More Proof of DoJ Lack of Interest in Enforcing the Law: The Case of the Kickback-Demanding Banks

In this world of rampant banking miscreance, it may seem hard to get worked up about $6 billion in impermissible kickbacks. But this is a case of a clear-cut legal violation, with the particulars sent to the Department of Justice by the HUD Inspector General’s office on a silver platter. And one of the alleged big bad actors was the ever-sanctimonious Wells Fargo.

American Banker has a detailed write-up of a kickback scheme between major banks who were mortgage originators, in particular Wells, Citigroup, Countrywide, and SunTrust and mortgage insurers. The mortgage insurance was to insure the riskier portion of a highly geared mortgage. The borrower would pay a higher rate to compensate for the lack of a large (or much of any) down payment. The kickback was dressed up as reinsurance, meaning the mortgage insurer was laying off some of the risk to the originator and paying a fee to do so. But what instead happened was that fees were paid but the deals were structured so that no risk was shifted over to the banks.

The violations were uncovered by HUD’s Inspector General office. IGs are tasked to prevent and uncover fraud, waste, and abuse. Its budget is separate from the rest of HUD. It has substantial law enforcement powers and can subpoena documents but not witnesses. Not surprisingly, this isn’t the first time that significant HUD IG finding has been ignored. The IG’s office found substantial evidence that the biggest servicers had defrauded taxpayers (with Wells again a particularly bad actor) But since that report contradicted the “see no evil” Foreclosure Task Force findings, nothing has been done.

The overview from the American Banker story:

In exchange for the their business, companies such as Citigroup Inc, Wells Fargo & Co, SunTrust Banks Inc. and Countrywide allegedly required reinsurance partnerships on generous terms that violated the Real Estate Settlement Procedures Act, a 1974 law prohibiting abusive home sales practices.

During a two-day presentation in the summer of 2009, HUD’s team presented DOJ attorneys with a thick binder of evidence that major banks had engineered a decade-long kickback scheme, people familiar with the investigation say.

Documents from the investigation show that the inspector general’s staff concluded that banks and insurance companies had created elaborate financial structures that had the appearance of reinsurance but failed to transfer significant amounts of risk to their bank underwriters.

Some of the deals were designed to return a 400% profit on a bank’s investment during good years and remain profitable even in the event of a real estate collapse.

Making matters worse, banks allegedly forced unknowing consumers to buy more insurance than they needed and failed to properly disclose the reinsurance agreements, another RESPA violation…

Wells Fargo and Bank of America Corp. have settled class action cases alleging the same sort of misconduct flagged by HUD, and internal documents show that banks and insurers viewed the arrangements as a thinly veiled pay-to-play scheme. Even as insurers complained they couldn’t afford the escalating cost of the reinsurance payments, banks threatened or punished companies that balked at providing them, documents obtained by American Banker show.

Wells Fargo & Co told one insurer that it should consider giving Wells such deals if it wanted business referrals. After insurer MGIC Investment Corp. announced plans to cut back on banks’ share of premiums in 2003, Countrywide executives complained to an MGIC executive and told him that they were shifting Countrywide’s business to MGIC’s competitors.

The article provides far more in the way of supporting detail Former members of the mortgage industry have also confirmed that the banks were aggressively demanding kickbacks. Yet look what then transpired:

HUD Inspector General Ken Donohue — and his deputy, Mike Stephens, who succeeded him last year — were confident that they had a case…

The DOJ said it wanted take the matter on, according to Inspector General Stephens and others. Six months later, HUD’s attorneys formally referred its case to prosecutors, effectively ending the housing agency’s involvement. Investigators believed a speedy settlement in the hundreds of millions of dollars was likely, and HUD’s investigators even suggested that the proceeds should be used to pay for mortgage counseling for borrowers who were allegedly victims of kickback schemes.

Major banks deny that their reinsurance agreements were illegal, but they have not been eager to defend them in court….

More than a year and a half after the Department of Justice took over the case, no settlement has been reached and there is serious doubt as to whether the case even remains active.

So why is the Department of Justice’s excuse for sitting on its hands? The excuse made is that it lacks the needed accounting skills. If you believe that, I have a bridge I’d like to sell you. Actions speak louder than words, and the evidence is overwhelming that the DoJ has no interest in inconveniencing anyone influential, particularly banks.

