Marking a watershed day in the aftermath of the national housing crash, Arizona officials announced a pair of settlements with large banks over allegations of improper lending and foreclosure practices that will result in more than a billion dollars of aid for struggling homeowners.

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Arizona’s portion of a nationwide, $26 billion settlement with the country’s five biggest lenders will be $1.6 billion, the third-largest share after hard-hit California and Florida.

Most of the money in that deal, announced Thursday after negotiations by attorneys general across the country, will be paid out by lenders in the form of principal reductions — cutting the amount of money that certain borrowers are responsible for repaying on their home loans. Lenders will also dedicate part of the funds to reducing other borrowers’ interest payments and will issue $2,000 payments to people who lost homes in improperly managed foreclosures.
A second, smaller settlement with Bank of America ends a state lawsuit over the bank’s lending practices and will fund consumer protection and future investigation of mortgage lending.

The national settlement will not deliver assistance to every struggling homeowner. It applies only to mortgages held by the five large lenders and does not extend to borrowers with loans backed by federal mortgage giants Fannie Mae and Freddie Mac, who make up more than half of all mortgage-holders.

Still, federal officials estimate that 60,000 Arizona borrowers could see assistance with their principal or interest rates. And the settlement marks the first time lenders have agreed, on any large scale, to forgive money owed by underwater borrowers.

“These settlements will help Arizona homeowners and the state’s economy that is so tied to housing,” Arizona Attorney General Tom Horne said. “I think we are holding banks accountable.”

Who benefits
Only borrowers with loans owned by BofA, Citigroup, the former GMAC (now known as Ally Financial), JPMorgan Chase and Wells Fargo are eligible for aid from the national settlement. The five lenders are responsible for contacting eligible homeowners in the coming month to offer assistance.

The deal requires the banks to reduce loans for about 1 million households that are at risk of foreclosure. The lenders will also send $2,000 each to about 750,000 Americans who were improperly foreclosed upon from 2008 through 2011. The banks will have three years to fulfill terms of the deal.

Borrowers who had loans originally issued by the five participating lenders but then had their mortgages sold to another bank aren’t eligible.

About $1.3 billion of Arizona’s $1.6 billion will go toward principal reductions. Federal officials estimate the national average for principal reductions will be $20,000 per loan. In Arizona, where home prices have fallen 60 percent, many homeowners are likely to be underwater by far more than $20,000.

Horne said homeowners whose mortgage balances are 175 percent or more of their current home values and who are current on their payments will probably be the first to receive principal reductions.

Nationally, at least $17 billion of the settlement is to go directly to reducing principal. Details on how much lenders will reduce the amount borrowers owe aren’t available yet.

About $86 million of Arizona’s share of the deal will go toward offers to modify borrowers’ loans by lowering interest rates. An additional $110.4 million has been set aside to compensate Arizona borrowers who lost their homes to foreclosure from 2008 to 2011 and believe they suffered unfair treatment by lender servicers. Each borrower is eligible for $2,000.

Horne said that any former homeowner who thinks he or she qualifies for the $2,000 should contact the lender and that little documentation will be required to receive this compensation.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said 55,000 former Arizona homeowners will qualify for the $2,000 payments. During the housing crash, more than 175,000 borrowers have had Arizona homes taken back by lenders, though that figure includes loans held by Fannie and Freddie.

Arizona will receive $102.5 million to be used for mortgage-fraud investigations and consumer counseling.

Arizona State University’s real-estate analyst Mike Orr said reducing mortgage principal for underwater homeowners will “significantly bolster the housing market” if it entices more people to stay in their homes and keep making payments.

Almost 50 percent of the state’s homeowners are underwater, meaning homeowners owe more than their homes are now worth because values have plunged by more than half since the market’s peak in 2006.

Patricia Garcia Duarte, president of the Phoenix-based housing non-profit Neighborhood Housing Services, said the settlement looks like a lot of money to help both former and current homeowners. However, she said the damage done to Arizona families and communities has been extreme.

“The funds will definitely help,” Garcia Duarte said. “But how the funds are spent in Arizona will determine the success in our housing recovery.”

BofA lawsuit
Arizona is also receiving $10 million through the settlement of a lawsuit with BofA over allegations of mortgage fraud and deceiving borrowers trying to obtain loan modifications.

