Whistleblower Warfare from The Center for Public Integrity

Wells Fargo hit with $3.1 million fine in mortgage servicing mess

WELLS FARGO & COMPANY — 2012-04-10T12:15:26-04:00

A federal judge ordered Wells Fargo to pay $3.1 million in punitive damages over its mishandling of a homeowner's loan, according to a report in the Huffington Post.

The opinion was issued by Elizabeth Magner, a federal bankruptcy judge in the Eastern District of Louisiana. Manger described Wells Fargo's behavior as "highly reprehensible" in its five-year fight with the homeowner.

The plight of the homeowner was raised in a Jan. 27 story on iWatch News.

In an emailed statement published in the Huffiington Post, Wells Fargo spokesman Tom Goyda said "we believe that there are numerous factual and legal problems with the opinion and are reviewing our options regarding an appropriate legal response."

Meanwhile the Consumer Financial Protection Bureau, created by the Dodd-Frank financial reform law, is reportedly considering new rules to require lenders to provide borrowers with more information about the status of their loans.

New whistleblower cases allege continued bank fraud

BANK OF AMERICA CORPORATION — 2012-03-09T12:22:34-05:00

Whistleblower lawsuits made public in recent weeks shed new light on abuses in the mortgage industry that led to — and continued well after — the housing crash in 2007.

The cases suggest that fraud inside the banking industry continued years after the meltdown, some as late as 2011. They have been made public as federal officials put the finishing touches on the $25 billion mortgage fraud settlement with five major lenders.

A suit unsealed March 7 alleges that Bank of America fraudulently misled borrowers and regulators in order to keep customers out of mortgage modifications that would have cost the bank money but potentially prevented foreclosures — making “a mockery of a program designed by Congress and the Treasury Department to help millions of struggling American homeowners,” the complaint stated.

As a condition of accepting $45 billion from the federal bank bailout, Bank of America promised to help move troubled borrowers into the taxpayer subsidized Home Affordable Modification Program (HAMP).

But that’s not what happened, according to the whistleblower suit filed by Gregory Mackler, formerly an employee of Urban Lending Solutions, the company Bank of America contracted to manage HAMP complaints.

Mackler claims the company developed a host of strategies to evade required HAMP modifications, using stalling tactics designed to run down the clock on the window of time borrowers were eligible for federally subsidized loan modifications.

The suit claims Bank of America:

Told borrowers and regulators that a complaint was “under review” while internally classifying the files as incomplete.
Parked cases with terminated or vacationing employees and sent payments to a “partial account” instead of crediting them to the loan, artificially inducing or prolonging a delinquent status.
Tried to persuade borrowers that did qualify for HAMP to take a proprietary loan that came with much less favorable terms, a violation of the bank’s agreement with the government when it took the bailout money.

Mackler, the whistleblower, rarely saw complaints resolved by moving a homeowner into a HAMP loan, although he was able to resolve one borrower’s complaint after alerting top management that the homeowner was an underwriter for AIG and presented an elevated risk of litigation.

Another whistleblower case filed in 2009 but not unsealed until last month detailed how Countrywide Financial Corp., now owned by Bank of America, developed a scheme to inflate housing prices, which ultimately led to more foreclosures. Bank of America allegedly manipulated home evaluations with help from LandSafe, a Bank of America subsidiary of appraisers, and a home building company, KB Home.

Those inflated prices, the complaint alleges, included thousands of Federal Housing Administration backed loans, which were supposed to be reviewed by qualified appraisers. But the complaint alleges that the companies skirted federal law by using rookie appraisers lacking certification from the federal government.

These came to the attention of Kyle Lagow, a former appraiser supervisor at LandSafe, who tried unsuccessfully to get the company stop.

Instead, these relationships allowed Countrywide to “use its market power to pressure appraisers to inflate values to whatever Countrywide needed and punish appraisers who refused to ‘play ball,’” the complaint stated.

Countrywide also set up a review system of the appraisals that the complaint alleges were used to “create the illusion” of due diligence but instead allowed “for rewriting and inflating of any appraisal valuations.”

“To put it plainly, Countrywide made money by making loans,” the complaint claimed. “It worked aggressively and unlawfully to prevent a final appraisal from coming in with a valuation less than was necessary to close the loan.”

A third whistleblower case unsealed last month also addressed fraud involving FHA loans, this time involving Citibank. The company settled the complaint in February for $158 million. The case was based on a whistleblower complaint brought by former quality assurance manager Sherry Hunt.

Citibank accepted responsibility for failing to verify borrowers’ ability to make payments and endorsing loans with “serious defects.” This violated government standards and as a result, since 2004, more than 30 percent of loans originated or underwritten by Citibank went into default.

Citibank spokesperson Mark Rodgers said in a statement: “We take our quality assurance processes seriously and have pro-actively undertaken process improvements to ensure that they are as robust as possible.”

Bank of America did not respond to calls for comment.

The federal government has until March 16 to decide whether to join the Bank of America or Countrywide actions.

These cases highlight issues that have been explored by recent Center for Public Integrity investigations. One piece documented evidence that Countrywide worked to silence whistleblowers who tried to report forged documents, inflated income documentation and other misconduct. One of the highest-level employees to complain about fraud inside Countrywide was Mark Zachary, a former vice president who alleged appraisal problems similar to those described in Lagow’s lawsuit. Zachary and Bank of America reached a confidential settlement in 2009.

Another Center story looked at how homeowners are still struggling to deal with a faulty mortgage modification process.

The $25 billion mortgage fraud settlement by 49 state attorneys general and several federal agencies included Bank of America and Citibank, as well as JP Morgan Chase, Wells Fargo, and Ally Financial Inc. Although the formal papers have yet to be filed in court, the U.S. Department of Justice announced that under settlement, the majority of the funds would go to principal reductions and loan modifications to borrowers under water. And roughly 750,000 borrowers who lost their homes to foreclosure will receive $2,000.

Virginians protest General Electric over foreclosures

WMC Mortgage Corporation — 2012-03-07T12:10:13-05:00

A crowd of Northern Virginia residents and clergy members marched to General Electric's offices in Washington, D.C., today, demanding that the company's CEO, Jeffrey Immelt, take responsibility for helping homeowners who received subprime loans from the company's now-closed mortgage arm, WMC Mortgage Corp.

WMC, was the subject of a Center for Public Integrity investigation, which found that after GE bought WMC in 2004 it continued to ignore complaints from compliance officers about suspicious loans supported by inflated incomes and falsified documents. After having pumped out roughly $110 billion in high-cost loans, the company’s finances began faltering and GE shuttered the unit in 2007

The FBI is now investigating WMC.

At today’s protest, Rev. Clyde Ellis, pastor at Mt. Olive Baptist Church in Woodbridge, VA, led off a series of speakers with a call-and-response litany of Immelt and WMC’s ills. “They made loans that were structured to fail!” he said.

“Shame!” the knot of roughly 75 protesters shouted back into the building’s otherwise empty lobby and 10-story high atrium.

The protestors were led by a coalition of religious groups, Virginians Organized for Interfaith Community Engagement (VOICE), which targeted GE because they say the company has refused to consider investing money in nearby Prince William County to help struggling homeowners make up for the equity and losses they incurred from the subprime loans. VOICE has successfully begun negotiations for reinvestments with other major lenders, including Bank of America.

The event came on the same day President Obama announced a new initiative for mortgage relief to military personnel.

GE spokesperson Russell Wilkerson said the company has agreed to fund one mortgage counselor and that it is reviewing VOICE's requests for additional investments.

"This is an ongoing discussion," Wilkerson said. ""It takes time to go through each of their items."

However VOICE member Rev. Nancy McDonald Ladd of Bull Run Unitarian Universalists in Manassas, VA, says that though they met with a GE representative last year, they've asked for follow up meetings three times since and been turned down.

What’s more, she said, WMC Mortgage was not part of the $25 billion nationwide attorneys general mortgage fraud settlement announced last month.

At the event, protestors left pink slips of papers — a notice of dismissal they said they were delivering to GE’s Immelt, who chairs President Obama’s jobs council.

"You're fired," the crowd shouted, as they asked for a GE representative to come downstairs to speak with them.

A handful of other clergy spoke before building security began ushering the group out the door.

Feds investigating possible fraud at GE’s former subprime unit

WMC Mortgage Corporation — 2012-01-20T11:16:13-05:00

Federal authorities are investigating possible fraud at General Electric Co.’s former subprime mortgage arm amid increased public pressure to hold Wall Street accountable for its role in the financial crisis.

The FBI and the U.S. Justice Department are looking into potentially criminal business practices at Burbank, Calif.-based WMC Mortgage Corp. during the home-loan boom, according to four people with knowledge of the investigation. They declined to be identified because of the sensitivity of the investigation.

The government is asking whether WMC used falsified paperwork, overstated borrowers’ income and other tactics to push through questionable loans, two of the people said. They said the probe appears to be focusing on whether senior managers condoned improper practices that enabled fraudulent loans to be sold to investors.

“It’s mostly about: Did they knowingly sell mortgages into the secondary market that they knew were fraudulent?” said one person with direct knowledge of the investigation.

A spokesman for the FBI declined to comment, and the Justice Department did not return telephone calls.

Russell Wilkerson, a spokesman for GE, said the company “as a matter of practice” cooperates with law enforcement on inquiries but does not comment on specific investigations. However, he said any allegation that WMC sold large numbers of fraudulent loans to investors was false.

GE acquired WMC near the height of the mortgage boom in 2004, giving it a major presence in the growing subprime lending market. But by 2007 the California lender was hemorrhaging money and slicing into the conglomerate’s earnings.