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  1. Hugh

    Imagine all the resources, personnel, and brain power that were put into all these scams. People sitting around figuring out how they could get a cut of every aspect of every deal. This is how we need to view the financial sector. There business wasn’t finance. It was coming up with and merchandizing cons, scams, and swindles. This is the very essence of the kleptocratic mind: loot everything, leave nothing behind. It is amazing that this degree of thoroughness still gets mistaken for stupidity, or a few bad apples, or people not really understanding what they were doing, and not the malevolence that it is.

    But in that kleptocracy is a system, it is not surprising that sporadic attempts to investigate parts of it get torpedoed. The looters need back up in government and as here with the DOJ they got it.

    1. Sleeper

      So DOJ lets the criminals escape again.

      When will they get it through their hads that these criminals are a far greater threat to the state than any simple terrorist ?

    2. Rex

      Nice summary of a significant portion of our “financial industry”. Existing laws are not enforced and the trend has been to remove or neuter more and more regulation. Hence the “free markets” are free to skim, scam and steal.

      Not big news to those who read here, but each new example still pains those of us who are aware and retain some sense of ethics.

    3. Tao Jonesing

      I can’t believe you think the banks engaged in scams! After all, as we learned in the just prior post “It’s silly to think that everybody in finance is ‘evil’ or engaged in fraud (though there are people who assert that). Most people involved are very smart, diligent, hard working and passionate about what they do.”

      1. Element

        Yes indeed, there’s far too much of this intellectual ‘understanding’ and winking at the ignorance of the law, or of claimed extenuating circumstaces.

        When I was young two things were drummed into us;

        1) ignorance of the law is no excuse. i.e. if you didn’t know the laws you were assumed to have known and wilfully disobeyed.

        2) justice must be seen to be done. i.e. if it was seen to be not done, ala DoJ, then you were inviting complete collapse of LAW AND ORDER.

        Are US citizens really expected to just tollerate this outrageously dangerous and totally unjust Dept of pseudo-Justice?

        1. Nathanael

          #2 is what I’ve been trying to point out repeatedly.

          I expect the collapse of the authority of the federal government at this rate. Under Bush & Obama — starting with the 2000 election theft, really — it has completely abandoned any attempt to follow the law impartially, on one area after another after another. Eventually if this isn’t reversed, practically everyone will just see it as an oppressive, abusive tyranny.

          Something like 95% of compliance with the law is voluntary, so at that point it will collapse one way or another.

          Not looking forward to it.

      2. Nathanael

        It’s important to distinguish between *everyone* being actively evil and between *the people running things* being evil.

        Heck, most members of the German military in WWII were just trying to do a good job.

  2. Conscience of a Conservative

    This American Banker piece once again points out how Countrywide is woefully under capitalized, turning to an insufficiently capitalized mortgage insurer forcing them to kick back and give re insure some of the risk and then (BAC not reserving against it). This is something analogous to the AIG insurance side letters that Spitzer went after. The A.B. piece is fantastic by the way.

  3. Element

    Gee, the US DoJ does not want to prosecute uber-criminals now?


    Do you think the criminals perhaps are the ‘prosecutors’ … these days then?

    Of course, if any one were to suggest this was ‘just’ and understandable reason to demand and instigate overthrow of the whole corrupt DC charade, someone would be along in about 5 mins to explain why that is clearly not the case, and would be very ‘counterproductive’.

    For these criminals in bitchin suits also control the national lie-support apparatus … as well as the banks … and OFAL office … and nuclear munitions and carriers and comms.

    Thank God I don’t live in that outsized prison yard.

    1. citalopram

      If they can’t prosecute the worst grievances committed in our lifetime, then their cries for us to obey their laws sort of ring hollow, don’t they?

  4. pj

    The actions of the DOJ over the past four years could make one think they were quite corrupt themselves, couldn’t it?

