Unlike mail fraud, bank fraud, or wire fraud, mortgage fraud does not have its own federal statute associated with it. However, that definitely does not prevent the federal government from aggressively prosecuting the crime under the title of “mortgage fraud.”. As is seen in Pasquantino v. United States, 125 S.Ct. 1766 (2005) (No. 03-725) (defendants convicted under the wire fraud statute for defrauding the Canadian government of excise taxes due on illegally imported liquor), Assistant United States Attorneys (hereinafter, AUSAs) will tie one of the existing fraud statutes to an act that is somehow fraudulent. Sometimes it will be the wire fraud statute, and other times it will be the bank fraud statute, the mail fraud statute, or any number or combination of other fraud statutes. Even other times, all that will be alleged is a conspiracy to commit mortgage fraud, which is also punishable by federal statute.
Mortgage fraud prosecution has increased in recent years due to low interest rates on home mortgages which make purchasing homes easier and more attractive, and as the housing market grows, we can expect even more mortgage fraud cases to be brought. One can only imagine what will happen if and when the housing market bursts and banks attempt to initiate foreclosures and recoup what they claim are losses.
Fraud is defined as a “knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” Black’s Law Dictionary 685 (8th ed. 2005). While fraud is usually a tort, and therefore a civil cause of action, when the conduct is willful, there may be criminal prosecution. Id. Mortgage fraud, therefore, while it has no official definition in Black’s, can be defined as committing some sort fraudulent activity in conjunction with the mortgage process. Sometimes, when a person is investigated for an attempt to defraud, which is defined as “caus[ing] injury or loss to (a person) by deceit,” Id. at 456, there may be no actual loss or injury to another person during the investigation. This is one of the hardest things for a person who is being investigated to comprehend. Therefore, it is essential that people involved in any way in the real estate industry understand how the FBI investigates and classifies mortgage fraud and what has and has not been deemed to be fraud.
The FBI has recently ramped up efforts to investigate mortgage fraud, and it does so in two distinct categories: “Fraud for Profit,” (hereinafter, FFP) and “Fraud for Housing,” (hereinafter FFH). Federal Bureau of Investigation, Financial Crimes Report to the Public, According to the FBI, Fraud for Profit is sometimes referred to as “Industry Insider Fraud,” and the motive here is to “revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties.” Id. Apparently, nearly 80% of all reported fraud losses fall into the FFP category. FFH is different. It involves “illegal actions perpetrated solely by the borrower,” and the motive in these types of cases “is to acquire and maintain ownership of a house under false pretenses,” typically by a borrower “who makes misrepresentations regarding his income or employment history to qualify for a loan.” Id. at D2.
The FBI claims that it is focusing its efforts on industry insiders, those who fall within the FFP category. Id. It sees rising trends in equity skimming, property flipping, and mortgage related identity theft. Id. Equity skimming schemes often “involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors.” Id. Property flipping involves the purchase of properties “and artificially inflating their value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the ‘flipper.’ After three or four sham sales, the properties are foreclosed on by victim lenders.” Id.
The FBI has compiled a list of activities which it feels indicates mortgage fraud.
Exclusive use of one appraiser
Increased Commissions and/or Bonuses by Brokers and Appraisers
Bonuses might paid (outside or at settlement) for fee-based services
Broker or appraiser might receive higher than customary fees
Falsifications on Loan Applications
Buyers instructed how to falsify the mortgage application
Buyers requested to sign blank application
Fake Supporting Loan Documentation
Buyer requested to sign blank employee or bank forms
Buyer requested to sign other types of blank forms
Purchase Loans Disguised as Refinance
Purchase loans that are disguised as refinances typically require less documentation or might be scrutinized less by the lender
Short Term Investments with Guaranteed Re-Purchase
Investors might be used to flip property prices for a fixed percentage
Multiple “Holding Companies” might be utilized to increase property values. Id. at D9-D10.
It has also described the various types of schemes it sees in mortgage fraud cases.
Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes this practice illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflated buyer income, etc. Kickbacks to buyers, investors, brokers, appraisers, or title company employees are common in this scheme. In this type of scheme, a home worth $20,000 may be appraised for $80,000 or higher.
The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, the funds are borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.
The identity of the borrower is concealed through the use of a nominee (also known as a Straw Buyer) who allows the borrower to use the nominee’s name and credit history to apply for a loan.
Fictitious or Stolen Identity
A fictitious or stolen identity may be used on the loan application. The applicant may sometimes be involved in an identity theft scheme. In such a scheme, the applicant’s name, personal identifying information and credit history are used without the true person’s knowledge.
An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.
The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.
An investor may use a straw buyer, false income documents, or false credit reports, to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes. Id. at D10-D11.
We have separated the various mortgage fraud cases that have been decided by discussing them in context with the federal statutes under which the defendants were charged. In many ways, this is an arbitrary distinction. After all, some cases find the defendant charged with several different violations, ranging from wire fraud, submitting false statements, and making false entries, to making and passing false mortgage notes, bank fraud, money laundering, and conspiracy. See United States v. McLean, 131 F. Appx. 34 (4th Cir. 2005). It almost seems that the exact statutes a defendant is charged under are secondary; what is more important to the AUSA is the scheme, and how it has defrauded somebody. However, categorizing the cases by statute provides a way to manage the information found within the cases.
One other problem confronted with discussing mortgage fraud is that since these are criminal cases, the cases for which an appellate decision has been published have defendants who have more often than not already been found guilty of mortgage fraud, so determining what does not constitute mortgage fraud can be difficult to accomplish. Where possible, therefore, we have tried to include opinions from the district courts which acquit the defendant of mortgage fraud.
Furthermore, as many of the schemes discussed in conjunction with mortgage fraud are quite complicated. To adequately represent what constitutes mortgage fraud, we feel it is important to provide the fact patterns of the cases, as the cases are usually fact-specific. Therefore, many of the following case synopses are quite long.
