Case NOT filed despite strong recommendations. State of California Memorandum From Subject Frances T. Grunder Senior Assistant Attorney General Benjamin G. Diehl Nickles A. Akers Supervising Deputy Attomeys General Nicholas G. Campins Angela M. Mu?oz Todd 1. Espinosa Susan M. Saylor Deputy Attorneys General Consumer Law Section Of?ce of the Attorney General San Francisco Please see the attached Executive Summary. Department of Justice 455 Golden Gate Avenue, Suite 11000 San Francisco, California 94102 Date: January 18, 2013 Telephone: (415) 703-5733 Facsimile: (415) 703-5480 Executive Summary - Request for Authorization to File Action against OneWest Bank, FSB One West Investigation (SF2012105513) January 18, 2012 Page 2 Executive Summary The Consumer Law Section requests authority to ?le a civil enforcement action against OneWest Bank, FSB. Because the limitations period for some of the claims will end on March 19, we request a decision by March 5. Headquartered in Pasadena, OneWest began operations on March 19, 2009 with its acquisition of most of IndyMac?s assets ?orn the FDIC. Shortly thereafter, OneWest acquired the assets of two smaller banks: First Federal Bank of California, FSB and La Jolla Bank, FSB. As part of the acquisitions, OneWest obtained the servicing and/or bene?cial rights to tens of thousands of troubled loans throughout California. Many of the loans were Option Adjustable Rate Mortgages whose rates became unaffordable for the borrowers, who were subsequently pulled into the foreclosure process. Since March 2009, OneWest has foreclosed on approximately 35,000 California homes and initiated foreclosures on approximately 45,000 more. In April 2011, OneWest agreed to the Of?ce of Thrift Supervision?s (OTS) entry of a Consent Order. The Order included ?ndings that OneWest recorded documents that were not properly notarized, initiated non-judicial foreclosures without proper authority, failed to devote suf?cient resources to ensure proper administration and oversight of its foreclosure processes, and failed to suf?ciently oversee vendors. The misconduct ?ndings, together with consumer complaints and the large volume of foreclosures conducted by OneWest, prompted our investigation. The investigation was hampered by our inability to subpoena OneWest, by OneWest?s obstruction of our related LPS investigation, and by our apprehension that OneWest would ?le a declaratory relief action against us if we aggressively sought to obtain evidence ?'om third parties. We were therefore limited to publicly recorded land records, a few hundred incomplete OneWest loan ?les obtained from LPS before OneWest objected, and documents we were able to obtain ?'orn foreclosure trustees used by OneWest. Despite the limitations on the investigation, we uncovered evidence suggestive of widespread misconduct, including evidence that OneWest: (I) signed backdated and false instruments, acknowledged them to notaries, and then caused them to be recorded with county recorders throughout the State; (2) made and directed unlawful credit bids at trustee?s sales which resulted in the wrong parties winning auctions and the unlaw?il evasion of documentary transfer tax obligations; (3) performed other acts in the foreclosure process without valid legal authority; and (4) failed to comply with requirements related to the execution, timing, and mailing of foreclosure documents. We therefore recommend that the Attomey General authorize the ?ling of a civil enforcement action against OneWest. SF2012105513 40643961 .docx State of California Department of Justice 455 Golden Gate Avenue, Suite 11000 San Francisco, CA 94102-11004 Memorandum To Frances T. Grunder Date: January 18, 2013 Semor Assmtant Attomey General Telephone: mswomm (mm) E-mail: Benjamin G. Diehl . WM A. Akers Wm Supervising Deputy Attorneys General From Nicholas G. Campins Angela M. Mu?oz Todd 1. Espinosa Susan M. Saylor Deputy Attorneys General Consumer Law Section Of?ce of the Attorney General San Francisco Subject Request for Authorization to File Action against OneWest Bank, West Investigation (SF2012105513) REQUESTED ACTION The Consumer Law Section requests authority to ?le a civil enforcement action against OneWest Bank, SB. An annotated COpy of the draft complaint is attached as Exhibit