  5. TheHube

    Notice how even the potential penalty is presented:

    “Investigators believed a speedy settlement in the hundreds of millions of dollars was likely”

    There is ZERO personal exposure for these thieves. Until prosecutors start putting people in jail, and handle these cases the old fashioned way by starting at the bottom, forcing people to accept deals to testify about what they know about the involvement of higher ups, then forcing those people to cop a plea, subpoenaing every document in sight, and bringing witnesses before a grand jury, there will be no change in behavior. The threat of jail and a ruined life is the only thing that will force change. Forcing the corporation to cough up cash will never change things.

    I liken it to the tax shelter industry. It existed for decades, regardless of what changes in the law were made. The minute they started putting people in jail it stopped cold.

    Treat bank fraud like the organized crime it is and it will stop. The banksters don’t think of themselves as criminal. When they start thinking about jail time they will change their behavior to one that does not carry that risk.

    1. nonclassical

      How can it be “fraud” if Texas RethugliCON Senator Phil Gramm placed in end of Clinton administration legislation,
      flyer disallowing audit of banks…? (remember his wife won subsequent seat on board of Enron..)

  6. Norman

    Looking at who stocked the DOJ 11 years ago, what it has become today in continuance of which, now there’s the cry for yet another flim-flam man for P.O.T.U.S., one who seems to mirror exactly what the right is hell bent on doing to public education in the U.S.A. today. Sort of like putting the cart before the horse, only I’m not sure he/she could even be called a horse in this perspective.

  7. Stuart Gittleman

    In order to obtain NY Financial Services Superintendent Ben Lawsky’s consent to sell its Litton servicing unit to Ocwen, Goldman Sachs last week agreed to rein in force-placed insurance and premium overcharges but there was no fine or mention of a criminal referral to AG Eric Schneiderman. The deal also required approval by the Fed, which ordered GS to have an outside review of Litton’s foreclosure practices. If done honestly, it should make for interesting reading.

    1. Yves Smith Post author

      Schneiderman and the NY banking regulator have been in a turf war, with the banking regulator (with Cumomo’s backing) trying to assert control over areas that formerly fell to the AG.

      1. alex


        I’m sure you’re aware of these points, but those not living in NY State may be interested in a little background on Cuomo.

        Gov. Cuomo is NY State’s own version of Obama. In fact Obama pushed for Cuomo’s gubernatorial candidacy. Amongst Cuomo’s important actions in office was ending the “millionaire’s tax” (a small income tax surcharge on high incomes), which required allying himself with Republican’s and opposing fellow Democrats.

        With Democrats like these, who needs Republicans?

      2. Nathanael

        Luckily, the independently elected Attorney General in New York can investigate whatever he wants and empanel whatever grand juries he wants, and pretty much nobody can stop him.

        Well, unless the (also independently elected) Comptroller denies him funds.

        Checks and balances NYS-style — Governor, Comptroller, and Attorney General, independently elected and each able to prevent the others from getting away with too much.

  8. It's not Illegal When Banks do It!

    NYT, Eric Lichtblau, June 2008:

    “WASHINGTON — Justice Department officials illegally used “political or ideological” factors in elite recruiting programs in recent years, tapping law school graduates with Federalist Society membership or other conservative credentials over more qualified candidates with liberal-sounding résumés, an internal report found Tuesday. ”

    Chris Hedges, August 29 2011:

    “A society is in serious trouble when its political pariahs have at the core of their demands a return to the rule of law. This inversion, with our political and cultural outcasts demanding a respect for law, highlights the awful fact that the most radical and retrograde forces within the body politic have seized control. “

    1. monday1929

      I am sure the Dept of homeland security will add “calling for a return to the Rule Of Law to terrorist “markers” such as carrying the US Constitution.

  9. Sleeper

    I wonder why no media reporter is willing to ask in an open press conference at DOJ, the White House, or Congress why the DOJ continues to give a get out of jail free card to all bankers ?

    We’ve heard the usual excuses –

    DOJ is too busy
    The cases are too complicated
    DOJ doesn’t have enough (any) experienced accounting staff
    And so on.

    And here is a case that is neatly gift wrapped and hand delivered.

    Could DOJ be charged with obstruction of justice ?

    Or at least could we ask that the attorneys invloved be disbarred ? If the DOJ attorneys who were involved in this obstruction of justice were known the public could petition the local bar association for discipline and hopefully disbarment.

    While there is little chance of any real action taking place at least it would make things just a little more difficult for DOJ attorneys.

