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OCC Fines Sterling Bank & Trust $6M Over Mortgage Fraud

David Krechevsky
Sep 27, 2022
Court Justice

Bank, parent company remain under criminal investigation by Justice Department and SEC.

The federal Office of the Comptroller of the Currency (OCC) on Tuesday said it has imposed a $6 million fine on Southfield, Mich.-based Sterling Bank & Trust FSB over claims that it originated mortgage loans for about eight years using false or fraudulent information.

The OCC and Sterling Bancorp Inc., a California-based thrift holding company for Sterling Bank & Trust, announced the civil money penalty as part of a consent order. The OCC said it also terminated a formal agreement with the bank that it had entered into on June 18, 2019.

Under terms of the consent order, the bank neither admits nor denies the allegations made by the OCC.

The OCC said the civil penalty is based on violations of state and federal laws and unsafe or unsound practices related to the bank’s Advantage Loan Program (ALP), a low-document mortgage loan program it offered between approximately 2011 and December 2019. 

According to the OCC, Sterling Bank originated numerous ALP loans that were based on false or fraudulent loan information. It also found underwriting deficiencies and violations of federal Bank Secrecy Act/Anti-Money Laundering regulations related to the program.

According to the consent order, Sterling Bank “originated numerous ALP loans that had false or fraudulent loan applications. These loan applications contained falsified applicant income and employment information and debt-to-income ratios and relied on falsified supporting documents, such as verification of employment documents, letters of explanation, and gift letters.”

In addition, the order states, “loan documents failed to disclose the use of third-party mortgage brokers. Despite deficiencies within the ALP, the bank did not take appropriate corrective action and continued to grow the ALP.”

The order also states the bank “failed to make a reasonable and good faith determination of applicants’ ability to repay and to ensure that documents used to verify applicants’ employment, income, and assets were obtained from third parties, were reasonably reliable, and that there were proper quality control mechanisms to ensure the accuracy and reliability of the bank’s loan documents.”

The bank also “failed to properly disclose the involvement of, or fees paid to, third-party mortgage brokers on loan estimates and closing disclosures,” and made ”false representations about the ALP loans to and concealed material information regarding the ALP loans from the Federal Home Loan Bank of Indianapolis.”

In terminating its June 2019 agreement with the bank, the OCC said it “has determined that the bank has implemented all corrective actions required by the Formal Agreement and is in compliance with all articles of the enforcement action.”

The bank’s $6 million civil penalty will be paid to the U.S. Treasury, the OCC said. According to Investopedia.com, such penalties are normally equivalent to the amount of money a violator earns as profit from their activities.

The consent order did not state how many were fraudulently approved under the Advantage Loan Program over the approximately eight years it was in place, nor did it provide an overall dollar value for the approved loans. 

In its second-quarter earnings report in August, the bank reported a net loss of $2.2 million, or 4 cents per diluted share. The bank also reported total deposits of $2 billion, and total gross loans of $1.8 billion.

In a statement, Sterling Bank said the civil penalty “will be applied against the previously accrued liability for contingent losses reflected on the company’s consolidated balance sheet, which amounted to $15 million as of June 30, 2022.” It added that the consent order “represents a full and final settlement of the OCC’s investigation with respect to the bank.”

The OCC, however, said it continues to review “the conduct of institution-affiliated parties subject to OCC jurisdiction who were associated with the now-ceased Advantage Loan Program.” It adds that “this work remains ongoing.”

Jack L. Kopnisky
Jack L. Kopnisky

Sterling Bancorp CEO Jack L. Kopnisky said the announcement of the OCC civil penalty “represents a painful resolution of the long-running regulatory fallout from the ill-fated Advantage Loan Program.”

“The level of cooperation that we have provided and the comprehensive internal investigation have been critical to our building a reputation with our regulators that had been absent previously,” Kopnisky said. “In my tenure as CEO, the board of directors, management, and staff have placed this extensive cooperation along with the remediation of all of the critical findings in the OCC Agreement and elsewhere as our primary focus. Our commitment and the ultimate success are evidenced by the termination of the OCC Agreement.”

He said the “$6 million civil money penalty, while significant, is a clear reflection of our extraordinary cooperation and remediation efforts and represents another significant milestone in putting these legacy issues behind us.”

In its statement, the bank said both the parent company and the bank remain under criminal investigation by the U.S. Department of Justice and the Securities and Exchange Commission regarding the ALP, as well as for “related disclosures of that program in the company’s federal securities law filings.”

Kopnisky said the bank remains “engaged with the DOJ” on the criminal aspects arising from the ALP. 

“At this point in time, we have no visibility into the potential terms or timing of any settlement with the DOJ,” he said. “We will continue to provide full cooperation and hope (a) resolution with Sterling will be forthcoming.”

Sterling Bancorp Inc. is a unitary thrift holding company. Its wholly owned subsidiary, Sterling Bank & Trust F.S.B., has primary branch operations in San Francisco, Los Angeles, and New York City.  Sterling also has an operations center and a branch in Southfield, Mich.

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