The Colonial BancGroup, Inc (fka CBCGQ)

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FDIC: Bank Of America Owes $900M For Colonial Mortgages
By Patrick Fitzgerald
17 January 2012

The Federal Deposit Insurance Corp. says Bank of America Corp. owes the failed Colonial Bank $900 million for losses suffered when Colonial collapsed in the wreckage of Taylor Bean & Whitaker Mortgage Corp.'s multibillion-dollar bank fraud.

The FDIC said in a court filing Friday that Bank of America, as the middleman between Colonial and Taylor Bean's Ocala Funding unit "stripped" more than 4,800 mortgage loans from the bank but didn't pay for them.

The FDIC, which was named the receiver of Colonial when the bank collapsed, says Bank of America, in its conflicting roles as a custodian for Colonial as well as Ocala, "injured" the defunct bank.

"That injury caused a $900 million loss to Colonial that was borne by FDIC-R[eceiver] and Colonial's innocent creditors," the FDIC said in papers filed in federal court in Washington, D.C.

Bank of America spokesman William Halldin declined to comment on the FDIC's filing.

Colonial was Taylor Bean's main lender. Both Bank of America and the FDIC, as Colonial's receiver, claim they were victims of the massive fraud at Taylor Bean, which involved the falsifying of books to allow the triple pledging of the same mortgage loans to different buyers.

The exposure of the Taylor Bean fraud, which federal prosecutors claim has resulted in more than $7 billion in losses to investors, resulted in the criminal convictions of some Taylor Bean and Colonial executives and triggered a flurry of civil lawsuits involving investors, banks, regulators and creditors.

At the center of the fraud was the Ocala Funding LLC conduit, a mortgage-financing vehicle that Taylor Bean created in 2005 to purchase its home loans, which were then bundled into securities and sold to investors such as Freddie Mac. It funded its business by issuing short-term notes that it sold to investors.

The investors---Deutsche Bank AG and the mortgage subsidiary of BNP Paribas SA---sued Bank of America in 2009 for breach of contract over the bank's alleged failure to secure $1.75 billion in cash and mortgage loans on their behalf. Bank of America, which served as the trustee for the notes issued by Ocala, has denied any wrongdoing. The litigation between the bank and the investors is pending.

Bank of America in turn sued the FDIC, as receiver for Colonial, back in the fall of 2010 to recover $1.75 billion in losses suffered by investors in Ocala.

The FDIC, which sought to have the Bank of America lawsuit dismissed, countersued, alleging the bank "executed demonstrably false documents---that indicated that BoA had rights in the loans and purported to strip Colonial of its ownership rights---in order to sell the loans to Freddie Mac." The FDIC claims Bank of America's actions constitute breach of contract, malfeasance, bad faith, gross negligence and willful misconduct with respect to Colonial. Bank of America is seeking a dismissal of the FDIC's countersuit.

The Ocala conduit was a key element in the seven-year fraud orchestrated by Taylor Bean founder Lee Farkas.

The scheme involved Colonial "purchasing" mortgage loans from Taylor Bean that had already been sold to other investors. In this way, Taylor Bean masked its financial problems and maintained its licenses as mortgage lender, seller and, importantly, issuer of mortgage-backed securities. Colonial, which was Taylor Bean's main lender and "co-conspirator," according to Bank of America's lawyers, provided the lender with $3 billion in mortgage financing, much of which went through Ocala.

Farkas also tried to pump $300 million into Colonial as part of a fraudulent scheme that would have enabled the struggling bank to become eligible for a $550 million federal bailout under the government's Troubled Asset Relief Program.

Farkas, a Florida businessman who built Taylor Bean from a small mortgage company into the U.S.'s largest mortgage lender not owned by a bank, is serving a 30-year prison sentence for his role in the scheme. A handful of other executives from Colonial and Taylor Bean have also been sentenced to prison for their roles in the fraud.

Taylor Bean collapsed after federal regulators uncovered evidence of fraud and suspended its authority to make loans insured by the government agencies.

Colonial Bank, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of 2009. The FDIC estimates Colonial's collapse will cost its insurance fund around $5 billion, making it one of the most expensive bank failures in U.S. history.

The FDIC was named receiver of Colonial Bank after regulators seized the Montgomery, Ala., bank on Aug. 14, 2009, and sold its assets to BB&T Corp. Taylor Bean filed for Chapter 11 bankruptcy protection 10 days later.



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