President-elect Donald Trump’s selection to lead the Treasury Department, Steven Mnuchin, allegedly oversaw illegal activity in his previous role as CEO of mortgage lender OneWest. During Mnuchin’s term in leadership, the bank broke California law as it rushed to complete foreclosures and kick people out of their homes, according to a memo written by top prosecutors in the state attorney general’s office. The Intercept first obtained the memo.
OneWest began operating on March 19, 2009 after Mnuchin and other investors bought the assets of failed mortgage lender IndyMac and turned them into the new bank. OneWest eventually owned tens of thousands of troubled mortgages in California, according to the memo.
Many of the loans were Option Adjustable Rate Mortgages, which allowed borrowers to make minimum payments that didn’t cover the interest accrued each month. That extra interest would get added to the principal balance, eventually ballooning monthly payment amounts to a sum the borrower couldn’t afford. That landed them in the foreclosure process.
Between 2009 and 2013, OneWest foreclosed on approximately 36,000 homes while initiating about 45,000 more foreclosures.
While the investigation by the California attorney general office’s Consumer Law Section was limited — it can’t subpoena national banks before filing a lawsuit and OneWest allegedly obstructed the investigation by telling third parties not to comply with subpoenas — it still uncovered evidence that OneWest broke California foreclosure law.
According to the law, if a homeowner falls behind on payments and can’t work out a solution with the bank, the mortgage lender files a notice of default that gives the homeowner 90 days to either repay what he owes or lose his home in an auction. After that time period, the loan’s trustee, a third party designated by a lender to handle a sale in the case of foreclosure, can record a notice of sale that sets an auction date at least 21 days later.
But the memo describes findings that the bank illegally backdated documents to speed up the foreclosure process, made false statements about the process of transferring trustees for its mortgages, and made credit bids at foreclosure auctions that it didn’t have the authority to make but that froze out other bidders and allowed it to avoid taxes.
In a review of documents the department obtained from Quality Loan Service, a third party the bank worked with, nearly all of the documents—99.56 percent—were backdated. Of 300 files it obtained from Lender Processing Services, another third party, that covered counties throughout the state, 7 percent had false dates, false statements made about the process of substituting the trustee, or both.
“[T]his backdating is important not only because it resulted in false instruments being recorded with county recorders, but also because it meant that the associated foreclosures moved more rapidly toward completion,” the memo notes. That means both that OneWest may have lied to government representatives while rapidly and improperly pushing homeowners out of their homes.
The practice went so far as putting dates on documents that were before OneWest even began operating in March 2009, some of them as far back as a year earlier. The memo notes that “it would have been impossible for OneWest to sign the instruments before it became an operational bank.”
Without the discovery process of an actual prosecution, investigators couldn’t know for sure why documents were backdated. But the memo theorizes that the practice was implemented to cover up misrepresentations about following the proper timelines. Actually correcting these errors, on the other hand, would have required the bank to reissue a notice of default and restart the 90-day clock on the foreclosure process.
In publicly filed documents in two different counties, investigators also found “substantial numbers” of unlawful credit bids and unlawful substitutions of trustee. At a foreclosure auction, only the current owner of the mortgage can make a bid in credit instead of cash or check at the start of the auction. In the documents, OneWest made or told others to make these credit bids without being the owner of the loan, then went back afterward and assigned itself ownership. Investigators also found that OneWest listed trustees on documents before going through the formal process of transferring the trusteeship and then backdated documents to make it look like it had followed procedure.
The memo projected from what it found in those documents that 16 percent of completed foreclosures had these types of violations.
The documents had other basic violations. One was unsigned but was still recorded. Eight others weren’t dated. And the memo notes that all of its findings were preliminary. “The review is resource intensive, and we still have 38 months worth of data to review,” it says.
Given all of the evidence it uncovered, the Consumer Law Section requested the authority from the attorney general, at the time Sen. Kamala Harris (D-CA), to file a civil enforcement action against OneWest, hoping that it would get relief for homeowners and hold the bank accountable. While it gave such an action a moderate chance of success given that it would have been the first of its kind in the state and it “raises complex legal and factual issues,” the memo still makes the case that it was worth it. “We believe that there is substantial public justice value in fully investigating OneWest’s conduct through the use of civil discovery and holding it publicly accountable,” it states, “even if sizable penalties and restitution are not awarded.”
But two months later, without providing an explanation, Harris’s office told the Consumer Law Section that it wouldn’t move forward.
In response to a request for comment from ThinkProgress, a spokesman for CIT Bank, which now owns OneWest, said, “CIT complies with all applicable laws and regulations, including California’s foreclosure process and all applicable servicing guidelines, and has implemented enhancements that strengthen the overall operations and controls at OneWest Bank.” Representatives for Sen. Harris, California’s attorney general office, and the Trump transition team did not respond to requests for comment.
The investigation was prompted by previous misconduct at the bank. In 2011, OneWest agreed to enter into a consent order with the Office of Thrift Supervision over findings that it didn’t properly notarize documents, initiated foreclosures without proper documentation, didn’t have proper oversight and administration resources in the foreclosure process, and didn’t properly oversee third-party vendors handling foreclosures.
There have been other complaints against Mnuchin’s bank as well. The California Reinvestment Coalition has called it a “foreclosure machine,” particularly for the high number of foreclosures on reverse mortgages, usually made to elderly homeowners who borrow against their home’s equity. It made up nearly 40 percent of foreclosures on reverse mortgages since 2009 despite serving just 17 percent of the market. That unit is under investigation by the Department of Housing and Urban Development’s (HUD) Office of Inspector General.
The California Reinvestment Coalition also recently filed a complaint with HUD accusing the bank of redlining. It alleges that the bank gives very few mortgages to people of color — according to its data, none of OneWest’s loans in Los Angeles in 2012 and 2013 went to black borrowers — fails to put branches in communities of color, and neglects foreclosed homes in neighborhoods of color more often than white ones.