Taylor Bean & Whitaker: Old Loans, New Dates, Missing Collateral

In its mortgage funding fraud case, the Securities and Exchange Commission alleged that Taylor Bean & Whitaker’s former chairman sold more than $1.5 billion in fabricated or impaired mortgage assets to Colonial Bank to conceal cash shortages. The bank’s parent reported those assets to investors as high-quality and liquid. If you worked in mortgage funding, collateral operations or accounting, the case turns on records you may recognize: which loans backed an advance, whether they had already been sold, and who changed the information before anyone outside the business saw it.

This page follows TBW’s warehouse funding, the collateral behind Ocala Funding’s commercial paper and the attempted investment meant to unlock federal bailout money. Our page on mortgage-backed securities offering fraud follows loan-quality disclosures and repurchase promises made to investors buying those securities.

How Did TBW’s Mortgage Funding Work?

Taylor Bean & Whitaker originated, acquired, sold and serviced residential mortgages from its base in Ocala, Florida. It depended on financing, primarily from Colonial Bank’s Mortgage Warehouse Lending Division, because it lacked enough capital to fund its own originations. Colonial Bank belonged to Colonial BancGroup, the publicly traded bank holding company headquartered in Montgomery, Alabama.

The Securities and Exchange Commission’s complaint describes the arrangements that were supposed to move mortgages through the business. Under the arrangement called COLB, Colonial Bank purchased interests in individual loans that TBW represented met quality standards and had an eventual buyer committed to purchase them. That buyer’s payment would repay the bank’s advance. TBW also earned servicing fees for collecting borrowers’ payments and passing the money to the investors who owned the mortgages.

Under an Assignment of Trade arrangement, Colonial Bank instead bought an interest in a bundled group of loans pre-certified as mortgage-backed securities. TBW had to supply evidence of a binding commitment from a buyer to purchase the trade within a specified period. Once a trade entered this account, the complaint says, Colonial Bank’s accounting system stopped identifying the individual mortgages inside it. That loss of detail became central to the SEC’s allegations.

How Did the Mortgage Funding Hole Start?

The Securities and Exchange Commission alleged that TBW began covering a cash shortage by overdrawing its warehouse line, then concealing the overdrafts. In early 2002, those overdrafts were approximately $15 million each day. By December 2003, they had reached approximately $150 million on a nearly daily basis.

According to the complaint, TBW’s chairman pressured a Colonial Bank officer to help conceal the shortfall through kiting. Certain debits were held back until the next day’s credits had been entered, changing what the accounts appeared to show. When concealing the overdrafts became more difficult, the chairman allegedly directed TBW to submit nonexistent loans for funding. The complaint identifies those fictitious loans by their internal name, “Plan B.”

Other loans existed but carried problems that the funding reports allegedly concealed. The complaint described loans investors had rejected, aged loans, foreclosed loans and loans already paid in full, with no future payments left to collect. TBW allegedly sold these impaired or exhausted assets to Colonial Bank too. The complaint says the chairman called that group “Crap.”

What Did Colonial Bank Receive on Its Books?

The complaint alleged that fictitious and impaired loans moved into trades that hid their identity and age. Beginning in 2004, the chairman and the Colonial Bank officer allegedly shifted those loans from the individual-loan account into the Assignment of Trade account. The bank’s system could then no longer identify the underlying loans or how old they were.

The complaint describes further changes when those trades failed to sell. Commitment dates were reset and identifying trade numbers changed to make old trades look newly purchased, with purchase commitments that had not yet expired. Other trades already sold to third parties were re-entered and filled with fictitious or impaired loans. In the complaint’s account, we get a new trade number for the same old loans.

By the end of 2007, the complaint alleged, the account held approximately $500 million in completely unsecured Plan B loans and approximately $1 billion in impaired loans. Colonial BancGroup’s financial statements presented the assets as high-quality and carried them at face value. A mortgage-funding employee who knew the underlying loan could see a different asset from the one public investors were being shown.

How the SEC Says Colonial BancGroup’s Public Reports Hid the Loan Problems

The Securities and Exchange Commission alleged that the funding scheme caused Colonial BancGroup to understate its allowance for loan losses and overstate its reported net income. Advances to TBW appeared as assets ready for resale, even when they represented unsecured lending or loans backed by impaired collateral. The bank holding company’s public description of its mortgage warehouse business went the other way. Its January 2009 earnings release, quoted in the complaint, said:

The complaint also alleged that TBW’s chairman signed confirmations sent to BancGroup’s outside auditors, describing the balances as complete and accurate without disclosing the fictitious and impaired loans inside them. The Securities and Exchange Commission’s civil action charged the chairman with fraud and violations involving reporting, accounting records and internal controls. The Justice Department’s account of the criminal indictment also describes an allegation that TBW submitted false financial data to Ginnie Mae to extend its authority to issue mortgage-backed securities.

What Happened to Ocala Funding’s Mortgage Collateral?

