the credit crunch: what’s crime got to do with it?
TRANSCRIPT
The Credit Crunch: The Credit Crunch: What’s Crime Got What’s Crime Got
to Do With It?to Do With It?
Singin’ The PL BluesSingin’ The PL Blues
MODERATOR:
• Edward G. Gallagher, Esq., General Counsel, Surety & Fidelity Association of America
PANELISTS:
• Christopher Cavallaro, RPLU, Managing Director, ARC Excess and Surplus, LLC
• Phyllis Chechile, Managing Director, Frank Crystal & Company
• David T. DiBiase, Esq., Managing Partner, Anderson, McPharlin & Conners LLP
• Melissa Mailman Schwartz, Assistant Vice President, Liberty International Underwriters
• John Wallace, MBA, Director, Product Executive, CUNA Mutual Group
AgendaAgenda
• Role of Mortgage Fraud
• Pre-existing Losses
• Potential Insurance Coverage
• Fraud Enabled by the Crisis and New Technologies
• Impact on the Fidelity Market
Role of Mortgage FraudRole of Mortgage Fraud
The Mortgage MeltdownThe Mortgage Meltdown
The SAR Activity Review, May 2006, Financial Crimes Enforcement Network (Fin CEN)
2006 Mortgage Fraud Report “Year in Review”,Federal Bureau of Investigation (FBI)
If we jump from 2006 to today, the signs are still troublesome.
SAR Activity Review, Fin CEN, July 8, 2009
2008 Mortgage Fraud Report “Year in Review”,Federal Bureau of Investigation (FBI)
Mortgage Loan ApplicationsMortgage Loan Applications
Fraud/Forgery Covered Under a Fraud/Forgery Covered Under a Financial Institution Bond?Financial Institution Bond?
Or….????
Bad Lending Practices?Bad Lending Practices?
Loan ApplicationLoan Application
• Inflated, exaggerated or even fabricated income?
• Lies re assets/net worth?
• Untruth re owner occupied intended use?
• Forged signature on application?
• Falsehood re source of down payment?
• False / inflated appraisal?
Mortgage Loan Purchase and Mortgage Loan Purchase and Sale AgreementsSale Agreements
• Generally with recourse
• Reps and warranties include good title no undisclosed liens or claims compliant with HUD notes are “genuine…legal, valid and binding…”
• Buyer’s recourse seller must remedy any defects OR repurchase the loan
Cause and EffectCause and Effect
• RBC Mortgage Company v. National Union Fire Ins Co of Pittsburg, PA., 812 N.E. 2nd 728 (Ill.)
“…RBC losses were derived…from RBC’s breach of the warranty contained in the brokerage agreement. Had there been no contractual liability…for the fraudulent loan packages, RBC would not have incurred monetary losses.
Cause and EffectCause and Effect
• Tri City National Bank v. Federal Insurance Company, 674 NW2nd 728 (Wisc.)
“…the employees were dishonest by permitting financially inappropriate people to obtain mortgages from other entities…the bank initially lost nothing…It was only after the…mortgages defaulted…and the mortgage companies suedTri City that ‘losses’ resulted.”
Cause and EffectCause and Effect
• Ohio Savings Bank v. Progressive Casualty Insurance Co, 521 F.3d 960(8th Cir. 2008)
“A banker’s blanket bond is not intended to ensure (sic) the bank against losses from its normal lending activities….”
Cause and EffectCause and Effect
• Vons Companies v. Federal Insurance Co, 212 F.3d 489 (9th Cir. 2000)
“Direct means direct…”
Pre-existing LossesPre-existing Losses
Madoff Cases by TypeMadoff Cases by Type
5%
5%
3%
9%
3% 4%
19%6%
8%
16%
18%
10%
Malpractice: Banking
Malpractice: Auditing
Malpractice: Fund Manager
Malpractice: Investment Advisor
Securities: Breach of Fiduciary Duties
Securities: Collective Action
Securities: Fraud
Securities: Class Action
Securities: Derivative Action
Insurance Coverage Disputes
Ponzi Scheme
Other
Stanford International Cases by TypeStanford International Cases by Type
29%
26%13%
8%
16%
8%
Securities: Class Action
Securities: Fraud
Securities: Sales Practices
Fraudulent Trade Practices
Malpractice
Other
Potential Insurance CoveragePotential Insurance Coverage
Fraud Enabled by the CrisisFraud Enabled by the Crisisand New Technologiesand New Technologies
Impact on the Fidelity MarketImpact on the Fidelity Market
Financial Institution Fidelity LimitsFinancial Institution Fidelity Limits
QuestionsQuestions&&
AnswersAnswers
Many thanks to …Many thanks to …
• Edward Gallagher
• Christopher Cavallaro
• Phyllis Chechile
• David DiBiase
• Melissa Mailman Schwartz
• John Wallace