In particular, the United States alleged that in 2005-2007, WMC attempted to increase its profits and meet profit goals by increasing originations. WMC loan analysts responsible for underwriting mortgage loans were encouraged to approve loans in order to meet volume targets, even where the loan applications did not meet the criteria outlined in WMC’s published underwriting guidelines, and received additional compensation based on the number of mortgages they approved. At the same time, there were significant deficiencies with respect to WMC’s quality control, which was viewed by some as an impediment to volume. In 2005, a WMC quality control manager described his department as a “toothless tiger” with inadequate resources and no authority to prevent the approval or sale of loans his department had determined were fraudulent or otherwise defective. By late third quarter 2006, managers responsible for quality control and risk management at WMC and GECC had expressed concerns that WMC’s quality and fraud controls were so lax that WMC received more mortgage applications containing fraud or other defects than its competitors. As a member of GE’s Corporate Audit Staff (CAS) involved in audits of WMC observed in April 2007, WMC “jacked up volume without controls.”

Selling Junk Fraud Loans To Unsuspecting Investors

The United States alleged that the investment banks that purchased WMC’s loans declined to buy certain mortgage loans that WMC attempted to sell due to defects in the loan file or suspected fraud. When it declined, or “kicked out” a loan, the potential purchaser typically notified WMC of its reasons for rejecting the file, including the defects identified. WMC’s general practice was to re-offer certain kicked loans to a second potential purchaser for inclusion in RMBS without disclosing that the mortgage had previously been rejected or the reasons why the first potential purchaser concluded the mortgage had defects.

78% Fraud Rate in Portfolio

The United States alleged that by late 2005 and early 2006, investment banks were kicking out more of WMC’s loans than ever, and investors in RMBS backed by WMC loans raised concerns about the quality of loans originated by WMC because WMC borrowers were failing to repay their loans at unexpectedly high rates. WMC also began receiving increased numbers of requests from investment banks to buy back, or repurchase, loans. In March 2006, WMC reviewed a representative sample of the 1,276 loans it had repurchased in 2005, and concluded that 78 percent of the loan files reviewed contained at least one piece of false information. The results of this review were shared with WMC’s senior executive team and discussed on multiple occasions with personnel from GECC.

The United States alleged that in fall 2006, GECC took control over the strategic direction of WMC. Even in the face of increasing repurchase demands, kick-outs, and concerns about WMC’s underwriting quality, WMC continued selling its loans and making false representations about their qualities and attributes. GECC became closely involved in WMC’s whole loan sales and provided WMC with input and direction on how to sell off WMC’s remaining loans. Beginning in 2007, GECC also assumed control over WMC’s ability to grant repurchase requests.