In March, Sherry Hunt and a co-worker were called into a meeting at CitiMortgage’s big operations base in O’Fallon, Mo.
A high company executive awaited her there.
“It’s your asses if these defects don’t improve,” Hunt recalled being told by her “boss’s boss’s boss.”
Hunt didn’t create the “defects” in mortgage applications. It was her job to find them — red flags for bad loans. She felt the executive wanted her to stop doing her job and let the bank make bad loans that would be guaranteed by the federal government.
“The message was clear to me,” Hunt recalled. “I was threatened.”
Her experience provides a telling window into the inner-workings of mortgage misconduct that continued to occur even after the global financial system nearly collapsed due to the industry’s shady dealings with subprime loans and mortgage-backed securities.
Hunt, rather than cave to pressure, filed a “whistleblower” lawsuit against CitiMortgage and its Citigroup parent, claiming the mortgage lender deliberately ignored fraud and errors in government-insured mortgage programs. The U.S. Department of Justice then joined the suit.
Earlier this month, Citigroup admitted that it approved Federal Housing Administration mortgages that failed to meet government guidelines. It agreed to settle the suit for $158 million, the amount government expects to lose on FHA mortgages it claims Citi should never have made.
Hunt filed suit under the federal False Claims Act, which lets whistleblowers share in the payout if their suits succeed. Her take, minus legal fees, will be $31 million.
“I didn’t do it for the money,” said Hunt in an interview last week with her and her lawyer, Finley Gibbs.
As she tells it, Hunt tried hard to persuade Citi management to root out fraud. She complained weekly in memos, and finally took her case to human resources. When all that failed, and the pressure to bend kept building, she went to a lawyer.
In an emailed statement, Citi said it settled “so we could put these issues behind us and focus on serving our clients. We take our quality assurance processes seriously and have pro-actively undertaken process improvements.”
The bank declined to respond to specific allegations. A spokesman also would not say if Citi had removed or reassigned executives because of the case, or describe other changes it made to satisfy the government.
Now that it’s over, Hunt thinks CitiMortgage will finally reform. But it’s not clear if she’ll be there to see it; she’s now negotiating whether she remains an employee with the company.
Hunt lives on a “hobby farm” in Silex with her retired husband, Jonathan. They grow alfalfa and vegetables. She is reticent about her private life. She declined to say how many children she has, for instance, or describe her upbringing. She wouldn’t say what she might do with so much money.
Her entire working life — 37 years — has been spent in the behind-the-scenes paper-shuffle of mortgage processing.
Citigroup, the nation’s third largest bank, is a giant in the mortgage business. It made 30,000 FHA loans since 2004, totaling more than $4.8 billion. About 30 percent have defaulted, according to the government.
Like many big lenders, Citi can make government-backed loans — putting taxpayers on the hook for defaults — without sending applications to the FHA for review. But it has to abide by strict guidelines and set up separate quality control departments, independent of the bank’s other operations, to flag suspicious applications.
That was Hunt’s job at CitiMortgage. She had started in the mortgage business in 1975 at age 18 as a lowly processor, then climbed the ladder into management. By 2008, she supervised nine workers in the quality control department. They scrutinized one out of every 10 mortgage applications.
They caught “over a thousand” applications with problems, according to Gibbs, her lawyer. Some were obvious fraud – such as numbers whited-out on a W-2 wage form faxless payday loans. Others may have been goofs, such as missing documents or wrong calculations.
The cases were passed on to a fraud unit, which verified that about half really were attempts to cheat, says Hunt. Such cases were supposed to be reported quickly to the Department of Housing and Urban Development, which overseas the FHA. But the government wasn’t hearing of the problems.
At first, Hunt didn’t blame the Citi system. “The sheer volume of referrals was overwhelming,” she thought.
More than 1,000 cases referred by Hunt’s unit were backed up in the fraud unit in 2009, according to the government. More than 80 percent were loans that had defaulted shortly after they were made, which the government calls an indicator of fraud. Eventually, Citi simply erased those records from its files, the government charged.
Then Hunt suspected something more sinister, a “pattern of behavior,” she said. “As I found things against the HUD rules and reported them to management, nothing happened, even after more follow-ups.”
According to the government, Citi’s misbehavior started in 2004, when it took the quality control function away from an outside contractor and moved it in house. It continued until mid-2011. That was more than two years after CitiGroup nearly failed over problems that included massive investments in bad mortgages. The government bailed out the bank to the tune of $45 billion.
Hunt wasn’t alone in her worries. According to the government’s suit, Michael Watts, the director of quality control, complained repeatedly to company officials charged with controlling risk. He warned that employees had “marching orders” to fight quality control decisions.
At one large staff meeting, managers praised loan processors for “beating back” the quality control team and getting them to withdraw complaints, she said. The quality control team was standing there listening. “Someone was allowing them to bully us,” Hunt said.
In June of last year, Hunt wrote a memo complaining about pressure from Jeffrey Polkinghorne, Citi’s director of “front-end” risk. “We also have Polkinghorne telling us it is our asses . . . if the quality does not improve,” she wrote, according to the federal complaint.
At that point, Hunt could have shut up and started overlooking problems. Instead, she complained to CitiMortgage human resources department. There were meetings. Five months later, nothing had changed.
That’s when she decided to blow the whistle outside Citi.
Part of the decision was self interest — she wanted to separate herself from an illegal activity. Hunt also felt an obligation to keep the mortgage industry honest. The FHA had certified her to handle its mortgages. “I uphold their standard,” she said.
She talked with her husband about the costs of standing up, about everything they could lose. Her career. Their home.
She talked to Gibbs, a lawyer from Columbia, Mo., who she knew. Gibbs knew about the federal false claims act, although he had never handled such a case. He filed suit in August.
Then Hunt went back to work. “I kept a low profile. It wouldn’t serve a purpose for me to go blasting this all over the place,” she said.
False Claims Act suits are filed under seal, and they remain sealed until the government decides whether to participate. For the first few weeks, Citigroup didn’t know it was being sued.
The Justice Department got interested and took up the case. It began negotiating with Citgroup. The law forbids employers from retaliating against whistleblowers, and Hunt said she felt no blowback at work.
“I don’t believe much of this filtered down to the O’Fallon office,” she said. “I was comforted in my mind that nobody I was passing in the hallways knew.”