In the daytime hours of June 16 this year, newswire stories began to trickle in reporting the arrests, indictments and guilty pleas of individuals and institutions across the country for charges of mortgage fraud. On June 17, the U.S. Justice Department officially unveiled its national "takedown" of mortgage scams and announced that it had arrested nearly 500 people in a matter of days.
Taking a bird's-eye view of the situation, U.S. Attorney General Eric Holder said, "The breadth of the fraud is truly astonishing." Operation Stolen Dreams had begun.
Operation Stolen Dreams symbolizes an unprecedented effort and level of coordination by state and federal agencies to pursue and prosecute identified fraudsters operating at every level of the mortgage industry.
"From homebuyers to lenders, mortgage fraud has had a resounding impact on the nation's economy," added Federal Bureau of Investigation (FBI) Director Robert S. Mueller III at the unveiling of Operation Stolen Dreams. "Those who prey on the housing market should know that hundreds of FBI agents on task forces and their law-enforcement partners are tracking down your scheme, and you will be brought to justice."
Mortgage companies generally have reacted positively to the enhanced focus of law enforcement. Over the course of years, lending institutions and secondary market investors have paid the cost of mortgage fraud in losses amounting to millions of dollars.
From top to bottom, the industry stands to benefit as the crackdown recovers losses through criminal enforcement and adds a disincentive to engaging in fraudulent transactions that hurt both institutions and the financial system alike. This greater urgency against mortgage fraud will also help lenders and brokers identify fraudsters within companies and the industry.
Companies must be aware of and prepare for the enhanced oversight by federal enforcement agencies within the industry. Institutions caught within the crosshairs of a criminal investigation by the Justice Department can also expect the attention of state licensing entities, attorneys general and the usual federal agencies that regulate housing, such as the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). In addition, the newly created Bureau of Consumer Financial Protection--authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July--is empowered to regulate a wide range of financial products and services, including mortgages and other bank products.
As enforcement efforts persist and reach across the entire industry chain, an investigation into a local loan office could lead investigators to cast a wider net to include third parties, brokers, underwriters and lending institutions. Even in situations where the investigation focuses on the interaction between a borrower and a loan officer, lending institutions may find themselves the recipients of federal subpoenas for documents, witness testimony and information.
Proactive companies need to train their employees to operate in the current environment, ensure robust compliance and internal oversight, and prepare for the impact of expanded criminal investigations.
Prior federal efforts
Although mortgage fraud has long affected the industry the recent financial crisis magnified the effect that losses from fraudulent transactions can have on the mortgage industry and the overall economy. Without a doubt, the industry has made a concerted effort to police itself and increase its own risk-management tools to curb the serious losses that occur when instances of fraud weaken the system. In March 2010, Mortgage Banking dedicated its cover report to the subject of mortgage fraud and steps a company can take to protect itself.
As a whole, the industry has raised the requirements for licensing …