Associated Mortg. Corp. v. Weaver (In re Weaver), Bankruptcy Case No. 13–12548 EEB

Citation579 B.R. 865
Decision Date05 January 2018
Docket NumberBankruptcy Case No. 13–12548 EEB,Adversary Proceeding No. 13–1292 EEB
Parties IN RE: Janet Kay WEAVER, Debtor. Associated Mortgage Corporation, Plaintiff, v. Janet Kay Weaver, Defendant.
CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

Ray M. Solot, Dennis P. Walker, Denver, CO, for Plaintiff.

Jenny M.F. Fujii, Lee M. Kutner, Denver, CO, for Defendant.


Elizabeth E. Brown, Bankruptcy Judge

THIS MATTER comes before the Court following a trial on Plaintiff's Complaint alleging nondischargeability claims under 11 U.S.C. § 523(a)(2) and (a)(4).1 The issue presented is whether the Debtor, a former employee of the Plaintiff Associated Mortgage Corporation ("AMC"), fraudulently manipulated a loan file to ensure that her brother could obtain a loan from AMC to refinance his mortgage. After her brother closed on the loan, he immediately defaulted, leading to foreclosure and a loss to AMC. For the reasons set forth below, the Court finds and concludes that the Debtor's fraudulent conduct caused AMC to approve a loan that, absent the fraud, it would not have approved. Some, but not all, of the damages alleged by AMC are nondischargeable.

A. AMC's Denver Branch

AMC's home office is in Tulsa, Oklahoma. In 2007, AMC hired the Debtor along with a group of loan officers or originators to open a branch of AMC in Denver, Colorado (the "Denver Branch"). AMC employed the Debtor as a mortgage underwriter from November 2007 through June 28, 2011. AMC is a "warehouse lender," which means it funds its loans through its warehouse line of credit with First Tennessee Bank. After AMC approves a loan, an employee sends a funding request to First Tennessee Bank, who then transmits funds to the title company handling the loan. AMC does not typically service the loans it makes. Instead, after initial funding, AMC sells the loan to a third party investor.

The Denver Brach was a small office, consisting of three to six loan originators, a loan processor/receptionist and an underwriter. Each employee had specific duties. The loan originators essentially served as salespeople. On a typical loan, they would interview potential borrowers to determine their goals and discuss potential loan options. The originator would usually obtain a loan application from the customer, research and select the appropriate loan program, and ultimately "lock" the loan at a particular interest rate.

The loan processor was responsible for collecting the documents necessary for the loan file, such as an appraisal, title work, insurance, credit reports and verifications of employment. Once the loan processor assembled the file, she would hand it off to the underwriter. The underwriter was then responsible for reviewing the file to ensure the information was accurate and met the applicable federal guidelines set by Fannie Mae. Based on this review, the underwriter then determined whether AMC should close the loan or not. The underwriter also drew up the closing documents and arranged for funding of the loan through the warehouse line of credit. No one in AMC's Tulsa office directly supervised the Denver Branch and no one reviewed the Denver Branch underwriter's recommendations to fund loans.

During the timeframe relevant to this case, the Denver Branch employees used three different computer systems to perform their job duties. First, there was AMC's loan operating system called "PC Lender." PC Lender served as a central electronic repository of information for any given loan file, including the borrower's assets, income and debts, and the details of the loan offered to that borrower, such as the loan amount, interest rate, and the loan-to-value and debt-to-income ratios. AMC employees could either manually enter financial information about the borrower into PC Lender or electronically input it from a credit report. AMC employees could also use PC Lender to print various documents, such as a loan application, which PC Lender would auto-populate with information already entered into the system.

PC Lender generates a log that transcribes the date and time of the transactions that affect a particular loan file (the "Log"). Each AMC employee had a unique logon and password for PC Lender, and the log reflects when an employee interacted with a loan file. For example, a common log entry shows the date and time that a particular AMC employee printed the borrower's loan application. This was a frequent activity at the time because it allowed the employee to review a hardcopy snapshot of a borrower's information. The PC Lender Log, however, did not capture every change made to the loan file. Prior to AMC locking a loan, when the loan is in so-called "lead status," PC Lender did not record when and who made changes to a borrower's income and debts. Thus, a borrower's income might increase or decrease within PC Lender, but there would be no record of who made that change and why. After a loan locked, the Log would capture these details.

