The banking world is buzzing about Abacus: Small Enough to Jail, a new documentary about the only commercial bank criminally charged as a result of the mortgage crisis, $250 million-asset Abacus Federal Savings Bank located in New York City’s Chinatown.
The buzz is well deserved. Scarier than a horror movie, it’s the story a financial institution that finds, stops and reports employee mortgage fraud only to have the government turn on it and accuse it of defrauding Fannie Mae and contributing to the financial crisis.
Abacus is a classic David and Goliath story. On one side, there’s a family-owned community bank helping a community of immigrants build the American Dream. The patriarch is Thomas Sung, a lawyer-turned-community banker who moved to the U.S. from China as a teenager. He and three of his four daughters run the bank, with one serving as president and another one a director. It’s a warm and close-knit family that reminds me of many banking families.
On the other side is an overzealous New York district attorney that’s looking for blood after not a single Wall Street banker went to jail as a result of the mortgage meltdown. He charged Abacus, including 19 former employees, with 184 criminal counts, including grand larceny.
When Abacus caught a loan officer defrauding a customer and overstating income on loan documents in 2011, it did everything right. It immediately fired him. It hired an investigator and fired a few other employees suspected of wrongdoing. It reported the incident to its regulator, the Office of Thrift Supervision, and turned over thousands of pages of documents to the police.
In all fairness, things must not have been perfect at Abacus from a risk and compliance perspective. There must have been weaknesses in its system, which regulators have since worked with the bank to correct. But fraud can happen anywhere. Google “community bank” and “fraud” and you’ll find occasional stories of banks that discover and fire a loan officer committing fraud. The former employee is then prosecuted—not the bank that detected the problem and addressed it.
After a five-year investigation, the D.A. charged the bank, claiming Fannie Mae was victimized by the bank’s systematic fraud. But as the movie makes clear, the fraud is far from systemic. In the thousands of pages of binders the bank turned over, the D.A. found just 30 or so loans with overstated incomes sold to the GSE. None of them had gone into default.
Further, of the 3,000 mortgages the bank had sold during the period, just 10 of them had defaulted—an extremely low rate. The charges of wide-ranging fraud and conspiracy just don’t add up.
I don’t need to remind community financial institutions how ridiculous this treatment was compared to what went down at the nation’s largest banks. The Sung family spent five years and $10 million defending the bank. Ultimately a jury exonerated the bank, but victory came at a huge cost.
This documentary raises important questions. When is senior management liable for the illegal behavior of its employees? When does it become acceptable for the prosecutors to get involved in a compliance issue?