The unit was shut down as the housing market buckled. Since then, investors have launched a string of civil lawsuits, and federal authorities began a criminal inquiry.

The FBI’s San Francisco office indicated that it has been looking into WMC’s business practices for nearly two years, according to one of the people who has knowledge of the investigation. The bureau has examined individual WMC loan files and has begun contacting former employees about how the lender handled the sale of mortgages to investors, this person said.

WMC recorded the second-highest number of foreclosures on higher-risk mortgages in America’s 10 hardest-hit real estate zones, according to the U.S. Treasury Department. The company was second only to now-defunct subprime lender New Century Financial Corp. of Irvine, Calif.

For instance, the Treasury report said WMC’s foreclosure rate topped 40 percent in hard-hit California areas such as Merced, Modesto and Stockton.

The FBI and Justice Department had little success in prosecuting mortgage executives after launching investigations in 2008. But there has been increasing pressure, from groups including labor unions and Occupy Wall Street, to find culprits for the devastating housing crash that triggered the financial crisis.

Subprime lenders have long been in the cross hairs.

They issued hundreds of billions of dollars in mortgages to people with shaky credit, then bundled the loans for sale to investors as highly rated securities. When the borrowers couldn’t pay their mortgages, the investments collapsed — leaving investors and lenders saddled with toxic debt.

Lawsuits in state and federal courts have charged that WMC and GE misled investors and other parties in the sale of mortgages and mortgage-backed securities.

An investor lawsuit in federal court, for example, said that a $550-million pool of mortgages originated by WMC and another subprime lender, EquiFirst Corp., included numerous examples of fraud. The lawsuit said a review found inflated borrower incomes and other “material breaches” in 75 percent of the loan files sampled.

GE said it would “vigorously defend” itself, adding that the complaint is “based upon a flawed statistical sampling of a small number of loans.”

“WMC had in place processes to detect and report fraudulent activity,” Wilkerson, the GE spokesman, said. “When any allegations of misconduct at WMC were raised to GE, they were investigated and given an appropriate response by WMC, including the termination of employees.”

WMC was a wholesale lender that issued loans through a network of independent mortgage brokers, making it a less-familiar name than giant retailers such as Ameriquest Mortgage Co. and Countrywide Financial Corp. Still, in 3½ years under GE’s ownership, WMC issued roughly $110 billion in risky home loans.

Federal prosecutors in Los Angeles have said they investigated three prominent high-risk home lenders in Southern California that melted down — Countrywide, New Century and IndyMac Bancorp — without finding clear evidence that top executives intended to defraud anyone. No criminal charges were filed.

Some settlements have been reached. Countrywide co-founder Angelo R. Mozilo paid $67.5 million — much of it covered by insurance — to resolve an SEC case.

Other executives are contesting the suits. Former IndyMac Chairman Michael W. Perry has even created a blog, nottoobigtofail.org, on which he argues he has been scapegoated with false accusations.

The Justice Department has been successful in only two major criminal investigations into the mortgage crisis. Both ended in guilty pleas to egregious fraud. One, at Taylor, Bean & Whitaker Mortgage Corp. in Florida, included the creation of fictitious loans. The other, at U.S. Mortgage Co. in New Jersey, involved selling the same loans twice — once to credit unions and then to home finance giant Fannie Mae.

Some former WMC employees say sales staffers at the lender used fraudulent practices to push through loans borrowers couldn’t afford.

Eight former employees told iWatch News that WMC managers ignored them when they flagged loans supported by misrepresentations such as fake bank statements and pay stubs.

“They didn’t want to hear what you found,” Gail Roman, who worked as a loan auditor at a WMC office in New York, said. “Even if you had enough documentation to show that there was fraud or questionable activity.”

Some ex-employees claim GE officials did too little to root out fraud at WMC, despite warnings from whistleblowers who worked inside the lender. GE disputes those allegations.

White-collar crime experts say the WMC criminal probe is unusual at this late date — more than four years after subprime lenders began to collapse.

“In that area I haven’t heard boo these days,” said Orange County defense attorney David Wiechert, a former federal prosecutor.

This story was the result of a reporting partnership between iWatch News and the Los Angeles Times. Michael Hudson is a staff writer with iWatch News and E. Scott Reckard is staff writer with the Times.

Hudson’s previous reporting on General Electric’s subprime unit can be found here.

Woman says GE-owned subprime lender deceived, defrauded her

West Virginia,United States — 2012-01-06T07:08:30-05:00

Sheila Timmons, a single mother of two from a West Virginia coal town, is fighting a legal battle against General Electric Co., one of America’s most powerful corporations.

How this happened is a story about the dream of home ownership and, Timmons claims in a lawsuit, corporate fraud.

It began one day in 1998 when she had a talk with her youngest son, Travis. He was 7 at the time.

“My baby says, ‘Mom, I want a house with a triangle roof,’” Timmons recalls. “We lived in a trailer park at the time.”

She took out a loan and paid $28,000 for a small home in Gallagher, a former coal camp where she grew up. The simple, coal company-built house — known in West Virginia’s coalfields as a “Jenny Lind” home — didn’t have much insulation. The bathroom ceiling was falling in and windows needed replacing. But it was home for Timmons and her boys and she was willing to get her hands dirty and fix up the place, doing the rehab work herself.

By 2006, she says, she decided she needed money to continue her renovations.

“I wasn’t desperate, but I was in need,” Timmons recalls.

She talked to a mortgage broker about refinancing her mortgage and pulling some cash out to make repairs and pay some debts. According to a lawsuit Timmons later filed in Kanawha County Circuit Court, she told the broker she wanted a fixed-rate loan that would roll her property insurance and taxes into her monthly payments.

She claims the broker promised her a loan with $622-a-month payment that would be fixed for two years, after which, the broker said, she could refinance and keep a fixed rate.

The appraisal was done by a West Virginia-based real-estate appraiser named Mark Greenlee. He put the value of the home at $75,000 — a figure that was double the actual market value at the time, Timmons’ lawsuit claims.

When she closed on the refinancing in November 2006, Timmons’ suit says, she didn’t receive a federally required ”settlement statement” that laid out the costs and details of her loan.

The $67,500 loan was funded by WMC Mortgage Corp., a subsidiary of General Electric since 2004.

GE shuttered WMC in 2007, but before it did, the lender booked more than $100 billion dollars in risky home loans under GE ownership. Many of them ended up going bad. One $319 million pool of mortgages funded by WMC in 2005, for example, would later show a 44 percent delinquency rate, according to a lawsuit filed against GE by federal regulators.

Timmons says she dealt with the broker and wasn’t aware that her lender was owned by the industrial giant that had made her clock radio and electric hand mixer.

About a year after Timmons signed up for her WMC loan, her suit claims, she was surprised to learn that the loan paperwork hadn’t required that money be put in escrow to cover taxes and insurance. Her loan servicer informed her that, in order to roll in the costs for insurance and taxes, her mortgage payments would have to increase to $800 a month, Timmons says.

“That was just not manageable. That was out of the question,” says Timmons, who earns about $38,000 a year working for a nonprofit agency in Charleston.

Unable to keep up with her payments, and facing the possibility of foreclosure, Timmons sought help from Mountain State Justice, a legal-aid clinic.

The suit filed by the legal clinic claims WMC engaged in a pattern of deception and predatory lending designed to land borrowers into exploitive and unfair loans. It charges that WMC “intentionally employed an appraiser to misrepresent the market value” of Timmons’ home in order to induce her into taking out the new loan.

“In West Virginia, we have so many people of modest means who own their own property,” Timmons’ lawyer, Bren Pomponio, says. In the “gold rush of the subprime explosion,” he says, many lenders used inflated appraisals to “suck them into exploitive loans” by leading them to believe their homes where worth more than they were.

A General Electric spokesman says the company denies Timmons’ allegations, but pointed to court documents for elaboration.

In court records, lawyers for WMC say Timmons received all the proper disclosures in the loan transaction. They add that any damages she may have suffered were caused by Simmons’ own actions or by others; “no part" of her alleged damages were caused by WMC, the lawyers say.

The appraiser on the deal, Mark Greenlee, pleaded guilty in September to a criminal fraud charge involving an unrelated case. Federal prosecutors said Greenlee admitted he had “prepared a false and fraudulent appraisal” in 2006 in support of a multimillion-dollar mortgage fraud scheme at a subdivision in Hurricane, W.Va.

Simmons’ own legal battle has been going on since 2008. She’d like to put it out of her mind. But she can’t.

“This has been going on for a while. It’s just a like a cloud that hangs constant,” she says. “It’s not something you can just forget.”

Fraud and folly: The untold story of General Electric’s subprime debacle

WMC Mortgage Corporation — 2012-01-23T20:34:46-05:00

For General Electric Co., hawking subprime mortgages was a long way from making light bulbs and jet engines.

That didn't stop the industrial giant from jumping into the subprime business in 2004, lending blue-chip respectability to the market for risky home loans by paying roughly half a billion dollars to buy California-based WMC Mortgage Corp.

What GE got in the bargain, former WMC employees say, was a place where erstwhile shoe salesmen, ex-strippers and even a former porn actress could sign on as sales reps and make big money pushing home loans. WMC's top salespeople earned a million dollars a year or more and lived fast, swigging $1,000 bottles of Cristal and wheeling around in $100,000 Ferraris and Bentleys.

In pursuit of these riches and perks, several ex-employees claim, many WMC sales staffers embraced fraud as a tool for pushing through loans that borrowers couldn’t afford.

