Countrywide Home Loans Audit Fraud Continues

When Countrywide promoted Eileen Foster to executive vice president and named her to lead the company’s mortgage fraud unit in March 2007, the mortgage market was failing.

Home values were stalling, borrower defaults were rising, and the industry leader, Countywide, would soon be compelled to seek a capital injection from Bank of America to stay afloat.

The section in charge of fraud investigation was also having difficulties. According to Foster, the corporation had laid off several skilled investigators. Those who remained were bombarded with an increasing number of fraud allegations.

Eileen Foster worked for Countrywide Financial Corp., which later became Bank of America, as the head of mortgage fraud investigations.

Foster had about a dozen investigators working for her, but only four or five of them had true investigation experience, according to Foster. She claims that several of the others were transferred from clerical jobs to the unit.

The company’s fraud investigation resources were also fragmented, which was an issue. Many of the operating divisions, like Countrywide’s subprime unit, had their own smaller investigative teams in addition to the company-wide fraud unit that Foster had taken over.

Foster was perplexed by this. It meant that the smaller investigative teams reported to divisional sales executives, who would be motivated to discourage aggressive fraud investigations in order to keep the company’s production pipeline full of loans.

One of her initial responsibilities was to lead a fraud mitigation “reengineering” that would bring all fraud investigations under her unit’s control. She presented the concept to divisional presidents in a series of meetings in June 2007.

She found that the proposal had been shelved a few weeks later. She claims she didn’t get an explanation for why, simply that it wasn’t the ideal time for restructuring.

She couldn’t dwell on the setback because she didn’t have time. In July, her unit received a call from an ex-employee who said he was dismissed after reporting fraud at one of Countrywide’s Boston-area subprime loan offices.

Foster arranged for the shredding contractor for the Boston branches to set aside the documents they took off-site and store them safely. Then, in Boston, a team of her detectives and other firm representatives went through the stacks of paper.

The team conducted a thorough search of the offices after discovering signs of “cut and paste” document falsification. According to Foster, they discovered an extraordinary quantity of Wite-Out dispensers on top of workers’ desks. They also discovered blank templates for account statements from several banks and brokerage businesses, such as Bank of America and Washington Mutual, within their desk drawers, she said.

Investigators discovered multiple fax machines in some of the locations. During conversations with investigators, employees confirmed that the extra fax machine was used to simulate borrowers sending in phony paperwork, according to Foster. Branch personnel had modified the transmitting fax machine so that there was no banner identifying the fax number from which the transmission originated, she claims, to avoid leaving a paper trail.

Mark Zachary was one of the highest-ranking Countrywide workers to complain about fraud.

In August 2006, Zachary began working with Countrywide KB Home Loans in Houston, Texas, as a vice president. Countrywide controlled the lender as part of a joint venture with KB Home, one of the leading home builders in the country. Countrywide KB Home Loans offered the finance that enabled home purchasers to purchase residences that KB Home was built at a breakneck speed.

According to a complaint he eventually filed in federal court in Texas, Zachary began confronting Countrywide executives about inflated property appraisals and “other grave criminal concerns” soon after he joined. According to Zachary, the phony evaluations deceived both consumers, who ended up borrowing more than their homes were worth, and investors who bought the loans on Wall Street.

According to his lawsuit, he sent an email to Countrywide’s employee relations section in April 2007 warning that selling people overpriced homes and forcing them into loans they couldn’t afford was a “recipe for disaster.”

According to his lawsuit, he also had a disagreement with management over a need that the lending unit approves 10% of backlogged loan applications each day so that KB Home could begin construction on the homes under contract. He was “taken out of the loop” and “treated like a pariah by his boss” after he claimed he couldn’t fulfill the objective.

Instead, Countrywide KB Home Loans began approving applications through a backdoor method, according to Zachary, in which loans were essentially “issued without a review by an underwriter.”

He said that these authorizations were referred to as “Shadow Approvals.”

What about Zachary? He said that a supervisor had written him up for “performance concerns,” a dramatic contrast to the wonderful performance assessment he’d received three months previously. According to his lawsuit, he was fired two weeks after receiving the written warning.

Following Zachary’s lawsuit, Countrywide stated that it had “investigated each of his claims and found no merit to his allegations.” Before making the charges of wrongdoing, Zachary had “received verbal counseling on his performance, as well as written criticism in the form of his evaluation,” according to the report.

Countrywide stated its loan activities were “prudently and successfully managed,” with “rigorously enforced” ethical standards.

In 2009, Zachary and Bank of America achieved an out-of-court settlement. Zachary agreed not to speak about his time at Countrywide any further as part of the settlement.

Countrywide has been nothing but a nightmare for Bank of America since the merger.

With a group of 22 large mortgage investors, the bank reached an $8.5 billion settlement. It also assisted Countrywide’s founder, Angelo Mozilo, in settling charges that he had amassed a personal fortune of $141.7 million through fraud and insider trading. (Mozilo’s lawyer called the allegations “baseless.”) The total settlement amount was $67.5 million, with Bank of America and Countrywide’s insurers contributing $45 million and Mozilo paying $22.5 million out of pocket — or around 16 cents for every dollar investigators said he had in ill-gotten personal gains.

In addition, the bank agreed to pay $108 million to resolve fraud charges against Countrywide Home Loans Servicing, the same company that Foster claims compelled her to stop publicizing its complaint data in her reports. According to the Federal Trade Commission, the servicing unit overcharged consumers and deceived them about how much they owed on their mortgages.