Ocala Funding raised investor money to purchase mortgages from TBW, but the Securities and Exchange Commission alleged that its cash was diverted to pay TBW’s other obligations. The complaint describes Ocala Funding as TBW’s wholly owned subsidiary, which raised cash by issuing commercial paper to two institutional investors. Mortgages and the proceeds from mortgage sales were supposed to secure that paper.

The intended cash movement was specific. Ocala Funding bought mortgages that Colonial Bank had financed, and a later purchaser, usually Freddie Mac, bought those mortgages from Ocala Funding. Sale proceeds belonged in the account supporting Ocala Funding’s investors. Every 30 days, the collateral agent was supposed to confirm that the mortgages and cash still covered the outstanding commercial paper before it renewed.

According to the complaint, the chairman instead directed payments from that investor account to TBW’s operating accounts to pay unrelated debts to Colonial Bank or other creditors. Falsified collateral lists concealed the diversion. Many listed loans had already been sold to Freddie Mac, while Colonial Bank’s records continued to show ownership of many of the same loans. In that account, the loan had been sold. The ownership stayed on the books.

The Justice Department’s account of the criminal indictment and other court filings describes the resulting shortfall separately. Those filings alleged that, around August 2009, Deutsche Bank and BNP Paribas held approximately $1.68 billion in Ocala Funding commercial paper backed by only approximately $150 million in cash and mortgage loans. They alleged that false collateral information led the investors to believe their paper was sufficiently secured. When TBW failed, the banks could not redeem it for full value.

The Justice Department’s account says Alabama’s banking regulator seized Colonial Bank in August 2009 and that Colonial BancGroup filed for bankruptcy that month. The Securities and Exchange Commission’s announcement says TBW also filed for bankruptcy in August 2009.

How Did the TARP Investment Story Reach Investors?

The Securities and Exchange Commission alleged that TBW’s chairman promised an equity investment that Colonial Bank needed to qualify for the Treasury’s Troubled Asset Relief Program. In December 2008, Colonial BancGroup announced preliminary approval for $550 million in TARP funds. Its stock rose 54% in the remaining two hours of trading. The bank later disclosed that receiving the federal money depended on raising $300 million in equity.

The complaint alleges that the chairman offered to assemble the investment group while falsely claiming that an investment bank would finance TBW’s contribution. That bank had never committed to do so. The stock purchase agreement also named other supposed investors who had never agreed to participate. The commitments on paper were doing work that committed money should have done.

The alleged escrow maneuver tied this story back to the missing mortgage collateral. Under an internal effort called “Project Squirrel,” money was to be diverted from the Ocala investor account into the capital-infusion escrow account. The complaint alleged that TBW supplied an escrow summary falsely showing deposits by investors who had neither agreed to invest nor made those deposits. The supposed new investors’ deposits, the complaint alleged, were to come from the old investors’ collateral.

The complaint reports that Colonial BancGroup’s stock declined 20% on the day the companies announced termination of the investment agreement. The Justice Department’s account of the criminal indictment says Colonial BancGroup ultimately received no TARP funds.

Which Records Show Mortgage Warehouse Funding Fraud?

For mortgage funding fraud, useful evidence connects the claimed collateral with the actual loan, its ownership, its eligibility and the money advanced against it. The TBW allegations show why a loan-level file, warehouse report and collateral certification can describe the same mortgage differently. Our work on securities fraud evidence connects those records to the instructions and decisions behind the discrepancy.

A funding employee may know that a purported buyer never committed, that an investor rejected a loan, or that a mortgage had already been sold or pledged elsewhere. A collateral employee may know why a loan remained on a list after its sale. An accounting employee may understand why an aging trade received a new number or why an audit confirmation omitted the problem. We connect that knowledge with the funding movements and the statements made to the bank, investors or auditors.

The same comparison reaches a claimed capital investment. An email promising financing, the agreement naming investors, the escrow summary and the source of the deposit can tell different stories about the money. The useful connection is who knew the difference and who approved the representation that went outside the business.

If you are considering reporting securities fraud to the SEC, speak with our whistleblower experts about the connection between the funding records and what investors were told. If your information also concerns false claims against government money, we assess that separate issue. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

TierOne’s Stale Appraisals and Alleged Hidden Losses

In a separate case involving TierOne Bank, the SEC alleged that executives used stale collateral appraisals to suppress loan losses. New appraisals led to over $130 million in additional losses. The appraisals were old. The losses were not.

At TBW, the complaint alleged changes to loan identities, trade dates and ownership representations. In the TierOne allegations, management relied on outdated information about collateral value. Both turn on what the business knew about the asset against what it told others.

You Know Which Loans Were Really Available

If you know why a mortgage stayed on a collateral list after it was sold, or where the money behind a supposed investment actually came from, speak with our whistleblower experts about the funding you saw. We build your case around the loan records, cash movements and decisions you can explain, and bring in securities fraud whistleblower lawyers who understand mortgage funding and bank disclosures. We stay with you from the first conversation, working toward your strongest securities fraud whistleblower case.