Risk & Compliance

Deloitte to Pay $149M Over TBW Loan Fraud

The government says the TBW financials audited by Deloitte failed to reflect the mortgage originator's "severe financial distress."
Matthew HellerMarch 1, 2018

Deloitte & Touche has been fined $149.5 million to settle allegations that its auditors failed to detect a massive accounting fraud at Taylor, Bean & Whitaker that led to the collapse of the mortgage originator.

In announcing the settlement on Wednesday, the U.S. Department of Justice said Deloitte “knowingly deviated from applicable auditing standards” while it served as TBW’s independent auditor from 2002 to 2008.

During that time period, TBW was “engaged in a long-running fraudulent scheme involving, among other things, the purported sale of fictitious or double-pledged mortgage loans,” but the financial statements audited by Deloitte “failed to reflect its severe financial distress,” according to the DoJ.

Deloitte previously settled a $1.3 billion lawsuit in which Freddie Mac alleged it was “grossly negligent” in its auditing of TBW, which originated, serviced, and sold mortgages in pools to Freddie Mac and Fannie Mae. The fraud resulted in losses to the Federal Housing Administration, the insurer of the mortgages.

A number of TBW officials, including former Chairman Lee Farkas, were convicted of criminal charges after regulators shut the firm down in August 2009.

“When auditors fail to exercise their professional judgment, and make false statements that allow bad actors to remain in government programs and submit false claims to the government, there will be consequences,” Acting Assistant Attorney General Chad A. Readler said in a news release.

TBW was, at one time, the largest privately held mortgage company in the U.S., with funding provided by Colonial Bank. By December 2003, however, its rolling overdraft had grown to more than $120 million and, as HousingWire reports, “Farkas and others began selling mortgages that didn’t exist to cover the shortages.”

Colonial failed a few days after TBW, causing a $2.8 billion loss for the Federal Deposit Insurance Corp. In August 2016, PwC, Colonial’s auditor, settled a $5.5 billion case filed by TBW’s bankruptcy trustee. It was the largest accounting negligence lawsuit ever to go to trial.

Deloitte said it was misled by TBW management but was “pleased to have resolved this matter to avoid the risk and uncertainty of protracted litigation.”