Dave Riedel, a former compliance manager at WMC, says sales reps intent on putting up big numbers used falsified paperwork, bogus income documentation and other tricks to get loans approved and sold off to Wall Street investors.

One WMC official, Riedel claims, went so far as to declare: “Fraud pays.”

How well did GE address WMC’s fraud problems?

GE says it did plenty to deal with the issue. Some ex-employees counter that GE officials didn’t do enough to rein in illicit practices, despite warnings from Riedel and other whistleblowers inside the lender. GE dispatched emissaries to look into the problem, the ex-employees say, but their efforts were too little, too late.

“They sent in people we thought were going to bring us back in the right direction,” Victor Argueta, a former risk analyst at WMC, says. “But it just never happened.”

By 2007, WMC was bleeding bad loans and red ink. General Electric shut the lender and reported related losses totaling more than $1 billion.

‘Everyone knew’

How could General Electric — a corporate icon voted America’s most admired company in 2006 and 2007 — have stumbled so badly?

The story of GE’s subprime misadventure has earned little attention from news media or public officials amid headlines about bank failures and mega-bailouts at other big companies. But now, with the aftershocks still being felt by GE and by WMC's borrowers, lawsuits and former employees have begun to shed light on what happened and why.

It’s a tale of a 134-year-old industrial concern that’s transformed itself into a financial services juggernaut. It’s also a story about breakdowns in corporate compliance systems amid the chase to cash in on the latest innovations in high and low finance.

In interviews with iWatch News, eight former WMC employees claim WMC’s management ignored them when they reported loans supported by falsified documents, inflated incomes or other legerdemain. Two of them say they were transferred and demoted because they pressed too hard to expose corrupt practices.

Riedel, who worked as quality-control manager for the lender’s largest production division, claims that after he informed a GE official about fraud inside the lender, WMC’s management demoted him — reorganizing him out of his job, taking away his office and his staff and forcing him to sit at a desk for months without a job title.

“I didn’t have any files,” Riedel told iWatch News during a series of interviews. “I basically stared out a window.”

Two other former WMC employees confirm Riedel’s account of his transfer. “Everyone knew,” Argueta, the former risk analyst, says. “We all knew why he’d been moved to our section, from a nice comfy office out to the cubicles.”

General Electric didn’t answer questions from iWatch News about the accounts provided by Riedel and other ex-employees. It also declined to provide detailed answers to a series of questions about how much it knew about alleged fraud at the Burbank, Calif.-based lender and what steps it took to deal with it.

In a written statement, GE says that “following its acquisition by GE, WMC strengthened and expanded its compliance programs and standards. WMC held people to those standards. In those instances where WMC learned of violations of these standards, management took disciplinary action, including terminations of employment.”

‘All kinds of crazy loans’

WMC made a name for itself long before GE came courting.

Founded in 1955, it had been known for much of its life as Weyerhaeuser Mortgage, a subsidiary of the pulp and paper giant Weyerhaeuser Co.

By the late 1990s it had a new owner — billionaire financier Leon Black’s Apollo Management LP — and it had moved into the subprime game, spurring production by rolling out a “Race to the Top” program that gave top sales performers the use of Porsche Boxsters.

The push to book mortgage deals produced a rash of bad loans around the country. WMC claimed it had been victimized by on-the-ground fraudsters who’d used bogus appraisals and other deceits to get mortgages approved.

In Minnesota’s Twin Cities, however, so many WMC loans ended up in or near foreclosure that a local newspaper, the Star Tribune, suggested WMC had “self-inflicted some of its wounds by pushing too hard and fast” to sell loans. An assistant state attorney general told the paper that the company simply didn't do "some of that due diligence” needed to ensure loan deals made sense.

“I have never seen a company that has been this aggressive,” one mortgage broker told the Star Tribune. “They were doing all kinds of crazy loans. They were doing anything they could do to push these deals through.”

Questions about WMC’s lending tactics were also raised by an academic study that looked at a pool of 5,610 loans the company had made around the country in 1998. By December 1999 almost 25 percent of the loans were facing foreclosure or were seriously delinquent — more than five times the rate for loans originated by other major subprime lenders, the study found.

GE, meet WMC

Despite these problems, WMC’s aggressive sales culture helped it survive and grow.

One of the forces behind its resurgence was Amy Brandt, who had gone from practicing law to peddling mortgages for WMC, quickly rising to become WMC’s No. 1 salesperson and then executive vice president of production. When she joined the executive team in 2000, she later told a business magazine, the company was on the verge of bankruptcy, and she helped lead what was, in her words, an “unbelievable turnaround story.”

By the end of 2003, Brandt was WMC’s president and chief operating officer, and the lender was producing $8 billion a year in subprime home loans and boasting profits of $140 million a year. It had also attracted the interest of General Electric, which was looking to grow in what, since 2001, had been a slow-moving economy.

“We’re going to have to turn up the engines to drive growth,” GE’s chairman, Jeffrey Immelt, told a TV interviewer in late 2003, explaining his company’s overall growth strategy. “The economy is not going to give you much, so what do you do?”

One of the things General Electric did was to seek profits in a home loan market that was rapidly heating up.

The big deal was announced in April 2004.

General Electric has never publicly disclosed the purchase price, but Apollo later revealed in securities filings that GE paid nearly $500 million for WMC, providing a nice profit for Black’s firm, which had paid less than $200 million for the lender seven years before.

GE asked Amy Brandt to stay on. She added CEO to her title. Internal documents obtained by iWatch News indicate GE promised the 31-year-old executive as much as $20 million in compensation over three years — including a $10 million upfront bonus at the closing of the deal.

General Electric declined to answer questions from iWatch News about the acquisition. It won’t say how much scrutiny it gave the lender before it closed the deal, or whether it was aware of WMC’s earlier fraud problems.

GE officials made it clear at the time that their regard for Brandt played a role in the company’s decision to buy WMC. “A big part of us doing the acquisition was Amy, no question about it,” a top GE executive told American Banker.

Immelt and other GE honchos thought so much of what Brandt had done with WMC, Businessweek later noted, they invited her to talk before the parent company’s top 600 executives at its annual leadership summit in Boca Raton, Fla.

As she left the stage, Immelt gave her a high five.

Tricks of the trade

Dave Riedel started at WMC soon after General Electric took over.

Riedel had experience in the banking industry as a real-estate appraiser, loan underwriter and, most recently, mortgage fraud investigations manager at Washington Mutual Bank. At WaMu, he claims, higher ups had told him to keep quiet when he’d tried to warn them about fraud-tainted loans streaming into the company’s mortgage pipeline.

With General Electric in charge, Riedel thought things would be different at WMC. He thought he’d get a chance to do his job and, he says, “catch the bad guys.”

He supervised a quality-control team of a dozen or more people who watched over WMC’s lending in a broad area of Southern California where salespeople were pushing subprime loans as well as “Alt-A” mortgages, another type of risky home loan.

The team, Riedel says, found many examples of fraud committed by in-house staffers or the independent mortgage brokers who helped bring in customers to the lender. These included faking proofs of loan applicants’ employment and faking verifications that would-be home buyers had been faithfully paying rent for years rather than, say, living with their parents.

Some employees also fabricated borrowers’ incomes by creating bogus W-2 tax forms, he says. Some, he says, did it old-school, cutting and pasting numbers from one photocopy to another. Others, he says, had software on their computers that allowed them to create W-2s from scratch.

‘Branded as a whistleblower’

In 2005, Riedel’s team became concerned about a sales manager who oversaw the funding of hundreds of loans a month. An audit of these loans, Riedel says, found that many of the deals showed evidence of fraud or other defects such as missing documents.

This wasn’t enough to get the sales manager fired. At most, Riedel says, the guy got a stern lecture.

“He became a little more shy. He wasn’t so flamboyant,” Riedel says. “But nothing changed.”

Later, during a sit down with a visiting GE compliance official, Riedel recalls, he described the audit and the response.

Over the next few days, Riedel claims, his career was thrown into tumult.

He says a WMC official countered by telling the GE representative that Riedel didn’t know what he was talking about and that the company had already been planning to demote him.

Riedel was stripped of his title, he says, and idled for months with no assignments and no staff.

A former WMC executive, who spoke on the condition of anonymity, says the fact that GE knew about Riedel’s concerns about fraud may have prevented WMC officials from firing him, but it didn’t stop them from putting him into corporate limbo.

“He was kind of branded as a whistleblower and not a team player,” the former executive says. “They didn’t exactly fire him. They just marginalized him and he didn’t really have anything to do.”

‘Business as usual’

While Dave Riedel was fighting battles inside WMC’s California headquarters, Gail Roman was losing battles on the other side of the country.

Roman worked as a loan auditor at WMC’s regional offices in Orangeburg, N.Y. She and other colleagues in quality control, she says, dug up persuasive evidence of inflated borrower incomes and other deceptions on loan applications.

It did little good. Management ignored their reports and approved the loans anyway, she says.

“They didn’t want to hear what you found,” Roman told iWatch News. “Even if you had enough documentation to show that there was fraud or questionable activity.”

If GE made any progress against fraud at WMC, Roman says, she didn’t notice it. Fraud was as bad at WMC in 2006 as it was when she started at the lender in 2004, she says.

“I didn’t really see much of a change,” Roman says.

Victor Argueta, the former risk analyst, says he didn’t see much change either.

Meetings would be held. Executives from GE would agree fraud was a problem and something needed to be done. “But the next month it was business as usual,” Argueta says.

Argueta was barely a year out of college, with an undergraduate economics degree from the University of Southern California, when he started at the lender in 2004. What he encountered, he recalls, wasn’t what he had expected to find at a branch of a top-flight Fortune 500 corporation.

