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Details Emerge of New Financial Fraud Unit

Financial Crimes Unit

First Posted: 01/26/2012 5:56 pm Updated: 01/30/2012 10:41 pm

The new financial crimes unit announced by President Barack Obama during Tuesday's State of the Union address will have the power to investigate mortgage fraud going back at least 10 years, according to senior officials at the Department of Justice.

The new unit, however, could jeopardize the negotiations now taking place between five of the country's largest banks, the states' attorneys general and the Obama administration over mortgage fraud and wrongful foreclosures, some observers say.

In a conference call with reporters on Thursday afternoon, senior officials at the Department of Justice fleshed out details of the new unit. The new unit will focus on both the origination and securitization (or packaging) of mortgage loans. The unit will also investigate loans that were sold to, and insured by, government agencies, said Justice Department officials.

The new unit "has a pretty good chance of derailing it," JPMorgan Chase CEO Jamie Dimon told CNBC on Thursday, referring to the settlement. JPMorgan is one of the five banks involved in those negotiations. It is likely that under the settlement investigators could pursue cases only from as early as January 2008, said a source close to the negotiations who is prohibited from speaking on the record.

The banks are interested in the settlement because it will protect them from future liability, according to one industry insider who agreed to speak on the condition of anonymity. If they agree to spend $25 billion to guarantee such protection, then find themselves facing the exact same cases with the new investigative unit, they no longer have an incentive to bother with the settlement.

Senior officials at the Department of Justice were quick to emphasize that the fate of the settlement talks is unrelated to the new unit. "We have certainly heard criticisms that the settlement would give immunity for all [the mortgage-related misconduct], but that's simply not true ...This [unit] is addressing a very different problem than the servicing settlement," said one official.

Some view the new unit as a response to the growing criticism that the Obama administration has yet to seriously pursue the big banks and high-level executives responsible for the housing crash that led to the worst financial crisis since the Depression. "This new unit will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans," Obama said on Tuesday.

The investigators will consider a variety of cases, including false statements, mail and wire fraud, and failure to comply with the Financial Institutions Reform, Recovery and Enforcement Act of 1989, established in the wake of the savings and loan crisis. This law empowers investigators to examine wrongdoings going back a decade. Many other mortgage-related laws have statutes of limitations for less than half as long.

Already the new unit has 15 attorneys and 10 investigators, including FBI agents. Once fully staffed, it will employ roughly 55 people, in addition to the five co-chairs, and include a mix of new hires and existing personnel from participating agencies, including the Treasury Department, Consumer Financial Protection Bureau, Internal Revenue Service, Department of Housing and Urban Development and Federal Housing Administration as well as the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. A "significant portion" of the unit will be based in Washington, D.C., though officials anticipate expanding to "at least three or four U.S. attorney offices," as the cases unfold, said a Justice Department official.

The new unit's co-chairs had their first call Wednesday and included staff from the office of Delaware Attorney General Beau Biden, who has resisted signing on to a settlement deal. The unit is funded through "existing resources," according to the Justice Department officials and is part of the larger Financial Fraud Enforcement Task Force established in 2009 to investigate the roots of the 2008 financial crisis.

With representatives from more than 20 federal agencies and 94 U.S. attorneys offices, the 2009 task force has disappointed critics who argue that it has chosen to pursue relatively small fraudsters while leaving alone the major offenders, including the CEOs of banks that wrongfully foreclosed on struggling homeowners.

Eric Schneiderman, the New York attorney general, is one of the new unit's five co-chairs. He gained prominence last year with his repeated assertions that the pending deal between the administration and the five banks would be too soft on the Wall Street behemoths, which are accused of falsifying mortgage documents and inappropriately denying loan modifications to needy homeowners. Specifically, Schneiderman has said he is worried that states would be required to drop potential legal battles against the banks in exchange for securing $25 billion in assistance for struggling homeowners.


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