 12 months. The Attorney General also announced that 110 federal civil cases were filed against over 150 defendants for losses totaling at least $37 million, and involving more than 15,000 victims. According to statements made at the press conference, these cases involved more than 73,000 homeowner victims and total losses estimated at more than $1 billion.

Shortly after this press conference, we requested documentation that supported the statistics presented. In November 2012, in response to our request, DOJ officials informed us that shortly after the press conference concluded they became concerned with the accuracy of the statistics. Based on a review of the case list that was the basis for the figures, the then-Executive Director of the FFETF told us that numerous significant errors and inaccuracies existed with the information. For example, multiple cases were included in the reported statistics that were not distressed homeowner-related fraud. Also, a significant number of the included cases were brought prior to the FY 2012 timeframe. (ii, footnote omitted)

According to the report, this was not a one time problem with the DoJ’s reporting about mortgage fraud.

The audit “makes 7 recommendations to help DoJ improve its understanding, coordination, and reporting of its efforts to address mortgage fraud.” (iii) The last two seem to be the most important:

6. Develop a method to capture additional data that will allow DOJ to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization.

7. Develop a method to readily identify mortgage fraud criminal and civil enforcement efforts for reporting purposes. (30)

I (along with Brad Borden) have previously argued that law enforcement agencies have not been tough enough on high-level perpetrators of mortgage fraud, although our position appears to be the minority view among lawyers (see here for a more common view). I think this audit supports our view that, for one reason or another, prosecutors have dropped the ball on this in a big way. It’s probably too late to do anything about the last financial crisis, but it sure would be swell to have a system of accountability put in place for the next one!

S&P’s Fightin’ Words

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S&P filed a memorandum in support of its motion to compel discovery in the FIRREA case that the United States brought against S&P last year. S&P comes out fighting in this memorandum, arguing that the “lawsuit is retaliation for S&P’s decision to downgrade the credit rating of the United states in August 2011.” (1)

S&P argues that the “most obvious explanation” for the United States’ “decision to pursue a FIRREA action against S&P alone” among the major rating agencies “is apparent:”   “S&P alone among the major rating agencies downgraded the securities issued by the United States.” (17) This is not obvious to me, particularly given the various explanations for this disparate treatment that have appeared in outlets like the WSJ over the last couple of years. But it may be true nonetheless.

In any case, I do not find the “chronology of events relating to the downgrade and the commencement of this lawsuit” to provide “powerful evidence linking the two.” (17) The chronology ends with the following entries:

  • S&P’s downgrade of the United States occurred on Friday, August 5, 2011. That Sunday, August 7, Harold McGraw III, the Chairman, Chief Executive Officer and President of McGraw Hill (of which S&P was a unit), received a telephone message from a high-ranking official of the New York Federal Reserve Bank; when the call was returned, the official conveyed the personal displeasure of the Secretary of the Treasury with S&P’s rating action.
  • This was followed on Monday by a call to Mr. McGraw from the Secretary of the Treasury, Timothy Geithner, in which Secretary Geithner stated that S&P had made a “huge error” for which it was “accountable.” He said that S&P had done “an enormous disservice to yourselves and your country,” that S&P’s conduct would be “looked at very carefully,” and that such behavior could not occur without a response.
  • The McClatchy Newspapers subsequently reported in a piece authored by Kevin G. Hall and Greg Gordon that while the United States’ original investigation included S&P and Moody’s, “[i]nvestigator interest in Moody’s apparently dropped off around the summer of 2011, about the same time S&P issued the historic downgrade of the United States’ creditworthiness because of mounting debt and deficits.” A source familiar with the investigations was quoted as stating: “After the U.S. downgrade, Moody’s is no longer part of this.”
  • In the year preceding S&P’s downgrade of the United States, two states, Mississippi and Connecticut, had initiated proceedings alleging deceptive practices based specifically on an alleged lack of independence. Each of those states named both Moody’s and S&P as defendants. After the downgrade, additional state lawsuits were commenced, with allegations nearly identical to those of the Connecticut and Mississippi complaints. Drafted after coordination and consultation with the U.S. Department of Justice, none of those lawsuits named Moody’s. (19, footnotes omitted)

This is surely no smoking gun and lots of dots remain to be connected.  How did DoJ get involved? Are the state Attorneys General in on the conspiracy? Why would DoJ stop an investigation of Moody’s to punish S&P? Sounds a bit like cutting off your nose to spite your face?

That being said, S&P might be right about the motivation for this suit and their allegations may be enough to win this motion to compel discovery. But whoever wins this round, this should be a fight worth watching.

Reiss on Countrywide Verdict

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Law360 interviewed me in DOJ’s Countrywide Win Could Force More Bank Settlements (behind a paywall).  The story opens

The U.S. Department of Justice’s victory in a case against Bank of America Corp.’s Countrywide subsidiary over a housing-bubble-era mortgage program shows the power of a 1980s fraud statute, and could further encourage banks to settle future financial crisis cases, attorneys say.

A federal jury in New York on Wednesday unanimously found that Countrywide Financial Corp. and one of its former executives defrauded Fannie Mae and Freddie Mac through a program designed to speed up mortgage issuing in 2007 and 2008.

The court victory was significant in part because of U.S. Attorney Preet Bharara’s use of the Financial Institutions Reform Recovery and Enforcement Act, a law that grew out of the 1980’s savings-and-loan crisis, to bring a case over the 2007-09 financial crisis. With a fairly low standard of proof and a 10-year statute of limitations, a jury’s verdict based on FIRREA bodes well for future government cases, said Brooklyn Law School professor David Reiss.

“This successful use of FIRREA makes it much more likely that financial institutions are going to settle with the government,” he said.

Judge Rakoff Is All FIRREA-ed Up

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Law360 quoted me in a story, Rakoff Gives DOJ License To Be Bold In Bank Crackdown (behind a paywall), that reads in part,

U.S. District Judge Jed S. Rakoff’s expansive Monday opinion backing the federal government’s $1 billion mortgage fraud suit against Bank of America Corp. leaves the U.S. Department of Justice wide latitude to use its favorite financial fraud tools in cases linked to the recent financial crisis.

Judge Rakoff’s opinion expanded his May decision allowing the Justice Department’s October suit against Bank of America over lending practices during the housing bubble and financial crisis to move forward under the Financial Institutions Reform Recovery Enforcement Act, while also explaining why portions of its case using the False Claims Act failed.

The ruling, which accepted the government’s broad view of which federally insured financial institutions can be sued under FIRREA and on what grounds, gives the government further ammunition to bring such cases in the future, said Brooklyn Law School professor David Reiss.

“The federal government has taken an expansive view of this phrase, and Judge Rakoff agrees that it can be read broadly in certain circumstances, such as when the affected federally insured financial institution is the alleged wrongdoer itself,” he said.

* * *

[T]he Second Circuit will look closely at other appellate rulings related to interpreting congressional intent, as well as any rulings dealing specifically with FIRREA should an appeal come its way, as many observers expect.

However, it is likely to look closely at Judge Rakoff’s opinion when rendering an ultimate decision, which is why he considered those issues, Reiss said.

“Judge Rakoff stated that this result clearly flowed from the plain language of FIRREA, so the defendants may have a hard time on appeal,” he said.