One final consideration: many of the cases that deal with mortgage fraud are technically classified as unreported, or not for publication. Therefore, their precedential value is technically nil. However, they still provide insight into how the FBI and AUSAs investigate and prosecute mortgage fraud cases, and as such, where appropriate, we have included them on these pages.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 225 (Continuing Financial Crimes Enterprise)18 U.S.C. § 225 (2007).
The CrimeIt is a crime under section 225 for a person to
organizes, manages, or supervises a continuing financial crimes enterprise; and
receives $5,000,000 or more in gross receipts from such enterprise during any 24-month period. I8 U.S.C. § 225(a).
The PunishmentThe punishment for violating section 225 is
a fine of not more than
$10,000,000 if an individual, or
$20,000,000 if an organization, and
imprisoned for a term of not less than 10 years and which may be life. 18 U.S.C. § 225(a)
For purposes of subsection (a), the term “continuing financial crimes enterprise” means a series of violations under section 215, 656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of this title affecting a financial institution, committed by at least 4 persons acting in concert. 18 U.S.C. § 225(b).
Case Law Interpreting Section 225Prosecutions for mortgage fraud under section 225 are fairly rare; only one case has been reported where the defendant was charged with managing a continuing financial crime enterprise in conjunction with mortgage fraud.
United States v. Lefkowitz, 125 F.3d 608 (8th Cir. 1997).
The defendant in Lefkowitz was convicted on forty-five counts of mail and wire fraud, managing a continuing financial crimes enterprise, defrauding an agency of the United States, aiding in the preparation of false tax returns, making a false statement in connection with a bankruptcy case, and obstruction of justice. Lefkowitz at 612. In this case, the defendant was the President of a California corporation from 1984 to 1994 that formed real estate limited partnerships to build low- and moderate-income housing, specifically concentration of projects that would qualify the limited partners for low-income housing tax credits. Id To qualify for these credits, the investors were required to “build, rehabilitate, or acquire buildings in which a prescribed percentage of the apartment unites are occupied by low-income tenants.” Id. A typical project for the president’s company would include finding land in a desirable location, develop an apartment complex, hire a builder, and apply for tax credits. Id. With the allocated tax credits, the defendant’s company would form an L.P. with the defendant and his company as general partners, and release a Private Placement Memorandum to securities broker-dealers who would market the investment to prospective L.P.s. Id. The project’s equity came from the L.P.s, and upon completion, the defendant’s management company would lease out the apartments, the allocated tax credits would be released, the remaining debts to the builder would be paid, and the L.P.s would begin receiving annual tax credits. Id.
When the defendant eventually left his company in 1994, “properties in which limited partners and ¼ investors had invested more than $80,000,000 were unbuilt, unfinished, or lost in foreclosure.” Id. at 613. Evidence introduced in the district court demonstrated that the defendant ran his company to defraud investors: “[f]unds from limited partners and ¼ investors were first deposited in an operating account for each particular investment. But [the defendant] and [his company] as general partners immediately transferred funds to a central [company] account. From there, [the defendant] personally controlled all expenditures, and [company] employees had standing instructions first to pay [the defendant’s] personal bills, then [the company’s] general operating expenses, and finally expenses for the various ongoing projects.” Id. Over $9.5 million was used to pay the defendant’s expenses, including $5 million that was deposited in his wife’s personal bank account. Id. The company’s employees began referring to the monetary shortfall as “the black hole.” Id. This black grew exponentially, and as it did so, the defendant “increasingly relied on funds from new projects to complete old projects.” Id. The IRS began tracing new partnership deposits as they were used to meet the defendant’s personal needs, a practice which was not disclosed to the company’s investors. Id. The defendant also defrauded builders-by not disclosing a lack of permanent financing or coercing builders to extend their construction loans-as well as Housing Agencies and the IRS-by representing that the “National Development Council” was a nonprofit general partner (which it was not), taking nonprofit tax credits which were allocated to the company’s projects based on those misrepresentations, and having the company’s employees file tax returns claiming that buildings finished late in the year had been completed and leased to tenants at the beginning of the year. Id. at 614.
The defendant was charged with one count of managing a continuing financial crimes enterprise (hereinafter, CFCE). Id. at 618. “The manager of a [CFCE] violates 18 U.S.C. § 225 if (i) he supervises a series of mail or wire fraud transactions which affect a financial institution, (ii) receives at least $5,000,000 in gross receipts from the criminal enterprise in a twenty-four-month period, and (iii) acts in concert with at least three other persons in executing the crimes.” Id. The jury found that Lefkowitz violated section 225 when his company raised more than $5,000,000 from investors within a two-year period, “because banks invested in those offerings and at least three other persons acted in concert with Lefkowitz in executing mail and wire frauds.” Id. Because the defendant used his company’s funds for his personal use, the more than $5 million that the investments showed up as the defendant’s gross receipts. Id. Though the defendant attempted to argue that banks weren’t harmed or affected by the fraud because he used later funds to repay the investors, the court stated that “whatever the banks finally realized on their investments, they were affected when deceived into investing funds that [the defendant’s company] then fraudulently misused.” Id. The defendant also attempted to argue that the government failed to prove he acted “in concert” with at least three other persons in defrauding financial institutions; he claimed that “there was no knowing complicity by his subordinates in the continuing ¼ fraud against financial institutions.” Id. However, the court found that the jury instructions, which stated that the government needed to prove that “[t]he defendant organized managed or supervised these three or more other persons in connection with this series of violations,” was sufficient to show the defendant acted “in concert” with at least three other persons. Id.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1001 (False Statements)
United States v. Lefkowitz, 125 F.3d 608 (8th Cir. 1997).For details of the defendant’s scheme, see the discussion of this case in conjunction with 18 U.S.C. § 225, supra. As far as section 1001 is concerned, it is only a minor part of the case. It highlights, however, how a seemingly minor detail can allow the AUSA to prosecute a defendant for mortgage fraud under section 1001.