    If the criminal bankers don’t pay perhaps the attorneys that cover for them can be made to pay.

  10. Jack Straw

    Pay to Play exists everywhere in finance, but it takes different forms, and while it is easy to point out, it is also difficult to prove. Some are “perfectly legal” and trade organizations like RESPRO fight to the death to preserve their “legality.” There’s this guy in the midwest who is up to his 80-something-year-old ears in this who just bought a part of a TBTF who is probably the single largest identifiable investor in the various companies who you will find to be the biggest players (on both sides); re-insurers, mortgage insurers, title insurers and agents, forced-place insurers. But it filters down to the lowest levels as well: appraisers, notaries, credit reporting, inspections, flood zone certification, property tax reporting.

    The expectation is that you pay to play, and it’s the payers’ problem to figure out how to do it without getting caught. RESPA was enacted with knowledge of this, but has never been a very effective means of consumer protection. I don’t know about the new regulatory amendments to RESPA so much, but consoldation of the industry tells me that TPTB are still one or more steps ahead.

    All this said, there are distinctions that are worth making. Regardless of the structure, many are simply commercial bribery, where the “decider” is getting his pockets lined regardless of any duty to his/her company. One company mentioned above had positions that were highly-sought-after because becoming a “decider” often meant low-to-high 5 figure checks every month in addition to salary. Others are more “legitimate” in the sense that the “decider” is acting in the best interests of his/her company – to extract as much out of the fees sloshing around to other people as they possibly can.

    This is the primary reason why insurance is regulated at the state level. Insurance is thought to be particularly susceptible to fee-sharing/premium-splitting and thus overcharges, on the one hand, or fee-sharing and under-reserved insurers on the other.

  11. Jack Straw

    Should have said:

    There’s this guy in the midwest who is up to his 80-something-year-old ears in this who just bought a part of ANOTHER TBTF …

    1. monday1929

      Buffett would get 20 years for his “side letter” deals alone. I am willing to pay DOJ whistle blowers. Contact me through this site. GNW Put profits now allow for a $100,000 bribe to do your job. Millions will be available if the S&P gets under 900.

  12. Gil Gamesh

    It’s time to close down the DOJ. It’s simply causing too many Americans (the 50 or so that pay attention, i.e. high information types, as opposed to 160,000,000 low informations)to lose faith in their government. God, where is John Mitchell when you need him!

  13. Capo Regime

    How stupid does DOJ think people are? For that matter, seems like this government thinks we are all twits or is comprised of twits–maybe both? Presumably they can proceed like any other government agency and let a contract and hire 10 or 1000 auditors quite quickly and easily. HUD hires auditors, IT consultants the whole gamut literally on any basis. Hell, the defense department and homeland security are never truly shorthanded they just–hire contractors. Am sure finding a contractor to do auditing or getting an budget item to hire 100 auditors (or 500) former mid level traders would not be a problem if they (DOJ) actually wanted to do their job on behalf of the people.

  14. David Woolley

    The DOJ is up against well financed opponents which results in a lengthy litigation process. For example, when the DOJ request documents, they are stonewalled for years, once compelled the defendants flood DOJ with millions of documents which may or may not be related to the request. The successful litigation of an individual or a company could take 3, 5, 7 years spanning several election cycles and the priorities set by current events. Couple this with the DOJ track record of bringing these folks to justice has resulted in very few wins i.e. Mr. Mozilo, Mr. Sambol and Mr. Sieracki. Right or wrong has nothing to do with it; it becomes impractical to prosecute the cases. The rule of law has become comingled with the body politic, democracy at its best and worst.

    Interestingly, the defendants believe they are entitled to operate their business, which includes fleecing taxpayers and/or contributing to Iowa AG Millers campaign coffers, in a manner which results in their version of success. Their success is thorough and complete; for example, today AG Miller arguably represents the bank’s interest over the taxpayer’s interest. Ask yourself, why is it so important “we” reach a settlement on the foreclosure process? Couldn’t we let the servicers just eat cake? What are “we” going to do with the $25B offered by the banks? They cannot move these homes off their books, not our problem.

    If the servicers continue with the fraudulent forged document processing (er. surrogate signatures), prosecute the unrepresented low level managers. How long could the servicers stand around and watch their rank and file get picked off?

