Earl Gross, former president and CEO of U.S. Mortgage, pleaded guilty Tuesday to one count of bank fraud for his alleged role in defrauding Wells Fargo Bank of more than $8 million in a complex mortgage scheme.
According to court records, Wells Fargo contracted with U.S. Mortgage to service pools of residential mortgage loans held by investors in mortgage-backed securities. Under the agreement, Gross and U.S. Mortgage were obligated to collect from the borrowers the monthly payments they made toward their mortgages and forward the proceeds to Wells Fargo Bank.
In the event that a borrower paid off the loan – usually by selling the mortgaged property – U.S. Mortgage was obligated to remit to Wells Fargo Bank the full payoff amount. U.S. Mortgage agreed to provide Wells Fargo Bank with monthly reports, which described the status of the loans, such as the balance, principal and interest, as well as payment status. U.S. Mortgage received servicing fees for each loan it serviced.
The Department of Justice's (DOJ) indictment alleges that from 2004 to 2009, Gross and U.S. Mortgage withheld more than $8 million in loan payoffs that were due Wells Fargo by submitting reports stating that numerous borrowers were continuing to make monthly payments when, in fact, they had paid off the loans in full.
Rather than remit the full payoff amount, Gross and U.S. Mortgage forwarded only what the borrowers' monthly payment would have been and retained the difference in U.S. Mortgage's bank account, according to the DOJ.
To deceive Wells Fargo about the status of paid-off loans, Gross and U.S. Mortgage created fake amortization schedules indicating that borrowers who had sold and paid off homes were continuing to make monthly payments, a DOJ release states.
Gross, 75, of Las Vegas, faces a maximum penalty of 30 years in prison. Currently, he is scheduled for sentencing on Sept. 19. His arrest and guilty plea came as a result of efforts by President Obama's Financial Fraud Enforcement Task Force, which was formed in 2009 to investigate and prosecute financial crimes.
Over the past three fiscal years, the DOJ has filed more than 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,700 cases of mortgage fraud.