The case is currently under review by the Justice Department, which is required to assess all complaints brought under the federal False Claims Act, commonly known as the whistleblower law. Court records show the DOJ is slated to determine whether to prosecute the case by the end of March -- well after President-elect Donald Trump’s administration hopes to have Sen. Jeff Sessions (R-Alabama) installed to lead the agency and Mnuchin confirmed as Treasury secretary.
Typically, whistleblower lawsuits are filed under seal. But the allegations against OneWest outlined in this article were made public after the DOJ initially opted in March not to follow-up on the case. The whistleblowers amended their complaint in October, prompting a second look from Justice that remains ongoing. The latest version of the complaint is under seal.
"This is another example of the media sensationalizing allegation over fact, and the fact here is that the DOJ reviewed these allegations and declined to take up the case,” Mnuchin spokeswoman Tara Bradshaw said.
Mitchell declined to comment for this article. One of his attorneys, Jason Lichtman of Lieff Cabraser Heimann and Bernstein, also declined to comment on the case.
CIT Group, which acquired OneWest in 2015, did not comment as well. A person with knowledge of the proceedings said the bank has not responded to the allegations in court.
The whistleblower case is one of a litany of lawsuits alleging that OneWest wrongfully foreclosed on homeowners while Mnuchin helmed the company -- accusations that Democrats are certain to seize on during his confirmation hearing Thursday. Progressive groups began airing state TV ads Wednesday linking OneWest to the worst abuses of the financial crisis, hoping to target Republican senators Dean Heller in Nevada, Jeff Flake and John McCain in Arizona and Chuck Grassley and Joni Ernst in Iowa. On Capitol Hill, Massachusetts Sen. Elizabeth Warren hosted a forum Wednesday featuring homeowners foreclosed on by OneWest.
“Judging by Mr. Mnuchin’s tenure as head of OneWest bank, there is significant evidence that he has no interest in working for the benefit of all Americans,” Warren said. “OneWest was notorious for its belligerence and its cruelty.”
Mitchell said he worked for OneWest as as a specialist in “loss mitigation” -- industry parlance for evaluating homeowners’ requests to stave off foreclosure by modifying their mortgages. In his lawsuit, he said he repeatedly notified his supervisors of problems with the bank’s procedures, at one point threatening to reach out to the television news program “60 Minutes” with his accusations.
In January 2012, Mitchell said he took his concerns all the way to the top. He met with Mnuchin and at least three other bank executives at OneWest’s headquarters in Pasadena, Calif., according to the complaint. He described to them faulty formulas for analyzing applications, technical snafus that misclassified loans and a pervasive lack of training and staff to handle complex financial products and navigate the government’s cumbersome regulations.
Court documents show Mitchell stopped working at OneWest a month later. According to two people familiar with the matter, the bank then hired Mitchell as a consultant and told him to correct errors he had identified. One of those people said the bank implemented at least some of his suggestions but did not specify which ones.
“A responsible company doesn’t have a perfect record,” that person said, requesting anonymity because his current employer restricts speaking to the media. “A responsible company takes seriously the advice that they get.”
But Mitchell alleges that OneWest never fixed the problems.
“There has been no evidence to suggest that OneWest’s policies or procedures have been changed to address these very important issues,” the lawsuit states.
Another former OneWest employee, who requested anonymity, supported Mitchell’s account of the wrongdoings. This employee said supervisors were repeatedly notified that the bank was not complying with federal regulations -- and that the warnings were ignored.
“We were telling these people, these borrowers, ‘Oh yeah, we’re looking at you for this and for that,’” the employee said. “But we didn’t have any of those things to put them in, so that was a straight lie.”
Among the problems Mitchell said he identified in 2014 was an incorrect Microsoft Excel formula that allegedly affected at least 1,000 homeowners. According to the complaint, OneWest’s models automatically assumed that borrowers would defer 30 percent of their loan as part of their modification, the maximum amount that was allowed under federal guidelines.
Assuming the maximum deferral meant that at least some homeowners would be taking on too much debt to qualify for the program, the complaint said. Yet Mitchell said there was no way for employees to alter the amount -- forcing them to deny the requests.
After about six months, Mitchell said he designed a new formula himself but that the denied applications were never re-evaluated.
“They lost their family homes for no good reason but management’s knowing indifference,” the 2014 complaint states.
The suit also alleges that a third-party contractor hired by OneWest to process modification requests agreed to terms that violated federal guidelines in about 40 cases. OneWest refused to honor those agreements, according to the complaint, frustrating homeowners who thought their modifications had been approved.
In addition, Mitchell argued that OneWest did not provide special consideration to members of the military and low-income borrowers with loans insured by the Federal Housing Authority, as required under government guidelines.
It is unclear what allegations from Mitchell’s 2014 complaint remain in the updated version. Legal experts said whistleblower suits are often amended several times to add new facts, change defendants or push new arguments. Justice officials can spend years weighing whether to prosecute a case.
Many financial institutions, including some of the nation’s biggest banks, have been hit with similar lawsuits. The second whistleblower in the case against OneWest, Michael Fisher, worked for a law firm that represented homeowners requesting modifications from the bank. He and one of his attorneys have sued several other mortgage companies as well, resulting in a $30 million settlement with Atlanta-based Ocwen Financial last year.
The OneWest suit estimates the bank could owe the federal government more than $100 million if it is found to have violated modification guidelines.
“The same lawyer who brought this case brought almost identical cases against at least eight other banks, showing that this is a lawyer-driven scheme to make money, not a legitimate case, let alone a case that is specific to OneWest,” Bradshaw said.
As Treasury secretary, Mnuchin would help oversee the wind down of the government’s efforts to help struggling borrowers remain in their homes. OneWest tested some of the earliest versions of those programs in the wake of the financial crisis, and Bradshaw said federal auditors found the bank had low error rates.
Mnuchin, a veteran Wall Street investor and former Goldman Sachs executive, led the consortium of investors that purchased the subprime mortgage lender formerly known as IndyMac from the federal government in 2009 for $1.6 billion after its spectacular collapse during the housing bust. Mnuchin renamed the bank OneWest and ran it for six years.
Many of the mortgages he acquired were among the worst-performing loans in the country, made to the riskiest borrowers with little to no documentation. When Mnuchin took control of OneWest, roughly 178,000 homes were in already in foreclosure, Bradshaw said. The bank offered homeowners more than 101,000 loan modifications, many of which also promised to forgive part of borrowers’ mortgages, she said.
Mnuchin sold the bank to CIT Group in 2015 for $3.4 billion but retained a seat on its board of directors. He stepped down from that role in December, after his nomination, and pledged to divest his stake in the company if he is confirmed. Compensation research firm Equilar estimates his holdings are worth about $100 million.
“One of the most proud aspects of my career was buying IndyMac during the financial crisis,” Mnuchin said on CNBC in November. “We saved a lot of jobs and created a lot of opportunities for corporate loans.”