Conference 7.286::dcu

601.0. "Cape Cod Times, Aug 27, 1992" by PLOUGH::KINZELMAN (Paul Kinzelman) Thu Sep 10 1992 15:56

		Credit Union Warning Ignored
		Inexperience by regulators cited

		By SUSAN MILTON
		STAFF WRITER, Cape Cod Times
		Thursday, Aug 27, 1992

HYANNIS - In 1987,federal examiners of the Barnstable Community
Federal Credit Union were warned that something unusual, possibly
illegal, was going on.

But not until late 1990, when a Mashpee borrower's complaint was
heeded, was a serious investigation started. In June 1991, the failing
credit union was shut down by the National Credit Union
Administration.

The four-year delay turned out to be expensive.

The NCUA is suing flve credit union insiders for allegedly draining
$47 million in fake loans. The civil suit is pending in U.S. District
Court. A parallel grand jury is investigating possible crimes, but no
indictments have yet been issued.

In their defense, most of the accused lenders have argued that, if
they were doing something wrong, the federal regulators should have
known it.

The federal agency does not have a case, defendant Michael O'Neil
stated, because its negligence is greater than his.

The agency's performance, in part, reveals its inexperience in
supervising real estate lending. It also shows there were inadequate
examinations by untrained personnel of the sophisticated fraud
allegedly involved in Hyannis.

Such factors are described in interviews with credit union leaders
after last years takeover, in interviews with borrowers during
investigations this year, and in court records filed Friday in the
civil suit.

"What may be very obvious in hindsight often isn't as obvious early
on," Layne Bumgardner, NCUA regional director, said after taking over
the credit union in March 1991. "I'm not going to justify the past.
I'm not sure that would help. We have to deal with now."

Facing charges of fraud are O'Neil, former Barnstable town councilor
and Hyannis lawyer; Barnstable developer James K.  Smith; Richard
Mangone of Norwell, an accountant and credit union administrator; and
Robert Cohen of Newton, a Wellesley lawyer. Bruce Harris, another
credit union insider now living in California was charged later.

The five men allegedly hid their activity from federal and private
examiners by faking loan documentation and using "straw" or stand-in
borrowers in real estate trusts, the suit claims.

The same insiders and loans were described in 1987 by the Cape Cod
Times in a published article and in meetings of Times reporters with
NCUA examiners. The Times investigation showed that:

-Publicly recorded mortgages and deeds showed that 62 percent of the
credit union's mortgages were obtained by only 30 borrowers. They were
either past or present officers of the credit union, their relatives,
friends or known business associates.

-Smith, O'Neil and other insiders were benefiting from their credit
union posts through fees paid to them for work as builders, landlords,
appraisers or lawyers.

At the time, two examiners checked some loan files but, in general,
said such lending behavior was unusual but not illegal. They said they
had not known about the relationships between the lenders and
borrowers or how real estate trusts worked.

A later warning, however, brought a closer look by regulators.

On Nov. 23, 1990, Richard P. Fernandes complained that he had a
construction loan instead of a promised mortgage on his 2-year old
house in the Winslow Farms subdivision in Mashpee.

Fernandes told NCUA examiners Dec. 14 that a Smith employee had filled
out his loan application and that the sale of the lot, owned by Smith,
was handled through Smith's Sands Real Estate Co.

He told them he did not pay $139,900, as shown on closing documents,
for the unfinished house, but only $105,500, the same amount as his
mortgage. He applied for a fixed-rate, long-term mortgage, not the
temporary construction loan on which he learned he was making interest
only payments every month. And since 1988, the note had been extended
or rolled over twice without his permission.

Bumgardner has not identified who or what sparked the federal agency's
sudden and expanded investigation late in 1990. But in March 1991,
Bumgardner said, "The smoking gun is when you have somebody come
forward and say, 'we didn't get a loan.' It came out of the examiners'
review when they talked to some of the borrowers about their loans."

The Hyannis credit union already had drawn more regulatory attention
in mid-1990 because of its increasing foreclosures. By November 1990,
as Fernandes was complaining, the federal agency was trying to brake
the union's construction lending.

Examiners presented surprised board members with a four-to-five page
list of delinquent loans.

"There was never any indication that there was a problem. In 1989, we
got a raving review," testified John Kenney, a credit union director,
in a recently filed court deposition.  "The following year, we were a
bunch of idiots in the eye of the NCUA."

Given the drop in real estate values in the developing recession, the
examiners also asked for new appraisals on all major loans, said
former credit union manager Lynn Vasapolle in her affadavit.

