Com­pli­ance & Reg­u­la­tion

A new doc­u­men­tary that re­cently aired on PBS raises ques­tions about why pros­e­cu­tors tar­geted a small bank af­ter the fi­nan­cial cri­sis and left big­ger in­sti­tu­tions un­touched.

National Mortgage News - - Front Page - BY PENNY CROSMAN

SINCE THE FI­NAN­CIAL CRI­SIS HAS ended, the pub­lic has strug­gled to make sense of why big-bank CEOs weren’t pur­sued for their role in orig­i­nat­ing and sell­ing faulty mort­gages on a mas­sive scale.

A new PBS “Front­line” doc­u­men­tary that aired last month, “Aba­cus: Small Enough to Jail,” may reignite those ques­tions. It tells the story of Thomas Sung, a Chi­nese im­mi­grant and at­tor­ney who started a bank in Chi­na­town that be­came the only U.S. bank in­dicted for mort­gage fraud re­lated to the 2008 cri­sis.

The doc­u­men­tary raises the ques­tion of why New York of­fi­cials de­voted five years to pros­e­cut­ing the $300 mil­lion-as­set Aba­cus Fed­eral Sav­ings Bank for 30 mort­gages with al­leged fake doc­u­men­ta­tion, but didn’t go af­ter the many large banks that orig­i­nated thou­sands of fraud­u­lent home loans.

“There was this no­tion that we couldn’t bring crim­i­nal ac­tion against them be­cause the col­lat­eral con­se­quences of an in­sti­tu­tion that was so large, so in­ter­na­tion­ally con­nected, that in­dict­ing them or bring­ing crim­i­nal charges against them could wreck the en­tire fi­nan­cial sys­tem,” Neil Barof­sky, for­mer head of mort­gage fraud at the U.S. At­tor­ney’s Of­fice in New York, says in the pro­gram.

The pro­gram is sym­pa­thetic to Sung and his three daugh­ters, who work at the bank and fought the case along­side him. Sung is shown watch­ing “It’s a Won­der­ful Life” with his wife, speak­ing of the movie’s hero, small-town banker Ge­orge Bai­ley, as an in­spi­ra­tion, and strate­giz­ing with his daugh­ters. The cam­eras fre­quently cut to scenes of street life in Chi­na­town.

Even so, the doc­u­men­tary takes a deep dive into the charges brought against the bank and in­ter­views Cyrus Vance, the New

York dis­trict at­tor­ney, and col­leagues who worked on the case. It also fea­tures a ju­ror in the trial who thought the bank should have been found guilty.

THE CASE AGAINST ABA­CUS

The DA’s of­fice charged that the bank de­frauded Fan­nie Mae by sub­mit­ting mort­gages with fraud­u­lent doc­u­ments.

In De­cem­ber 2009, the bank’s pres­i­dent, Jill Sung, caught a loan of­fi­cer, Ken Yu, ac­cept­ing a “tip” from a cus­tomer and com­mit­ting fraud. She fired him the same day and hired an out­side con­sul­tant, a for­mer fed­eral pros­e­cu­tor, to in­ves­ti­gate.

The in­ves­ti­ga­tion un­cov­ered mis­con­duct of two other loan of­fi­cers. “Noth­ing at the level of Ken Yu, but we fired them nonethe­less,” Jill Sung says in the pro­gram.

The bank’s man­age­ment also re­ported the find­ing to Aba­cus’ reg­u­la­tor at the time, the Of­fice of Thrift Su­per­vi­sion. A bor­rower com­plained about stolen money. The bank sug­gested she file a com­plaint with the po­lice.

The dis­trict at­tor­ney in­ves­ti­gated the case and found ir­reg­u­lar­i­ties in the bank’s loans. For in­stance, some loans were backed with “gifts” that turned out to be a bor­rower hand­ing a loan of­fi­cer $9,000 in cash and the loan of­fi­cer writ­ing a check for the amount and us­ing it to back the loan. (Many Chi­na­town busi­nesses are cash­based and do not re­port all their earn­ings to the IRS. The bank saw its role as a provider of credit, not as an en­forcer for the IRS.)

The DA’s of­fice de­ter­mined that the loan of­fice was thor­oughly cor­rupt, and saw the bank as legally re­spon­si­ble.

It in­dicted 19 em­ploy­ees of the bank and staged a chain-gang-style photo op for New York jour­nal­ists, with the em­ploy­ees all hand­cuffed to each other and pa­raded to the court­room in front of pho­tog­ra­phers. The an­nounce­ment led to a run on the bank and cus­tomers with­drew $44 mil­lion, putting the bank into a liq­uid­ity cri­sis.

Thomas Sung ap­proached cus­tomers on the line, shook their hands and said, “I’m here.” The run sub­sided. Peo­ple came back and de­posited money. Aba­cus fought the in­dict­ment in court.

FIVE YEARS AND $10M LATER

The DA’s of­fice made Ken Yu its star wit­ness. The doc­u­men­tary makes the case that Yu re­peat­edly per­jured him­self on the stand, chang­ing his story and con­tra­dict­ing him­self. The jury strug­gled to un­der­stand how much bank man­age­ment knew about the fraud.

Dur­ing the five-year pe­riod of the al­leged fraud, Aba­cus sold 3,000 mort­gages to Fan­nie Mae. A to­tal of nine de­faulted.

All the loans cited in the case con­tinue to per­form or have been paid off.

In the end, af­ter a five-year in­ves­ti­ga­tion and a lengthy trial, the jury ac­quit­ted the bank and its man­agers. Ken Yu served six months in jail.

The lit­i­ga­tion cost the bank about $ 10 mil­lion.

Asked if the case against Aba­cus might have been racially mo­ti­vated, Vance says in the show, “I felt that our han­dling of the bank was con­sis­tent with how we would have han­dled the bank if we were in­ves­ti­gat­ing a bank that ser­viced a South Amer­i­can com­mu­nity or the In­dian com­mu­nity.”

The case mat­ters be­cause what hap­pened to Aba­cus con­tin­ues. Small, weak tar­gets get hand­cuffed and jailed.

Large banks com­mit wrong­do­ing on a huge scale and may get fined, but their ex­ec­u­tives of­ten go un­pun­ished, no mat­ter how se­vere the crimes or how nu­mer­ous the vic­tims.

THOMAS SUNG

Aba­cus Fed­eral Sav­ings Bank

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