A. Because the limitations period for some of the claims will end on March 19, we request a decision by March 5. OVERVIEW What Prompted the Investigation: Headquartered in Pasadena, OneWest began Operations on March 19, 2009 with its acquisition of most of IndyMac?s assets ?'om the FDIC.1 Shortly thereafter, OneWest acquired the assets of two smaller banks: First Federal Bank of California, FSB (December 2009) and La Jolla Bank, FSB (February 2010).2 1 Detailed documentation concerning the IndyMac Acquisition is available at (as of November 20, 2012). For information concerning the deal terms and bid terms, see (as of November 20, 2012); bid (as of November 20, 2012); and (as of November 20, 2012). 2 Detailed documentation concerning the First Federal Bank of California, SB and La Jolla Bank, FSB failures, and their sale to OneWest are available at: January 18, 2013 Page 2 As part of the acquisitions, OneWest obtained the servicing and/or bene?cial rights to tens of thousands of troubled loans throughout California. For example, Option Adjustable Rate Mortgages (ARMS) made up 75 percent of IndyMac?s home loans ?'om 2004 to 2006.3 Option ARMS allowed borrowers the option of making a minimum payment, an interest-only payment, or a payment of the interest and some of the principal balance. In 2006, 75 percent of IndyMac?s Option ARM borrowers made only the minimum payment.4 Because the minimum payment did not cover the interest for the month, negative amortization occurred the difference between the interest charged for the month and the payment was added to the principal balance). After a few years the payment ballooned substantially and became unaffordable. When the homeowners could no longer make their payments, the loans entered the foreclosure process. Since March 2009, OneWest has foreclosed on approximately 35,000 California homes and initiated foreclosures on approximately 45,000 more. On April 13, 2011, OneWest executed a Stipulation and Consent to the Issuance of a Consent Order with the Of?ce of Thrift Supervision (OTS). The Order included ?ndings that OneWest (I) ?led or caused to be ?led in state and federal courts, or in local land records of?ces, numerous af?davits or other mortgage?related instruments that were not properly notarized; (2) initiated non-judicial foreclosure proceedings without always ensuring that the promissory note and mortgage document were properly endorsed or assigned; (3) failed to devote suf?cient ?nancial, staf?ng and managerial resources to ensure proper administration of its foreclosure processes; (4) failed to devote to its foreclosure processes adequate oversight, internal controls, policies, and procedures, compliance risk management, internal audit, third-party management, and training; and (5) failed suf?ciently to oversee outside counsel and other third-party providers handling foreclosure-related services. The misconduct ?ndings, together with the tens of thousands of foreclosures conducted by OneWest, prompted our investigation. The goal of this investigation is to determine whether the misconduct described in the OTS ?ndings extended to California. (as of November 20, 2012) and (as of November 20, 2012). 3 See, United States Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Majority and Mino?ty Staff Report, Wall Street and The Financial Crisis: Anatomy Of A Financial Collapse (April 13, 2011) 8b-a5ba-05efe2b22f?7 1> (as of November 20, 2012). 4 United States Senate Permanent on Investigations, Committee on Homeland Security and Governmental Affairs, Majority and Minority Staff Report, Wall Street and The Financial Crisis: Anatomy Of A Financial Collapse, supra, at pages 233-234. January 18, 2013 Page 3 Limitations on the Investigation: The investigation was hampered by our inability to subpoena OneWest,5 by OneWest?s obstruction of the LPS investigation (outlined more fully beginning on page 10), and by our apprehension that OneWest would ?le a declaratory relief action against us if we aggressively sought to obtain evidence from third parties.?3 We were therefore limited to publicly recorded land records, a few hundred incomplete OneWest loan ?les obtained from LPS before OneWest objected, and documents we were able to obtain from foreclosure trustees used by OneWest. The Misconduct: