Wed, 11 Jan 2017 20:37 UTC
The memo obtained by The Intercept alleges that OneWest rushed delinquent homeowners out of their homes by violating notice and waiting period statutes, illegally backdated key documents, and effectively gamed foreclosure auctions.
In the memo, the leaders of the state attorney general's Consumer Law Section said they had "uncovered evidence suggestive of widespread misconduct" in a yearlong investigation. In a detailed 22-page request, they identified over a thousand legal violations in the small subsection of OneWest loans they were able to examine, and they recommended that Attorney General Kamala Harris file a civil enforcement action against the Pasadena-based bank. They even wrote up a sample legal complaint, seeking injunctive relief and millions of dollars in penalties.
But Harris's office, without any explanation, declined to prosecute the case.
Mnuchin, the former CEO of OneWest, was already facing challenges in his upcoming Senate confirmation hearings on account of his bank's ruthless foreclosure practices, ranging from locking out one homeowner during a Minneapolis blizzard to foreclosing on another over a 27-cent payment shortfall.
"After years peddling the kind of dangerous mortgage-backed securities that eventually blew up the economy, Mnuchin swooped in after the crash to take a second bite out of families by aggressively — and sometimes illegally — foreclosing on their homes," Sen. Elizabeth Warren said in a statement last month. Sen. Ron Wyden, the top Democrat on the Senate Finance Committee, warned: "Given Mr. Mnuchin's history of profiting off the victims of predatory lending, I look forward to asking him how his Treasury Department would work for Americans who are still waiting for the economic recovery to show up in their communities."
The consistent violations of California foreclosure processes outlined in the memo would indicate that Mnuchin's bank didn't merely act callously, but did so with blatant disregard for the law.
According to the memo, OneWest also obstructed the investigation by ordering third parties to refuse to comply with state subpoenas.
Whether Mnuchin directed efforts to prevent scrutiny of his bank's practices could be a focus of the confirmation hearings.
The memo also raises questions about then-California Attorney General Kamala Harris, who was sworn in as a U.S. senator on Tuesday, and who will soon have to vote on Mnuchin's appointment.
Why did her office close the case, deciding not to "conduct a full investigation of a national bank's misconduct and provide a public accounting of what happened," as her own investigators had urged?
State and federal law enforcement have been severely criticized for failing to hold accountable those responsible for the financial crisis and its aftermath. The OneWest case provides another example, and this time, the failure to prosecute could help the nation's next treasury secretary get confirmed.
TO UNDERSTAND THE importance of these revelations, one needs to know a bit about California's nonjudicial foreclosure process. If a homeowner misses mortgage payments and no resolution can be worked out, the lender files a notice of default, starting a 90-day clock where the homeowner can either repay the debt or face a sale of their property.
In the original deed of trust that establishes the mortgage, the lender designates a third-party trustee to handle the sale process in case of foreclosure. Lenders can change trustees at any time, memorializing this with a "substitution of trustee" document (SOT).
After the 90 days expire, if the homeowner is still in default, the trustee can record a notice of sale, setting a date for the auction at least 21 days thereafter. The winner of the auction gets the home, and can proceed to evict the homeowner.
Because no judge oversees this process, adherence to the rules is paramount.
"Compliance with the law gives us confidence in the outcome," said Katherine Porter, a law professor at the University of California, Irvine, and an expert on foreclosures. "The whole scheme is a gift from the legislature to the mortgage industry. If the state is giving the industry benefits to take shortcuts, it's reasonable to expect the industry to comply strictly with that process."
And according to the state investigation, OneWest wasn't following the rules.
OneWest already had a history of using false documents in foreclosures. A July 2009 deposition of Vice President Erica Johnson-Seck revealed that she "robo-signed" 6,000 foreclosure-related papers per week, spending just 30 seconds on each sworn affidavit that attested to the veracity of all relevant information in the case. Johnson-Seck even admitted to not reading the documents before signing them. OneWest entered into a consent order in April 2011 with the now-defunct federal Office of Thrift Supervision over related failures in the foreclosure process.
Knowing that OneWest foreclosed on thousands of California homeowners, the Consumer Law Section decided to investigate in 2012.