On the two counts of violating section 1001, the defendant was convicted of “knowingly and willfully using false documents in a matter within the jurisdiction of an agency of the United States (the IRS) when he cause [the company] to file false non-profit tax credit applications with [a housing agency].” Id. at 617 n.2. On appeal, the defendant argued that he did not know that the applications would list the National Development Council as a project partner, but there was ample evidence offered to permit a reasonable jury to find knowing and willful violations of section 1001.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1006 (2007) (Credit Institution Fraud)
18 U.S.C. § 1006 (2007).
The CrimeIt is a crime for a person who is
an officer, agent or employee of or connected in any capacity with
the Federal Deposit Insurance Corporation,
National Credit Union Administration,
Office of Thrift Supervision, any Federal home loan bank,
the Federal Housing Finance Board,
the Resolution Trust Corporation,
Farm Credit Administration,
Department of Housing and Urban Development,
Federal Crop Insurance Corporation,
the Secretary of Agriculture acting through the Farmers Home Administration or successor agency,
the Rural Development Administration or successor agency, or
the Farm Credit System Insurance Corporation,
a Farm Credit Bank,
a bank for cooperatives or any lending, mortgage, insurance, credit or savings and loan corporation
or association authorized or acting under the laws of the United States or any institution, other than an insured bank (as defined by 18 U.S.C. § 656), the accounts of which are insured by the Federal Deposit Insurance Corporation or by the National Credit Union Administration Board,
or any small business investment company,
with intent to defraud any such institution or any other company, body politic or corporate, or any individual, or to deceive any officer, auditor, examiner or agent of any such institution or of department or agency of the United States,
make any false entry in any book, report or statement of or to any such institution, or
without being duly authorized,
draw any order or bill of exchange,
make any acceptance, or
issue, put forth or assign any note, debenture, bond or other obligation, or draft, bill of exchange, mortgage, judgment, or decree, or,
with intent to defraud the United States or any agency thereof, or any corporation, institution, or association referred to in this section,
participate or share in or receive directly or indirectly any money, profit, property, or benefits through any transaction, loan, commission, contract, or any other act of any such corporation, institution, or association.
The PunishmentThe punishment for a violation of section 1006 is
a fine of not more than $1,000,000, imprisonment for not more than 30 years, or both.
Case Law Interpreting Section 1006United States v. McLean, 131 Fed. Appx. 34 (4th Cir. 2005).Details of the scheme in this case can be found in the discussion of section 1010, below. The defendants in the case were charged with, in part, “making false entries on monthly status reports required by HUD in violation of 18 U.S.C. § 1006.” McLean at *8. One of the defendants was convicted on the charge, but the court unfortunately does not discuss the conviction.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1010 (2007) (HUD & FHA Fraud)
18 U.S.C. § 1010 (2007).
The CrimeIt is a crime for a person
for the purpose of obtaining any loan or advance of credit from any person, partnership, association, or corporation
with the intent that such loan or advance of credit shall be offered to or accepted by the Department of Housing and Urban Development for insurance, or
for the purpose of obtaining any extension or renewal of any loan, advance of credit, or mortgage insured by such Department, or the acceptance, release, or substitution of any security on such a loan, advance of credit, or
for the purpose of influencing in any way the action of such Department,
make, pass, utter, or publish any statement, knowing the same to be false, or
alter, forge, or counterfeit any instrument, paper, or document, or
utter, publish, or pass as true any instrument, paper, or document, knowing it to have been altered, forged, or counterfeited, or
willfully overvalue any security, asset, or income.
The PunishmentThe punishment under this section is
a fine, imprisonment for not more than two years, or both.
Case Law Interpreting Section 1010United States v. McLean, 131 Fed. Appx. 34 (4th Cir. 2005).In McLean, the defendant was charged and convicted on 66 counts, one of which was “making and passing false mortgage notes to influence HUD in violation of 18 U.S.C. § 1010.” McLean at *8.
The scheme in this case involved officers and owners of a mortgage company which qualified as a Federal Housing Administration (hereinafter, FHA) lender which direct endorsement authority. Id. at *2. This means that the mortgage company had the authority to approve mortgage loans for FHA insurance, which are “readily saleable” on the secondary mortgage market. Id. The mortgage company was also an approved Fannie Mae lender, which meant that the mortgage company could originate a mortgage loan with the borrower, which would be immediately bought on the secondary market by Fannie Mae who would do its own underwriting evaluation. Id.
The mortgage company also created a subsidiary company, which was in the business of building modular homes financed by the parent mortgage company. Id. at *2-*3. To obtain funds for the home-builder to build homes, the officers of the parent mortgage company recruited individuals, most friends and relatives, to sign mortgage loan notes “purporting to secure funds advanced by [the mortgage company] for homes that, in fact, did not exist or were owned by someone other than the ‘borrower’ on the note.” Id. at *3. The officers induced the individuals to sign the notes by paying them money to participate in “investment” opportunities and representing that, by signing the notes, the “investors” did not actually incur any repayment obligation. Id. The officers also signed similar fictitious notes themselves. Id. No one who signed the documents ever acquired or possess an ownership interest in the properties listed on the notes. Id.
These instruments were then sold to Fannie Mae on the secondary market, “representing by the terms of the note that the borrower signing the note had an ownership interest in the listed property, that [the mortgage company] had a security interest in the property, and that the property was of sufficient value to protect the lender” or any secondary purchaser of the loan, such as Fannie Mae. Id. at *3-*4. Because the mortgage company was an approved Fannie Mae lender, it could transfer its loans to Fannie Mae without having to submit the loans to any underwriting review process by Fannie Mae; in essence, the mortgage company was making underwriting decisions on behalf of Fannie Mae. Id. at *4.
When Fannie Mae began to notice irregularities in the mortgage company’s underwriting practices, it conducted an audit of the loans it had purchased and found that many of the properties were either vacant lots or partially completed houses. Id. One of the defendants, when faced with the collapse of the Fannie Mae scheme, agreed to repurchase the loans, and he secured funds to do so by conducting the same kind of scheme with Ginnie Mae. Id. at *5. Ginnie Mae is owned by HUD. Id. Eventually, the schemes fell apart and the defendants were charged in a 66-count indictment.