Despite the limitations on the investigation, we uncovered documented evidence of wrongdoing suggestive of wideSpread misconduct, including substantial evidence that OneWest: (I) signed backdated and false instruments, acknowledged them to notaries, and then caused them to be recorded with county recorders throughout the State; (2) made and directed unlawful credit bids at trustees? sales which resulted in the wrong parties winning auctions and the unlawful evasion of documentary transfer tax obligations; (3) performed other acts in the foreclosure process without valid legal authority; and (4) failed to comply with requirements related to the execution, timing, and mailing of foreclosure notices and instruments. For example, our review of draft and executed OneWest instruments obtained ?'om Quality Loan Service suggests that many instruments executed and notarized by OneWest?s employees and then recorded with county recorders are backdated. 7 The results of the review to date are summarized in Table 1: Table 1. Ongoing Quality Loan Servicing Review of Backdated Documents (BD) BD 7 BD 7 Total Total Days or Days or Notary Notary Review Month Reviewed BD BD More More BD BD Status Jun-09 640 637 99.53% 67 10.47% 40 6.25% Complete In Jul-09 116 115 99.14% 45 38.79% 16 13.79% Progress In Oct-09 157 157 100.00% 84 53.50% 73 46.50% Progress Totals 913 909 . 99.56% 196 21.47% 129 14.13% nfa 5 We were unable to subpoena OneWest because of a Supreme Court decision which classi?es state-issued administrative subpoenas to national banks regarding core bank functions as a prohibited exercise of visitorial powers (Cuomo v. Clearing House Assn. (2003) 557 US. 519, 536.) 6 Please see the subsection entitled ?The Financial Freedom Litigation? and the section entitled ?The Investigation,? at pages 9-11 below. '1 See, Tab 1 (Spreadsheet re?ecting the results of the review for October 2009). January 18, 2013 Page 4 The review is resource intensive, and we still have 38 months worth of data to review. As detailed below, this backdating is important not only because it resulted in false instruments being recorded with county recorders,8 but also because it meant that the associated foreclosures moved more rapidly toward completion. Another review conducted as a part of the investigation focused solely of publicly ?led instruments in Alameda and Santa Clara counties and assumed that the dates set forth in the instruments are accurate. Even when the bene?t of the doubt is given to OneWest regarding the veracity of the dates of the instruments, we still found substantial numbers of unlaw?Jl credit bids and substitutions of trustee? The results of the review to date are summarized in Table 2: Table 2. Results of Ongoing Review of Publicly Filed Instruments in Alameda and Santa Clara Counties Number of Number of . Number of ma wful Unlawful Combmed County Foreclosures . . . Reviewed credit sabmmuons Violations Bids of Trustee Alameda 175 15 10 14.29% Santa Clara 87 13 4 19.54% Totals 262 28 14 16.03% Using the results of this review, Table 2A projects the total number of possible violations statewide: Table 2A. Projected Number of Possible Credit Bidding and Substitution of Trustee Violations Based On Review of Publicly Filed Instruments Com leted Estimated Projected set-Vicar Foreclbsures of Tom Violations Violations oneWeSt 14,992 16.03% 2,403 (excluswely) Completed by OneWest (Started by 0 IndyMac, First 20,031 15-03% 3,211 Federal, or La Jolla) Totals 35,023 16.03% 5,514 3 The data show that backdated instruments were recorded in a variety of counties, including: Alameda, Contra Costa, El Dorado, Fresno, Imperial, Kern, Los Angeles, Merced, Riverside, San Bernardino, San Diego, San Joaquin, San Luis Obispo, Stanislaus, Tulare, and Ventura. 