Wednesday, February 15, 2006

Proposed Mortgage Fraud Crime

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)

Download mortgage_fraud_legislation.pdf

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Tracked on Mar 27, 2006 4:03:19 AM


Some "mortgage fraud" questions that interest me:
-- What happened to the notion "Let the buyer beware"? What's an "unwitting buyer"? I did several hours of online research recently before buying a $120 mp3 player. Why does the law assume people who sign documents obligating themselves to tens of thousands of dollars in loans bear no responsibility to understand and evaluate the worth of the property they are buying?
-- Are property flippers any more venal orcorrupt than others who put the products or services they offer in the best possible light to prospective consumers?
-- When and how did buying low and selling high become a crime? I recently learned of one incidence of alleged mortgage fraud in which federal agents substituted their ability to judge a property's true value for the judgment of people who appraise property for a living. In this instance the feds argued a duplex that steadily generated $1,400 a month in rental income had been fraudulently overpriced at $80,000. I hope we all can agree a $1,400 monthly return on an $80,000 investment is a desirable thing.
-- Why are lenders excused from responsibility to underwrite loan apps when foreclosures occur? Why are omissions on loan docs treated as overtly fraudulent acts? It's common knowledge and practice that lenders and even Freddie and Fanny employees routinely counsel "mortgage professionals" to leave blank items in loan docs that might prove troublesome...relying on underwriting to catch anything important to the lenders' decision to grant or reject the loans.
Some "mortgage professionals" are true criminals (those who recruit straw buyers or forge sales documents to mislead buyers, for example), but many business people who have been swept up in the government's mortgage fraud crusade have merely been rolled by insanely powerful federal agents into confessing to vague "wire fraud" and "money laundering" charges as the only practical alternative to financial ruin (the cost of a federal trial defense starts at about a half million dollars) and the prospect of spending decades in prison if they lose at trial (where evidentiary and procedural rules generally favor the government).
Mortgage fraud, it appears, has become a full-employment program for federal agents being hired by the thousands these days...a headline opportunity for prosecutors who value career advancement over truth and justice.

Posted by: John Kerr | Oct 30, 2006 8:01:42 AM

Mr. Kerr in his post brought about some interesting points. I would like to point out that making a purchase online is the same as purchase a home - You don’t know what you’re going to get until you get it." We run a non-profit in the state of Utah called Perfect Home Living that educates consumers, law enforcement and lenders to loopholes used by criminals in committing acts of mortgage and real estate fraud.

Unfortunately the state of Utah ranks second in the nation for mortgage fraud and with a population of only 2.5 million, the effects of this heinous crime have reached epidemic proportions. The suggestion by Mr. Kerr that a person could search the internet and find the best MP3 player for sale at the bets price is correct, but it would be absurd to believe that when that product arrives it would work at the consumer level of expectation it was purchased at.

Consider that Mr. Kerr is from Albany, NY and is moving to the state of Utah. Having worked with a relocation specialist Mr. Kerr puts in an offer on a home in an upscale neighborhood that houses a lot of retired baby boomers on fixed incomes. After a few rounds of negotiations, Mr. Kerr purchases the home for $650K.

What Mr. Kerr didn’t know before his purchase of the home, and what wasn’t online on some web page is that criminal enterprises purchased multiple homes on the street less than 2 months prior for only $120K and through false appreciation were selling the homes, Mr. Kerr’s included for a profit of $530K.

To the surrounding neighbors who are on fixed incomes, they now must absorb the false increased home values through increased property taxes - a catalyst for criminals in removing seniors from desirable real estate locations.

And in response to the excusing of lenders from underwriting practices consider that criminals involved in mortgage and real estate fraud often use mortgage brokers that can funnel in loans. In other words it is rare even with good credit to have a consumer walk into the doors of the bank to obtain a home mortgage. A point that lenders will readily agree with, hence the explosion by lending institutions to offer consumers a wide range of cross-selling products to attract the consumer back to more traditional products and services that have remained the staple for banking business - i.e. checking; savings and mortgages.

Not to defend lending institutions but to some degree they are victims of mortgage lenders such as BNC Mortgage that immediately sell loans within the first 30 to 45 days. These in our humble opinion represent the real cause and effect of lender fraud in the U.S. Housing Market today.

For those truly interested in learning how to protect yourself from the dangers of mortgage and real estate fraud, our suggestion become educated. Contact your Senator, Legislator or Mayor and ask for a non-profit such as Perfect Home Living to come in with Agents of the FBI, the Attorney General’s Office to mention a few to learn about this growing epidemic.

Posted by: Michael Blackburn | Nov 14, 2006 1:22:27 PM

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Posted by: RefinancingTips | Apr 28, 2008 8:35:13 PM

Great read. I think I'll subscribe to this as it has some good info! Thanks. I do apppreciate the blog :-)

Posted by: RefinancingTips | May 2, 2008 2:02:07 AM

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You raise some good points


Posted by: Jules Carney | Aug 22, 2008 4:35:08 AM

This law should have been created many years ago. There are lots of individuals and even companies that took huge sum of money because there are no law that stop them from doing illegal activity. I am optimistic that this industry will be more productive after approving this law.

Posted by: deed copy | Apr 15, 2011 2:24:02 AM

I am so glad these people are getting busted , D.T.A Dont Trust Anyone sux to say but it's true. Do reasearch on every person

Posted by: peter | Aug 15, 2011 1:46:22 PM

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