U.S. Probes Banks' Mortgage Practices

WASHINGTON (TheStreet) -- The U.S. Department of Justice has been aggressively investigating whether mortgage lenders defrauded the government by improperly accessing federal guarantees on mortgage debt, according to attorneys and other banking professionals with knowledge of the investigation.

It's unclear how far the Justice Department has gone in its probes, or which lenders it is targeting, because the investigations often remain under seal for several years. Also, because of the complexity of the mortgage market and how the investigation falls under the False Claims Act (FCA), the scope of lender liability also remains uncertain, industry watchers say.

This new front in the government's push on mortgage fraud may be more successful than previous efforts since it has been a useful tool in other industry investigations. Since 1986, the Justice Department has recouped $27 billion in False Claims Act settlements. The health care industry, which has been the main target of False Claims Act investigations in recent years, has contributed the lion's share.

Attorneys who have been involved in such cases say that if targets are publicly traded, they are required to mention related subpoenas in regulatory filings. Mentions of government subpoenas have been popping up in bank regulatory filings recently.

>>Mortgage Mayhem: A Special Series by TheStreet

Bank of America (BAC) said in its most recent 10-K filing that its Countrywide division received a subpoena from the Justice Department. A spokesman did not respond to a request for comment.

Citigroup (C) also said that government agencies had issued subpoenas concerning its "subprime mortgage-related conduct and business activities." A spokesman did not immediately have a response regarding the nature of those subpoenas. The most recent annual reports for Wells Fargo (WFC) and JPMorgan Chase (JPM) do not mention subpoenas.

Those top four mortgage players, as well as Ally Financial and a host of other large banks, have already been targeted by state attorneys general and federal regulators that are probing foreclosure practices.

Justice Department spokesman Charles Miller said he couldn't confirm or deny that there are active False Claims Act cases related to mortgage fraud, but wouldn't rule it out.

"I can't tell you whether anything's percolating," said Miller, later adding, "that's not to say things can't change in a week, a month or a year."

Lawyers on either side of the litigation table were less circumspect.

"It's something that the federal government is very interested in," says Brian P. Kenney, a partner at the law firm Kenney & McCafferty, which represents plaintiffs in False Claims Act cases. Kenney wouldn't comment on anything he's directly involved in, but said mortgage fraud is "being actively investigated" by the Justice Department.

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