Twenty-something salespeople with little education or mortgage experience ran the show, he says. They pulled in $250,000 to $350,000 a year while sales managers made $1 million or $2 million, thanks to generous production bonuses and the network of independent mortgage brokers that fed the lender business.

“We had ex-strippers working there,” Argueta says. “The whole point was to have someone attractive to talk to the brokers. One of the salespeople did porn before she worked there. When someone told me that, I couldn’t believe it. Then I saw the video and I realized it was true.”

Argueta says one top sales staffer escaped punishment even though it was common knowledge he was using his computer to create fake documents to bolster applicants’ chances of getting approved.

“Bank statements, W-2s, you name it, pretty much anything that goes into a file,” Argueta says. “Anything to make the loan look better than what was the real story.”

In one instance, Argueta says, he sniffed out salespeople who were putting down fake jobs on borrowers’ loan applications — even listing their own cell phone numbers so they could pose as the borrowers’ supervisors and “confirm” that the borrowers were working at the made-up employers.

Management gave him a pat on the back for pointing out the problem, he says, but did nothing about the salespeople he accused of using devious methods to make borrowers appear gainfully employed.

Nightmare loans

Roman and Argueta weren’t alone in their concerns, according to other ex-employees who spoke on the condition they remain anonymous, because they still work in banking and fear being blackballed within the industry.

“It was ugly,” one former fraud investigator at WMC recalls. “I would have nightmares about some of the things I’d find in a file. I’d wake up in the middle of the night going, ‘Oh my God, how did this happen?’ ”

A former manager who worked for WMC in California claims that company officials transferred and essentially demoted her after she complained about fraud, including the handiwork of a sales rep who used an X-Acto knife to create bogus documents, cutting numbers from one piece of paper and pasting them onto another, then running the mock-up through a photocopier.

“They knew I had a lot of crap on them and I wasn’t going to shut up,” she says. “And the easiest way was to pay me off. Create a job where I could just sit and collect my money.”

Both Riedel and another former WMC employee confirm the woman’s account.

Two other ex-employees say that, in their experience, WMC managers didn’t condone fraud. When he identified fraud-tainted loans, one of the two recalls, his managers killed them.

Both add, though, that the lender did push loans that were likely to land borrowers in trouble in the long run. The desire to keep sales numbers growing often trumped good judgment, the other ex-employee recalls. “It was like hitting your head against a brick wall, trying to make sure the right thing was done,” she says.

‘Fraud pays’

By early 2006, Dave Riedel had begun to rebuild his career inside WMC.

He helped put together a presentation in May 2006 aimed at giving GE officials a sense of how serious WMC’s fraud problems were. Riedel says an audit of soured loans that investors had asked WMC to repurchase indicated that 78 percent of them had been fraudulent; nearly four out of five of the loan applications backing these mortgages had contained misrepresentations about borrowers’ incomes or employment.

Riedel also helped work on a computer program designed to dig out fraud across the company’s loan portfolio. It sifted through a swarm of data, including evidence that many borrowers submitted multiple applications with income figures that mysteriously grew from one application to the next. Then it spit out a fraud alert flagging applications that appeared to have false information.

Riedel hoped that the company would use the data-tracking program on a real-time, wide-scale basis, he says.

It was at a meeting about the computer program, Riedel says, that an executive declared “fraud pays” — explaining that it didn’t make sense to slow the gush of loans going through the company’s pipeline, because losses due to fraud were small compared to the money the lender was making from selling huge volumes of loans.

The anti-fraud algorithm was never put into regular use, Riedel says.

Final days

In October 2006, Dave Riedel changed his computer password to “finaldays107!” — reflecting his expectation the company would be out of business by October 2007 (10-7).

As home values were starting to fall and subprime loan defaults were starting to rise across the industry in late 2006, Amy Brandt stepped down as WMC’s top executive. She told a trade publication that her contract with GE was ending and, rather than re-enlist, it was time for her “to move on.”

“This was really my baby, and I wanted to wrap up this era because I really love the company,” Brandt explained.

By the spring of 2007, problems in the subprime mortgage market had grown more serious. Borrower defaults and investor alarm had spun the mortgage industry into chaos. In the first half of the year, WMC lost more than a half-billion dollars.

GE officials blamed the mortgage market’s swoon for WMC’s problems. In mid-July, GE revealed it had entered what its chairman, Immelt, described as an “active exit process.” Immelt told investors his company decided to end its three-year subprime experiment because “we just had too many other better choices. And I just think we wanted to get this off the table vis-a-vis the things that investors have to think about with GE.”

Along with taking an immediate hit to its balance sheet, GE also set aside hundreds of millions of dollars to cover investors’ demands that it buy back defective WMC loans.

By October 2007 — as Riedel had predicted — WMC Mortgage was effectively out of business, dead after having pumped out roughly $110 billion in subprime and “Alt-A” loans under GE’s watch, according to industry data tracker Inside Mortgage Finance.

‘Living it up’

And Amy Brandt?

She was “living it up,” at least according to Businessweek.

WMC’s former CEO had a 30-acre ranch outside Los Angeles where she kept a dozen horses. She’d used some of the millions she’d earned at the lender, the magazine said, to start an independent record label, YMA Music Group, which signed such artists as former Limp Bizkit guitarist Wes Borland. She’d also become CEO of Vantium Capital, a private equity fund that planned to make money off distressed mortgages.

Brandt told Businessweek that, looking back, she wished she’d done more to diversify the kinds of loans WMC made.

“We were too aggressive in some areas,” she said.

Others agreed that WMC had been too aggressive in its lending practices.

A study by federal regulators, “Worst Ten in the Worst Ten,” found WMC’s loans accounted for the second-highest number of foreclosures on subprime and “Alt-A” mortgages in the nation’s 10 hardest-hit foreclosure hotspots, trailing only New Century Financial.

In the Fort Pierce-Port St. Lucie area in Florida, for example, 47 percent of the loans WMC booked from 2005 through 2007 had ended up in foreclosure as of late 2009, the study found.

Washington State banking regulators accused WMC, Brandt and two other WMC executives of “deceptive and unfair practices.” The regulators claimed the lender failed to make sure all borrowers received legally required disclosures, including paperwork that reported how much they would be paying on their loans.

WMC reached a consent order with the agency that included modest cash payments to a few borrowers. It didn’t acknowledge wrongdoing.

Brandt told iWatch News she couldn’t comment on the state regulators’ allegations or answer other questions about her time at the lender.

One former employee, who spoke on the condition her name not be used, says she believes Brandt “was so far removed from daily operations that she probably didn’t know” how bad fraud was inside the company.

‘Stunning failure rate’

Mortgage investors also are taking a closer look at WMC’s practices.

A review of a $550 million pool of mortgages booked by WMC and another subprime lender, EquiFirst, found inflated borrower incomes, missing documents and other “material breaches” in 150 loan files out of a sample of 200 — a “stunning 75 percent failure rate,” according to an investor lawsuit filed in September in federal court in Minnesota.

One of the defective WMC loans, the suit claims, was supported by paperwork that said the borrower earned almost $180,000 a year doing “account analysis.” The borrower’s tax returns, the suit says, showed he actually made less than $20,000 per year driving a taxi.

GE told iWatch News that it will “vigorously defend” itself against the lawsuit. It says the suit’s claims are “based upon a flawed statistical sampling of a small number of loans.”

The Federal Housing Finance Agency, meanwhile, charges that General Electric misled investors in the sale of hundreds of millions of dollars in securities backed by WMC mortgages.

The agency’s lawsuit claims GE didn’t tell the truth about how well WMC followed its loan underwriting guidelines, or about how much borrowers owed on their homes or whether they intended to live in them or use them as investment properties.

GE denies the allegations, and insists that Freddie Mac, which invested in the securities, made out well on the deals.

On the record

Dave Riedel no longer reads the financial news. When someone brings up the mortgage crisis at a party, offering opinions about what happened and why, he keeps his mouth shut. Talking about it makes his blood pressure rise.

After WMC closed, he spent almost two years looking for work before he found a sales job outside the banking industry. Nobody in the banking business was interested in hiring him.

Of the 40 best fraud investigators he knows, Riedel estimates that maybe four of them still have jobs in banking. Meanwhile, he says, bureaucrats without the talent or temperament for fighting corruption have snapped up choice fraud-control jobs at many big banks.

Despite his desire to put his mortgage days behind him, he says he felt an obligation, when iWatch News contacted him, to tell what he knew.

Later, he had second thoughts, worrying there might be blowback against him for talking about what happened inside WMC and GE, even if he stuck to facts rather than opinion. He asked his comments be put “off the record.” When he was told it wasn’t possible to go off the record after the fact, he made peace with going public.

“I have an ethical problem with covering things up,” Riedel says.

Given a chance, he adds, he’d be willing to talk to the FBI about what he uncovered during his time at WMC.

The feds should be turning over rocks, he believes, across the mortgage industry. People who committed or condoned fraud and helped crash the economy, he says, need to be held accountable.

“I can’t tell you who broke the law and who should or shouldn’t go to jail,” he says. “But I can tell you that these people should have to answer to somebody about what happened.”

Ex-WaMu worker claims he was shunned for refusing to push toxic loans on borrowers

Washington Mutual, Inc. — 2012-09-30T15:20:41-04:00

In the case of the salesman who wouldn’t sell, the two sides have starkly different tales to tell.

Greg Saffer says conscience and common sense prevented him from pushing the product his bosses wanted him to sell — “Option ARM” home loans that, he says, put homeowners at risk.

