Home > Risk > A true story of fraud and corporate culture that has implications for us all

A true story of fraud and corporate culture that has implications for us all

This weekend, the tales of alleged fraud and the financial crisis became real for me. What I want to share here is a true story told to me by a good friend. For obvious reasons, no names will be mentioned.

The story is about a US company that sold home loans in California. Apparently, one agent worked extensively with an immigrant community where English was frequently poorly spoken. She had customers who were not familiar with the process, the difference between different types of loans, or the risk in loans with balloon payments.

What she seems to have done is encourage people to apply for loans they did not qualify for, and fail to inform them that there were balloon payments or that rates would rise after a teaser period. In at least one case, the copies of the loan documents she gave them after signing did not include the pages with these disclosures.

Some of these individuals complained when they found out. The manager was contacted. But, no action was taken – the manager called HQ but was told to leave it alone. Not only was no action taken, but the agent continued without interruption.

I am told the agent made $600k in annual compensation during this period. The manager and her supervisors in HQ shared in the good times. Nobody called a whistleblower line, a reporter, an auditor, an agency. The silence was deafening. My friend simply quit.

I doubt that the fraudulent deceptive behavior was limited to the one agent, or even to one company.

What does this mean?

  1. When there is money there is temptation
  2. When management benefits from employee fraud, don’t be surprised if they look the other way
  3. If you are concerned about fraud, startlingly high bonuses are a red flag
  4. It’s not only tone at the top that you have to worry about
  5. Incentive compensation is an issue at all levels within the organization
  6. Even good people will quit rather than go through the hassle of a whistleblower call
  7. I wonder where the auditors were
  1. January 5, 2011 at 4:16 PM


    Good points, this is a very common scenario in the banking world. I remember an instance were I was new to the city and taking a loan. So had no guarantors which was a requirement as the banks procedures. I had stated earlier that I will not be able to fulfill this clause. They went ahead and approved the loan, and asked for the guarantors. When I repeated my problem, the loan sanctioning manager said he could ask two of his friends to gaurantee the loan for a commission. Amazing isnt it.


  2. Fred
    January 5, 2011 at 9:42 PM


    This type of behavior is very common in the mortgage industry and it doesn’t just happen to immigrants who know little English. Loan officers get a cut from the back office (sometimes 50k or more) if the optimize the loans (make the home buyer pay the highest rates. Mortgage is a very shady business. It’s no different than investment banking (banker fees, selling worthless collateralized debt obligations to pension funds and states) and hedge funds (insider trading, and Mudorff??)

  3. Thomas Boegballe
    January 6, 2011 at 1:19 AM

    Interesting story, but I don’t fancy learning #7 – “where were the auditors”… It seems to me like a cheap shot given the facts presented in the story.

  4. January 6, 2011 at 5:16 PM

    @thomas – Banks have internal auditors who are responsible for reviewing financial processes and results. I am wondering how this bank’s auditors missed these problems as well.

    @norman – Whistleblowers don’t fare well within their industry after they publicize and organization’s malfeasance. It’s a sad fact, but a true one. I can appreciate why your friend walked away.

  5. Fred
    January 7, 2011 at 1:09 AM

    Faun, you are assuming that what the loan officers did is illegal. A lot of these loans are legal and although there are certain % limits imposed by regulations, it doesn’t take one to hit the limit to see their payments balloon out of control.

  6. January 11, 2011 at 12:19 PM

    Yes, Norman, this is a poignant story, and your questions are obviously completely relevant. Thank you for sharing this, which SURELY must be repeated, almost verbatim, for tens of thousands, likely, hundreds of thousands of people who did business in a less than ethical way over the past decades.

    Actions are legal, so long as they remained unchallenged, uncharged, unprosecuted, and unconvicted as illegal. The laws and regulations are only concepts until put into motion. Therefore, the fact of the matter, if we consider, say, about the past 30 years is that ALL HAS BEEN LEGAL.

    That is NOT to say, “all has been ethical” or “all has been legal…had these actions been framed into charges and put into the legal process.” We know better than that.

    However, in the case noted here, either you, or your friend, now use the term “fraud” to describe what was a standard business practice–in thousands of businesses, with modifications for their marketplaces. Indeed, even now, we can say the SAME thing for any sale made to a person who does not have the capacity or access to understand the precise implications of their decision.

    The coldest minds in business say, with impunity, “Caveat Emptor,” Let the Buyer Beware. The most immoral are driven solely by money and profit–so long as their hands are not slapped, so long as they have a series of “shields” protecting them: contracts, signatures, layers of management, and the wonders wrought by In-House or Contract Legal Counsel.

    Should they post, “Let the Buyer Beware,” if their goal is to capture as much easy money as possible without penalty, without conscience? Why should they–or, in your example, their managers alerted to the “problem”–stop the little rabbit ready to nibble on the tenderest, fresh grasses placed over the razor-sharp steel trap, with all scents of danger removed?

    That is PRECISELY why they studied their sales methods, their uses of behavioral psychology, the close, the answers to objections–even the most pointed ones.

    So, Norman, I do apologize for the rant, but YOU started it with your simple, effective, and so truthful summary of a kind of an illustrative “nexus” for the tens of thousands of decisions, over the past decades, and even now, helping to bring us into the maelstrom of economic collapse.

    I’m doing what I can. Keep on doing what you can, Good Man! And let us encourage others to join the ever-widening circle!

    Thank You,
    John Willis, PhD, President

  7. January 11, 2011 at 4:03 PM

    I think learning number 8 is where were the compliance and risk controls? And why wouldn’t such a common scenario come up in any basic risk/compliance assessment and something – other than conflicted supervision – put in place?

  1. January 5, 2011 at 3:25 PM
  2. January 20, 2012 at 1:47 AM

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: