12 CU employees fired for alleged involvement in mortgage fraud scheme

In 2022, the $5.1 billion Travis Credit Union in Vacaville, California, fired 12 employees for their alleged involvement in an internal mortgage fraud scheme that caused more than 714,000 $ losses.

Travis is suing CUMIS, now TruStage, after the Madison, Wis.-based insurance company denied the credit union's loss claim.

Between January 1, 2021 and June 30, 2022, former Travis loan officers and “complicit staff” allegedly manipulated the credit union's loan origination system (LOS), to misclassify home loan originations in order to generate “improper and fraudulent commissions,” according to an amended complaint filed in U.S. District Court in Sacramento in May.

The credit union said in its complaint that outside loan officers were only entitled to commissions on outside loans they actually closed, and that the sales case management plan allowed a commission based on the volume of loans financed by all external lending agents. In April 2022, external loan officers were reclassified to senior mortgage loan officers. At this time, “retail” loans (some of which could come from internal sources) became commissionable. However, they were only commissionable if the external loan officer actually generated the loan submission package with the borrower and submitted it to the operations team.

The first method loan officers used to fraudulently classify home loans was to characterize them on the credit union's LOS as commissionable for certain employees when, in fact, they were not commissionable, Travis CU alleged in his complaint. The loan officers who allegedly perpetuated the fraud changed the loan officer assignment in the LOS to indicate that an external loan officer either initiated the loan or generated the loan submission package, even though this was not the case for the external loan officer.

In many cases, the reallocation of service levels took place shortly before or after the loans were actually funded. As a result, Travis' LOS falsely reflected a fee owed to the outside loan officer to whom the loans were reallocated, when no fee was actually owed, according to the credit union's complaint.

The second method loan officers used to fraudulently classify loans, according to the credit union, was to make them appear to be commissionable at a higher rate than they actually were. Under Travis CU's commission plans, in cases where refinanced loans were commissionable, those loans were commissionable at a lower rate than new money. Loan officers involved in the fraud would falsely classify the loans as new money, making them appear to qualify for a commission at a higher rate, according to Travis CU's lawsuit.

As a result of this scheme, the credit union reported suffering losses of at least $714,812. After the fraud was discovered, Travis CU hired an auditor to review its loan portfolio and assess the extent of the embezzlement (misappropriation of funds) and whether the loans presented an increased risk due to the fraud. The forensic audit cost $43,058.

The lawsuit does not specify how the alleged scheme was detected.

The credit union said it “separated from 12 employees who participated in the fraud or neglected to supervise those employees and exercise their supervisory responsibilities.” Travis CU did not say how many loan officers or how many staff members were involved.

In August 2022, the credit union filed a claim under its CUMIS insurance policy's employee or director dishonesty coverage and policy performance coverage – enhanced coverage, which provides that CUMIS will pay for loss resulting directly from an employee's failure to faithfully carry out his or her mandate. trust.

It took almost 10 months for CUMIS to notify Travis CU that his loss claim had been rejected.

CUMIS' response to Travis CU's complaint argued that its claim for loss fails as a matter of law because the loss does not fall within the scope of the surety's employee or director dishonesty coverage. loyalty.

“Travis sought compensation for funds he alleged were improperly paid as commissions to his own loan officers and employees as a result of their fraudulent activities,” according to CUMIS’ legal filing. “The surety’s employee or director dishonesty coverage provides that CUMIS “will pay you for your loss resulting directly from dishonest acts committed by an “employee” or “director,” acting alone or in collusion with others . However, it specifically provides that “'Loss' does not include 'employee benefits, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing, business entertainment or pensions, intentionally paid by you “.

Additionally, because these fees arise from loans originated by Travis CU, the credit union must establish that the dishonest acts were committed with the intent both to cause a loss to Travis and to obtain a financial advantage unfair to the employee, director or a financial advantage to any other person or entity, according to CUMIS.

“The bond specifically states that “improper financial benefits” “does not include fringe benefits received in the course of employment, including salaries, commissions, fees, bonuses, promotions, awards, profit sharing, professional entertainment or pensions,” CUMIS argued in its court filing. “Because the only benefits allegedly obtained were commissions, there was no 'improper financial advantage,' and therefore no coverage.”

The insurance company also argued that the loss reported by Travis also did not fall within the scope of Fidelity Guarantee – Enhanced Coverage, as this coverage is available for losses resulting directly from the failure of a appointed employee to faithfully fulfill his trust.

“Failing to faithfully fulfill one's trust” is a defined term that means “acting in conscious disregard of (the credit union's) established and enforced sharing or deposit policies or that portion of the (credit union's) established and enforced lending policy.” credit union) which sets out the parameters that must be met for a loan to be approved,” CUMIS' court filing states. “This does not mean, among other things, “(c)conscious disregard of any policy other than loan, stock or deposit policies, including, without limitation, personnel policies, investment policies or collection policies or that portion of any policy that relates to the collection of money.”

CUMIS claimed that Travis CU did not identify any sharing or deposit policies that employees allegedly violated or ignored in connection with their misclassification of mortgage loans, and the claim is not based on allegations that any of these loans would have been incorrectly approved.