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Mortgage Fraud Prosecutors Pounce on a Small Bank


Mortgage Fraud Prosecutors Pounce on a Small Bank

Photograph by Robert K. Chin

One of the few things not in dispute in the criminal case against Abacus Federal Savings Bank is that it began with a mortgage closing on Friday, Dec. 11, 2009, for a two-family home in the Bensonhurst section of Brooklyn. Abacus is a small bank, catering mostly to Chinese immigrants. The closing was at 10 a.m. at the bank’s headquarters, a brown-brick building on the Bowery in New York’s Chinatown between a noodle shop and an herbal medicine emporium. Sitting around the table in an undecorated conference room were the seller, the buyers, their attorneys, the real estate broker, and the title closer. Vera Sung, Abacus’s lawyer, was in and out of the meeting.

Sung, 46, is a daughter of the bank’s founder—her younger sister Jill is Abacus’s chief executive officer. Vera is also a onetime prosecutor in the Brooklyn district attorney’s office, and that morning she recalls hearing something that made her pause: The borrowers were asking about extra checks they had earlier made out to the loan officer, Qibin “Ken” Yu. Sung didn’t know what those checks were. “I thought this was very strange, so I stopped the closing,” Sung says. She spoke to Yu in her office, then called Jill, and they canceled the loan. The following Monday, Yu was fired. The bank’s executives won’t speculate what the checks were for, but in other fraud cases individual loan officers have been convicted of asking for kickbacks or payments for falsifying paperwork. Yu’s lawyer declined to comment.

Former bank employees are indicted, May 2012Photograph by John Marshall Mantel/The New York Times/ReduxFormer bank employees are indicted, May 2012

On May 31 of last year, the Manhattan district attorney’s office announced criminal charges against the bank and 19 former employees, some facing up to 25 years in prison. (Vera and Jill Sung have not been charged.) “Mortgage fraud became institutionalized at Abacus Bank,” District Attorney Cyrus Vance Jr. said at a news conference. Abacus, like many banks, had sold its loans to Fannie Mae (FNMA), taking the proceeds and lending them back out to earn more interest. The huge government-backed company in turn bundled those mortgages into securities it sold to investors. Abacus lied about applicants, Vance charged, because otherwise its loans wouldn’t have met Fannie Mae’s income requirements, and the bank depended on Fannie’s money for a significant chunk of its profit. The indictment stated that between 2005 and 2010, Abacus sold hundreds of millions of dollars of fraudulent mortgages to Fannie, reaping many millions of dollars in commissions and fees.

In Vance’s description, Abacus’s fraud epitomizes the reckless behavior that swelled—and then burst—the U.S. housing bubble. But Vance was understating the uniqueness of the case. The fraud analytics firm Interthinx estimates that there were between $1 trillion and $4.8 trillion in fraudulent mortgages issued nationwide between 2005 and 2007, yet criminal cases against banks for originating such mortgages have been very rare. There have been a few prosecutions of individuals, a few large civil suits brought against banks such as Bank of America (BAC) and JPMorgan Chase (JPM), and deferred prosecution deals where lenders have paid a financial penalty in lieu of criminal charges. But in the wake of the financial crisis only one bank in the whole country has, as an institution, been criminally indicted for mortgage fraud: Abacus.

If the point was to send a message to Wall Street, the bank was a curious choice. Few people outside the Chinese-American community have ever heard of Abacus. Compared with the whales of global finance, it’s plankton, with roughly one ten-thousandth the assets of JPMorgan Chase. And unlike the defaults that crippled Countrywide and Washington Mutual and Fannie Mae—and, through them, the world financial system—Abacus’s loans get paid back.

Abacus borrowers, in fact, are champion repayers: The bank’s default rate is a fraction of the industry average—in late 2009, when 5.4 percent of Fannie loans were defaulting, Abacus’s default rate was less than a tenth of that. “If every bank in this country committed mortgage fraud the way Abacus allegedly did, we wouldn’t have had a financial crisis, because these loans are performing,” says Kevin Puvalowski, the lawyer representing the bank in the case. As a result, Abacus finds itself in the unlikely position of being charged with a fraud that may have made millions of dollars for its victim, Fannie Mae. By the bank’s own calculations, Fannie and the investors who bought its securities have thus far earned more than $174 million in interest from Abacus mortgages. The DA’s office declined to confirm or contest the figure, and Fannie itself declined to comment on the case.

“The DA’s office went after a small, minority-owned community bank … because they wanted to indict a bank,” James Haggerty, a spokesman for Abacus, writes in an e-mail. “Whether to burnish their résumés or because they were frustrated they couldn’t indict one of the big boys … it doesn’t matter. It still stinks.”

The DA’s office sees things differently. While none of the bank’s top executives have been charged, prosecutors believe that the fraud was so pervasive it was impossible for Abacus’s leadership to miss without their being either negligent or complicit. The fact that the loans performed doesn’t change that.

