Through the Eyes of a Whistle-Blower: How Sherry Hunt Spoke Up About Citibank's Mortgage Fraud

Abstract

In 2011, Sherry Hunt was a vice president and chief underwriter at CitiMortgage headquarters in the United States. For years she had been witnessing fraud, as the company bought billions of dollars in mortgage loans from external lenders that did not meet Citi credit policy and sold them to government-sponsored enterprises (GSEs). This resulted in Citi selling to GSEs such as Fannie Mae and Freddie Mac pools of loans that were considerably defective and thus likely to default. Citi had also approved hundreds of millions of dollars' worth of defective mortgage files for U.S. Federal Housing Administration insurance. After reporting the mortgage defects in regular reports, notifying and working closely with her direct supervisor (who was subsequently asked to leave Citi after alerting the chairman of the board to these issues) to stop the purchase of defective loans, leaving anonymous tips on the FBI's and the Department of Housing and Urban Development's websites, and receiving threats from two of her superiors who demanded that she change the results of her quality control unit's reports, the shy and conflict-avoidant Hunt had to decide who she should tell about the fraud, and how.

The case gives students the opportunity to recommend how Hunt should proceed based on their analysis of the stakeholders involved. To aid instructors, the case includes Kellogg-produced videos of Hunt—the only on-camera interviews she has ever given—explaining what happened after she reported the fraud to Citi HR and, later, the U.S. Department of Justice. Within the case, students are also briefly exposed to legislation and bodies pertinent to whistle-blowing in the United States, including the Dodd-Frank Act, the Sarbanes-Oxley Act, and the SEC Office of the Whistleblower.

This case won the 2014 competition for Outstanding Case on Anti-Corruption, supported by the Principles for Responsible Management Education (PRME), an initiative of the UN Global Compact.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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Resources

Exhibit 1: Hunt's Place in the Underwriting Reporting Structure

Source: This figure was created from information retrieved from Sherry Hunt, in interview with the authors, April 14, 2014; Richard Bowen, in interview with the authors, April 21, 2014; and Testimony of Richard M. Bowen, III, Hearing on Subprime Lending and Securitization and Government Sponsored Enterprises, Presented to the Financial Crisis Inquiry Commission, April 7, 2010, http://fcicstatic.law.stanford.edu/cdn_media/fcic-docs/2010-04-07%20Richard%20Bowen%20Written%20Testimony.pdf.

Figure

Exhibit 2: Richard Bowen's Email

From: Bowen, Dick [GCG-REO] [dick.bowen@citi.com]

Sent: Saturday, November 03, 2007 5:47 PM

To: Rubin, Robert E [CCC]; Bushnell, David C [CCC]; Crittenden, Gary [CCC]; Howard, Bonnie [CCC]

Cc: Bowen, Dick [GCG-REO]

Subject: URGENT—READ IMMEDIATELY—FINANCIAL ISSUES

TO: Robert Rubin, Chairman of Executive Committee

David Bushnell, Senior Risk Officer

Gary Crittenden, Chief Financial Officer

Bonnie Howard, Chief Auditor

Gentlemen:

I am currently (since early 2006) the Business Chief Underwriter for the Real Estate Lending Correspondent channel, which is within the Consumer Lending Group. From 2002 to 2006 I was SVP and Chief Underwriter for the Correspondent and Acquisitions channel within CitiFinancial Mortgage. I am also licensed as a Certified Public Accountant in the State of Texas.

The reason for this urgent email concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization.

Since mid-2006, I have continually identified these breakdowns in processes and internal controls. The REL Chief Underwriter (my 2006 manager) and I have widely communicated these breakdowns, with possible ramifications, in weekly reports, emails, and discussions (which included the CLG Chief Risk Officer). There have also been two special investigations by CLG Business Risk and Control (the first initiated by me), with the findings confirming these breakdowns.

However, to my knowledge, these breakdowns have not been communicated to or recognized by either Audit or Finance.

I have been agonizing for some time over these issues, and in all good conscience feel I must now communicate these concerns outside of the Consumer Lending Group. I sincerely regret the delay.

Concern #1—Correspondent Fundings Through Delegated Authority

We currently purchase from mortgage companies and sell to third party investors approximately $50 billion annually ($42 billion YTD 2007) of mortgage loans which have not been underwritten by us but which we rep and warrant to the investors (primarily Fannie/Freddie) that these files are complete and have been underwritten to our policy criteria.

Our internal Quality Assurance function, which underwrites a small sample of these files post-purchase, has reflected since 2006 (when this function started reporting to me) that 40–60% of these files are either outside of policy criteria or have documentation missing from the files. QA for recent months indicate 80% of the files fall into this category.

If any of the mortgages in this category default, the investor may require that Citi repurchase the defaulted files based upon our reps and warrants. Under seller reps and warrants Citi may then force the selling mortgage company to repurchase the files, if the seller mortgage company remains financially viable at that time. (As one example, QA results indicate that Citi may be responsible for in excess of 50% of the losses associated with files purchased from the failed Aegis Mortgage—$2.5 billion purchased since Jan ‘06).

A CLG BRC investigation, requested by me, confirmed the breakdowns associated with the QA process and the fact that the QA findings were significantly out of compliance with QA Risk Policy. The Chief Underwriter responsible for this function was terminated and a new QA Risk Policy was approved in 2006. We continue to be significantly out of compliance with the new QA Risk Policy.

I do not believe that our company has recognized the material financial losses inevitably associated with the above Citi liability.

Concern #2—Correspondent Fundings Through Wall Street Bulk Purchases

During 2006–07, there were pools of mortgage loans aggregating $10 billion which were purchased from large mortgage companies with significant numbers of files identified as “exceptions” (higher risk and substantially outside of our credit policy criteria). These exceptions were approved by the Wall Street Channel Chief Risk Officer, many times over underwriting objections and with the files having been turned down by underwriting. These pools involved files aggregated and originated by Merrill Lynch, Residential Funding Corp, New Century, First NLC, and others.

The purchase decisions on many of these pools were approved even though the execution rates and other criteria established by the CLG Bulk Acquisition Policy were not met.

Because of the initial high losses associated with many of these pools, CLG BRC investigated and reviewed correspondence which documented underwriting objections to purchasing identified pools.

BRC conducted an investigation of one Merrill Lynch pool, identifying generic breakdowns of process required by policy and recommended needed changes.

Changes were made in the bulk purchase process, but I do not know if the expected material financial losses from these pools has been recognized.

I know that this will prompt an investigation of the above circumstances which will hopefully be conducted by officers of the company outside of the Consumer Lending Group, and I pledge my full cooperation.

As a professional, as well as a shareholder of this company, I am deeply distressed with having to report the above.

I will be in the office Monday, and can be available by cell phone, if needed, this weekend.

Dick Bowen

469-220-1151 office

214-497-0241 cell

Confidential

Source: Testimony of Richard M. Bowen, III, Hearing on Subprime Lending and Securitization and Government Sponsored Enterprises, Presented to the Financial Crisis Inquiry Commission, April 7, 2010, http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010-04-07%20Richard%20Bowen%20Written%20Testimony.pdf.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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