Wednesday, July 30, 2008

Crime in the Mortgage Industry

Wow! The Miami Herald has a jaw-dropping series on how borrowers were betrayed in Florida. They were betrayed by the mortgage brokers, loan originators and the authorities who were supposed to monitor the industry.

This is a not to be missed story - and hopefully other blogs will pick it up too. As of this writing the first two sections have been posted with the third still to come. The first part discusses the mortgage brokers. This post the infiltration of criminals as mortgage brokers and the regulators that let them slip through. The second part on loan originators will be the feature of our next post.

The Miami Herald article features criminals with long rap sheets were becoming licensed brokers. Applicants that in the 1990s would have been quickly shown the door were getting approved with no questions asked. Too much work for the regulators to bother to find out who they were licensing. Numerous examples are given throughout the original article. Lets take a look at some of the shocking info regarding borrowers betrayed: mortgage brokers -

State regulators allowed thousands of ex-convicts to enter a profession that gave them access to the most sensitive and personal financial information: credit cards, bank accounts and Social Security numbers.

Those criminals went on to commit nearly $85 million in mortgage fraud, the newspaper found. They stole their customers' identities. They stole their money. They even stole their homes.

Through licensing ex-convicts Florida readily approved this type of activity. Some of the ex-cons went right from prisoners directly to mortgage broker. The lack of oversight by the regulators was appalling. While it may be negligence, it is still unbelievable and unacceptable. Wonder what is happening throughout the other 49 states. And now lets take a look at what the Miami Herald found -

  • From 2000 to 2007, regulators allowed at least 10,529 people with criminal records to work in the mortgage profession. Of those, 4,065 cleared background checks after committing crimes that state law specifically requires regulators to screen, including fraud, bank robbery, racketeering and extortion.
  • More than half the people who wrote mortgages in Florida during that period were not subject to any criminal background check. Despite repeated pleas from industry leaders to screen them, Florida regulators have refused.

  • Confronted with a growing epidemic of mortgage fraud -- Florida now has the highest rate in the nation -- the number of license revocations declined over the last five years, leaving borrowers at the mercy of predatory brokers.

  • During the peak of the housing boom, the Office of Financial Regulation ignored a state law enacted in 2006 that compelled it to perform nationwide criminal background checks on applicants. That failure allowed people convicted in other states -- and in federal court -- to peddle loans in Florida without any scrutiny.

  • Regulators allowed at least 20 brokers to keep their licenses even after committing the one crime that seemed sure to get them banned from the industry: mortgage fraud.

The ones who were supposed to enforce the laws were readily breaking them. This is evident with the 2006 requirement to conduct national background checks and the lack of enforcement. No one was enforcing the regulators, and the regulators were obviously not doing their jobs. The regulators were supposed to be screening but instead they become the problem. Here's more shocking on the state regulators -

Through it all, state regulators were the only line of defense, empowered to keep criminals out of the mortgage industry and revoke licenses to protect consumers from fraud.

Sometimes state officials themselves broke the law.

In 2006, the year license applications and home-sale prices peaked, the Florida Legislature changed the law to close a significant gap.

The new provision required state officials to send would-be brokers' fingerprints to the FBI to screen for convictions in other states and in federal court, where serious financial crimes and drug-trafficking cases are often prosecuted.

But state officials didn't follow the law. Last February, more than a year after the statute was changed, Greg Oaks, chief of the OFR's Bureau of Regulatory Review, told The Miami Herald that running the FBI checks using the old-fashioned hard-copy fingerprint cards took too long.

Take too long? That is the excuse for not following the law? And these regulators still have their jobs? First they allowed criminals that would be normally screened out. Then the regulators had complete disregard about who became licensed as long as it did not take "too long". Some of these criminals applied for their positions upon being released. One day prisoner, the next day mortgage brokers - and not just metaphorically! These were not Frank Abagnale Jr. (Catch me if you Can) reformed criminals, many went into the industry and remained criminals with no real oversight.

Very scary news. We wonder what the standards and practices are in New Jersey and the rest of the country. Are they all this bad?

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