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PostPosted: Tue Dec 19, 2006 11:29 pm 
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A. Alleged Fraudulent Scheme
*2 Plaintiffs allege that to raise capital, ABFS used a financing technique known as a securitization. In its Form 10-K filed with the Securities and Exchange Commission (SEC) on October 10, 2000, ABFS noted that "[t]he ongoing securitization of our loans is a central part of our current business strategy." (Consol.Compl.¶ 5). In each of its securitizations, ABFS transferred a pool of mortgage loans to a trust in exchange for certificates, notes or other securities issued by the trust that were then sold to investors for cash. Plaintiffs allege that ABFS would often retain the rights to service the loans for a fee and would retain an interest in the cash flows generated by the securitized loans (called an "interest-only strip").
Plaintiffs further assert that ABFS' loan delinquency ratio, or the ratio between the company's current and delinquent loans, affected ABFS' ability to securitize its loan pools and consequently its profitability. They allege that investors were less likely to invest in securities secured by loan pools containing a higher number of delinquent loans. Thus, plaintiffs assert that ABFS would be unable to execute its quarterly securitizations if the company's loan delinquency ratios became too high and the company's profitability would suffer. Plaintiffs allege that throughout the class period ABFS consistently reported an extremely low delinquency ratio as compared to industry averages for the sub-prime mortgage industry thus allowing the company to obtain securitizations for increasingly large sums with each successive quarter.
At the core of plaintiffs' claims is their allegation that defendants fraudulently altered their loan delinquency ratio by engaging in improper practices to artificially lower the number of loans that were reported as delinquent. Plaintiffs assert that ABFS employees "knowingly accepted bad checks to satisfy ABF[S'] months delinquency goals...." (Consol.Compl.¶ 42). Plaintiffs also allege that ABFS engaged in "re-aging" techniques such as forbearance and deferment agreements and that ABFS pressured delinquent borrowers to enter into such agreements in order to keep properties from being counted as delinquent. (Consol.Compl.¶¶ 31-41).
Forbearance agreements are agreements negotiated between a borrower and a lender whereby the lender foregoes a given remedy against the borrower for non-payment. Under a forbearance agreement, property held by a non-paying borrower would not be counted as delinquent. A deed in lieu of foreclosure is one type of forbearance device where a delinquent borrower deeds a mortgaged property to a lender in exchange for a release from all obligations under a loan. Under a deferment agreement, a lender will defer a borrower's payment (including past-due payments, plaintiffs allege) and roll the amount due onto the back of the loan to be paid back over time. Plaintiffs assert that the use of these techniques is limited by the guidelines of the Federal Financial Institutions Council (FFIEC) and that ABFS violated the FFIEC requirements.
*3 Absent from plaintiffs complaint are specific allegations as to the frequency with which re-aging techniques were used to avoid delinquent loans or specific allegations as to the amount by which the reported delinquency rate was understated at any point in time. To support their allegations that defendants fraudulently lowered the company's delinquency ratios, plaintiffs rely upon the statements of five confidential witnesses, all purported to be former ABFS employees. (Consol.Compl.¶¶ 31-36, 37-38, 39, 40-43). Confidential witness 1 is alleged to have served as a collections supervisor at ABFS from 1997 to 2003, working to oversee the collections process for delinquent loans. (Consol.Compl.¶ 30-31). He alleges that "individual collectors in his department were expected to, and did, use information they had obtained from borrowers in previous months, such as bank routing numbers, in order to falsify payments from borrowers who were delinquent...." (Consol. Compl. ¶ 31 (emphasis omitted)). Confidential witness 1 also reported attending a 1999 meeting where ABFS' lawyers discussed forbearance agreements and deeds in lieu of foreclosure. (Consol.Compl.¶ 32). Plaintiff alleges that confidential witness 1 reported that at the meeting the lawyers also emphasized the need to minimize loan delinquency ratios for purposes of obtaining securitizations (Consol.Compl.¶ 32). Plaintiff further alleges that in 2001 confidential witness 1 complained to American Business Mortgage Services' president of operations because he believed that the use of forbearance agreements and deeds in lieu of foreclosure were improper and that he regularly refused requests to negotiate and execute them. (Consol Compl. ¶ 36).

In re American Business Financial Services, Inc. Securities Litigation
--- F.Supp.2d ----, 2005 WL 1324880
Jun 02, 2005

David Szwak
Chairman, Consumer Protection Section, Louisiana State Bar Association
Bodenheimer, Jones & Szwak
509 Market Street, 7th Floor
Mid South Tower
Shreveport, Louisiana 71101
Fax 318-221-6555

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