Failure of officials at a South Carolina bank to comply with federal regulation and banking industry standards contributed to a multi-million dollar mortgage fraud that also targeted a Lewisburg resident, a former national bank examiner reported.
“Carolina First Bank failed to comply with federal banking regulations and regulatory guidance, standards in the banking industry and its own documents,” reads a report issued by Catherine Ghiglieri, president of a consulting firm located in Austin, Texas.
Ghiglieri, also a former Texas Banking Commissioner, is currently recognized as an expert in the banking and financial fields.
She examined CFB policies at the request of Charles “Steve” McCue, 67, of Lewisburg. McCue was one of 18 victims of mortgage fraud at the bank, which is now TD Bank (NYSE: TD), formerly Carolina First Bank, of Hilton Head, South Carolina.
According to McCue, CFB mortgage loan officer Blair Witkowski worked with a construction company headed by McCue’s nephew to commit mortgage fraud against McCue in 2006.
McCue had authorized a company headed by his nephew, Empire Construction, to build a luxury home in Hilton Head.
Once Witkowski began controlling the loan, he and the builders took part of the money for themselves.
Although construction on the McCue home had virtually ended, leaving the house unfinished, Witkowski provided false reports of progress on the construction — a red-flag for fraud that CFB officials should’ve caught, according to Ghiglieri.
He also ordered appraisals on the house, which Ghiglieri stated is a violation of banking regulatory practice.
Witkowski forged a power of attorney and took out a $300,000 loan using McCue’s identity. He used that money for himself and to make payments on fraudulent mortgages he’d established.
A notary public at CFB signed off on the mortgage, although he’d never seen McCue in person, according to court documents.
The mortgage fraud scheme spanned four states and cost lenders at least $40 million, according to a New Jersey federal prosecutor.
Witkowski was sentenced to 20 months in federal prison and ordered to pay more than $6.7 million in restitution.
His cooperation led to the arrest of at least five conspirators in the scheme, prosecutors reported.
CFB sued McCue for the $300,000 loan and the original loan, now around $840,000, when he refused to sign a forbearance agreement releasing CFB from liability, according to court documents.
McCue filed a countersuit, but said he has endured health and financial problems and hasn’t been able to retire due to legal costs and paying upkeep on the unfinished home.
In a 40-plus-page document, Ghiglieri reported CFB violated federal law by not having a written standard regarding the home equity line of mortgage (HELOC) fraudulently loaned to McCue.
CFB Vice-President Joseph Lindley had testified he was unaware of a specific policy at CFB regarding equity lines of credit.
The bank didn’t meet banking industry standards when it made the $300,000 HELOC available on McCue’s house, since the house was still under construction.
“Home equity loans, as well as home equity lines of credit, shouldn’t be made on unfinished houses, because the value of the house is not yet realized,” stated Ghiglieri.
Approving the loan based on forged signatures violated banking industry standards, she added.
“It’s surprising that the bank would sue Mr. McCue on the HELOC, knowing that this loan was made on a forged signature,” said Ghiglieri.
She pointed out that the notary public at CFB approved the fraudulent power-of-attorney without ever having met McCue — another violation of banking standards.
“The notary on the power-of-attorney did not know if he had ever met Mr. McCue,” she said. “The signature on the power-of-attorney did not match the signature card.”
She added that the close relationship between Witkwoski, the construction company and appraisers was another red-flag for possible fraud, according to FDIC guidelines.
On the day the $300,000 HELOC was deposited into the CFB account established in McCue’s name, $200,000 was withdrawn immediately and placed into Empire Construction’s account.
Then, $40,000 was transferred from the builders’ account into Witkowski’s personal account, according to court documents.
“The bank should have had internal controls in place sufficient to prevent Witkowski from accessing funds from Mr. McCue’s draw and from being able to transfer funds into his own personal account,” Ghighlieri stated. “By not having proper controls to prevent Witkowski from taking funds from Mr. McCue’s draws for his personal use, the bank failed to meet the standards in the banking industry.”
“No inspection reports were required prior to each draw,” she noted.
Ghiglieri said it’s still unclear how much of McCue’s construction loan ($840,000) was misused.
“The bank may be the only source of this information,” she stated. “And they have not produced any such analysis.”
According to testimony from CFB officials, Witkowski was given a commission based on fee income on loans his subordinates generated.
Ghiglieri stated that the apparent CFB practice of compensating loan officers based on volume of loans rather than quality of work constituted failure to comply with regulatory guidance and industry standards.
Ghiglieri has around 25 years of experience in the banking industry, according to the credentials listed on her company Web site.
Ghiglieri’s reports, along with other documents and complaints regarding the bank’s practices, policies and procedures have been forwarded to the U.S. Comptroller of the Currency, McCue added.