Section 1010 comes into play in McLean when the defendants challenged the district court’s refusal to give a “good faith” instruction on the counts alleging the passing of false mortgage instruments to HUD under § 1010. Id. at *13. The judge did so for the other counts, and the defendants felt they were entitled to a good faith instruction “because they held a good faith belief that they were participating in a lawful investor program.” Id. at § 14.
The court disagreed. “On the knowledge element, the district court charged that the Government was required to prove defendants ‘knew that the mortgage notes were actually false or counterfeited’ and that they ‘knew [the notes] would be offered for some purpose to HUD.'” Id. There is no element of the offense which would allow a good faith defense; “[a]s long as defendants knew the information on the documents they procured was false and that the documents were headed to HUD (i.e., Ginnie Mae), defendant’s belief that the scheme was lawful, even if true was not a defense.” Id.
United States v. Koehn,
74 F.3d 199 (10th Cir. 1996).The defendant in this case pleaded guilty to one count of wire fraud and “one count of making a false statement to the Department of Housing and Urban Development,” under section 1010. Koehn at 200. In 1991, the defendant was the president of a mortgage company which was engaged in “originating and refinancing residential mortgages and selling them on the secondary market.” Id. He also controlled an escrow services company which he used to close mortgages originated by his mortgage company. Id. Typically, the mortgage company would originate and sell a secured residential loan to a mortgage servicing company, and if that company decided to buy the mortgage loan from the defendant’s mortgage company, it would deliver funds to the defendant’s escrow services company. Id. The funds were intended to be held in escrow and disbursed to pay off existing mortgages, and when “the existing mortgages were satisfied, new notes and related papers were forwarded to the buyer.” Id. In mid-1991, the defendant telephoned a mortgage trader located in Florida, and offered to sell that trader thirteen FHA and VA insured residential mortgage loans. Id. The trader’s company agreed to purchase all thirteen loan packages, and pursuant to the defendant’s instructions, it wired $882,550.76 to the defendant’s escrow services company’s account; the funds were purported to pay off the existing mortgages on the thirteen loans the trader’s company had agreed to buy. Id. However, that same say the defendant “misappropriated about $725,000 of these funds for the purpose of satisfying unrelated and independent obligations of [the defendant’s mortgage company].” Id. By the end of that month, the defendant had misappropriated the remaining funds, and he “never delivered the thirteen loan packages to [the trader’s company]. In fact, he sold the same loan packages to another mortgage servicing company. As a result of [the defendant’s] fraud, [the trader’s company] was driven out of business.” Id.
United States v. Austin,
1992 U.S. App. LEXIS 30121 (10th Cir. 1992) (Nos. 92-1046, 92-1047).The defendants were convicted on various counts including mail fraud, wire fraud, and making false statements in connection with this scheme. Austin at *1. “The essence of the scheme was to purchase properties from legitimate sellers and then divide each property into single family residences.” Id. The defendants recruited a number of “strawmen buyers” who secured mortgages from a mortgage company which was insured by the department of Housing and Urban Development (hereinafter, HUD). Id. HUD requires that each purchase be funded with a minimum of 15% down payment by the purchaser, but “no such investment was made by the strawman.” Id. Closing documents, however, were drawn up which falsely stated that down payments had been made. Id. at *1-*2. The defendants would then pay each strawman $1,000 for each of the transactions in which they participated. Id. at *2. Furthermore, the defendants assured the straw borrowers that the defendants would be responsible for the payment of the loans on the properties, but no payments were made, and the properties when into foreclosure. Id.
The defendants also incorporated an escrow service company which they used to give the transactions an air of legitimacy. Id. The escrow service company’s appearance as an independent entity convinced loan closers on the strawmen purchases to believe that down payments were paid by the purchasers in cash or certified funds. Id. Since the defendants arranged for all loans to be handled through the same mortgage company, which was able to charge high interest rates because the purchasers had no real interest in the property, the loans were attractive to secondary lenders because of the high interest rates and prospect of HUD insurance. Id. Eventually, the loans that went into default ended up losing the victims of the scheme more than $20,000,000. Id. at *3.
On appeal, the defendants argued that there was insufficient evidence to prove their guilt under section 1010 “which prohibits, among other things, the making of a false statement in connection with a credit transaction offered to HUD for insurance.” Id. at *5. The government focused on line 303 of the HUD-1 form, which is “prepared and submitted in connection with the closing upon real estate transactions,” that showed the purchaser made a case down payment, but no such payment was actually made. Id.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1014 (2007) (False Statements on Loan Applications)
18 U.S.C. § 1014 (2007).
The CrimeUnder section 1014, it is a crime for a person to
knowingly make any false statement or report, or
willfully overvalue any land, property or security,
for the purpose of influencing in any way the action of the
Farm Credit Administration,
Federal Crop Insurance Corporation or a company the Corporation reinsures,
the Secretary of Agriculture acting through the Farmers Home Administration or successor agency,
the Rural Development Administration or successor agency,
any Farm Credit Bank, production credit association, agricultural credit association, bank for cooperatives, or any division, officer, or employee thereof, or
of any regional agricultural credit corporation established pursuant to law, or
a Federal land bank, a Federal land bank association,
a Federal Reserve bank,
a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or
the Small Business Administration in connection with any provision of that Act,
a Federal credit union,
an insured State-chartered credit union,
any institution the accounts of which are insured by the Federal Deposit Insurance Corporation,
the Office of Thrift Supervision,
any Federal home loan bank,
the Federal Housing Finance Board,
the Federal Deposit Insurance Corporation,
the Resolution Trust Corporation,
the Farm Credit System Insurance Corporation, or
the National Credit Union Administration Board,
a branch or agency of a foreign bank (as such terms are defined in paragraphs (1) and (3) of section 1(b) of the International Banking Act of 1978 [12 U.S.C. § 3101(1) and (3)]), or
an organization operating under section 25 or section 25(a) of the Federal Reserve Act,
upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan, or any change or extension of any of the same, by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor.
The punishment for a violation of section 1014 is
a fine of not more than $1,000,000, imprisonment not more than 30 years, both.