9 See, Tabs 8-11. January 18, 2013 Page 5 Once the effects of unlawful backdating are included in the calculation there is proof that additional assignments were executed after the property was sold at auction and/or that the party signing a substitution of trustee was not the present bene?ciary), we would expect this number to increase substantially. As detailed below, in the case of unlawful credit bidding, this misconduct was important because it resulted in a party taking title to a home pursuant to a credit bid when it did not have the right to do so and/or resulted in the unlawful nonpayment of documentary transfer taxes. Finally, in the review of the 300 OneWest loan ?les obtained from LPS, we found that 21 ?les evidenced unlawful conduct by OneWest.10 Those 2] ?les (7 percent of those reviewed) contained falsely dated instruments executed by OneWest, substitutions of trustee in which OneWest falsely stated that it was the present bene?ciary under an applicable deed of trust when it was not, or both. This unlawful conduct occurred throughout the state, concentrated primarily in southern Califomia. The 21 ?les related to homes in the following nine counties: Los Angeles, Orange, Placer, Riverside, San Bernardino, San Diego, San Mateo, Santa Barbara and Ventura. If the proposed enforcement action is authorized, we will be allowed to conduct ?ill discovery.ll We will use discovery to obtain the information we need to more de?nitively establish the number of violations of law by OneWest in California. We expect the number of proven violations to increase substantially. Financial Status of OneWest: OneWest is in excellent ?nancial condition and an IPO is expected to occur this year.12 Expected Outcome and Tirneline: If the proposed enforcement action is authorized, the primary goals will be to obtain liability ?ndings and to hold OneWest publicly accountable for its misconduct. If we succeed, we will seek extensive injunctive relief, penalties, restitution, and costs. We anticipate a removal ?ght, substantial motion practice, a civil discovery process (because of our inability to subpoena OneWest and its obstructive conduct), and a trial. Absent settlement, we expect that the litigation will last 3 to 5 years. Likelihood of Success: Moderate. The proposed enforcement action would be the ?rst of its kind in California and it raises complex legal and factual issues which may lessen the prospect of settlement and/or require appellate review. If we take the enforcement action to trial, we face a higher than average risk that the court may choose to award minimal amounts in Because it was OneWest that executed the falsely dated instruments identi?ed by the review (and not LPS), the misconduct at issue is notaddressed by the settlement with LPS. 12 C.F.R. (2012) (?Exception for courts of justice. National banks are subject to such visitorial powers as are vested in the courts of justice. This exception pertains to the powers inherent in the judiciary?) '2 Please see description of OneWest under the ?The Players? section, at page 7 below. January 18, 2013 Page 6 restitutionI3 and/or penalties.l4 We nevertheless expect to obtain a liability ?nding and secure injunctive relief. 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, even if sizable penalties and restitution are not awarded. Resources: We expect resource intensive and prolonged litigation. We will need 2-3 full-time DAGs, substantial SDAG time, auditor time, and paralegal time. Outside expert (testifying and consulting) support will be required to assist us as we review and evaluate data regarding the tens of thousands of relevant foreclosures conducted by OneWest. Supervision of the Litigation: The proposed enforcement action would be supervised by Frances Grunder (SAAG), Benjamin Diehl (lead SDAG), and Nickles Alters (SDAG). Relationship to the National Mortgage Settlement and the Homeowner?s Bill of Rights: The proposed enforcement action would complement the prior efforts in three ways. One, it would enable us to use the ?ll] panOply of tools available in civil discovery to conduct a full investigation of a national bank?s misconduct and provide a public accounting of what happened. That is something we were unable to do in the prelude to the National Mortgage Settlement because of a Supreme Court decision which classi?es state?issued administrative subpoenas to national banks as a prohibited exercise of visitorial powers (Cuomo v. Clearing House Assn. (2003) 557 US. 519, 5315.)15 Two, the pmposed enforcement action would enhance the deterrent effect of SB 900 (the anti- robosigning legislation) by demonstrating the of?ce?s commitment to investigating and prosecuting entities that record instruments without verifying their accuracy. ?3 OneWest will likely argue that the displaced homeowners