The money will go toward funding criminal loan investigation and consumer education. Horne said it’s not clear yet whether the BofA borrowers who served as plaintiffs will be compensated from the $10 million or the state’s $1.6 billion from the national settlement.

The suit, filed in December 2010 by the state’s attorney general, had to be reconciled for Arizona to participate in the national settlement.

“If we had continued to litigate the BofA lawsuit, we might have recovered more money,” Horne said. “But the lawsuit could have taken another five to six years. By settling now and joining the national settlement, more homeowners will receive help sooner.”

Enforcement
The deal establishes a regulatory group of local and federal government agencies. It calls for North Carolina’s banking regulator Joseph Smith to monitor lenders for compliance.

Horne said lenders will be subject to hefty fines if they don’t follow through with the actions to help homeowners laid out in the settlement.

Federal officials said states could receive more funding if more mortgage firms sign onto the agreement. One estimate is for the national settlement to grow to $40 billion if the next nine large lenders join in. The only state not part of the national settlement is Oklahoma. Arizona, California, Florida, New York and Nevada were the last states to join. Arizona’s negotiations with BofA over the mortgage-fraud lawsuit went on until almost 11 p.m. Wednesday night.

President Barack Obama said in a speech Thursday that the $26 billion settlement will allow the nation’s biggest banks, “banks rescued by taxpayer dollars,” to right wrongs committed in making loans and foreclosing on homeowners during the past several years.

“These banks will put billions of dollars towards relief for families across the nation. They’ll provide refinancing for borrowers that are stuck in high interest-rate mortgages,” Obama said. “They’ll reduce loans for families who owe more on their homes than they’re worth. And they will deliver some measure of justice for families that have already been victims of abusive practices.”

A federal grand jury in Cleveland returned a 37-count indictment against two local businessmen, A. Eddy Zai and Ted M. Vannelli, and local accountant Zrino Jukic, with 25 of those charges relating to their participation in a fraud against St. Paul Croatian Federal Credit Union, formerly in Eastlake, Ohio, Steven M. Dettelbach, United States Attorney for the Northern District of Ohio, Stephen D. Anthony, Special Agent in Charge of the Federal Bureau of Investigation’s Cleveland office and Darryl William, Special Agent in Charge, IRS Criminal Investigation, Cincinnati field office, announced.

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“These defendants’ actions were part of a conspiracy  that resulted in one of the largest credit union collapse in history,” Dettelbach said. “This has been a long and thorough investigation and will continue.”

“This indictment is the result of a lengthy joint investigation between the FBI and the IRS. Zai was the single largest recipient of fraudulent loans and significantly contributed to one of the largest collapses of a credit union in U.S. history,” Anthony said.

Williams said: “Money laundering is a very complex crime involving an enormous amount of financial transactions, and IRS-CI has the investigators and expertise that is critical to locating the money and prosecuting the offenders.”

Those charged, including their ages, residences, and the charges filed against them are as follows:

A. Eddy Zai, 43, of Pepper Pike, Ohio: two counts conspiracy, two counts of bank fraud, one count of bank bribery, 11 counts of money laundering, 17 counts of making false statements to a bank, one count of making false statements to federal agents.
Ted M. Vannelli, 66, of Willoughby, Ohio: one count each of bank bribery, conspiracy, bank fraud, and making a false statement to a bank.
Zrino Jukic, 41, of Cleveland: one count each of bank fraud and money laundering.

Including today’s filings, 19 people have now been charged related to the credit union collapse.

Zai conspired with others, including Anthony Raguz, the former Chief Operating Officer of the St. Paul Croatian Federal Credit Union (SPCFCU), to submit false loan documents to the credit union, defraud the credit union of approximately $16.7 million, and pay bribes and kickbacks to Raguz for using his position at the credit union to approve numerous loans to Zai and the entities and nominee companies he controlled, according to the indictment. The conduct took place between December 2003 through March 2010, according to the indictment.

SPCFCU was placed into conservatorship by the National Credit Union Administration on April 23, 2010. One week later, the NCUA liquidated SPFCFU and discontinued its operations after determining the credit union was insolvent. At that time, SPCFCU served about 5,400 members and was believe to have assets of approximated $239 million.

