12 CU Employees Fired for Alleged Involvement in Mortgage Fraud Scheme

In 2022, the $5.1 billion Travis Credit Union in Vacaville, Calif., fired 12 employees for their alleged involvement in an internal mortgage loan fraud scheme that caused more than $714,000 in losses.

Travis is suing CUMIS, now TruStage, after the Madison, Wis.-based insurance company denied the credit union’s loss claim.

From January 1, 2021 and June 30, 2022, former Travis loan officers and “complicit staff” allegedly manipulated the credit union’s loan origination system, (LOS), to misclassify real estate loan originations to generate “improper and fraudulent commissions,” according to an amended complaint filed in U.S. District Court in Sacramento in May.

The credit union said in its complaint that external loan officers were only entitled to commissions on externally sourced loans that they actually closed on, and the sales case manager plan allowed for commission based upon all external loan officers’ volume of loans funded. In April 2022, external loan officers were reclassified as senior mortgage loan officers. At that time, “retail referred” loans (some of which may have been internally sourced) became commissionable. However, they were only commissionable if the external loan officer actually generated the loan submission package with the borrower and submitted it to the operations team.

The first method the loan officers used to fraudulently misclassify real estate loan originations was to characterize them on the credit union’s LOS as commissionable for certain employees when, in fact, they were not commissionable, Travis CU alleged in its complaint. The loan officers who allegedly perpetuated the fraud changed the loan officer assignment in the LOS to reflect that an external loan officer had either originated the loan, or had generated the loan submission package, when the external loan officer had not.

In many instances, the LOS reassignment occurred shortly before or after the loans had actually been funded. As a result, Travis’s LOS falsely reflected a commission due to the external loan officer to whom the loans were reassigned, when no commission was actually due, the credit union’s complaint alleges.

The second method the loan officers used that fraudulently misclassified loans, the credit union alleged, was to make them appear to be commissionable at a higher rate than they were. Travis CU’s commission plans, in instances in which refinanced loans were commissionable, these loans were commissionable at a lower rate than new money. The loan officers who were engaged in the fraud would misclassify loans as new money, making them appear to be commissionable at the higher rate, Travis CU’s lawsuit alleged.

Because of this scheme, the credit union said it suffered losses of at least $714,812. After the fraud was discovered, Travis CU hired a forensic auditor to examine its lending portfolio and to assess the scope of the defalcations (misappropriation of funds) and whether any loans suffered increased risk as a result of the fraud. The forensic audit cost $43,058.

The lawsuit does not say how the alleged scheme was detected.

The credit union said it “separated with 12 employees who either participated in the fraud or who were derelict in supervising those employees and in performing their control responsibilities.” Travis CU did not say the number of loan officers and the number of staff members were involved.

In August 2022, the credit union filed a loss claim under its CUMIS insurance policy’s employee or director dishonesty coverage and the policy’s faithful performance – enhanced coverage, which provides that CUMIS will pay for loss resulting directly from an employee’s failure to faithfully perform his or her trust.

It took CUMIS nearly 10 months to inform Travis CU that its loss claim had been denied.

CUMIS’ response to Travis CU complaint argued that its loss claim fails as a matter of law because the loss does not fall within the scope of the fidelity bond’s Employee or Director Dishonesty Coverage.

“Travis sought indemnification for funds it claims were improperly paid as commissions to its own loan officers and employees as a result of their fraudulent activities,” according to CUMIS’ legal filing. “The bond’s Employee or Director Dishonesty Coverage provides that CUMIS “will pay you for your loss resulting directly from dishonest acts committed by an ‘employee’ or ‘director,’ acting alone or in collusion with others.” However, it specifically provides that “loss” does not include “any employee benefits, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing, business entertainment or pensions, intentionally paid by you.”

What’s more, because these commissions resulted from loans issued by Travis CU, the credit union must establish that the dishonest acts were committed with the intent to both cause Travis to sustain a loss and to obtain an improper financial benefit for the employee or director or a financial benefit for any other person or entity, according to CUMIS.

“The bond specifically states that ‘improper financial benefit’ “does not include any employment benefits received in the course of employment including salaries, commissions, fees, bonuses, promotions, awards, profit sharing, business entertainment or pensions,” CUMIS argued in its court filing. “Because the only purported benefits obtained were commissions, there was no ‘improper financial benefit,’ and therefore no coverage.”

The insurance company also contended the loss reported by Travis also does not fall within the scope of the fidelity bond’s Faithful Performance – Enhanced Coverage because that coverage is available for losses resulting directly from a named employee’s failure to faithfully perform his/her trust.

“Failure to faithfully perform his/her trust” is a defined term that means “acting in conscious disregard of the (credit union’s) established and enforced share or deposit policies or that portion of (the credit union’s) established and enforced lending policy which sets out the parameters which must be met in order for a loan to be approved,” CUMIS’s court filing read. “It does not mean, inter alia, “[c]onscious disregard of any policies other than lending, share or deposit policies, including, without limitation, personnel policies, investment policies, or collection policies or that portion of any policy that relates to the collection of monies.”

CUMIS claimed that Travis CU did not identify any share or deposit policy that the employees purportedly violated or disregarded in connection with their misclassification of mortgage loans, and the claim is not based on allegations that any of these loans were improperly approved.