While news events have conspired to delay finishing the series on foreclosure
fraud begun here several weeks ago, it seems appropriate to interject mention
of a report released recently by the Mortgage Bankers Association
(MBA) on mortgage fraud. The report is apparently a pre-emptive strike against
Congress and various state legislatures to short circuit passage of legislation
the trade organization finds inappropriate and to differentiate between MBA's
definitions of mortgage fraud and predatory lending. But bias recognized is
bias neutralized and the report does make some interesting points.
MBA rather narrowly defines
mortgage fraud as the "intentional
enticement of a financial entity to make, buy, or insure a mortgage loan when
it would not otherwise have done so, had it possessed correct information."
Predatory lending, on the other hand is the term "generally used to portray
in a negative light practices that are likely to harm borrowers."
While one might quibble with the fact that MBA uses the term "fraud"
only to describe actions harmful to its lenders, it is probably correct in asserting
that steps taken to address mortgage fraud are rarely appropriate to address
predatory lending and vice versa.
And mortgage fraud is a problem for lenders. The MBA report quotes FBI figures
that mortgage fraud cost the industry between $946 million
and $4.2 billion in 2006 alone and the Federal Financial Crimes Enforcement
Network (FinCEN) has reported that the number of Suspicious
Activity Reports filed by lenders last year was 44 percent higher than in 2005
which itself was 29 percent higher than in 2004.
Mortgage fraud generally takes one of two forms - fraud for profit where
the motive is to "resolve equity, falsely inflate the value of the property,
or issue loans based on fictitious properties," and fraud for housing
which occurs when the borrower's motive is to acquire or maintain ownership
of a house.
The thrust of the MBA report is that there is no reason for additional federal
laws to combat mortgage fraud, that existing laws already provide law
enforcement with adequate authority to prosecute the crime and that any new
steps taken by government to prevent or punish mortgage fraud "must not expose
mortgage lenders to additional (and possibly greater) risks of loss."
The report outlines the kinds of existing laws that it states provide law enforcement
with authority to prosecute "all instances of mortgage fraud."
First, MBA says, because they have been broadly fashioned and broadly interpreted,
federal mail and wire fraud statutes apply to all instances of mortgage fraud.
The mail fraud statute makes it illegal to devise or intend to devise any scheme
to defraud anyone and to send or receive any material by mail (or common carrier)
for the purpose of carrying out the scheme. A violation is punishable by fine
or up to 20 years in prison and if the scheme involves a federally chartered
or insured institution it can merit up to a $1 million fine and up to 30 years
in prison. Similar strictures apply to using wire (transfers) radio or television
for executing such a scheme.
These statutes were both written and have been interpreted by the courts as
applicable to any and all instances of mortgage fraud. The report uses the example
of United States v. Hitchens in which the Third Circuit Court of Appeals rejected
the argument of a real estate agent that there was no evidence she had personally
used the mail or wires. The Court held that law enforcement need only show that
the person commits the act with knowledge that use of the mails or wire would
follow and that evidence of business custom is sufficient to establish that
knowledge; mortgage companies routinely use mail or carrier services for loan
documents and the wires to transmit loan transfers.
Federal law regarding the transportation of stolen goods applies to many if
not all instances of mortgage fraud because of broad judicial interpretation
which have brought wire transfers under their purview even if the transfer may
not have crossed state lines.
Finally, other federal statues make any fraud perpetrated on federally chartered
or insured financial institutions which covers almost every kind of lender except
those that are state chartered and not insured by The Federal Deposit Insurance
MBA states that adding more laws, especially a federal law creating criminal
penalties may fall into the category of creating unintended consequences.
Why the association feels this may be true and its suggestion for state and
federal legislation action will be covered in a second part of this report.