SOUTHFIELD, Mich.—Sterling Bancorp has agreed to plead guilty to securities fraud for filing false securities statements relating to its 2017 initial public offering (IPO) and its 2018 and 2019 annual filings, the Department of Justice announced.
According to a signed plea agreement that will be publicly filed in court, Sterling Bancorp, Inc. was the holding company for its wholly owned subsidiary, Sterling Bank and Trust F.S.B.
$5 Billion in ALP Loans
The largest portion of the Bank’s loan portfolio was composed of residential mortgage loans. In or around 2011, the bank established a residential mortgage loan program known as the Advantage Loan Program (ALP). Between 2011 and 2019, the Bank’s employees and agents originated at least $5 billion in ALP loans.
“The bank touted the ALP’s flexible documentation requirements and fast underwriting and closing capabilities. The program required a minimum 35% down payment and charged higher rates and fees than generally were available elsewhere in the market, but it did not require submission of typical loan documentation, such as an applicant’s tax returns or payroll records,” the DoJ said.
Pressure to Increase Revenues
DoJ stated that in the lead-up to its IPO, Sterling, through its founder and certain members of senior management, encouraged loan officers to increase the volume of ALP loan originations to increase the bank’s revenue through origination fees and interest payments. The bank’s Underwriting Department maintained internal underwriting guidelines that governed the loan approval process for the ALP. The underwriting guidelines required loan officers to obtain various documents from the borrower and the borrower’s employer. In addition to collecting these documents, loan officers were supposed to calculate the borrower’s debt-to-income ratio, which was a personal-finance measure that compared the amount of debt a borrower had to the borrower’s overall income and was used to measure the borrower’s ability to manage monthly mortgage payments.
“Taken together, the various documents obtained from the borrower and the borrower’s employer, and related information, were critical to completing certain mortgage application forms and assessing the creditworthiness of a borrower’s application,” the DOJ noted.
Unqualified Borrowers
The department went on to add, “The false information that the loan officers included and caused to be included in ALP applications was ultimately transmitted to, and relied upon by, the bank’s Underwriting Department and caused the Bank to originate ALP loans and extend credit to borrowers who otherwise would not have qualified for credit from the Bank based upon the underwriting guidelines. These fraudulent loans directly increased the Bank’s revenue through fees and interest associated with the origination of the fraudulent loans.
“In or around October 2017 – while Sterling was artificially inflating its revenue through the ALP – Sterling went public. In connection with its IPO, Sterling’s 2017 SEC Form S-1 contained materially false and misleading statements that touted the soundness of the ALP loans. In truth, the ALP was rife with fraud,” the DoJ said.
Terms of Settlement
Under the terms of the plea agreement, which must be accepted by the court, Sterling Bank will plead guilty to one count of securities fraud. The company will also be required to serve a term of probation through 2026, submit to enhanced reporting obligations to the department, and pay more than $27.2 million in restitution to its non-insider victim-shareholders, DoJ said.
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