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NY & California AGs Are Prosecuting Bank Fraud

Posted By Barry Ritholtz On May 24, 2011 @ 7:01 am In Bailouts,Credit,Legal,Real Estate | Comments Disabled

Well. Isn’t this a welcome development?

Last week, we heard the announcements by New York Attorney General Eric Schneiderman that his office is investigating fraud [1] in mortgage securitization — originally focused on Goldman Sachs, Bank of America, and Morgan Stanley, this morning expanded to include JPMorgan, UBS, and Deutsche Bank.

Previously, the Florida AG had published a brutal analysis on Florida foreclosure fraud [2].

We now learn that California is stepping up to the plate: California Attorney General Kamala Harris is creating a 25-person task force to target mortgage fraud of any size.  It includes a team of 17 lawyers and eight special agents from the state Department of Justice. The focus will be on three key areas:

Corporate fraud: including instances in which bundled mortgages were sold as securities to the state or its pension funds under false pretenses, using California’s False Claims Act, which makes false claims submitted to the state a felony;

Scams: including instances in which consultants, lawyers and others took fees from people in foreclosure, saying they would help the homeowners get loan modifications or other remedies, but delivered nothing.

Origination Fraud: Fraudulent lending practices, including deceptive marketing, failure to fully disclose loan terms. This includes qualifying people for loans who couldn’t afford the terms.

Note that this initiative is distinct from the multistate investigation because “it would go after all aspects of the mortgage-lending business.”

That statement makes the third item above quite fascinating: It means that the California AG is looking into something that no one else has been willing to touch: Origination Fraud. Any finance firm that lent money to people they knew could not possibly pay is back could be prosecuted under these terms.

Even more significant is the possibility of “Systemic Origination Fraud” — the no doc loans where lenders voluntarily kept themselves ignorant about the borrowers ability to repay loans.

Understand what the New York and California Attorneys General just did: They raised the bar for what it is going to take to stay in office as an elected AG. I expect we should soon hear from the Attorneys General offices Arizona and Nevada undertaking similar prosecutions.

If not, angry citizens in these foreclosure heavy, fraud ridden states will become very frustrated. Voters will be asking: “If NY and California and Florida can do this, why aren’t we?

I imagine that any AG that refuses to hold corporate interests accountable should best prepare to return to the private sector.

Previously:
Follow the Money: How Systemic Bank Fraud Contributed to the Financial Crisis [3] (April 12, 2011)

Florida Attorney General Report on Fraudclosure [2] (January 5, 2011)

Dodo Bird Bankers [4] (May 9, 2011)

Sources:
California creating mortgage fraud task force [5]
Alejandro Lazo
Los Angeles Times, May 23, 2011
http://www.latimes.com/business/la-fi-mortgage-fraud-20110523,0,1196882.story

New York Investigates Banks’ Role in Financial Crisis [1]
GRETCHEN MORGENSON
NYT, May 16, 2011 
http://www.nytimes.com/2011/05/17/business/17bank.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/05/ny-california-ags-are-prosecuting-bank-fraud/

URLs in this post:

[1] investigating fraud: http://www.nytimes.com/2011/05/17/business/17bank.html

[2] Florida foreclosure fraud: http://www.ritholtz.com/blog/2011/01/florida-attorney-general-report-on-fraudclosure/

[3] Follow the Money: How Systemic Bank Fraud Contributed to the Financial Crisis: http://www.ritholtz.com/blog/2011/04/follow-the-money-how-systemic-bank-fraud-contributed-to-the-financial-crisis/

[4] Dodo Bird Bankers: http://www.ritholtz.com/blog/2011/05/dodo-bird-bankers/

[5] California creating mortgage fraud task force: http://www.latimes.com/business/la-fi-mortgage-fraud-20110523,0,1196882.story

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