In an earlier article we referred to the Mortgage Bankers Association's (MBA) white paper on mortgage fraud that was issued recently as a "pre-emptive strike" against proposed legislation on both the state and federal level. MBA, in fact, states that "enacting a new federal law - especially a federal law creating criminal penalties - carries with it the potential for unforeseen and unintended consequences."

MBA says that "the interpretation of a new statute may be influenced in unforeseen ways by other existing statutes (or vice versa.)" As we detailed in the earlier article, MBA feels that a number of types of statues such as those prohibiting mail fraud provide adequate protection and cover under which to prosecute fraud against lenders.

MBA's first concern is that the meaning and reach of new statutes may only be known and measured after they are applied and interpreted by the courts. Some new varieties of fraud may yet to be invented or uncovered and "Unforeseen factual scenarios can challenge terms that the drafters considered clear such as the introduction of new words that have not been court tested."

In contrast to any new law, current ones prohibiting mortgage fraud have been on the books for many years and their meanings and reach are refined and clarified by the courts. Thus prosecutors can bring charges under these statutes with greater confidence that the law will apply to any given case and will not lead to counterproductive appeals. Terms in new laws might unintentionally exclude categories of offenses or provide other loopholes in coverage. MBA cites one pending federal law, S.1222 introduced by presidential candidate and Senator Barack Obama, which would allow only a "mortgage professional" to be charged with mortgage fraud. This would, MBA says, exclude prosecution of individuals who have engaged in fraud, particularly in the "fraud for housing" context who are not mortgage professionals.

Or, if terms are defined too broadly they could allow prosecution for activities that are not fraudulent at all. S. 1222 is once again cited as faulty for defining "mortgage fraud" to include obtaining money, including fees, under "false" pretenses and then failing to fully define that term. An example provided by the report would be a lender recommending a loan to a borrower, an example of subjective judgment and then later being accused of fraud when the borrower decides the loan was not in his best interest.

New laws interacting with old can also produce problems. Since MBA claims that the mail and wire fraud statutes already apply to any case of mortgage fraud as explained in our earlier article, could the enactment of a new federal law be interpreted as indicating that Congress feels that the existing laws are not as broad as once thought?

MBA is also opposed to a federal "private right of action" for mortgage fraud. MBA says that victims of mortgage fraud already have private rights of action under state law. Every state has laws allowing any person or entity to bring a civil action for mortgage fraud, some of which also provide for treble damages, punitive damages, and attorney's fees. The federal RICO laws (Racketeer Influenced and Corrupt Organizations Act) may also provide relief.

Federal private right of action could, MBA maintains, spawn frivolous litigation which could prove costly to the industry. For example, if the meaning of "mortgage fraud" is expanded there is a risk it would apply to activities that are not truly such as currently understood but would trigger class actions as proxies for other types of claims and could result in lenders, the primary victims of mortgage fraud, to become defendants in private litigation under those very statutes intended to protect them against mortgage fraud.

MBA offers a number of suggestions for federal legislation that it claims would assist in preventing and prosecuting mortgage fraud. Among these are:

  • Creating and funding a federal Office of Mortgage Fraud Enforcement with prosecutors and investigators familiar with mortgage fraud who could effectively target fraud and provide a focus and raise awareness about this type of crime.
  • Creating an intergovernmental data sharing mechanism through which the states and the Department of Justice could share information and prevent fraudsters from moving from state to state while practicing the same patterns of deceit.
  • Expanding the applicability of existing laws such as three that currently govern certain federally supervised institutions (Section 20 institutions) but not state licensed lenders or revising mail and wire fraud statutes that currently cover all instances of mortgage fraud but provide much higher penalties for those impacting Section 20 institutions.

While some provisions of Senator Obama's proposed legislation do get kudos from MBA such as those requiring reporting of fraud among the various institutions, establishing a system to foster communication regarding suspicious activity trends and a database of debarred or censured mortgage professionals, it condemns those portions of the bill which conflate mortgage fraud with predatory lending and urges states to avoid passing legislation which does the same.

MBA urges that "any new state legislation be evaluated based upon its effectiveness in actually preventing mortgage fraud." This would be done by enhancing the resources available to law enforcement to combat mortgage fraud (increased funding for prosecution and to regulation), targeting fraud and predatory lending under separate and distinct statutory frameworks, and insuring consistency between state and federal law.