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Michigan Settlement Spotlights Lending Fraud Risks

A $41 million settlement with federal regulators in early January highlighted a rising tide of residential mortgage fraud in the United States, but federal regulators say the commercial real estate industry is in a better position to thwart scams than its residential cousin.

ABN AMRO Mortgage Group Inc. agreed to pay the U.S. government $16.85 million and to absorb an estimated $24.35 million in losses on 783 defaulted loans rather than submit those loans for reimbursement by the Federal Housing Authority. The settlement is the largest from an enforcement action in FHA history, and stemmed from falsified underwriting signatures on more than 28,000 federally insured loans issued by a mortgage subsidiary of Troy, Mich.-based LaSalle Bank Midwest, which is in turn a subsidiary of Netherlands-based ABN AMRO Bank N.V.

Specifically, staff members at ABN AMRO Mortgage Group fraudulently signed the names of two underwriters to thousands of mortgage loans between 2000 and 2003. In announcing the settlement agreement, HUD Inspector General Kenneth Donahue Sr. described the incidents as “lax procedures during the heyday of the housing boom.”

In its own announcement of the settlement, ABN AMRO stated the company self-reported the wrongdoing to investigators, and had sufficient reserves to cover the settlement amount without harm or loss to borrowers or business partners. Further, the company stated the loans in question were underwritten by HUD-authorized underwriters, though the final certification process wasn’t completed properly.

Mortgage fraud, mostly perpetrated by borrowers, is a huge problem in Eastern Michigan, according to U.S. Attorney Stephen J. Murphy. “The lenders almost always find themselves in the capacity of victim,” Murphy says. “The ABN AMRO case was unusual in that the lender had not complied with various requirements.”

Mortgage fraud is one of the fastest growing crimes in the nation, according to the Federal Bureau of Investigation. The agency received 21,994 Suspicious Activity Reports from the banking industry in Fiscal 2005, an increase of more than 28% from the 17,127 filed in Fiscal 2004. Reported losses in the recent fiscal year more than doubled to $1.01 billion from $429 million a year before.

The FBI has even launched an ongoing initiative to combat what it terms the growing epidemic of mortgage fraud. Working with HUD, the Internal Revenue Service, U.S. Postal Inspection Service and the Justice Department, the investigators brought back indictments against 156 mortgage fraud suspects, made 81 arrests, and obtained 89 convictions between July 5 and Oct. 27, 2005.

What are the risks for commercial lenders and borrower? That’s hard to say, because few commercial deals involve the sort of federal mortgage protection regulators use to monitor residential lending. “We don’t have a way of really tracking (commercial mortgages),” says Special Agent William Carter, an FBI spokesman. “We’re unaware of problems in the industry, because there are strict underwriting procedures and because attorneys are mandatorily involved throughout the closing process.”

But Carter, the U.S Attorney on the ABN AMRO case, says the greater dollar volumes involved in commercial real estate lending are an enticement to the unscrupulous.

“I would advise both lenders and borrowers in the commercial real estate world that whenever there is financing and huge dollar amounts at issue, as there is in that industry, unsavory individuals can try to devise ways to get their hands on those funds,” Carter says.

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