Case Law Interpreting Section 1014United States v. Dominguez,
226 F.3d 1235 (11th Cir. 2000).In Dominguez, the defendant was charged and convicted on multiple accounts involving participation in a cocaine distribution organization and mortgage fraud. Dominguez at 1236. The appeal centered around the defendant’s assertion that the drug-related charges and the mortgage fraud-related charges were improperly joined in the district court. Id. The court ultimately rejected the defendant’s argument because “[c]oncealing money from the drug activity was the motive for the mortgage fraud.” Id. at 1242. The court relied on the government’s closing argument, which centered around the defendant making false statements on a loan application, which brings it under section 1014. Id. at n.9.
The evidence on those [false statement] counts shows that he made false statements to these banks in an effort to influence the banks to give [him] loans. ¼ This is the 1990 return. Here is the 1989 return that he submitted to the banks. ¼ And you heard testimony that these are forgeries. The IRS has never seen them. ¼ It is very simple why he does this. If he goes into this bank showing the kind of money he has made from cocaine trafficking, four years out of law school, worth $3 and a half million, you show that kind of money and those kind of assets that he has got, with his true legitimate income of 20 grand or 30 grand, he is in trouble. ¼ He creates plausible tax returns ¼ that will pass the laugh test. You look at them, you go, oh, okay, he makes 75 or 85, okay. That’s, you know, that makes sense with this income. And that is really the problem with cocaine, folks. You make so much money that it is impossible to justify what you have. ¼ This is proof beyond any reasonable doubt that he committed these mortgage frauds. Id.
Dominguez, then, shows that in some cases, the false statements on loan applications, which typically show inflated assets, see United States v. Nguyen, 1999 U.S. App. LEXIS 170 (9th Cir. 1999) immediately below, can sometimes involve making the assets appear smaller than they really are.
United States v. Nguyen, 1999 U.S. App. LEXIS 170 (9th Cir. 1999).In Nguyen, the defendants were charged and convicted with mail fraud and making false statements to a federally insured financial institution in connection with a loan application, in violation of section 1014. Nguyen at 3. The defendants wanted to purchase a more expensive house than they already owned, but they wanted to sell their old house first. Id. at *5. So they convinced some friends to allow the defendants to use the friends’ names on a loan application for the supposed purchase of the defendants’ first house. Id. The defendants then submitted a residential loan application to a mortgage company for the purchase of the first house. Id. The defendants’ made a number of misrepresentations in the application: “they created a fictitious position and salary for [one of the friends,] inflated [the other friend’s] salary, and submitted numerous false documents in support of the application,” such as “false W-2 statements, credit reports, tax returns and a forged Request for Verification of Employment.” Id. at *5-*6. One of the defendants worked as a loan processor for a mortgage company owned by the other defendant, and she prepared the loan application using a fictitious name. Id. at *5 n.2. A mortgage company loaned $265,000 to the defendants’ friends, who subsequently quitclaimed their interest in the residence to the defendant’s brother; a few years later, a new mortgage company foreclosed on the property, recovering their investment. Id. at *6 & n.4. After the sale of the defendants’ first property, the defendants sought to purchase a new $930,000 residence. The purported buyers of the residence were listed as one of the defendants, the other defendant’s sister, and that person’s brother, all as joint tenants. Id at *7. This defendant submitted a second loan application, again under the fictitious name, to the mortgage company, falsely representing the defendant’s marital status, her employer and her monthly income; it also inflated the other defendant’s sister’s and brother-in-law’s monthly incomes and included false credit reports verifying the entries. Id. Relying on the misrepresentations, the mortgage company loaned $600,000 to the three “joint tenants.” Id.
United States v. Fraza, 106 F.3d 1050 (1st Cir. 1997).In Fraza, the defendants, a father and a son, were convicted on various counts of fraud, including one under section 1014. Fraza at 1052. On appeal, the defendants claimed that being charged for both “knowingly making false statements to a federally insured lending institution, 18 U.S.C. § 1014, and …bank fraud, 18 U.S.C. § 1344, are multiplicitous, thereby violating the Double Jeopardy Clause of the Fifth Amendment of the Constitution.” Id. at 1053.
One of the defendants, the father, offered to purchase some land in Rhode Island from a seller at the agreed upon price of $120,000. Id. at 1052. The seller would maintain a $60,000 mortgage on the land. Id. The father signed a Purchase and Sale agreement, and gave the seller a $2,000 deposit check, but additional financing was required. Id. The father met with officers of a credit union, and during this meeting, he told the officers that the purchase price of the property was $205,000, and that he was seeking to finance $160,000. Id. However, due to his prior bankruptcy, the credit union would not grant him the loan, to which the father suggested that his son purchase the property and take the loan. Id. The officers agreed to consider the request but stated that the son might require a co-signer. Id. Later that year, the father and the seller attended an informal “closing” in the back seat of the car owned by an attorney whose firm had represented the credit union for over twenty years. Id. The father signed two closing statements, one reflecting the $120,000 purchase price and the other remaining blank, which the attorney claimed he needed to make a correction to a tax computation. Id. Simultaneously, the seller endorsed a deed conveying the property to the son’s construction company, and at that “closing” no money or financial instruments changed hands. Eventually, the father found a co-signer and the credit union approved a $160,000 loan based on the inflated purchase price of $205,000; the credit union’s appraisal of the fair market value of the property came in at $225,000.
The formal closing was held a month-and-a-half later, involving the father, his son, the son’s co-signer, a credit union loan officer and the attorney who was acting as the credit union’s attorney. Id. The attorney explained that the seller was unavailable and produced the blank closing form, which he then filled out with the purchase price being listed at $205,000. Id. After the son signed, the loan officer disbursed $160,000 to the attorney who then paid the closing costs, the existing $58,740 mortgage on the property and gave the remaining approximately $95,000 to the son, who in turn paid the attorney $5,000 for his work. Id. Shortly thereafter, the seller, who was not informed that the credit union held a $160,000 first mortgage on the property, received the son’s signed promissory note and mortgage in the amount of $60,000 in the mail. Id.