Because of federal pre-emption rules, state prosecutors cannot subpoena national banks for information about their core functions prior to filing a lawsuit. But the California attorney general's office was nevertheless able to review over 204,000 publicly available foreclosure documents filed with county recording offices throughout the state, along with other documents purchased from a website called ForeclosureRadar (now called PropertyRadar) that tracks foreclosure activity.
Working through the county records, the attorneys immediately uncovered a startling finding: 86 OneWest documents changing the designation of third-party trustees (SOTs) bore a date prior to March 19, 2009, the date OneWest opened for business. Some dated back to 2008.
"Because it would have been impossible for OneWest to sign the instruments before it became an operational bank," four deputy attorneys general from the Consumer Law Section wrote in the memo, "we deduced that the instruments were backdated."
Prosecutors also issued subpoenas to third parties with access to OneWest documents.
According to their memo, one subpoena went to Lender Processing Services, a company that assisted with foreclosure operations. LPS produced a random sample of 300 OneWest loan files and agreed to send more, but on February 13, 2012, Jennifer Gray, OneWest's head of litigation, told the attorney general's office that "the loan files belonged to OneWest and that LPS could not produce them."
The Consumer Law Section feared OneWest would sue them to stop the investigation, as they did in January 2010, when a lawsuit shut down an inquiry into OneWest's reverse mortgage subsidiary Financial Freedom. So prosecutors only got the 300 LPS files.
Mnuchin spokesperson Tara Bradshaw said that "state attorneys general have no jurisdiction to investigate federally chartered banks like OneWest. When OneWest pointed that out to the California attorney general's office, they withdrew their subpoena."
(Brian Brooks, the lead lawyer on that 2010 OneWest lawsuit, eventually became OneWest's Vice Chairman.)
The relatively few additional files prosecutors were able to obtain revealed more evidence of backdating. The Consumer Law Section reviewed 913 documents from Quality Loan Service Corp., a trustee that worked with OneWest; 909 of them were backdated. The LPS files included backdated documents as well. Investigators determined this because the document metadata showing the dates of execution showed later dates than the ones stamped on the documents themselves.
Investigators surmised that OneWest listed trustees on notices of default before formally executing the SOTs, then backdated the SOTs to make it look like those trustees were already in place at the time the notice of default was issued.
Had OneWest put the correct date on the SOTs, they would have had to file new notices of default, restarting the 90-day clock and delaying the foreclosure.
"That's consistent with a pattern of creating whatever documents that appear necessary at the time that they're created to grease the wheels of the foreclosure machine," said Mark Zanides, a former federal prosecutor who has represented homeowners in California.
The memo also alleges that OneWest occasionally acted as the loan owner on these SOTs when it was merely the servicer — and therefore did not have the authority to execute the documents. Other SOTs were recorded in county offices without being signed or without being dated. Trustees acting on OneWest's behalf also did not honor the 90-day waiting period in dozens of instances, issuing the notice of sale prior to the deadline. In other cases, SOTs were never mailed to homeowners notifying them of the identity of the new trustees with the power to sell their homes.
Finally, investigators found irregularities with foreclosure sales. At auction, bidders must typically pay the full amount by cash or cashier's check. But the "present beneficiary" — the current owner of the mortgage — can make a "credit bid" at the beginning of the auction if they want to keep the property themselves.
These credit bids, usually for the amount due on the loan, typically stop other bidders, who would never be able to profit from a re-sale if they paid full price for a foreclosed home. "Credit bids generally have the effect of deterring or entirely chilling a competitive bidding process," said Katherine Porter.
The Consumer Law Section found that, as with the SOTs, the key documents assigning beneficial interest in the loan sometimes were created after the auctions. In other words, OneWest made or directed others to make credit bids despite not being the present beneficiary.
Not only did this mean the winner of the auction may have made an unlawful bid, but credit bidders were exempt from significant documentary transfer taxes imposed by cities and counties. Those taxes range from $1.10 to $16.10 for every $1,000 of purchase price. Submitting credit bids saved OneWest and its partners from paying the taxes.
In 2015, CIT Bank bought OneWest. In a statement, CIT spokesperson Matthew Klein said that "CIT complies with all applicable laws and regulations, including California's foreclosure process and all applicable servicing guidelines, and has implemented enhancements that strengthen the overall operations and controls at OneWest Bank."
