The Federal Deposit Insurance Corp. said that it is not singling out mortgage brokers when it pursues claims on fraudulent loans owned by failed banks that it takes over. The regulator said that it follows much of the same procedure followed by wholesale lenders in similar situations.
A letter was sent from Richard J. Osterman Jr., deputy general counsel for the FDIC, to Mike Anderson, the government affairs chairman for the Association of Mortgage Professionals. The letter was written in response to an Aug. 31 meeting with the trade group.
Osterman explained that the FDIC’s professional liability operation performs an investigation into every failed bank. Professional liability claims are pursued against mortgage brokers, as well as bank directors and officers, when a breach of contract, negligence, fraud, or otherwise, cause losses to failed FDIC-insured institutions.
As of Aug. 31, the FDIC had 172 mortgage malpractice and mortgage fraud lawsuits pending.
The letter clarified that mortgage brokers are not singled out in mortgage malpractice and mortgage fraud claims. When suspicious information is discovered, outside counsel is retained to help in an investigation. But such counsel is not hired on a contingency basis.
“Mortgage malpractice and mortgage fraud claims that the FDIC pursues include claims against appraisers, attorneys and/or closing agents, title companies and title insurance companies, and mortgage loan brokers,” the letter stated. “In the case of loan brokers, claims that are vigorously investigated and pursued are those for which there is substantial evidence that the broker breached its legal obligations, including aiding, abetting or participating in falsifying a loan application.”
Mortgage fraud in such cases usually involves the representation of owner-occupancy for investor properties. Other breaches include overstating income, misrepresenting employment and concealing borrower debt.
Osterman explained that representations and warranties made by mortgage brokers to wholesale lenders already hold them liable for fraud. When an incident is discovered by the wholesaler, the broker is required to either repurchase the loan or make the wholesale lender whole.
“As I am sure you are aware, the FDIC’s approach to broker mortgage malpractice and mortgage fraud claims is not unusual,” Osterman said. “Banks and other lenders with large residential mortgage loan portfolios typically have employees dedicated to investigating and resolving similar claims. Indeed, many of the mortgage malpractice and mortgage fraud claims that the FDIC currently has in litigation were inherited from thrifts and banks when they failed.”
When the FDIC uncovers fraud, the broker is alerted and given a chance to respond. If the response isn’t enough to alter the FDIC’s opinion, then the regulator attempts to settle a claim outside of court. It is only after this point that the FDIC will pursue litigation.
Mortgage brokers are encouraged to contact the FDIC attorney handling the case when they have questions about claims. When outside counsel is involved but can’t provide help, the FDIC will determine if the matter should be raised to a higher level for an internal response.
