Wednesday, February 15, 2006
Senator Barack Obama of Illinois introduced legislation to combat mortgage fraud that includes an interesting provision that would create a new federal criminal law. The bill, S. 2280 (available below), is entitled (unfortunately) the "Stop Transactions which Promote Fraud, Risk, and Underdevelopment Act" or "STOP FRAUD Act," and it would provide for a central data base to track mortgage fraud and fund federal and state anti-fraud efforts in the area. Section 2 of the bill would create Section 1351, "Mortgage Fraud," that would make it a federal crime for a "mortgage professional" to engage in a scheme to defraud or make false/fraudulent statements in connection with a real property loan, with a maximum punishment of 35 year and a $5 million fine. The statute is narrower than the mail and wire fraud statutes, which are often used to prosecute mortgage fraud cases, because of the limitation to conduct by mortgage professionals. That term is defined as including appraisers, lawyers, real estate brokers, mortgage underwriters, and "any other provider of professional services engaged in the mortgage process" -- how is that for a circular definition: mortgage professionals are providers of professional services related to mortgages. Mortgage scams in which straw purchasers engage in sham transactions to inflate the value of property and then take out a large mortgage would not be covered by the statute unless the perpetrators were themselves mortgage professionals.
Even more interesting is proposed Section 1351(c), which permits private parties to bring a private right of action for violations of the provision, regardless of the amount in controversy, citizenship of the parties, or exhaustion of administrative remedies. Creating such a broad private right of action, with no real guidelines on the scope of the potential suit, is uncommon, and perhaps unprecedented. Off the top of my head, the only criminal provisions that I am aware of that also include express private rights of action are the False Claims Act and RICO, while the antitrust and securities laws also rely on private actions as a means of enforcement along with federal civil and criminal enforcement. RICO and qui tam actions have very specific pleading requirements, while the mortgage fraud suit would seem to be, in effect, a federal common law fraud action limited to mortgage professionals. If enacted, this provision would raise interesting questions about whether the principle of respondeat superior would permit a law suit against the mortgage professional's employer, whether punitive damages are recoverable, and perhaps most importantly, whether a prevailing party could be awarded attorney's fees. On a different note, is there any way that the use of silly acronyms for laws can be stopped, or at least curtailed? (ph)