defaulted on their mortgage obligations, were preperly subject to foreclosure, and were not substantially harmed by any violations. We will dispute this and point out that the unlawful activities tended to shorten the amount of time available for borrowers to ?gure out a way to become current. Nevertheless, it is possible that OneWest?s argument may resonate with the court and result in little to no restitution. ?4 OneWest will likely argue that any violations it committed were trivial in nature. We will vigorously dispute this. However, given OneWest?s size and the relative lack of attention traditionally paid by managers to loss mitigation departments, there is a risk that the court might be persuaded to award only a minimal penalty. In doing so, the court may embrace the theory that the violations are not indicative of a broader corporate culture of indifference to the law andlor the rights of borrowers, and that the violations were of a technical nature. ?5 12 CPR. (2012) (?Exception for courts of justice. National banks are subject to such visitorial powers as are vested in the courts of justice. This exception pertains to the powers inherent in the judiciary?) January 18, 2013 Page 7 Three, the investigation has uncovered evidence of unlawful credit bidding, a type of misconduct that is not squarely addressed by either the National Mortgage Settlement or the Homeowner?s Bill of Rights. As detailed below, unlawful credit bidding occurs when a party other than the foreclosing bene?ciary uses the credit re?ected by the deed of trust to take title to the home when it is not legally entitled to do so. This means that other bidders at the auction (perhaps in some cases the borrowers and/or their families) are unfairly disadvantaged in the bidding process and that cities and counties throughout the state lost documentary transfer tax revenue. THE PLAYERS Proposed Defendant: OneWest is the largest bank based in Southern California, and it operates 73 retail branches.l6 OneWest has total assets of $25 billion and $14 billion in deposits. 7 It is a federal savings bank and a subsidiary of IMB HoldCo OneWest?s CEO, Steven Mnuchin, stated that he anticipates taking it public this year.19 OneWest conducts much of its mortgage servicing operation through its IndyMac Mortgage Services Division.20 In addition to Pasadena, OneWest has signi?cant Operations in Austin, Texas and Kalamazoo, Michigan. FDIC: The FDIC was the conservator of IndyMac for several months before selling its assets to OneWest. The agreement included a Shared-Loss Agreement whereby the FDIC agreed to share losses on a portfolio of qualifying loans.21 The Shared-Loss Agreement covers 7 percent of the loans OneWest services (the loans owned by OneWest) and applies after OneWest has taken Speci?ed losses exceeding $2.5 billion. The Shared Loss Agreement does not cover losses for loans that OneWest failed to service in accordance with ?Customary Servicing '6 See Unknown Author, About One West Bank FSB Us/History/> (as of January 16, 2013). 17 See footnote 16, ante. 18 Consent Order entered into by IMB HoldCo LLC and the Of?ce of Thrift Supervision (now a part of the OCC) on April 13, 2011 (hereafter Consent Order) at page 1. 19 Taro, From IndyMac to OneWest: Steven Mnuckt?n's Big Score (Mar. 22, 2012) Bloomberg Businessweek (as of November 20, 2012). 20 See (as of November 20, 2012). 2' The shared loss agreement is available at (as of November 20, 2012) January 18, 2013 Page 8 Procedures.? 22 Orstomary Servicing Procedures are de?ned as servicing procedures ?which are in accordance with accepted mortgage servicing practices of prudent lending institutions?? The FDIC states that it has not made any payments to OneWest under the Agreement."M The FDIC was brie?y conservator of the other failed banks, First Federal and La olla, prior to the sale of their assets to OneWest.25 The complaint states that we are not suing the FDIC or the failed banks. It also states that we are not seeking to hold OneWest accountable for the failed banks? conduct. The possibility nevertheless exists that the FDIC might intervene on the ground that the litigation poses a risk of increasing the speci?ed losses above the $2.5 billion threshold and would require payments by the FDIC under the Shared-Loss