That was a problem because, she said "We knew if we hired someone we
could not trust, it would come out that the original appraisals by
Paul Brown (of Centerville) were inflated at the outset."

So the group of insiders hired Stanley Nowak whose Centerville real
estate office was next to Harris's office. Ms. Vasapolle gave Brown's
old appraisals to Nowak and instructed him to reduce the values by
certain levels, from 10 percent to 30 percent.

Eventually, Bumgardner said, "the issue of fraud came out of the same
questions (the Cape Cod Times) was asking. When we did the same kind
of work (the newspaper) had done, looking through registry records, it
became exceedingly clear we had a limited number of people involved in
illegal transactions."

Defendants such as Harris are arguing that the agency knew or should
have known what the credit union was doing. Also, Harris stated NCUA
could have known if it simply had inquired about the facts that he
supposedly misrepresented in his loans. Instead the agency repeatedly
examined and praised the credit union's performance.

The real problem, according to Bumgardner, is that the credit union's
routine examinations monitor a lender's procedures, overall well-being
and business affairs. They normally don't check those files with
actual deeds or mortgages recorded at the public registry. Nor do they
look at what was actually built.

After the credit union's takeover, federal investigators were seen
standing in open sunroofs of cars driving down subdivision streets and
videotaping lots and houses. It was a reality check since the credit
union's files showed construction loans spent to build houses on
still-empty lots.

In partial explanation, Bumgardner said that in the mid-1980s credit
unions were just getting into real estate lending and regulators were
just starting to clamp down on such business and commercial loans.

The credit union's auditor, the Boston offioe of Peat Marwick also
never found problems in its annual audits. It would ask selected
borrowers to verify loan information. It was such a check that first
alerted Fernandes, who disputed first the amount owed and then the
status of his mortgage.

The real estate boom also helped to conceal the allegedly illegal
lending, Bumgardner said, adding "If the market hadn't turned
(downward), it still would have been difficult to see."

Another complicating factor, he said was that the alleged insiders
knew what examiners and auditors would check in the loan file.

"There was a clear and conscious effort on the part of people
operating the fraud to cover their tracks," Bumgardner said. "They
had an accountant, lawyers, appraisers and a person in the
construction trades who knew the market and the locale better than
even we do. This one had some very good computer systems supporting it
and did a good job of closing the ring (involving few people)."

Could such an alleged fraud happen again?

In June 1991, Bumgardner said no, given changes in training,
experience and audits that came out of loan problerns in the
Southwest, Alaska and now in Massachusetts.

We've spent thousands of hours in training on the job to make certain
that examiners are ready to look at real estate loans. We've also
learned how to take information out of mainframe computers onto
personal computers and manipulate that data so you can look at
transactions by name, by date."

Bumgardner said such computer examination "was significant in gaining
an understanding in learning what's going on. It is a very powerful
tool because you can manipulate large mountains of data and start to
see trends, improper transactions, and unusual circumstances."

Such an analysis was part of the Hyannis investigation, as shown by
testimony that described the tracking of loan money into bank accounts
controlled by the credit union insiders.

>In their defense, most of the accused lenders have argued that, if
>they were doing something wrong, the federal regulators should have
>known it.

    In other words, you didn't catch me right a way so you should let
    me get away with it? After all how should someone know that lying
    to get a loan based on false valuation is wrong if the government
    doesn't say so on each and every transaction? The chutzpah of these
    people.

    			Alfred

re:  .1

Unfortunately, we shouldn't laugh.  Their defense may, in fact, hold
water and let them at least partially off the hook.  Wouldn't that
be special?

./chris

Well, if they get off the hook with the NCUA by stating in court that
they did illegal things that the NCUA should have caught, then how are
they going to get off the hook of the DCU suit?  Or the bonding company's
suit?  Or of lawsuits by the straw borrowers that went bankrupt because
of doing what their boss said?  Or of the hoped for criminal indictments?
So far they've been careful to say "IF we did anything wrong", but I
don't see how that can stand up under cross examination.  

The parts I love the best are:  "Harris stated NCUA could have known if 
it simply had inquired about the facts that he supposedly misrepresented
in his loans" and (after the examiners asked for reappraisals) "`We knew
if we hired someone we could not trust, it would come out that the original 
appraisals by Paul Brown (of Centerville) were inflated at the outset.'"
It sounds like an admission of fraudulent appraisals to me!  

	Larry