THE JANUARY 18, 2013, document obtained by The Intercept, known as a "package memo," was a pitch from the deputy attorneys general in the Consumer Law Section to their superiors. It laid out the evidence obtained, ran through the resources required for the case and the likelihood of success, and gave pros and cons for filing. In conjunction with the package memo, investigators directly made their case to supervisors and members of Attorney General Harris's executive committee.
Though the state investigators could not subpoena OneWest and were obstructed from obtaining more documents, they extrapolated that a full and unencumbered inquiry would yield at least 5,600 violations of foreclosure sale auctions, and turn up instances of backdating in nearly all of the 35,000 foreclosures OneWest had completed in California from 2009 to 2012. They wrote that there would be "substantial public justice value" in such an investigation, which could only proceed through the discovery process of a civil lawsuit. That discovery could have turned up other examples of noncompliance which may have been even more harmful to homeowners.
The attorneys wrote that scrutinizing the scope of OneWest's misconduct would provide public accountability, and enhance the deterrent to violating state foreclosure laws. They hoped to get injunctive relief, forcing OneWest to verify the accuracy of every foreclosure document they issued.
That's on top of civil penalties, which could be up to $2,500 for each violation, and double for "protected classes" like senior citizens or the disabled. Additional restitution could proceed from any premature foreclosures executed as a result of the misconduct.
The case did not contemplate criminal indictments, even though many of the violations described were felonies; Consumer Law is a civil enforcement section.
The prosecutors made clear to their superiors that the case would be a tough one, with no guarantee of success. They said they expected litigation to chew up substantial resources and last three to five years (which would have been about now).
"We face a higher than average risk that the court may choose to award minimal amounts of restitution and/or penalties," they wrote, explaining that they expected OneWest to argue that homeowners defaulted on their mortgages and were therefore not harmed by process violations.
Indeed, California courts have been known to accept such arguments. In a recent case against OneWest, a trial court agreed that a homeowner alleging improper documents in his mortgage case "never claimed he was not in default or that the 'true lender' would have refrained from foreclosing under the circumstances." Similarly, in a 2015 case against OneWest for failing to execute an SOT before issuing the notice of default — precisely the violation at issue in the Consumer Law Section investigation — the First District Court of Appeal allowed the foreclosure to go forward.
But those were cases brought by individual homeowners, rather than by a state law enforcement apparatus charged with policing noncompliance with statutory laws.
Consumer Law planned to argue that "while it may be true that the homeowners were delinquent on their mortgage obligations, that did not change the fact that they were denied the procedural protections required by law."
Legal experts agree that ignoring clear violations would make a joke of California's foreclosure law. "The foreclosure statutes establish a proper way to do things that will ensure that all parties are treated fairly," said former federal prosecutor Mark Zanides. "If you ignore that, you've reduced yourself to a banana republic, where courts sworn to uphold the law are precluded from doing so by being given documents that are false."
Mnuchin spokesperson Tara Bradshaw, without commenting on the violations themselves, would only say by way of justification, "the attorney general's office made no finding of any violation and took no action against OneWest."
CONSUMER LAW SECTION ATTORNEYS recommended "that the attorney general authorize us to file a civil enforcement action against OneWest." Two months later, they were told that the office would not move forward with the complaint. OneWest representatives were not even brought in for a meeting to discuss the matter.
So why didn't Kamala Harris leap at the chance to take on a bank that her staff said was illegally rushing Californians out of their homes? Why did she reject a case that her office had already spent significant resources on during a year of line-level investigation?
Kristin Ford, communications director at the attorney general's office, did not respond to a detailed request for comment. Without an official explanation, we can only speculate why Harris passed up the opportunity. Perhaps she judged the case too difficult, or not a high enough priority, or not having enough of a human interest. Or maybe it was something else.
Harris has been criticized for a lack of vigor in prosecuting foreclosure fraud before. She set up a Mortgage Fraud Strike Force in 2011, dedicated to "protect innocent homeowners and bring justice to those who defraud them." But despite hundreds of complaints of loan modification fraud — a primary target identified by the office — it only prosecuted 10 cases in the first three years.