The case is still in preliminary hearings and will not go to trial for several months. The indictment alone could drive the bank out of business. Depending on one’s perspective, that would be either a victory in the campaign to prevent another financial meltdown or a parable about the upside-down legal politics of bank fraud.
 
 
Abacus was founded in 1984 to provide financial services to the new wave of Chinese immigrants who had begun to come to the U.S. a few years earlier. The bank’s customers primarily worked in or owned the shops and restaurants in the commercial neighborhoods where Abacus, over the years, opened its six branches—in Manhattan, Brooklyn, Queens, Philadelphia, and Edison, N.J. Its founder was a prominent Chinatown lawyer and real estate developer named Thomas Sung.

Sung founded Abacus in 1984. He’s still its chairmanSung founded Abacus in 1984. He’s still its chairman

Sung grew up in Chongqing, the son of a manufacturer of hog’s-hair brush bristles, and came to the U.S. as a teenager. His family fled mainland China for Hong Kong when the Communists took over in 1949, then left Hong Kong during the Korean War. When they made it into the U.S., after three months in detention on Ellis Island, they settled in Florida, where Sung’s father started a cattle ranch. “We were the first Chinese cowboys,” he recalled in an interview last September at Abacus’s headquarters. He wore a well-cut gray suit, a gold Rolex, and a Bluetooth headset. Still the bank’s chairman at 77, Sung is wiry and voluble, with a full head of bristly gray hair. Talking to Chinatown residents, it’s common to hear that Sung helped them or their parents navigate the citizenship process. He moved his family to Greenwich, Conn., when Jill and Vera were small, and along with their two sisters they grew up speaking English.

New York’s Chinatown in the 1980s was a thriving economic enclave where almost none of the money flowed through banks. In part this was a supply problem—few banks had branches there, and residents who ventured uptown in search of a checking account or loan were unlikely to find someone who could explain the terms in Mandarin or Cantonese. Recent immigrants often had no credit history, and if they were in the country illegally they were unlikely to have valid identification. Other factors, too, fed a reluctance to submit to the scrutiny of mainstream banking. Most wages were paid in cash and, often, so were real estate purchases. For loans, local businesspeople pooled their resources into “bidding clubs” called biao hui, where members would bid to borrow a communal pot of money. Huge swathes of the economy stayed off the books, with wages underreported—or not reported at all—to tax authorities.

The community was distinguished by two financial and cultural traits. One was a strong commitment to paying back debts. “There’s this sense that if you borrow money, you pay it back, and that if you don’t pay it back you’re not going to get it next time,” says Peter Kwong, a sociologist at New York’s Hunter College who has written several books on Chinese-Americans. “Your reputation is involved.” Timothy Wong, a former JPMorgan analyst and private equity banker, goes further. “Chinese immigrants are the best credit on the planet, they don’t have delinquencies,” he says. Wong grew up in New York’s Chinatown, where he now runs a pest control and environmental consulting company.

The other trait was a suspicion of banks. Even today, Chinatown is prone to bank runs. Abacus suffered one ten years ago, when an employee was charged with embezzlement. Many neighborhood residents still use banks primarily for safe-deposit boxes and will line up on the sidewalk at the slightest rumor of a bank’s closing to make sure their valuables and documents are secure.

Abacus was one of the first banks to thrive in this distinctive financial ecosystem. Many Chinese immigrants were prevented from getting mortgages because of their lack of credit history, so the bank convinced Fannie to accept alternatives like proof of continual payment of rent or utility bills. Abacus broke into the remittance business, teaming up with the Agricultural Bank of China. Chinese immigrants send billions of dollars home every year, a market long controlled by the Bank of China (BACHY), Western Union (WU), and black-market entrepreneurs. With reliable service and low fees, Abacus and its partner were able to take business from all three.

The bank grew from $5.5 million in assets in 1985 to a peak of $282 million in 2002, and Sung viewed his work as civic duty. As he told Crain’s New York Business in 2003, “We nursed [customers] from being illegal immigrants to being legal immigrants to being prosperous people to being home buyers.” He has never paid himself a salary, and his family, which still owns the bank, has never taken a dividend.
 
 
“We didn’t go looking for this case, it came to us,” says Adam Kaufmann, the assistant district attorney who as chief of the office’s investigation division oversaw the probe into Abacus (he left for private practice in December). The Abacus clients whose aborted closing sparked Ken Yu’s termination lost their deposit on the property when the loan fell through. They went to the police and filed a complaint, mentioning that Yu had falsified their mortgage application. The police referred the matter to the DA. Abacus says it had already launched its own inquiry at this point, and that by mid-2010 it had hired two well-regarded fraud consultants, Vitale AML and the Mercadien Group, to do external investigations. The DA’s office declines to specify when its own investigation started, but says the bank only brought in the outside consultants after prosecutors started asking questions. The bank eventually forwarded Vitale’s and Mercadien’s findings to the Office of Thrift Supervision, its regulator at the time, which in February 2011 issued an order demanding an overhaul of Abacus’s lending practices. Some of the employees of the loan department were fired, others left of their own accord.

