The Risks of Mortgage Loan Origination Misconduct and Misleading Practices

Sterling Bancorp in Southfield, Mich., is under investigation by the Justice Department for issues tied to its mortgage business.

The $3.3 billion-asset company disclosed in a regulatory filing late Friday that it had received grand jury subpoenas from the agency seeking documents and information associated with its residential lending practices and related issues. Sterling said it is cooperating with the investigation.

Sterling also disclosed that it is cooperating with the Office of the Comptroller of the Currency, which is looking into the bank’s credit administration and its compliance with Bank Secrecy Act and anti-money-laundering laws. The company has been operating under a formal agreement with the OCC since June tied to BSA and AML compliance.

The company also decided to permanently discontinue its Advantage Loan Program, an initiative it had suspended late last year. The company has been auditing documentation for prior originations and implementing systems and controls to make sure policies and procedures are being followed.

Tom Lopp succeeded Gary Judd as Sterling’s chairman and CEO on Nov. 30.

The company also began an internal review led by a special committee of independent directors and outside counsel.

The ongoing review determined that some employees “engaged in misconduct tied to the origination of such loans, including with respect to income verification and requirements, reliance on third parties and related documentation,” the filing said.

As a result, Sterling said, a “significant number of employees” have been terminated, including the senior vice president in charge of the Advantage Loan Program in California, or have resigned. The company said more terminations and resignations are possible.

While Sterling is working on initiatives to diversify its loan production and review new mortgage products, it said that “the implementation of any new loan products takes time and may be subject to” regulatory review.

Because of those issues, Sterling said it has stopped paying dividends in the near term, halted dividends from its bank to the holding company and will delay filing its annual report.

Finally, Sterling dislcosed that a shareholder lawsuit was filed in the U.S. Disctrict Court for the Eastern District of Michigan against the company and some of its officers and directors. The lawsuit alleges that there were violations of federal securities laws, mostly tied to disclosures leading up to Sterling’s initial public offering, subsequent filings and during earnings calls.

“While the company intends to vigorously defend this action, it is too early to determine the potential outcome,” the filing said.

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