“I’m not going to steer people into a loan program that might not be good for them just because it’s more profitable for the company,” he says.

JP Morgan Chase Bank counters that Saffer didn’t sell because he didn’t have the chops to close deals.

“Rather than a paragon of virtue, Saffer was simply a guy who could not sell loans in an increasingly tough market,” the bank’s lawyers say in legal papers.

JP Morgan is matched against Saffer because it bought Saffer’s ex-employer, Seattle-based Washington Mutual Bank, in September 2008, after regulators seized WaMu in what was the largest bank failure in U.S. history.

Saffer charged in a lawsuit filed in 2009 in Los Angeles Superior Court that he was forced out of his job for refusing to take part in “fraudulent schemes.” In testimony in the lawsuit and in documents in arbitration proceedings, he claims WaMu retaliated against him because he refused to push “toxic” Option ARMs and mislead borrowers about how the loans worked and how much they would cost.

A judge ordered the case into arbitration last year. It could be months before an arbitrator rules on whether Saffer’s claims are valid.

Saffer’s case is notable because, as a salesman, his job description was different from most of the ex-employees who’ve made whistleblower claims against mortgage lenders. Many were fraud investigators or loan underwriters who claim they were punished for uncovering fraud by sales reps and sales executives.

Saffer’s legal claims paint him as one of what may have been a distinct minority among the mortgage industry’s sales corps during the nation’s home-loan frenzy – a salesman who said no to the dirty tactics that became pervasive during the boom. Former industry insiders say salespeople who refused to go along were often weeded out, to make way for others who had a more pliable sense of right and wrong.

Saffer’s attorney, Carney Shegerian, represents two other former WaMu sales reps who, like Saffer, claim that WaMu fired them because they resisted pressure to engage in improper lending tactics. Their case has also been ordered into arbitration.

Shegerian says his clients not only lost their jobs because they refused to go along with the practices at the bank, “their good names were totally soiled for having been employed by WaMu.”

‘Flagship loan’

Greg Saffer put in several years as a high-earning salesman at a smaller lender in Los Angeles, Citizens Mortgage, before he took a job in mid-2007 as a mortgage sales rep at a Washington Mutual office in Ladera Ranch, Calif.

WaMu, the nation’s largest savings and loan, was putting up big numbers peddling exotic home-loan products that, just a few years before, had been on the margins of the mortgage industry.

These included subprime mortgages designed for borrowers with weak credit as well as “payment-option” adjustable-rate mortgages generally targeted at borrowers with good credit.

Option ARMs allowed borrowers to make minimum payments that didn’t keep pace with interest charges on their loans. In other words, loan balances would grow rather than drop as each month ticked by. It’s known as a negative amortization loan, or “NegAm” in industry parlance.

Option ARMs accounted for roughly half of Washington Mutual’s home-loan production during the mortgage boom years, according to federal regulators.

WaMu chief executive Kerry Killinger touted Option ARMs as the bank’s “flagship product.”

It was no wonder.

WaMu earned more than five times as much on Option ARMs as it did on fixed-rate home loans, according to internal company documents. Mortgage investors on Wall Street loved them because their growing loan balances and escalating interest rates translated into big returns.

Payment shock

Whether they were good for borrowers was another question.

As early as 2006, BusinessWeek had called them “Nightmare Mortgages,” declaring they “might be the riskiest and most complicated home loan product ever created.”

Saffer says he thought Option ARMs were dangerous for most customers. That’s because once negative amortization pushed loan balances too high, the loans would automatically readjust and monthly payments would soar.

This “payment shock,” he knew, was likely to drive many into default.

Borrowers had the option of making larger monthly payments that would cover interest and pay down their balances, but Saffer says not many could afford to do that, because their loans had been underwritten based only on whether they could afford the minimum payment.

He refused to put together NegAm loans for borrowers, he says.

That didn’t leave him many other products he could sell. Washington Mutual purposely priced traditional 30-year fixed-rate mortgages higher than what other lenders were charging, Saffer testified.

Why?

His boss, a WaMu vice president named Mark Stockton, told him it was because fixed-rate loans weren’t profitable enough and WaMu wanted to steer borrowers into NegAm loans, according to Saffer’s testimony during the L.A. Superior Court proceedings, before the case was moved to arbitration.

Stockton, Saffer testified, told him Option ARMs were the way to go “if you want to make some serious money....This is the loan that I want you to pitch.”

In his testimony in the case, Stockton denied ever talking to Saffer about which loan programs were most profitable and which weren’t.

‘Unfounded accusations’

Saffer also testified that Stockton instructed him not to give borrowers the full story on how Option ARMs worked, to emphasize the low minimum payments but not to mention that their loan balances would increase if they paid only the minimum option. And to make sure borrowers qualified for these loans, Saffer testified, Stockton encouraged him to help them overstate their incomes on their mortgage applications.

When he expressed qualms about the ethics of pushing Option ARMs, Saffer testified, Stockton told him: “Greg, we’re about profit and profit only.” Stockton told him to “get with the program” and start selling Option ARMs, or he might be out of a job, Saffer testified.

In an interview, Saffer softened his assertions about Stockton by noting that higher-ups set the agenda and chose Option ARMs as WaMu’s flagship loan.

“I believe he was getting pressure from his upper management. The pressure just trickled down from the top,” Saffer says. “Mark Stockton didn’t invent this loan. I believe he was getting it probably as bad as I was getting it.”

In response to questions from iWatch News, Stockton said he would have “no comment regarding these unfounded accusations.”

Stockton testified that Saffer and other loan officers were never told to coach borrowers about how much income they should state on their loan applications. He added that loan officers were “thoroughly trained” on how to explain to borrowers what negative amortization was and how Option ARMs worked.

Subprime time

Option ARMs weren’t the only loan product that Saffer says concerned him.

Even as the subprime loan defaults were spiking and subprime lenders were going out of business in late 2007, WaMu was pushing its sales force to peddle subprime mortgages, Saffer claims in a written declaration in the arbitration proceedings. An in-house trainer instructed salespeople to target “lower income areas” with “less sophisticated” borrowers for deals that would strip the equity out of their homes, the declaration says.

“Do not feel sorry for these people,” the trainer said, according to Saffer’s declaration.

Stockton testified that Saffer and other loan officers working under him were never encouraged to sell subprime loans.

Staying clear of subprime and payment-option loans, Saffer says he focused on marketing home equity lines of credit. He says he thought they made sense for many borrowers; they carried no closing costs, the interest rates tracked the prime rate and borrowers wouldn’t have to refinance their existing mortgages to get a little more cash out of their homes.

He understood equity lines didn’t make a lot of money for the bank, but he says he was trying to operate as he had at his previous stops in the mortgage business, building a clientele for the long haul rather than making a quick score.

“I’m not a flash in the pan, make-all-your-money-now kind of guy,” he says. “To me, business is a long-term thing.”

His refusal to push riskier home loans soured his relationship with Stockton, Saffer testified.

They had gotten along well at first, but eventually Stockton did “a complete 180,” Saffer testified, either ignoring him in the office and not returning his calls or, when they did talk, showing him “nothing but animosity.”

Stockton testified that this wasn’t so. While he did raise concerns about Saffer’s production, he said, their relationship was never strained.

Saffer resigned Jan. 4, 2008. Given all that had happened, Saffer says in legal documents, he “had no other option” but to leave.

Defending WaMu

Saffer’s legal adversary, JP Morgan, has worked to portray itself as less culpable than other big banks in the questionable practices that helped crash the U.S. economy.

Its purchase of WaMu has put JP Morgan, however, in a position of having to decide whether to stand behind the practices of a bank that’s been harshly criticized by investigators, regulators and investors.

In Saffer’s case, JP Morgan has heartily defended WaMu’s practices. Its lawyers write that the WaMu’s Option ARMs weren’t toxic products. They “complied with all disclosure laws and regulations” and provided “very flexible” terms that allowed borrowers to change their payment levels from month to month, the lawyers say.

Others hold a darker view of WaMu’s Option ARMs.

Federal regulators say the consequences of WaMu executives’ drive to sell Option ARMs include huge numbers of homeowners facing foreclosure and ruin. One $600 million pool of Option ARMs that WaMu created in 2007, for example, had a 60 percent delinquency rate by the start of last year.

In a lawsuit against former CEO Killinger and two other former senior executives, the FDIC charged that WaMu sold Option ARMs “widely and indiscriminately,” using sales tactics that enticed marginal borrowers into deals they often couldn’t afford. The executives have admitted no wrongdoing.

Media reports last week said the trio and their insurers have agreed to settle the suit for a payout in the $60 million to $70 million range, a fraction of the $900 million the agency had sought.

‘Nice conservative bank’

Along with defending WaMu’s Option ARMs, JP Morgan’s lawyers also take issue with Saffer’s assertion that working conditions had become so intolerable he had to resign.

Things weren’t so bad for him, they say, noting, for example, that “Saffer admits that no physical altercations ever took place between him and Stockton.”

Saffer replies that a lack of physical violence hardly qualifies a workplace as model employer.

Saffer is now his own boss. His company arranges “reverse mortgages” for elderly homeowners who want to tap their equity without putting their homes at risk.

He says he’s glad to be working at a job where he can follow his principles, not the dictates of Washington Mutual executives who were, in his view, intent on peddling unsafe products.

“I never would have thought this nice conservative bank from Washington State would have this boiler room, mill mentality,” Saffer says. “I never would have thought that in a million years."