Six months later, the son filed for bankruptcy, and as part of the bankruptcy proceedings, both the father and his son, represented by the attorney, gave deposition testimony that they gave the credit union an inflated price for the seller’s property. Id. Roughly the same time, the attorney’s firm mailed the seller a tax form indicating that the seller had received $205,000 from the son for the property; reacting to complaints from the seller, a corrected tax form was sent to the seller, but along with it, the seller received a copy of the closing statement stating the purchase price as $205,000. Id. Also at the same time, the loan to the son became delinquent and the credit union discovered that the actual purchase price of the property was $120,000 instead of $205,000, and discovered the existence of two different closing statements. Id. Desiring to keep the credit union as a client, the attorney arranged for its pension fund to pay the credit union $160,000 and to take over the mortgage. Id. Three years later, the father, the son, and the attorney, who died prior to trial, were indicted on several charges. Id. As noted above the father and son were convicted of the charges.
As noted above, the defendants challenged the sections 1014 and 1344 charges on multiplicity grounds, but the court determined that the Blockburger test was satisfied: “Section 1014 contains an element not contained in § 1344, that is, proof that the statements were ‘materially false.’ Likewise, § 1344 encompasses a ‘scheme or artifice to defraud,’ which is not an element of § 1014.” Id. at 1053. The defendants pointed to United States v. Seda, 978 F.2d 779, 781 (2d Cir. 1992) which held that “§§ 1014 and 1344, when arising from the same offense, are multiplicitous.” Fraza at 1054. The court disagreed because Seda relied on a different case than Blockburger, which the court felt did not really apply in this situation. The court affirmed the convictions, apparently agreeing that the defendants’ acts constituted mortgage fraud.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1341 (2007) (Mail Fraud)
United States v. Bryson,
2004 U.S. App. LEXIS 6977 (7th Cir. 2004).Bryson is a very good case to be aware of. While it has no precendential value, it does a very good job of explaining the appraisal and closing processes, as well as outlining the various elements of fraud. The defendants in this case were indicted on, among other charges, three counts of mail fraud in conjunction with a mortgage fraud scheme. Bryson at **2. The scheme in this case was “large and complex.” Id. at **3. The genesis began with a man named Fagan, who began buying real estate through a mortgage company owned by a man named Dailey. Id. Fagan used inflated appraisals and falsified income documentation to obtain loans on residences in excess of the true value, obtaining the misleading documentation from an account named Killebrew, who created falsified W-2s, check stubs and tax returns. Id. Killebrew also created false invoices that showed liens on properties that needed to be paid at closing, causing money that lenders thought was being paid to pay the liens to go to Fagan. Id. At first, Fagan used the excess money to renovate the properties, but he quickly fell behind on the loan payments and thereafter began pocketing the extra money and defaulting on the loans. Id. Because of the defaults, Fagan’s credit prevented him from obtaining additional loans, so he began using people with good credit histories as straw purchases to obtain more properties and case from loans. Id. He shared the excess loan proceeds with the straw purchasers, who also defaulted on the loans, but Fagan still received several hundred thousand dollars in the scheme. Id. at **3-**4.
Because Fagan needed inflated appraisals for his scheme to work, he would tell appraisers the target value of the property; one of the defendants was one of the people who provided Fagan with the inflated appraisals. Id. at **4. “Appraisals follow a standard format and are supposed to include certain information.: Id. One piece of information is data from the multiple listing service (hereinafter, MLS), which lists properties offered through real estate agents. The MLS, which is available to all real estate agents, includes the asking price and a description of the property. Id. Using the listing price and any recent sales, an appraiser can determine the fair market value of a property; appraisers are also supposed to state whether, according to the MLS, the property is currently for sale or has been listed or sold in the past 12 months. Id.
The appraisals made by one of the defendants were significantly higher than the MLS listing price-between 50 and 223 percent higher. Id. at **4-**5. This defendant did not explain why he had appraised the property higher than the MLS listing price; instead, the he either falsely stated that the properties had not been listed in the MLS in the past 12 months or did not answer the question. Id. at **5.
After the inflated appraisals and falsified loan applications were completed, Dailey’s mortgage company would mail the loan application packages via FedEx to one of several lenders. Id. After the loan was approved Fagan or Dailey’s employees would designate the title company at which the closing would take place, with the companies being selected “based upon their willingness to let Fagan and [the mortgage company] control the closing,” which would ensure that the seller and lender were kept in the dark. Id. at **5-**6.
To keep the seller and lender in the dark, Fagan needed two HUD statements: “one for the seller showing the true selling price, and one for the lender showing an inflated selling price.” Id. at **6. Fagan, then, used the other defendant, who happened to be a closing agent at a title company. Id. He instructed her how to close the loans he obtained through the straw purchasers, telling her to write checks contrary to the lender’s instruction, including writing checks to the straw borrowers and to fictitious companies. Id. The HUDs that were sent to the lenders by FedEx never disclosed that the defendant wrote checks to the borrower; instead, “the HUDs falsely stated that the borrower provided a down payment and that most of the loan funds were disbursed to the seller.” Id. The lender HUDs reflected a false purchase price far above the true purchase price; in one instance, the HUD sent to the lender showed that $96,000 was the purchase price, whereas the seller’s HUD showed a $44,500 purchase price. Id. at **6-**7.
This defendant also prepared disbursement ledgers for the closing. Id. at **7. In the closing just mentioned, the ledger showed that the only money collected and disbursed by the defendant was the lender’s money ($81,129.00), while the borrower received $28, 798.13-a sum not reported on either HUD. Id. No down payment was collected or disbursed, even though one was listed on the HUD, which she signed, certifying that the forms were “true and accurate” accounts of the transaction. Id. She received $200 under the table from Fagan for each double-HUD closing she did.