County district attorneys and even attorneys general in other states filed many more California-based cases, despite more limited resources. And some of the cases Harris did file began under her predecessor Jerry Brown or were organized by other local and federal law enforcement teams; Harris just gave her strike-force credit for them.
In fact, many of the cases Harris's office is known for were part of multistate or prior investigations. The 2012 $25 billion National Mortgage Settlement with five large mortgage servicers (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Bank) over allegations of illegal foreclosure practices, which Harris touted in campaign ads, was a 49-state and federal matter, where she was not deeply involved with negotiations and was criticized as a grandstander.
The Intercept asked Harris's office for a breakdown of cases initiated and prosecuted by the Consumer Law Section during her tenure. They have not yet provided them.
Rigid hierarchies within Harris's office were known to have made it difficult to get cases moving. Sign-offs to open investigations, issue subpoenas, and proceed with enforcement all traveled through a chain of command from senior assistant attorneys general running the various divisions, to a small inner circle of special assistants known as the executive committee, to Harris. And this created a bottleneck, especially if Harris was tending to other matters. She has been criticized for luxury travel spending and a relentless nationwide campaign schedule throughout her attorney general tenure.
Many special assistants came from Harris's district attorney staff in San Francisco, and several are joining her in Washington as she enters the U.S. Senate.
The investigators who actually did the ground work in the OneWest case were not present for executive committee decision-making.
One of the supervisors involved in the OneWest case, Supervising Deputy Attorney General Benjamin Diehl, left the office in November 2013 to join Stroock Stroock & Lavan, a corporate law firm that represents Bank of America, JPMorgan Chase, and Citigroup in cases against consumers, regulatory agencies and state attorneys general. Emails indicate that Diehl arranged private meetings with Stroock partners six months before his hiring, while he still worked for the attorney general. Stroock would not make Diehl available for comment.
Harris's prodigious fundraising also raises questions about how attentive she is to the needs of campaign contributors. Prior to signing on with Trump, Mnuchin donated to members of both parties. He gave $2,000 to Harris' Senate campaign in February 2016. Among the investors in OneWest Bank was major Democratic donor George Soros, who maxed out to Harris' campaign in 2015.
"I DON'T KNOW why they didn't move forward," said Paulina Gonzalez of the California Reinvestment Coalition, a state housing advocacy group. "There's some really concerning information in this document that would say to us there needs to be further investigation. ... This is damning evidence of clear violations."
Gonzalez, whose organization has been tracking OneWest for several years, also received a copy of the package memo and sample complaint in the mail. Her copy came "with Wonder Woman stamps and the return address of Planned Parenthood," Gonzalez said. The copy sent to us had no return address.
With Mnuchin set to take over the Treasury Department, Gonzalez said the memo raises "real concerns about his ethics and potential for illegal behavior." She said her organization would take up the matter with OneWest's federal regulator, the Office of the Comptroller of the Currency (OCC), along with Harris' replacement as California attorney general, Xavier Becerra.
Bradshaw, the Mnuchin spokesperson, provided a report from the OCC showing relatively fewer error rates in OneWest foreclosures than other national banks. But those were reviewed under the context of harm to borrowers, not statutory noncompliance.
OneWest may also have violated a loss share agreement signed with the FDIC upon purchasing assets from the failed lender IndyMac. That agreement, which backstopped OneWest losses on foreclosures, committed OneWest to make good faith options to try to avoid them. Violations that sped up foreclosures could indicate that the bank didn't make such an effort.
Senate Democrats have already attacked Mnuchin over OneWest's foreclosure practices, even setting up a website inviting foreclosure victims to tell their stories. One of those victims, Teena Colebrook, voted for Donald Trump but lost her faith in that decision after the Mnuchin pick. In an interview, Colebrook alleged discrepancies on her substitution of trustee, similar to what was described in the package memo.
"It has to get out why this man should not be put in charge of Treasury," said Colebrook. "Nobody minds a billionaire, but not one feeding off people's misery."
Colebrook says she sent materials to Kamala Harris years earlier, asking her to help her save her home. Harris's response?
"She said 'We can't get involved in an individual case.'"