On August 14, 2013, the former manager of an Allentown, Pennsylvania, mortgage loan origination company was sentenced to four years in prison and ordered to pay restitution of $979,562.20 in connection with a mortgage fraud conspiracy. According to the U.S. Attorney’s Office for the Eastern District of Pennsylvania (the “USAO”), the former general manager of Madison Funding, Inc., a now-defunct Allentown mortgage company, pleaded guilty May 14, 2013, to conspiracy, and to uttering and publishing false documents to obtain a loan insured by the U.S. Department of Housing and Urban Development (“HUD”). Click here for USAO Press Release.
The USAO announced that between October 2006 and at least June 2008, the former manager conspired to defraud mortgage lenders by submitting loan applications that contained false information about the borrowers, and that were often supported by falsified, forged, and altered documents. The mortgage lenders relied on the fraudulent representations and provided Madison Funding’s clients with millions of dollars in loans to purchase real estate. Each funded loan generated thousands of dollars’ worth of commissions to Madison Funding and its employees. Many of those loans have since defaulted and some of them were insured by the Federal Housing Administration (“FHA”), which was an agency within the HUD. Click here for USAO Press Release.
U.S. District Judge Harvey R. Bartle, in addition to the prison term, ordered three years of supervised release. The former manager was also ordered to pay a $200 special assessment.
This development highlights the need for mortgage-industry companies to be vigilant about the employees they hire and the vendors they utilize. Federal agencies have issued guidance on steps that mortgage lenders should take as part of overseeing third-party relationships. Specific guidance issued by the Consumer Financial Protection Bureau (“CFPB”) states that mortgage companies should: (1) conduct thorough due diligence to verify that the service provider understands and is capable of complying with federal consumer financial law; (2) request and review the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents; (3) establish internal controls and on-going monitoring to determine whether the service provider is complying with federal consumer financial law; and (4) take prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate. CFPB Bulletin 2012-03 (April 13, 2012).
It should be noted that while even the most robust third-party oversight regime cannot foresee or avoid the sort of conduct at issue in the above case, designing and implementing a comprehensive compliance program can help to deter potential bad actors, reduce compliance risk, and provide regulators with evidence of good faith compliance. By incorporating the key elements of pre-contracting due diligence in selecting a vendor, appropriate training of personnel within the lender as well as at the vendor (including fraud monitoring training), and on-going oversight of third-party relationships, financial institutions – including mortgage lenders – will better position themselves to avoid misconduct from occurring at or through the institution. Additionally, such preventive measures will reduce the risk of a subsequent regulatory enforcement action.