In April 2011, Yu pled guilty to grand larceny, fraud, and falsifying business records, and is cooperating with the investigation. Six others have also taken pleas. The DA’s argument is that fraud was standard operating procedure at Abacus, that it was taught there, not just tolerated. New employees with no banking knowledge and rudimentary English were instructed that mortgage origination was an act of financial sleight-of-hand: fake gift letters, fake verification of employment forms, blatant misrepresentations on loan application forms. The accused employees include Yiu Wah Wong, the bank’s chief credit officer, who reported directly to Jill Sung; and Wai Hung “Raymond” Tam, the loan origination supervisor, who trained the bank’s loan officers and processors. According to the indictment, the two managers “falsely told employees that the exceptionally low default rate of Abacus-originated loans made the underlying accuracy of loan documents insignificant.”

Lawyers for Wong and Tam say there’s no evidence for this accusation. For its part, the bank’s defense returns again and again to its low default rate. It’s largely a way to absolve the bank’s executives of blame: Defaults are a key warning sign of fraud—they’re what regulators keep an eye out for. Without rapid defaults, argues Puvalowski, the Sungs had no reason to suspect anything was amiss.

The low default rate raises another question for the prosecution: Why would Abacus’s clients, in such overwhelming numbers, steadily pay off loans that—by Fannie Mae’s standards—they couldn’t afford? One possibility is that those borrowers were simply postponing the inevitable. Vance, in his press conference, invoked the mass defaults that triggered the financial crisis. “Those loans performed. Until they didn’t,” he said. Yet while subprime mortgages did have respectable default rates during the housing boom, even then they defaulted at higher rates than other mortgages (hence the name subprime). Abacus’s loans, conservative fixed-rate mortgages with high down payments, maintained their minuscule default rate even during the worst of the recession.

Another possibility is that the fraudulent loan applications were, paradoxically, accurate. The case against Abacus is not a tax case, but the issue of tax evasion comes up in most conversations about it. Many Chinatown businesses still deal mostly in cash, and the temptation to underreport taxable income is great. By helping—and encouraging—borrowers to file mortgage paperwork that didn’t match up with their tax returns, prosecutors allege that the bank was enabling tax evasion: People could report their actual income on the loan application and an artificially low number to the IRS.

There is a third possible explanation, one that prosecutors haven’t emphasized but that bankers and fraud experts offer when asked what might be going on. Regardless of whether they were being honest on their loan applications, perhaps the bank’s borrowers could simply handle more debt than Fannie thought they should be able to.
 
 
Among those who have loudly called for bank prosecutions, the Abacus case is a source of bemusement and frustration. It “is another indication of the absolute failure of prioritization,” says William Black, a lawyer who served as the litigation director of the Federal Home Loan Bank Board in the 1980s and later executive director of the Institute for Fraud Prevention. “This is one of those incredibly unusual cases that would have been so low a priority we would have never prosecuted it.”

“It doesn’t escape notice that the largest institutions and particularly the people within them who drove these mortgage origination securitization programs have not been the people who have been charged,” says Phil Angelides, the former California state treasurer who headed the Financial Crisis Inquiry Commission.

Kaufmann, the onetime head of the Manhattan DA’s investigation division, dismisses the suggestion that he and his colleagues picked out a small bank because it’s an easier target. “What’s the political upside to bringing this prosecution?” he countered, speaking early last October, before he left. The DA’s office, he argues, shouldn’t be held responsible for other prosecutors’ timidity.

According to the Sungs, the bank hasn’t lost customers, though it has had trouble attracting new ones since the indictment was announced. Timothy Wong, the banker turned environmental quality consultant, is an Abacus client, and has no plans to leave. He trusts the Sungs. “I know them,” he says.

Today, Chinese immigrants have many more banking options than they did in 1984. Giants like Bank of America and HSBC (HBC) have locations in Chinese neighborhoods. Hua Long Zou, a 54-year-old contractor, borrowed $819,000 in late 2006 from a Chase branch in Flushing, Queens, to buy a two-family house there. Then, during the recession, construction business dried up and he had trouble making his payments. “I just didn’t have the income,” he says in Mandarin, through an interpreter. Fortunately for him, he didn’t lose the house; with the help of a debt consultant, he’s managed to cut his interest payment by two-thirds.

Chase hadn’t been Zou’s first choice of a lender, though. He’d gone to four different Asian-American community banks, including Abacus. All of them turned him down. They hadn’t wanted to take the risk.

Bennett_190
Bennett is a staff writer for Bloomberg Businessweek in New York.

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