MBA Advises Against Broadening Fraud Laws

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 Corporation.

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.