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Potential Criminal Liability for Subprime Lending Practices
ABC Bank is a publicly traded lender specializing in consumer loans to first-time homebuyers in the southeastern United States. For the past three years, ABC Bank has posted record revenues from its operations in central Florida's hot real estate market. In 2005, ABC Bank decided to focus its efforts on new-loan origination. The bank's strategy was to originate consumer real-estate mortgages, quickly package them together and sell them on the financial markets. ABC Bank then used the proceeds to originate new loans. Most of the bank's employees spent their time originating new mortgages. Most other administrative functions, including appraisals, were handled by outside vendors.
Larry Lender heads ABC Bank's loan department in Midcity, FL. Larry has lived in Midcity all of his life and knows the real-estate market well. In 2006, Larry began noticing loans coming through for his approval based on appraisals that he suspected, even in the context of a hot real-estate market, were unrealistically high. Larry also knew, however, that ABC Bank would hold these mortgages only for a few weeks before packaging them into mortgage-backed securities ('MBSs') and selling them on the financial markets through an investment bank. The investment bank often repackaged some of the MBS into collateralized debt obligations ('CDOs'), which are debt securities backed by portfolios of other debt securities. Larry therefore viewed the risks to ABC Bank as minimal and approved the loans. He had many discussions with the bank's loan department heads in other cities in Florida, and understood that they were doing the same thing, as was most of ABC Bank's competition. Larry received a bonus at the end of the year based largely upon his loan volume. Since 2006, Larry's annual bonuses have dwarfed his salary.
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