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Mortgage Bankers Admit to Deceiving Warehouse Bank

Guilty pleas made by American Mortgage Specialists executives

Oct. 22, 2012

By Mortgage Daily staff

Two former senior executives of a failed mortgage banking firm have admitted that they deceived their warehouse lender about funded loans and their financial statements -- leaving the bank unable to repay capital received from the Troubled Asset Relief Program.

When American Mortgage Specialists Inc. collapsed in 2010, its demise was attributed to the loss of a warehouse line.

Turns out the company was insolvent and deceiving its own bank about its capital position.

On Friday, the U.S. Attorney for the District of North Dakota joined the Special Inspector General for the Troubled Asset Relief Program and the Inspector General of the Federal Housing Finance Agency Office in announcing that American Mortgage Specialist chief executive officer, Scott N. Powers, and vice president, David E. McMaster, pled guilty to defrauding BNC National Bank.

The pair of executives was first charged on Oct. 2 in a criminal information. Also charged were American Mortgage's former director of accounting Lauretta Horton and outside auditor David Kaufman, a certified public accountant. Horton and Kaufman were scheduled to be arraigned on Friday.

American Mortgage first entered a loan participation agreement with BNC to fund loan originations in 2006.

But "pay-down" e-mails that were supposed to be sent to the bank were delayed, enabling the lender to use the funds to pay offs loans that had previously been sold.

The deceit, however, didn't stop there.

The defendants allegedly provided BNC with fraudulent financial statements that overstated cash on hand and disguised delinquent federal tax payments as marketing and advertising expenses.

Powers and McMasters "used BNC as their personal piggy bank," Special Inspector General for the Troubled Asset Relief Program Christy Romero said in the announcement. SIGTARP's involvement was due to BNC's $17 million participation in TARP, and the alleged scam prevented the bank from repaying $3 million in TARP dividend payments.

Horton is accused of preparing the fraudulent financial statements, while Kaufman allegedly obstructed the grand jury investigation about a conversation where he learned about the fraudulent accounting.

The plea agreement requires Powers and McMasters to forfeit $28,564,470. Both face up to 30 years in prison at their April 15, 2012, sentencings.

"When their mortgage lending company became unsustainable, they turned to fraud," Assistant Attorney General Breuer said in the announcement.

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