When financial services giant Citigroup purchased Associates First Capital Corp. in 2000, it got more than one of the nation’s largest subprime lenders.
Citi, as the New York-based company is known, was also left with a $10 million fraud ring that touched the violent world of Chicago street gangs.
“Citigroup was left to clean up this inherited situation,” Citigroup spokesman Rob Julavits told MortgageDaily.com. “And we have cooperated fully with law enforcement and the investigation of this case.”
Chicago police and prosecutors have tied some of the fraud that allegedly took place at Associates to a $70 million fraud ring that totaled more than 100 phony mortgage applications and involved members of the Traveling Vice Lords street gang.
“We’ve known that the gangs are sophisticated in how they launder their money,” Chicago Police Chief Phil Cline said in an October 2004 statement announcing the fraud ring. “This is the first time we’ve seen it as this scale.”
Citigroup purchased Associates in November of 2000. By April of the next year the company uncovered that Associates had been duped into lending $9.6 million in more than 80 fraudulent loan transactions in the Chicago area. All the questionable loans occurred before Citigroup took over Associates.
“Soon after we purchased Associates … the suspicious activity was discovered in an Associates branch in Chicago,” Julavits said. “Citigroup immediately launched a thorough investigation and eventually terminated several employees.” Julavits said he did not have an exact number of how many former Associates’ employees were fired in Chicago. But by August of 2001 Citigroup had dismissed more than 5,000 subprime brokers inadequate for suspended state licenses; failure to bring in regular, quality business; integrity concerns; and failing to acknowledge the code of conduct.
Citigroup also announced in September 2002 that it paid $215 million to settle charges from the federal government that Associates, which is now part of subprime subsidiary CitiFinancial, engaged in systematic and widespread deceptive and abusive lending practices.
Associates fell prey to large scale fraud in Chicago that involved not only street gangs but other mortgage fraud scammers as well. In May 2003 the Cook County State Attorney’s office indicted several brokers, appraisers and others for their involvement with the fraud at Associates, according to Citigroup.
A manager at the Associates branch office may have been involved in the fraud, but the employee was not charged and has since left the company. No Citigroup employees or managers have been charged, named or implicated in the scheme, Julavits said.
The schemes were boilerplate fraud, with those involved using straw buyers, phony appraisers and fake documents to secure loans based on the artificially inflated values of mostly dilapidated properties.
Julavits said the company has instituted quality controls that will prevent such fraud from taking place in the future.