Bank of America to pay record settlement over Countrywide abuses

BANK OF AMERICA CORPORATION — 2013-04-29T14:42:11-04:00

Bank of America will pay $335 million to settle allegations of discrimination at Countrywide Financial Corp., the troubled lender it bought in 2008.

Countrywide was the nation’s largest subprime lender and came to symbolize the real estate collapse that led to the nation’s economic meltdown. The Justice Department said Wednesday that the agreement is the largest fair lending settlement in the department’s history.

“If you were African-American or Hispanic and you went to Countrywide for a loan, and you were qualified, you likely paid more simply because of the color of your skin,” said Assistant Attorney General Thomas E. Perez. People of color also were “far more likely to be steered into an expensive and risky subprime loan than a similarly-qualified white borrower.”

iWatch News reporter Michael Hudson has covered the risky lending practices at Countrywide in a series of stories called “The Great Mortgage Coverup.”

Perez said more than 200,000 African-American and Hispanic victims are identified in the complaint and will receive compensation.

Bank of America in a statement said that it does not discriminate.

The abuses occurred between 2004 and 2007, the peak of the subprime borrowing craze.

Management gurus claim they were blindsided by toxic culture at Countrywide

Countrywide Financial Corporation — 2011-12-13T06:12:01-05:00

On her first day at Countrywide Financial Corp., Cynder Niemela gave a talk to a gathering of her new colleagues. Every company, she said, has its own culture. Each is a tribe with its own rituals and myths.

Niemela, a management guru who’d worked for Boeing and other big employers, told the group of executives that research showed it took 16 months for a worker to become fully part of a corporate “tribe.” That time would allow her, she added, to offer a fresh perspective on how things were done at Countrywide.

Afterwards, she recalls, one of her new colleagues introduced himself and, with a knowing smile, said, “I can’t wait to see if you’re here 16 months from now.”

She lasted 16 months, but not much longer.

Countrywide fired her, Niemela claimed, after she raised questions about fraud against customers and employee discontent with top management.

The last straw, she alleged in an arbitration claim, came after she complained that higher-ups had revised and distorted one of her PowerPoint presentations in an effort to obscure the company’s problems with employee dissatisfaction and turnover.

Niemela’s account of her struggles at Countrywide provides another perspective on the culture inside what was once the nation’s largest home lender.

Many other ex-employees who claimed they were mistreated by the company were mid- and low-level workers who worked deep inside Countrywide’s mortgage-lending machine. Niemela, by contrast, was a high-level tactician who dealt with the big picture of how Countrywide treated its employees and what that said about the company’s culture.

She was among a group of management experts brought in to help the company as it grew in a period of a few years from 11,000 employees to 55,000, with a goal of reaching 100,000 by 2010.

What they encountered was like nothing they’d seen before in corporate America, according to Niemela and three other former Countrywide management experts interviewed by iWatch News.

They found, they say, a toxic culture ruled by fear and top-down intimidation.

“Every organization has a culture, some more healthy than others,” Niemela says. “Countrywide had a very unhealthy culture.”

Niemela sued Countrywide in state court in Los Angeles in 2007, asking for reinstatement and lost pay. A judge later ordered the case into private arbitration.

Last week, Niemela and Bank of America, which bought Countrywide in 2008, reached a confidential settlement of her claims. All Niemela’s interviews with iWatch News took place before the settlement was reached.

As the case was being argued, Bank of America denied that Countrywide officials mistreated Niemela.

The bank’s lawyers hit hard against Niemela in legal documents, saying that “her interpretation of events is severely skewed.” The lawyers claimed that Niemela was fired after colleagues complained she’d “badmouthed the company” and that she was “angry, critical and difficult to work with.”

‘Not a dictator’

Former Countrywide chief executive Angelo Mozilo and other former company officials, meanwhile, have disputed allegations that senior management bullied employees.

“I always regarded myself as a CEO, not a dictator,” Mozilo testified earlier this year during a civil trial involving another Countrywide executive’s wrongful dismissal claim. “I think the jury will note that I'm a pretty frank person — straightforward, I say what I believe. But I'm also willing to listen.”

“Countrywide was about people,” Mozilo testified. “Obviously, without quality people you can't have a quality company.”

In the end, the jury in that case awarded Countrywide’s former chief leadership officer, Michael Winston, a $3.8 million verdict, upholding his claims that Mozilo and other senior officials had punished him for standing up against management misconduct.

Winston charged that he’d been retaliated against for reporting an environmental hazard that had sickened workers inside a Countrywide office complex, and for refusing to falsify a report about the lender’s corporate governance practices.

Winston says he and Niemela and other organizational change specialists clashed with a culture in which breaking the rules “was more than okay. It was incentivized.” Winston claims they were punished for speaking up about bad management practices, just as lower-level employees were harassed for reporting fraudulent lending practices.

Bank of America has appealed the jury’s decision. A spokeswoman said the verdict was “not supported by any evidence.”

‘We all know’

Niemela has worked more than 20 years as an executive coach and management consultant. She was featured in a 2000 Fortune article about executive coaches and, in 2001, published a book, “Leading High Impact Teams: The Coach Approach to Peak Performance.”

In 2005, Countrywide recruited Niemela away from Boeing, hiring her as a first vice president in the company’s human resources department.

She’d never worked in a financial company before. She got a first-hand lesson, she says, in how her new employer did business when she took out a Countrywide mortgage to purchase a new home and move her family from the San Francisco Bay area to Los Angeles.

When she sat down at the closing table, she says, she got a nasty surprise: She discovered the loan, among other unappealing features, carried a “pre-payment penalty,” meaning that she’d have to pay thousands of dollars extra if she tried to refinance within seven years. Even the worst subprime loans generally carried an early payment penalty of no longer than three years, say fair-lending advocates.

She had no choice but to sign the papers, she says, because her relocation package required that she use a Countrywide loan to buy her house. If she didn’t, she stood to lose some $50,000 in relocation money.

She did complain to an executive in the company’s risk-management unit. He listened to her story, she says, and then said nonchalantly, “Yes, we all know. We screw our employees.”

‘Mozilo was God’

While Niemela was beginning to wonder about how things were done at Countrywide, other management gurus were growing more concerned about how the company was managed.

One of them was Dave Sullivan, an executive vice president and co-author of a book on bad management, “Why Leaders Fail.” Sullivan told iWatch News that Countrywide was “definitely the most top-down company I’ve ever seen. Mozilo was God. Whatever he said went.”

Another management specialist, Sharon Doyle, likened many Countywide executives to “bullies in the schoolyard.”

Doyle says these executives saw the management experts as “very dangerous. We were enlightening people. Ideas are very powerful things, and they didn’t want anything to change.”

The main organizing principle at the company, Doyle says, was “rule by fear and manipulation.”

As Niemela immersed herself in the culture and talked to her colleagues, she says, some executives were frank about how things were run, telling her: “Angelo makes every decision. We really are not empowered to make decisions. Angelo signs every expense report. He micro-manages us.”

Many employees, Niemela adds, had been infuriated by a 2005 New York Times profile of Mozilo in which the CEO suggested that the size of workers’ cubicles didn’t matter, because “whether it's smaller or larger, they adapt, like fish to a fish tank.”

‘A reckoning’

By 2005, Countrywide’s “voluntary turnover” rate had reached 31 percent, meaning that almost one in three employees chose to leave the company that year. Within its mortgage sales force, turnover was 45 percent.

Niemela spent months working to design a survey aimed at figuring out why the company’s turnover rate was so high.

She was surprised by what she found, she says.

She’d done surveys at many companies, she says, and had never seen the level of dissatisfaction with top executives that the survey of roughly 40,000 Countrywide workers showed. The employee satisfaction levels for a few unit presidents and other big executives were mired in the 30 percent to 40 percent range, Niemela says.

Mozilo and his senior executive team got a 58 percent approval rate, according to a Power Point presentation put together by Niemela summarizing her findings. At the best-run companies, Niemela says, similar surveys generally show an 80 percent to 85 percent approval rate for senior management, “certainly never less than 70 percent.”

Along with their answers to the survey questions, some employees used the survey’s comments section to complain about unethical practices.

“There is so much fraud being committed between loan brokering, document alteration, overstating borrower's length of employment and actual income,” one employee wrote. No one was being held accountable, the worker said, because the company continued to “look the other way.”

Another employee who raised concerns about improper lending pronounced that “there will be a reckoning. … think of the cigarette industry — they know it's a slow poison but they sell them anyway.” He raised the specter of “superfunds to undo the damage.”

After reading many similar comments, Niemela says, she urged Countrywide executives to open a full-scale investigation of fraud within the company. The investigation never happened, she says. “They just shut the whole thing down. They didn’t want to hear that.”

She got the same reaction, she says, from one top official when she passed on concerns about how low-level employees were being treated by managers.

In the Loan Administration Department’s call center, Niemela says, “most people felt they were treated like animals,” with every minute of their time closely monitored by managers.

When she raised these complaints with a high-level executive who oversaw the unit, Niemela says, he told her: “I don’t really care what people think if they’re not VP level. Let’s move on.”

‘Sham investigation’

Niemela drafted a lengthy presentation spelling out the results of the survey and her findings that top management was driving worker turnover.

Before it was submitted to senior executives, Niemela says, it was revised by a high-level HR official.

In legal papers, Niemela claimed that the revision was more than an edit; the presentation was altered and cut down in a way that “concealed the survey findings that ineffective executives were the cause of the high turnover.”

Nowhere in the revised version, Niemela said in an interview with iWatch News, was the word “turnover” used.