At all times herein, Zai owned, operated and controlled, either solely or with Vannelli, The Cleveland Group, LLC (aka the Cleveland Group of Companies) and its many related entities, which included: Cleveland Flooring & Designs, Ltd.; Alpina, Inc.; Cleveland Development Group, LLC; The Cleveland Group, Environmental, LLC; Cleveland Real Estate Group, Inc.; The Cleveland Group Real Estate Division; The Cleveland Group, Excavating Division; Cleveland Management Group, Inc.; The Cleveland Group, Construction Division; The Cleveland Group, Consulting Division; The Cleveland Group, Ltd.; 417, Ltd.; 417 Limited; and Sutton Park, Ltd. Certain of these entities were created primarily to operate as a “safe haven” for credit union proceeds, while others performed little or no legitimate business despite having loan proceeds intented for Zai’s “business” ventures, according to the indictment.

Vannelli separated from The Cleveland Group, LLC and its related entities on or about April 2008, according to the indictment.

Zai also engaged in a scheme to defraud the credit union by, among other things, submitting loan documents for and receiving loan proceeds on behalf of companies that ceased operations, according to the indictment. Zai continued to seek and obtain loan proceeds in the name of non-operating entities even after he directed that no loan payments be made to the credit union. This scheme to defraud the credit union resulted in an approximately $13.7 million loss, according to the indictment.

The indictment alleges further that Zai submitted numerous false loan documents to the credit union between March 2008 and July 2009 in order to influence the credit union’s decision to approve loans to the companies he controlled.

Zai and his former business partner, Ted M. Vannelli, gave Raguz numerous cash payments, usually in the form of $100 bills concealed in envelopes and hand-delivered to Raguz at the credit union’s offices, and totaling more than approximately $5,000, according to the indictment. The payments were made to both induce Raguz to approve additional fraudulent loan applications and to reward Raguz for having previously approved false loan applications, according to the indictment.

Vannelli is Zai’s father-in-law, according to court documents.

The indictment also charges Zai with 11 counts of engaging in financial transactions with fraudulently obtained loan proceeds, including a series of wire transfers, all in the amount of $475,000, from an account in the name of The Cleveland Development Group, LLC to an account in the name of The Cleveland Group Real Estate Division. Both entities had ceased operations prior to these transactions.

The indictment also charges Zai and Vannelli with conspiring to submit false loan applications to Park View Federal Savings Bank and to defraud Park View Federal Savings Bank. Specifically, the indictment alleges that Zai and Vannelli submitted false loan documents, including false personal financial statements, that overstated their net worth and failed to disclose their debt to the credit union. Park View Federal Savings Bank suffered a loss of more than approximately $750,000, according to the indictment.

The indictment also charges Zai with making false statements in loan applications to ABN Amro and CitiBank in connection with a residential mortgage and home equity line of credit by, among other things, failing to disclose his debt to the credit union.

Additionally, the indictment alleges that Zai made false statements to agents with the Federal Bureau of Investigation and Internal Revenue Service when he denied: (a) knowing that one of his investors, the Zlato Group, was co-owned by Raguz, and (b) speaking with Raguz about money Zai’s company received from the Zlato Group.

Finally, the indictment alleges that Zrino Jukic, a co-owner of the Zlato Group, engaged in a scheme and artifice to defraud St. Paul Croatian Federal Credit Union by providing false information in connection with approximately 11 loan applications, the proceeds of which were used to allow Jukic and Raguz, through their company, the Zlato Group, to invest in certain of Zai’s business ventures.

The indictment also alleges that Jukic engaged in a money laundering transaction by transferring fraudulently obtained funds from a Zlato Group bank account to his own bank account.

If convicted, the defendants’ sentences will be determined by the court after review of factors unique to this case, including the defendants’ prior criminal records, if any, the defendants’ role in the offenses and the characteristics of the violations. In all cases the sentence will not exceed the statutory maximum and in most cases it will be less than the maximum.

This case is being prosecuted by Assistant U.S. Attorneys Bridget M. Brennan and John D. Sammon, following an investigation by the Cleveland office of the Federal Bureau of Investigation and the Internal Revenue Service, Criminal Investigation Division.

An indictment is only a charge and is not evidence of guilt. A defendant is entitled to a fair trial in which it will be the government’s burden to prove guilt beyond a reasonable doubt.