    The banks readily offer the settlement is key to the economic recovery. Really, how so? If the banks begin foreclosures in earnest, flooding the market with homes and driving down the prices are the unemployed going to buy these homes? I am not. Do you want our government in the foreclosure rental business? Again, can’t we let them eat cake?

    For what it is worth,

    1. Capo Regime

      Good insights, but one ironic (yes the word is overused but appropriate here), the opponents are indeed well financed with funds from the government who presumably is to investigate them! Think about it, the otherwise bankrupt banks are only able to stave off government investigation using government funds! Its like Honduras but all dressed up by Ivy League Lawyers and MBA’s! Really, a fancy veneer but at core its no different than the most farcical banana republic.

      1. David Woolley

        The American public is out of touch with the bank’s world (they say they are out of bread and we say let them eat cake). Conversely, the banking industry has their finger on the pulse of America and more importantly, the pulse of our representatives. I do not understand our expectations from a bank; we seem to impose the high ideals such as fairness and honestly onto these institutions which serve a purpose outside of our expectations. Their behavior and attitudes towards the American public has certainly been consistent. When the S&Ls collapsed, the model was rebuilt to be bigger, stronger and faster. Today’s problems are the sequel, with the same cast of characters. We still have most of the Keating Five serving the public’s interest. The fact Keating, Milliken etc. went to prison did nothing to deter the game. Last time it was Saloman Brothers, this time Lehman Brothers. The game, when played correctly, is to create the illusion of fairness and honesty. We are the perfect rubes, we are repeatedly and perfectly surprised when they lift the shell and there is no pea. Again, what is the American public’s expectation? They are Lucy, we are Charlie Brown.

        When the banks said they were out of money, we hand them TARP and TALF. Meanwhile, secretly, the Fed shovels the banks (foreign and domestic) $1T under the table and requires a lawsuit to disclose the facts to the taxpayers. The illusion was lost briefly, fortunately for them, many Americans cannot balance finance and the whereabouts of Lindsey Lohan. Something has to give.

        We, as collective, are ignorant of the mechanics and expect “someone” to save the day. This isn’t Metropolis, there is no Superman. For those that break ranks i.e. Mr. Eric Schneiderman, Ms. Elizabeth Warren and Mr. Richard Cordray it will be interesting to look back five years from now and evaluate their fate. We know where the Keating Five will be, forever serving the public’s interest.

        Is all lost? Probably not, Rome collapsed but has not ceased to exist. Wars to end all wars continue to be fought. We are a society of haves and have nots, today the have nots have a little less and the haves a little.

        1. nonclassical

          ..interesting to ask-would an American populace not buried in debt sit still for this?..

          Does anyone believe burying the American populace in debt was not part of the plan?..

          Did anyone believe, when “bankruptcy laws” were “changed”, a whole hell of a lot of Americans were not going to go bankrupt?…

  15. steelhead23

    Yves, this is very annoying. Note that the article stated that this has been going on for over a decade. Think about that for a moment. This means that insurers payed extortion to banks for years without making a formal complaint. Why would they do such a thing? The only possible answer is that the cost of such a complaint would exceed the potential benefits. This would be the case if DOJ was in bed with the banks – a decade or more ago – long before the crisis! It makes me crazy that few (outside of bloggers) seem to understand the ramifications of this level of corruption. This is Chicago 1930. Tell a cop you’re being extorted and you’re dead, or your business burns down. That’s the big deal here – not the $6B, its the fact that DOJ is and has been, in on the deal. If you can’t trust the cops, who can you trust? How the heck can we get out of this mess if we can’t trust in the rule of law? This country is ruled by a bunch of gangstas.

    1. Nathanael

      Well, for better or worse, the main way things have improved when gangsters owned the government… is when a tougher set of gangsters, ready to be nastier, decides to take them out.

      Occasionally the new gang is actually run by good guys with high ideals (Gandhi & Nehru?), often it’s run by people who are not that high-minded but better than the previous lot (Napoleon?), sometimes it’s even worse than the last lot (Hitler?).

      1. Nathanael

        And yes, Gandhi was ready to be very nasty, even though he was non-violent. Gandhian non-violence involves what our government would call “economic terrorism”.

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