After she complained about the changes in the survey results, she alleged in her legal claim, Countrywide officials trumped up a “sham investigation” against her, asserting that she had spoken derogatively about a colleague and had caused “upheaval” in her department.

All the interviews in the investigation were done in a single day, and Niemela wasn’t given a chance to defend herself, Niemela alleged.

Soon after, in May 2007, she was fired.

Bank of America’s lawyers maintained that Niemela had given “several different versions” of when she first raised the issue about the changes in the presentation.

The bank’s lawyers said Niemela’s only concern was that the revised presentation “somehow painted a picture that was too rosy. Nothing more.” That wasn’t enough, they argued, to show bank officials had violated any laws.

Niemela wasn’t surprised, she says, in late 2007 and early 2008 as she saw news reports about growing loan defaults and financial reversals at Countrywide. She had expected something like this to happen, she says.

The survey results, the comments about fraud and the reactions from top executives — all these had been warning signs, she says, that Countrywide Financial was doomed.

Whistleblowers ignored, punished by lenders, dozens of former employees say

Washington Mutual, Inc. — 2011-12-09T14:46:44-05:00

Darcy Parmer ran into trouble soon after she started her job as a fraud analyst at Wells Fargo Bank. Her bosses, she later claimed, were upset that she was, well, finding fraud.

Company officials, she alleged in a lawsuit, berated her for reporting that sales staffers were pushing through mortgage deals based on made-up borrower incomes and other distortions, telling her that she didn’t “see the big picture” and that “it is not your job to fix Wells Fargo.” Management, she claimed, ordered her to stop contacting the company’s ethics hotline.

In the end, she said, Wells Fargo forced her out of her job.

Parmer isn’t alone in claiming she was punished for objecting to fraud in the midst of the nation’s home-loan boom. iWatch News has identified 63 former employees at 20 financial institutions who say they were fired or demoted for reporting fraud or refusing to commit fraud. Their stories were disclosed in whistleblower claims with the U.S. Department of Labor, court documents or interviews with iWatch News.

“We did our jobs. We had integrity,” said Ed Parker, former fraud investigations manager at now-defunct Ameriquest Mortgage Co., a leading subprime lender. “But we were not welcome because we affected the bottom line.”

These ex-employees’ accounts provide evidence that the muzzling of whistleblowers played an important role in allowing corruption to flourish as mortgage lenders and their patrons on Wall Street pumped up loan volume and profits. Codes of silence at many lenders, former employees claim, helped discourage media, regulators and policymakers from taking a hard look at illegal practices that ultimately harmed borrowers, investors and the economy.

Whistleblower advocates say weak federal and state laws also helped prevent finance industry workers from being heard. Congress passed tougher laws in the wake of the financial crisis, but whistleblowers and their advocates say labor-law enforcers, securities-law cops and banking regulators need to do more to ensure that banking workers can safely report fraud and other abuses.

For their part, banking industry representatives reject the idea that employees were punished for reporting problems.

In court documents, Wells Fargo denied Parmer’s charges that management interfered with in-house fraud watchdogs. The bank said Parmer was never prohibited from calling the ethics line and that its internal investigation showed that no one retaliated against her and that “no fraudulent activity occurred.”

A Wells Fargo spokeswoman told iWatch News that the bank has extensive protections for internal whistleblowers and that it is the responsibility of all employees to raise concerns about ethics breaches or law violations.

“We have a strict code of ethics and a no-retaliation policy,” Wells Fargo spokeswoman Vickee Adams said. “We take responsibility for our actions, and when there’s evidence of a mistake and there’s something that’s needs to be corrected, we take action.”

‘Zero tolerance’

iWatch News has reported on former employees of Countrywide Financial Corp. who claimed the company retaliated against them for objecting to falsified mortgage documents and other fraud. In September the Labor Department ruled that Bank of America Corp., which bought Countrywide in 2008, had fired Eileen Foster, the mortgage lender’s fraud investigations chief, as punishment for finding widespread fraud and for trying to protect other whistleblowers within the company.

Further investigation reveals that concerns about the abuse of whistleblowers weren’t limited to Countrywide.

Most of the workers who claimed they were punished for trying to fight fraud worked at giant firms such as Wells Fargo or Washington Mutual (WaMu). Others worked at smaller lenders that joined the rush to sell home loans during the boom years.

Wherever they worked, their accounts are similar. Many claim that commission-hungry workers falsified loan applicants’ incomes and bank statements, pushed appraisers to exaggerate property values and, in some instances, forged consumers’ signatures on documents.

In many cases, the former employees say, management encouraged the fraud and protected the fraudsters.

Parker, the former Ameriquest fraud investigations chief, claims that he had few problems when he did “ones” and “twos” — investigating cases that involved an employee or two who could cause only limited damage, he said. But things changed, he said, when he tried to fight systemic fraud by focusing on branches or regions where fraud was so prevalent, workers joked that bogus documents were being produced in the “art department.”

Management instructed his unit to limit its investigations by reducing the number of loan files it pulled when it went into a branch, Parker said. He was left out of meetings and key decisions and, eventually, squeezed out of his job, he claimed.

Ameriquest later agreed to pay $325 million to settle loan-fraud allegations by authorities in 49 states and the District of Columbia. It stopped making loans in 2007.

The company said previously in a written statement that Parker was a “disgruntled former employee” who lost his wrongful dismissal claim against the company before an arbitrator. In a 2007 opinion, the arbitrator ruled Parker hadn’t been able to prove that the company’s treatment of him was connected to his reports about fraud, adding that it “stretches the imagination” to think a company would retaliate against a fraud investigator for “doing his job.”

More generally, Ameriquest said it “had a policy of zero tolerance for fraud. When problems were discovered, the company addressed them, including immediately terminating the employee or vendor and pursuing civil and criminal action against them.”

‘Fraud is fraud’

At a White House press conference in October, ABC News correspondent Jake Tapper asked President Obama why his administration hadn’t pursued criminal cases more aggressively in the aftermath of disasters at Lehman Brothers and other banks.

“I don’t think any Wall Street executives have gone to jail, despite the rampant corruption and malfeasance that did take place,” Tapper said.

Obama replied that in many instances the government might have trouble making criminal charges stick, because “a lot of that stuff wasn’t necessarily illegal. It was just immoral or inappropriate or reckless.”

Obama isn’t alone in suggesting that criminal fraud by banks wasn’t the main cause of the nation’s financial disaster. Bankers have cited unpredictable market conditions, the federal government and borrowers as being among the chief culprits.

In congressional testimony, former Washington Mutual chief executive Kerry Killinger blamed borrowers for misleading WaMu about their incomes and other details in their loan applications.

“I’m certainly very disappointed to think about my customers lying to me, because that’s fraud and it shouldn’t happen,” Killinger said. “But I think an objective look at things is that there must have been situations where people did not tell the truth on their applications."

Many whistleblowers who worked inside major banks counter that it was fraud by lenders — not borrowers — that was the driving force in the growth of toxic loans that caused the mortgage meltdown.

“Fraud is fraud,” Parker said. “It’s fraud if someone changes information in a loan file without the borrower’s knowledge or does anything deceptive to get a loan approved and passed through. How can you say those are not criminal acts?”

Parker and other former mortgage workers say some borrowers did take part in the fraud, but they usually did so with coaching from sales representatives who knew how to work the system to get deals done. And in many cases, Parker and others say, borrowers weren’t aware of the deception and were fooled by bait-and-switch salesmanship and other tactics used by the mortgage professionals who controlled the process.

A two-year U.S. Senate investigation found that senior management at Washington Mutual ignored clear evidence that bank employees were engaging in fraud.

In a report released in April, Senate investigators noted that an internal WaMu review of a high-volume loan center in Southern California found that as many as 83 percent of the loans it booked contained fraud. Despite in-house gatekeepers’ warnings about fraud at that location and other loan centers, WaMu executives took “no discernable actions” to deal with problem, the Senate report said.

Top sales managers suspected of fraud, the report said, were allowed to continue to produce huge volumes of loans and win trips to Hawaii as members of WaMu’s “President’s Club.”

WaMu collapsed in September 2008, a $300 billion institution buried in bad loans. It was the largest bank failure in American history — and one of the biggest casualties of risky practices and missed warning signs stretching back to the start of the last decade.

Early warnings

In the spring and summer of 2001, Matthew Lee was a busy man.

A fair-lending activist and blogger on innercitypress.org, Lee was fielding a growing number of emails and phone messages from people who worked at Citigroup’s subprime lending unit, CitiFinancial. The lender, they told Lee, was using slippery methods to trap borrowers in cycles of overpriced debt.

The more he reported the whistleblowers’ information on his website, the more whistleblowers contacted him. “I can’t count the number of times people called me and said: ‘It’s actually worse than you described. Let me tell you about it,’” Lee recalled.

In all, Lee estimates, he talked with three dozen current and former CitiFinancial employees.

One continued helping Lee even after he lost his job at Citi, digging through trash bins outside CitiFinancial branches around Tennessee and rescuing internal memos and other documents that, in Lee’s view, provided evidence of the lender’s “pervasive lawlessness.” The documents would arrive via overnight mail, often damp and smelling of used coffee grounds.

One former CitiFinancial employee, Steve Toomey, agreed to go on the record, signing a statement that said managers pushed workers to mislead borrowers about the costs of their loans and to falsify information in borrowers’ files. Lee filed Toomey’s affidavit and other documents with banking regulators at the Federal Reserve.

CitiFinancial immediately denied the allegations against the company, asserting, for example, that Toomey had only raised questions after “he concluded that the company would not pay him monies that he demanded to resolve an employment dispute.”