The Denver Branch also utilized another important computer program called Desktop Underwriter, also referred to as "DU" or "AUS" (short for Automated Underwriting System). Fannie Mae created and maintains this program to incorporate that agency's underwriting guidelines. A mortgage company like AMC can run a proposed loan through DU to generate a report that makes a recommendation or a "finding" based on that loan's conformity to Fannie Mae's credit and eligibility standards. DU relies on the person requesting the report to provide accurate information about the loan and borrower. If DU gives the proposed loan an "approve/eligible" finding, that means it meets Fannie Mae guidelines and is eligible for purchase by Fannie Mae. AMC would typically run DU findings multiple times during the loan process. DU findings are electronic unless the employee running the program requests a printed report. AMC only kept copies of printed DU reports in its loan files. It was AMC's policy to only make loans that received DU's approve/eligible finding.

The third computer program used by AMC was NYLX. NYLX is a loan-pricing engine that compares pricing with multiple potential investors and determines the appropriate interest rate for a borrower. An originator would usually submit a loan to NYLX multiple times to review the pricing for various loan programs. The loan originator would also use NYLX to lock the loan at a particular interest rate. Only loan originators had passwords for NYLX.

Although these three computer programs were separate, they could interact. An employee logged into PC Lender could interface with either DU or NYLX through PC Lender. For example, an employee could sign on to PC Lender, interface with DU and request a DU report. This request would usually, but not always, be reflected in the PC Lender Log. An employee could also access DU directly, without going through PC Lender, in which case the Log would not record the request. Thus, although the Log provides a helpful history of how AMC locked, processed, underwrote and closed a loan, it does not necessarily record every detail of that process.

Once the Denver Branch closed a loan, AMC would sell the loan to a third party investor. To achieve the sale, the Denver Branch would ship the loan file to AMC's Tulsa office, which would then forward it to the investor. The investor would review the file and, if it had questions about the loan, would submit those questions in the form of a "suspense report" sent to the Tulsa office. If the Tulsa office could not answer the question, it would forward the suspense report to the Denver Branch. If AMC answered the suspense reports to the investor's satisfaction, the investor would purchase the loan.

B. The Wilson Loan

In 2009, the Debtor assisted her brother, Richard Wilson, in refinancing his home mortgage through AMC. Although Debtor officially served only as an underwriter for AMC, she played a much-expanded role on her brother's loan. PC Lender listed an AMC employee by the name of Todd Rego as the originator on the Wilson loan. However, Mr. Rego testified that he never spoke to Mr. Wilson (a fact that Mr. Wilson confirmed), never collected any information from Mr. Wilson, never touched the file, and did nothing as an originator other than "possibly" locking of the interest rate through NYLX. In fact, Mr. Rego assigned his entire loan origination commission of approximately $600 for the Wilson loan to the Debtor. Debtor admits that she was the one that communicated with her brother about the loan—a task that applicable guidelines permit loan originators to perform, but not underwriters. Debtor testified that, at the time, she also had a loan originator's license, which allowed her to communicate directly with borrowers. She also signed her brother's loan application "on behalf of Todd Rego," another task usually reserved for the loan originator. These facts demonstrate that Debtor served as the originator for the Wilson loan.

The Log shows that Mr. Rego did perform some limited tasks related to the loan. He ran NYLX on three different days, set the lock date on the loan for June 23, 2009 and sent a lock request on that date to the Tulsa office. However, the evidence also established that Debtor had Mr. Rego's NYLX password in her desk, and so there was a least the possibility that Debtor ran NYLX on his behalf. The Debtor denies doing so, but could provide no plausible explanation for why she would have Mr. Rego's password. She also admits performing origination functions on other loans on which Mr. Rego was listed as the originator, and that Mr. Rego assigned his commissions to her on those other loans. As for the Wilson loan, Mr. Rego could not remember if he was the one who actually performed the specific tasks reflected in the Log, or if Debtor did them using his password. Either way, his role in the origination of the Wilson loan was very limited.

The Debtor also appears to have performed many of the loan processing functions...

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