This $200 did not satisfy this defendant, so she “devised another way to make money from each transaction.” Id. She used the fraudulent loan closing proceeds to write checks drawn on her employer’s escrow account to individuals named Montgomery, Egger, and Kirby. Id. at **7-**8. These three people were recruited by the defendant and her husband to cash the checks and split the proceeds, telling the three individuals that they needed to cash the checks so the defendant could collect bonuses her employer would not pay her directly. Id. at **8. Fagan was not aware of this defendant’s activity, which generated the money laundering charges. Id. At about the same time Fagan was closing the fraudulent loans through the defendant, the pattern of bank deposits into her personal bank accounts changed, as did her personal spending habits; she deposited cash totaling several thousand dollars , and she began spending roughly $1,000 a month on various home shopping networks. Id. at **9.
At trial, the defendant testified on her own behalf, admitting that she signed both of the certified-as-true HUDs at each closing, and that she signed the disbursement checks. Id. However, she maintained that she thought there was nothing wrong with her actions. Id. She further contended that her assistant, who was not a closing agent, prepared the checks even though she did not have the proper authority to do so. Id. Furthermore, the defendant explained that she “was so busy conducting closings that she did not notice the checks were made out to” a third party. Id. She also explained that the checks made payable to Montgomery were for work her husband had done on Fagan’s properties, and that they were made payable to Montgomery so that her husband could hide the income from his former wife. Id.
United States v. Owens,
301 F.3d 521 (7th Cir. 2002)The defendant, a real estate appraiser, was convicted of mail fraud and wire fraud for his part in a multi-million dollar real estate and mortgage fraud scheme. Owens at 523.
The scheme in this case involves a “flip,” “which basically involved having people purchase distressed properties for cash and then immediately resell that same property at artificially-inflated prices.” Id. The ringleader of the scheme would identify the property he wanted to buy through realtors using the MLS system, and then try to negotiate the lowest possible price for the property, offering to buy it with cash. Id. Simultaneously, he would prepare to sell the property at an artificially-inflated price to a second buyer, needing the second buyer to obtain approval for a home mortgage, and needing to obtain an inflated appraisal that could be used to justify the higher sales price to the lending institution. Id.
The ringleader’s co-schemers worked to locate potential second buyers, offering to close with no money down with cash back. Id. The second buyers would have to secure a mortgage, but they typically did not have jobs or bank accounts and thus could not have normally qualified for a mortgage. Id. To overcome this obstacle, false documents, including W-2s, check stubs, and employment verifications were created to submit to the lender institutions. Id. The mortgage brokers also worked with an appraiser to ensure that the appraisal matched the contract price for the second sale in order to maximize profits. Id. By omitting critical MLS information from the appraisal reports, the appraisers were able to inflate the value of these properties; profits ranged from approximately $10,000 to $180,000 per flip transaction. Id. The profits from each transaction were used to pay the co-schemers. These profits, however, “came at the expense of lending institutions and the federal government because the second buyers could not or would not pay the mortgage payments due on the properties.” Id. at 524. Private lending institutions lost millions of dollars when the properties went into foreclosure because the mortgages were based on inflated values which had already been pocketed by Parr and the co-schemers. Id. Because many of the loans on the properties were insured by the FHA, a substantial portion of the losses ultimately were incurred by the United States Department of Housing and Urban Development. Id.
United States v. Nguyen, 1999 U.S. App. LEXIS 170 (9th Cir. 1999).Nguyen, discussed supra in conjunction with section 1014, also discussed mail fraud in relation to mortgage fraud. In this case, the defendants were actually acquitted on the mail fraud counts. The details of the mortgage fraud scheme are discussed supra. The district court examined the indictment and the evidence admitted at trial, and determined “that the government failed to meet its burden of establishing the elements of mail fraud. Nguyen at *18. “In order to convict for mail fraud, the government must prove: (1) the existence of a scheme to defraud, and (2) that the defendant used or caused the mail to be used in furtherance of the scheme.” Id. at n.8 (citing United States v. Lothian, 976 F.2d 1257, 1262 (9th Cir. 1992). The district court concluded that when the County Recorder mailed the deeds, that was not in furtherance of the fraudulent loan scheme. Id. at *18. Rather than accepting an expansive concept of fraud, the district court determined that the fraudulent conduct charged in the indictment, which was procuring the residential loans from the mortgage company, was completed once the mortgage company provided the loan proceeds to the defendants. Id. Therefore, “all conduct after receipt after receipt of the proceeds, including the mailings set forth in the indictment, was not done ‘in furtherance of’ the scheme to defraud.” Id.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1343 (2007) (Wire Fraud)
United States v. Jaffe,
387 F.3d 677 (7th Cir. 2004)Defendant was charge with wire fraud based on inflated appraisals. Jaffe at 679. He was convicted of participating “in a scheme to defraud and to obtain money and property … from a mortgage lender, National Lending Center, Inc., by means of materially false and fraudulent pretenses, representations, promises and material omissions….” Id. at 680. The government had to show that he knowingly participated in a scheme to defraud and that a wire was used in furtherance of the scheme. Id. The principle had a scheme to trick mortgage lenders into financing sales of properties at greatly inflated prices.