With the pressure building, Citigroup went out of its way to warn other current and former employees to keep quiet about what went on at CitiFinancial, according to Reuters news service.

Citigroup, Reuters said, hired a famed litigator “to help fight allegations of illegal lending practices and prevent former employees from bad-mouthing the financial services giant.” Mitchell Ettinger, one of Bill Clinton’s lawyers in the Paula Jones case, met with at least 15 current or former employees, reminding the ex-employees that Citigroup would enforce the “non-disparagement clauses” in their severance agreements with the company, Reuters said.

Lee charged that this was an attempt to paper over evidence of misconduct inside CitiFinancial. Why, he argued, would Citigroup dispatch a partner from Skadden Arps, described by Forbes magazine as “Wall Street’s most powerful law firm,” to talk with low-level employees?

Citigroup told Reuters the bank had acted properly. It added that the standard non-disparagement clause in the bank’s severance agreements wouldn’t prevent ex-employees from reporting illegalities.

Ettinger did not respond to requests for comment from iWatch News. A Citigroup spokesman declined to answer specific questions from iWatch News about former employees’ complaints. He said “issues from that time period” were “investigated and responded to appropriately by the company.”

The Federal Reserve eventually fined CitiFinancial $70 million for regulatory violations. Lee said that the Fed focused mainly on technical issues, however, and did nothing to protect whistleblowers from intimidation by the bank.

That, Lee said, made it less likely that more employees would come forward in the future with information about misconduct at Citi — or at other financial institutions that wanted to keep misbehavior secret.

“When people do step forward and put themselves at risk, you need to aggressively say to them, ‘If you’ve received any threats from the company, let us know,’” Lee said.

A spokeswoman said the Federal Reserve couldn’t comment on issues involving individual banks.

‘Their integrity … failed’

As whistleblowers were drawing scrutiny to Citigroup, then the nation’s largest commercial bank, others were raising questions about Washington Mutual, the nation’s largest savings and loan.

One of them was Theresa Hagman, a vice president in WaMu’s custom home-construction lending division. In 2003, Hagman spotted an increase in the number of construction loans going into default. She believed this was happening because loans were being pushed through without proper documentation, in violation of federal lending laws.

But when she pressed the issue with a high-level sales manager, Hagman later testified in a Labor Department hearing, he jumped out of his chair and charged her, screaming at her as his face purpled and veins popped in his neck. (In his testimony, the manager conceded he’d had disagreements with Hagman but denied they’d had heated confrontations.)

As an internal investigation proceeded, a senior vice president wrote: “If this wasn’t a good example of a need for a Fraud team, then I can’t find one. This poor individual is feeling like she is getting no support from her management.”

The senior executive’s concerns weren’t enough to protect her from more retaliation, Hagman said.

“I was being brutalized, and they knew it,” Hagman testified. “I was sharing the emails with everybody, pleading for protection. … We had borrowers that were being damaged and employees that were scared and crying.”

In March 2004, WaMu fired her.

Hagman filed a claim for federal whistleblower protection under the Sarbanes-Oxley Act, the corporate reform law passed in response to accounting frauds at Enron Corp. and other big companies.

Hagman told an administrative law judge that there were “senior-level people in this organization who are still there today who did not tell the truth. Their integrity and their honor … without question failed.”

WaMu maintained that there was no retaliation, only miscommunication between Hagman and her bosses. It said she hadn’t been fired, she’d simply been let go as part of a restructuring.

The judge sided with Hagman. He ordered that WaMu pay her more than $1 million.

‘Silent treatment’

The whistleblower affairs at Citigroup and WaMu came as the mortgage market was beginning to gain steam, recovering from a late 1990s credit crisis that had put dozens of subprime lenders out of business.

By 2004, mortgage industry production and profits were exploding. As the push to book loans grew to a near frenzy, industry insiders recall, the atmosphere at many mortgage-sales operations devolved into a cross between a “boiler room” operation and a frat-house blowout.

At Citizens Financial Mortgage Inc., a small Pennsylvania-headquartered lender, the out-of-control behavior included an ugly mix of sexual harassment and fraud, a lawsuit filed by a former loan processor at the company charged.

Gina La Vitola claimed one manager at her branch in Essex County, N.J., ranted and cursed and gambled on sports during office hours, even getting a visit from a bookie delivering a wad of cash. On several occasions, she said in her lawsuit, the manager picked her up, threw her over his shoulder and then used her “as a weight bar to see how many squats he could do.”

Supervisors’ behavior degenerated from vulgar to threatening, she claimed, when she started complaining about inflated property appraisals and other misconduct. Managers often forged borrowers’ signatures on loan documents and made up fake verification of employment forms, her lawsuit said. One manager, the suit said, had an arrangement with a friendly business owner who was willing to falsely claim that the manager’s loan customers were on his payroll.

After she reported the problems to Citizens’ president, she claimed, she got “the silent treatment” from coworkers and her bosses drastically changed her work hours and duties.

Finally, she said, a manager telephoned her and explained that, since her complaint, the “vibe is not there” in the office. That was a problem, he said, because he was “big about vibe, energy.”

He told her the company was letting her go, she claimed.

The company strongly denied her allegations. The case was settled on undisclosed terms. A former company official confirmed to iWatch News that Citizens was no longer in business, but said he couldn’t comment on the lawsuit.

Fraud sleuths

As mortgage salespeople embraced creative methods for pushing mortgages through the system, they were being stalked by a band of internal watchdogs.

Financial institutions keep fraud investigators and other gatekeepers on staff in part because they need to show regulators and investors that they have solid controls in place.

Many of these watchdogs took their jobs seriously.

In the spring of 2005, Darcy Parmer joined a team at Wells Fargo that was working on a plan to create a fraud detection report.

By doing queries within the bank’s computerized mortgage-application system, Parmer said, she and other fraud sleuths found a large number of duplicate credit applications submitted to various branch offices and divisions within Wells Fargo. It appeared to Parmer that loan officers were helping borrowers who’d been turned down for loans resubmit their applications elsewhere within the bank, inflating their incomes from one application to the next by as much as 100 percent.

The report, Parmer believed, was a great tool for sniffing out fraud. In 2006, however, management terminated use of the fraud detection report, Parmer said.Nothing was put in place to replace it, she said.

It wasn’t the only time that higher ups interfered with internal watchdogs’ ability to do their jobs, according to Parmer’s lawsuit in federal court in Colorado. Her court filings described many instances in which she claimed sales people and executives circumvented fraud controls or turned a blind eye to “acts of criminal fraud.”

One case involved a borrower Parmer referred to in court papers as Ms. A. According to Parmer, a loan officer had claimed in the loan-underwriting system that Ms. A earned roughly $140,000 per year, but federal tax records indicated she earned less than half that much — barely $60,000 a year.

When she tried to stop the loan from going through, Parmer said, a manager chastised her: “This is what you do every time.” He ordered her to close her investigation, she said.

After months of harassment, she said in an affidavit, she was “mentally and emotionally unable to continue working” and had to take disability leave to get treatment for distress and depression. After a time, she said, the bank informed her that her job had been filled.

Wells Fargo said in court documents that it had never fired her and that she was simply “on an unapproved leave of absence.”

The bank’s attorneys also said that Wells Fargo had refused to fund “nearly ever loan” that Parmer had complained about, and those that had funded had been handled “consistent with Wells Fargo protocol.”

Parmer and the bank settled the case in 2009. The terms were confidential.

‘In the dark’

When Congress passed Sarbanes-Oxley in 2002, it raised hopes that more workers would be emboldened to come forward with information that would help prevent future corporate scandals. One legal scholar hailed the act — which gave federal labor officials the power to order companies to swiftly reinstate whistleblowers with back pay — as “the most important whistleblower protection law in the world.”

Things haven’t worked out as whistleblower advocates had hoped. Critics claim the Labor Department hasn’t done enough to protect financial whistleblowers.

In roughly the first nine years of the law — from 2002 through May 20 of this year — the agency issued merit findings in 21 whistleblower complaints and dismissed 1,211 others.

That record is just one example, whistleblower advocates say, of the trials that corporate whistleblowers go through when they try to do the right thing.

When whistleblowers seek help from government agencies or state and federal courts, they often face long delays and find themselves outgunned by their employers’ legal teams.

At the same time, employers are often successful at preventing whistleblowers from getting the word out to the wider world. When companies and employees negotiate severance contracts and legal settlements, confidentiality clauses often permanently silence whistleblowers. Companies also frequently force ex-employees with whistleblower claims into private arbitration, ensuring that many details of their cases will remain secret.

Judges in Los Angeles, for example, have booted three former WaMu employees out of court and ordered them to go before arbitrators to press their claims that the company pushed them out of their jobs in early 2008 because they refused to participate in fraud.

Some former mortgage-industry workers contacted by iWatch News declined to talk in more detail about their legal claims because they’re gagged by secrecy agreements. Others said they couldn’t talk on the record because they still work in banking and don’t want to get in trouble with their current employers, or because they’re looking for jobs and don’t want to be blacklisted.

“Hell, we want to work,” one mortgage fraud investigator said, explaining why he and many of his colleagues haven’t gone public with what they know.

Matthew Lee, the fair lending activist who clashed with Citigroup a decade ago, believes getting whistleblowers to come forward is crucial to preventing the next financial meltdown.

Fraud thrives in secret. If regulators are serious about holding banks accountable, Lee said, they should cultivate and protect whistleblowers and serve as a counterweight to the power of big banks and their armies of lawyers.

“They need to think through how they’re going to protect people in the industry who come forward with information,” Lee said. “If you don’t, you’re going to be in the dark.”