Bank Facing $10M Loan Warehousing Loss Cites Fraud

A Texas bank that six months ago pushed for limits on the state bank commissioner's power to regulate its mortgage warehousing business says it has taken a hefty loss on the unit.

Fidelity Bank, Forth Worth, said that it could lose up to $9.8 million after taxes from what it described as procedural lapses in its mortgage warehousing unit and fraud perpetrated against it.

The bank declined to say how much the warehousing unit actually lost. However, a spokesman said, the unit's customers - mortgage banks - managed to have $14.8 million that Fannie Mae should have paid to Fidelity diverted instead to them.

The spokesman said that the bank's losses were "significant" but that it "remains well capitalized and has good liquidity."

The privately owned bank, with $176 million in assets, has been one of the most profitable banks in Texas. One of the primary reasons for its success, its mortgage warehousing unit, which dealt with mortgage banks all over the country, has been shut down.

In mortgage warehousing, a bank funds loans originated by mortgage banks. Fidelity should have been repaid for funding the mortgages when they were sold on the secondary market, in this case through Fannie Mae.

Two mortgage companies, one in New Jersey and one in Florida, received the Fannie Mae payments that should have gone to Fidelity, according to the bank.

The Florida company was Fidelity's largest mortgage banking customer.

The Florida mortgage company "kited the funds, sending some money to the bank but keeping some," alleged Sandy Brown, a Bracewell & Patterson lawyer representing the bank. "They would cover the payments owed with new payments from the bank. Over time, the volume (of kited funds) worked up to in excess of $10 million."

Mr. Brown said that when the bank discovered the diverted payments, it told Fannie Mae to send the funds directly to the bank. Mr. Brown claimed that an employee of the Florida mortgage company had used Fannie Mae's payment system to divert the funds from Fidelity.

Mr. Brown described the practice as fraudulent. He wouldn't disclose whether the bank had filed a criminal referral.

In the New Jersey case, Mr. Brown said, the mortgage company's principals themselves are still unsure how the bank's money was diverted. And though Fidelity has filed suit against the New Jersey mortgage company, Mr. Brown said it is continuing to talk to the company's principals about what exactly happened. He didn't characterize the New Jersey case as fraud.

"The bank is pursuing the principal of the (New Jersey) company because they guaranteed the performance on the loans," Mr. Brown said.

He added that the bank is actively pursuing funds from the Florida mortgage company and even from Fannie Mae itself. A Fannie Mae spokesman was unaware of the situation and could not comment.

The Fort Worth Star-Telegram identified the New Jersey company as Foremost Mortgage in Shrewsbury. The Florida company was identified as First National Funding Inc. in Fort Walton Beach. Officials at the companies could not be reached for comment.

Though Mr. Brown said the bank was the victim of a fraud in the Florida case, he acknowledged that "it's fair to say not all of the bank's procedures were followed in every instance."

The Federal Deposit Insurance Corp. and the Texas Banking Department recently completed a concurrent examination of the bank. State Banking Commissioner Catherine Ghiglieri said her office "would take whatever action is appropriate."

Fidelity's problems are the latest, ironic twist to a fight the Texas Bankers Association picked with Ms. Ghiglieri six months ago after she proposed writing regulations on mortgage warehousing for state-chartered banks.

Fidelity was one of a group of banks that urged the Texas Bankers Association to file suit or introduce legislation that would have limited Ms. Ghiglieri's power to write regulations that differed from national bank regulations.

The dispute ended in a compromise, but relations between Ms. Ghiglieri and the Texas trade group were badly strained.

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