Regulators Investigate Sun Trust Bank for Fraud

UPDATE 10-11-13: SunTrust was forced to settle with the government over the actions in this story which was first reported at Growth Capitalist. They had to pay over $1 billion dollars which lead to a negative 33 cent per share hit to earnings. It’s unclear if the whistleblowers will reap any reward from this sizable settlement.

UPDATE: You can see me talk about my Sun Trust investigation on RT’s top TV show Keiser Report today. Max Keiser also interviews me about the impact of the SEC investigation into JP Morgan – which I first reported on his show last year.

Original Text
A mid-size bank touted as a growth stock by analyst this year is under SEC investigation for selling billions of Alt-A loans labeled as Prime loans to Fannie Mae. I reported on the SEC investigation into SunTrust Bank on November 5th at Growth Capitalist.

According to whistleblowers, Atlanta-based SunTrust took advantage of a Fannie Mae program designed for the bank’s best of the best borrowers. They called it the Agency Shortcut Mortgage. In 2006, with pressure to keep earnings up as banks like Countrywide were laps head in earnings from resi mortgage origination, borrowers with good credit scores became a target for fraud by SunTrust. The bank needed high credit scores to get entry into the Agency Shortcut Mortgage program but after that SunTrust staff could manipulate the income and assets of the borrowers and force the GSE program to buy the loan. The whistleblower complaint alleges SunTrust did this in the billions from 06 to early 08.

Whistleblowers claim the highest level of management was directing the retail arm, wholesale, and outside mortgage brokers how to beat the Fannie Mae program and were encouraged to re-enter borrower income or assets over and over until the loan qualified. These whistleblowers say, once it was accepted in the Shortcut program underwriters were not allowed to ask for follow-up stated income docs like tax returns and bank statements. That’s because the Shortcut approvals were being done by SunTrust loan officers, branch managers, & mortgage brokers who were paid on volume instead of the bank’s underwriters who should have been hitting the approve button. These SunTrust interested parties basically circumvented the underwriting process by committing automated underwriting fraud. The result was Fannie thought it was buying tons of great prime loans from SunTrust.

It wasn’t till early 2008–right before the Shortcut program was terminated–that Fannie Mae limited the number of times their DU system could be re-run for a particular borrower to fifteen. While fifteen seems high Fannie took into consideration the number of hands that touched a loan from origination to funding. Subtle changes are often made in the underwriting process but the goal of Shortcut was to cut down on the detailed document request underwriters usually did. What this highlights is the laddering of income and assets loan officers were doing on Shortcut loans to achieve the ‘right mix’ that tripped Fannie’s DU system into approving the Shortcut loan–an abuse that must have been clear to Fannie executives who oversaw Shortcut. This questions the very core of Fannie’s system of risk controls along with how much their CEO, Daniel Mudd, knew about the health of his bank and didn’t disclose to shareholders.

SunTrust whistleblowers worked for a year to find a lawyer to get their case in front of U.S. regulators. The thought that the bank intentionally planned to cheat Fannie’s computerized underwriting acceptance program so they could improve origination volume was hard to sallow for a bank that’s managed to escape regulatory sanctions so far. I’ve watched whistleblower complaints filed for years now and the SEC will often sit on them for a long time before they start to investigate but with SunTrust the regulator got involved within only a few months. That’s because the mortgage fraud task force was already aware of other large residential mortgage originators doing the same thing. We saw proof of this when the DOJ acted last month and sued Bank of America for the sins of Countrywide’s ‘Hustle program’ with the GSEs.

Banks cheating to earn profits isn’t a new concept for main street to understand but how the Government Sponsored Entities allowed themselves to be cheated opens a whole other can of worms. In my report , at Growth Capitalist, we show a former regulatory enforcement lawyer discuss how and why Fannie isn’t the innocent victim here. On top of that think of the mortgage insurance that was sold alongside these loans which didn’t factor in enough risk. Then there are the second loans place on top of these Shortcut loans that another lender would have thought they were lending against after a prime loan was issued but instead it was a lower quality loan.

SunTrust told investors in September they thought they were through GSE putbacks and added hundreds of millions more to their putback reserves. But my story at Growth Capitalist questions how that could be true when they are faced with an SEC settlement on billions in loans executed with fraud. The bank’s Q3 earnings presentation shows putpacks have been requested on over $6 billion of resi loans with most coming from the GSE.

Editors Note: My story at www.growthcapitalist.com is behind a paywall that only paid subscribers can read. Great investigate journalism is with worth paying for and there are a ton more details in the story that make the subscription worth it.