The massive secondary market scheme pulled off by executives at Taylor Bean and Whitaker Mortgage Corp. could not have happened without the help of an insider at its bank. That bank insider — who was in charge of the institution’s warehouse lending business — has admitted her role in the $1.5 billion episode of fraud.
Catherine L. Kissick worked at Colonial Bank until it was seized by the Alabama State Banking Department in August 2009. She had worked there since at least 2002.
The 49-year-old woman was an officer and director at Colonial and served as senior vice president and assistant treasurer.
Kissick was also in charge of Colonial Bank’s Mortgage Warehouse Lending Division. It was in that capacity that she was allegedly able to help former Taylor Bean chairman Lee Farkas and former Taylor Bean treasurer Desiree Brown carry out a scheme involving $1.5 billion in fraudulent mortgages, according to court documents.
Taylor Bean was the biggest customer in Colonial’s warehouse division. In 2007, its outstanding lines with Colonial amounted to $3.5 billion — almost 82 percent of the unit’s total assets.
According to the government, liquidity dried up at Taylor Bean in 2002. The company began to overdraw its warehouse line by $15 million a day, and Farkas pressured Kissick to cover up the overdrawn accounts.
As losses grew, bookkeeping entries were altered. By the end of 2003, around $150 million was being overdrawn nearly each day. So Farkas and Kissick allegedly devised a plan to load Colonial’s books with fictitious loans.
In December 2003, Taylor Bean Treasurer Desiree Brown was brought into the scheme. She was directed to deliver $150 million in bogus loans.
Loans that failed to qualify for purchase in the secondary market as well as foreclosed mortgages and other impaired loans were also sold to Colonial as qualified loans.
By the next year, the volume of fraud prompted the defendants to devise a plan to hide the loans as trades that couldn’t be identified by Colonial’s internal system. A host of other tricks were used to conceal the crime.
The scheme began to unravel in 2007 when a private-label purchaser of loans reneged on its obligation to acquire around $600 million in loans funded by Colonial. The loans were broken down into smaller pools, and some were unloaded.
“By the end of 2007, and continuing through 2009, Colonial Bank’s [assignment of trade] account had approximately $500 million in completely unsecured Plan B loans and an additional approximately $1 billion in crap loans,” court documents state.
On Wednesday, the Department of Justice announced that Kissick pled guilty in U.S. District Court for the Eastern District of Virginia to conspiring to commit bank, wire and securities fraud.
Also on Wednesday, the Securities and Exchange Commission filed a civil lawsuit against Kissick in U.S. District Court for the Eastern District of Virginia.
She faces up to 30 years in prison at her scheduled sentencing on June 17.
Brown pled guilty last week, while Farkas was arrested in June 2010 and is scheduled to go to trial in April.
Securities and Exchange Commission, Plaintiff, v. Catherine L. Kissick, Defendant.
Case No. 1:11cv215LMB/JFA, March 2, 2011 (U.S. District Court for the Eastern District of Virginia).