Agreement. However, we believe that the facts augur against FDIC intervention for several reasons. First, because OneWest has not exceeded the loss threshold, the FDIC has not paid any money under the agreement and any future theoretical payments as the result of the enforcement action would be speculative. Second, the agreement covers only 7 percent of the loans which are serviced by OneWest. Third, because the Shared Loss Agreement does not cover losses for loans that OneWest failed to service using accepted mortgage servicing practices of prudent lending institutions, the conduct at issue in the Complaint should not be covered. OCC: On July 21, 2011, as a part of Dodd-Frank, the DIS was merged with the Of?ce of the Comptroller of the Currency (OCC). Responsibility for enforcement of the April 13, 2011 Consent Order now resides with the OCC. The Consent Order required OneWest to retain an independent audit ?rm to perform foreclosure reviews. OneWest retained Navigant Consulting};6 According to the Statement of Work, the primary objective of the foreclosure reviews is to identify borrowers who were improperly foreclosed on or who incurred ?nancial harm ?'om errors, misrepresentations, or other de?ciencies in the foreclosure process. Based on our discussions with consumers and consumer advocates, our understanding is that the foreclosure review process is not resulting in any redress to consumers and is not working well. 22 Shared Loss Agreement, supra, at article II, section page 8. 23 Shared Loss Agreement, supra, at-article 1, page 2. 24 See Unknown Author, Supplemental Facts about the Sale of IndyMac FSB to One West Bank (as of November 20, 2012). 25 See footnote 2, ante, page 1. 26See Amended Statement of Work entered into between OneWest and Navigant Consulting, Inc. as amended pursuant to OCC comments on October 4, 2011, available at 00000001.pdt> (as of November 20, 2012). January 18, 2013 Page 9 On January 7, 2013, ten mortgage servicing companies subject to enforcement actions for de?cient practices in mortgage loan servicing and foreclosure processing reached an agreement in principle with the OCC and the Federal Reserve Board (FRB) to pay more than $3.3 billion in direct payments to eligible borrowers and $5.2 billion in other assistance, such as loan modi?cations and forgiveness of de?ciency judgments. OneWest Bank is not included in this group. The OCC and FRB stated on January 7, 2013 that they continue to work to reach similar agreements with other servicers that are not parties to the January 2013 settlement, ?but that are also subject to enforcement actions for de?cient practices in mortgage loan servicing and foreclosure processing)?F Kev Executives and Investors: OneWest?s CEO is Steve Mnuchin. Mnuchin was a partner and hedge ?md manager at Goldman Sachs.28 OneWest is not publicly traded and any information available about its investors is therefore unveri?able. According to press regions, its investors include: Steven Mnuchin, John Paulson, George Soros, and Chris Flowers. As of April 13, 2011, the directors of OneWest included Steven T. Mnuchin, S. Kenneth Leech, Jay J. Miller, John J. Oros, Allen C. Puwalski, Eric J. Rosen, David J. Wermuth, Ravi P. Yadav, and Joseph 011mg.? As oprril 13, 2011, the directors HoldCo LLC included Steven T. Mnuchin, Allen (3i Puwalski, John J. Oros, Eric J. Rosen, Ravi P. Yadav, David J. Wermuth, and Jay J. Miller. The Financial Freedom Litigation: On November 24, 2009, our of?ce issued a subpoena to Financial Freedom Acquisition (FFA), a subsidiary of OneWest.32 The subpoena was designed to verify the results of a survey conducted by our of?ce that uncovered evidence of predecessor?s failure to provide legally required counseling to reverse mortgage recipients. Shortly after service, OneWest raised concerns regarding the custody of loan documents and the costs of complying with the subpoena. Over the next month or so, we discussed and tried to address OneWest?s concerns. We suspended the deadline on the subpoena and requested a subset of information in an effort to amicably resolve the issues. On January 26, 2010, OneWest raised visitorial powers and preemption concerns. 27 See .htm1> (as of January 8, 2013). 23 Taro, From IndyMac to OneWest: Steven Mnuchinis Big Score, supra, at