Thursday, September 5, 2013

18 U.S.C. Section 1014: Dick and Frank (Posner and Easterbrook to you) Duke it Out.

Yesterday the Seventh Circuit, sitting en banc, reversed and remanded (7-2) a Section 1014 (and Section 317) conviction connected to the mortgage meltdown crisis. Judge Posner wrote the majority opinion. Chief Judge Easterbrook (joined by Judge Bauer) dissented. The opinion is United States v. Lacey Phillips and Erin Hall.

Section 1014 prohibits making any false statement or report for the purpose of influencing in any way a federally insured bank. Longstanding case law requires the government to prove that the defendant knew the statement was false at the time it was made. Phillips and Hall were an unmarried couple who applied for a home loan and were rejected. Hall then contacted his friend Bowling, a mortgage broker, who began advising Hall and Phillips and ultimately led them to a different bank, Fremont Investment & Loan, which granted a home loan to Phillips. Hall was not listed as a borrower. This was a stated income loan, also known in the industry as a liar's loan.

Phillips and Hall could not keep up with the payments and lost their home. A prosecution ensued. There were several false statements on the loan application, but Phillips and Hall testified that they only were aware of one of the statements, which was as follows. Under the Borrower's Income line, Phillips put down the couple's combined income.

Phillips and Hall wanted to testify that Bowling told them: 1) Phillips should be the only applicant for the stated-income loan, because her credit history was good while Hall's was bad because of the recent bankruptcy; 2) Hall's income should be added to Phillips' on the line that asked for borrower's gross monthly income; and 3) adding the incomes together was proper in the case of a stated income loan, because the bank was actually asking for the total income from which the loan would be repaid, rather than just the borrower's income.

The government wanted to keep this testimony from the jury and U.S. District Court Barbara Crabb (I kid you not) agreed. The Seventh Circuit, per Posner, reversed, in an unnecessarily complicated opinion, but one that is nevertheless fun and instructive to read.

I see it this way. According to Phillips and Hall, Bowling told them that, to Fremont Investment & Loan, Borrower's Income meant the total income from which the loan would be repaid. They were in essence informed that Borrower's Income was a term of art for Fremont. If Phillips and Hall believed that Borrower's Income meant (to Fremont) Combined Income of the People Repaying the Loan, then Phillips and Hall were not making a statement to Fremont that they knew was false. Their state of mind on this point was directly at issue. Theirs may have been be an implausible story, but the jury was allowed to hear it. Judge Posner's opinion has some important things to say about terms of art and interpretation of seemingly simple terms.

 This case reminds me of a home loan I took out while I was an AUSA. The bulk of the down payment was being paid through my Thrift Savings Plan. That is, I was loaning myself money out of my government retirement fund. At the time, all of the standard loan applications required the borrower to state that no part of the down payment was coming from a loan. I asked my real estate agent and the mortgage broker whether that language applied to a Thrift Savings Plan Loan. They assured me that it did not. So, when I wrote down on the application that no part of my down payment came from a loan, I knew that in one sense this might be considered false, but to the bank, and presumably to any bank, it would be considered true, because the bank did not consider a Thrift Savings Plan Loan to be a loan. Had I defaulted and been prosecuted, I would have liked to present this as a defense, and it is hard to believe that any competent judge would have prevented me from doing so. But Judge Crabb did not allow this kind of evidence in, and Judge Easterbrook cheers her on.

Judge Easterbrook points out that the jury, in finding Phillips and Hall guilty, already determined that the couple knew several statements on the loan application were false. This is back-asswards and misses the point. This is not a sufficiency of the evidence case. If the jurors had heard the excluded testimony, they may well have been more likely to believe Phillips' and Halls' testimony that the rest of the false statements were made and submitted by Bowling without their knowledge. According to Posner, there was evidence to the effect that Phillips and Hall were naive, while Bowling (who pled guilty and cooperated) and Fremont (a bank that Posner deems disreputable) were sophisticated.

Of course, it is appalling and embarrassing that any self-respecting U.S. Attorney's Office would prosecute a case like this, but it is all part of DOJ's Piker Mortgage Fraud Initiative. Even more embarrassing was the government's contention on appeal that the excluded statements were hearsay. Posner called this a "surprising mistake for a Justice Department lawyer." I'm not so sure. Maybe it wasn't a mistake.

(wisenberg)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2013/09/18-usc-section-1014-dick-and-frank-duke-it-out-.html

Fraud, Judicial Opinions, Mortgage Fraud, Prosecutions, Prosecutors | Permalink

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