Other things in this case: defendant falsely represented that he had $100k in personal property. The wire aspect was satisfied by having money for a down payment wired to him.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1344 (2007) (Bank Fraud)
United States v. Walsh,
75 F.3d 1 (1st Cir. 1996).The defendant and four co-defendants were charged with conspiracy, twenty-nine counts of bank fraud, and twenty-nine counts of making false statements. Walsh at 3. “The substance of the indictment was that [the defendant] carried out a scheme to defraud Dime Savings Bank of New York [hereinafter DSBNY]¼by directing his employees to obtain 29 specific loans through the use of deceptions so that customers could purchase condominiums from [the defendant] and his associates.” Id. With a group of investors, the defendant purchased properties and converted them into condominiums. Id. He ordinarily served as a trustee of the realty trust that acquired the building, acted as legal counsel to the trust, and even served as the trust’s representative in the sale of individual units. Id. In 1986, sales started to lag, and the trust had difficulty repaying the acquisition loan. Id. As this was occurring, the defendant discovered that DSBNY had created a wholly owned subsidiary, Dime Real Estate Services of Massachusetts [hereinafter DRESM]. DRESM made mortgage loans available rapidly-“with no verification of income, assets or down payments”-but the loans required a twenty percent down payment and secondary financing was prohibited. Id. The defendant “directed his employees to arrange loans from [DRESM] for unit purchasers and to falsify documents submitted to [DRESM] to conceal the existence of secondary financing (and in some cases third mortgages as well).” Id. Roughly half the customers eventually defaulted and DRESM incurred substantial losses. Id. One of the issues raised on appeal is that the evidence failed to show that the victim was a federally insured financial institution. Id. at 9. “At the time of the fraudulent filings, 18 U.S.C. § 1344 aimed at schemes to defraud ‘a federally chartered or insured financial institution’ or to obtain property owned by, or under the custody or control of such an institution through falsehoods.” Id. The argument was based on the fact that DSBNY was a federally insured bank, but DRESM was not. However, since DRESM was “practically an alter ego” of DSBNY, DSBNY provided all of the funds for DRESM, and DRESM assigned the mortgages to DSBNY, “the mortgage fraud perpetrated against [DRESM] was effectively a fraud against [DSBNY].” Id.
United States v. Barnhart,
979 F.2d 647 (8th Cir. 1992).The defendant was convicted of aiding and abetting the execution of a scheme to defraud a federally insured bank. Barnhart at 648. He founded a mortgage company in the 1960s, and as part of its business, it made loans to individuals wanting to purchase homes. Id. To prevent its capital from being tied up in long-term loans, the mortgage company often “warehoused” loans by selling them on the secondary market, pledging the note and deed of trust to a bank to secure interim financing. Id. at 648-49. Directly at issue in this case are a “series of specific mortgage transactions” where the notes were sold to the Federal National Mortgage Association [hereinafter, Fannie Mae] on the secondary market. Id. at 649. In the normal course of business, Fannie Mae would wire the purchase price directly to the mortgage company’s account at its bank, the mortgage company would receive a list of loans Fannie Mae had purchased, and the mortgage company was supposed to repay the bank from which it had made the draw on its line of credit. Id. In 1987, however, the mortgage company began to experience problems with its cash flow, which made business operations difficulty, and created problems with Fannie Mae. Id. The defendant’s co-owner, in order to help the mortgage company survive, instructed one of the company’s accountants to use the proceeds from Fannie Mae to pay operating expenses or other loans, but not to pay the banks for the money borrowed. Id. This individual pleaded guilty to two counts of bank fraud and agreed to testify against the defendant. His testimony stated that he and the defendant discussed the ways the company could keep afloat, including obtaining financing by using furniture as collateral, laying off employees, and selling servicing rights. Id. There was also testimony that the two owners discussed the scheme of “mismatching” the proceeds from the sales of mortgages on the secondary market, which apparently meant that the two discussed “which loans to pay.” Id. There was also evidence introduced that showed that the company’s troubles were due in part to the defendant’s substantial draws on the company’s funds, some of which he agreed to repay. Id. The defendant was acquitted on seven of the eight counts against him. Id.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1503 (2007) (Obstruction of Justice)
United States v. Lefkowitz,
125 F.3d 608 (8th Cir. 1997).Details of the scheme in this case can be found in the discussion of 18 U.S.C. § 225, supra.
The obstruction of justice count in this case centers around a 1993 letter the defendant received that informed him that he was the target of a grand jury investigation. Lefkowitz at 619. Later that year, he instructed one of his company’s employees to remove all documents relating to two projects from the company’s offices. Id. The employee followed his instructions, taking the documents to her home. Id. When a subpoena included one of the projects, the employee “did not produce responsive documents at her home with [the company’s] response,” finally producing the documents in 1994 after receiving a target letter and discussing the matter with her own attorney. Id. Based on this incident, the defendant was convicted of violating section 1503 “by corruptly obstructing the grand jury’s investigation.” Id.
On appeal, the defendant argued that the government “did not prove a sufficient nexus between his instruction to remove documents and an intent to impede the grand jury process.” Id. at 619-20. The court disagreed because the defendant knew of the grand jury investigation when he instructed the employee to remove the documents, and based on her testimony, the trial jury “could reasonably infer that [the defendant] had intended her to hide these documents from the government.” Id. at 620. Furthermore, the defendant knew that his company had raised money and claimed tax credits for those two projects when the partnerships did not own any property. Id. Whether the documents were in fact incriminating is irrelevant because the jury could reasonably find that the defendant believed they would incriminate; section 1503 “is violated by ‘endeavors’ to obstruct justice, which include ‘where the defendant acts with an intent to obstruct justice, and in a manner that is likely to obstruct justice, but is foiled in some way.'” Id. (quoting United States v. Aguilar, 515 U.S. 593 (1995)).
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1956 & 1957 (2007) (Money Laundering)
United States v. Moncrief,
2004 U.S. App. LEXIS 22641 (5th Cir. 2004), vacated by Moncrief v. United States, 125 S. Ct. 2273 (2005).The judgment in Moncrief was vacated and the case remanded back to the Court of Appeals for further consideration in light of Booker. Booker dealt with the mandatory sentencing guidelines, so the discussion of the scheme in Moncrief is still appropriate here.
The government termed the activity in this case as the “largest mortgage-loan-fraud operation ever to be prosecuted.” Moncrief at *2. Twenty-three individuals were prosecuted in connection with the scheme, and the indictment in this case named eight defendants; seven of them pleaded guilty leaving the defendant here as the only one to deny guilt and proceed to trial. Id. The conspiracy centered on four members of the Mei family, who owned Mei Enterprises, “a conglomeration of several businesses operated by members of the Mei family.” Id. at *2-*3. The businesses included a construction company, several real estate companies, and mortgage brokers. Id. at *3. In 1996, two members of the Mei family began the bank fraud scheme that led to the indictment in this case. Id. The purpose of the scheme was to “accumulate large amounts of cash by inducing lenders to provide the Meis with loans that were $50,000 to $80,000 in excess of what it cost the Meis to purchase the real estate that served as the collateral for the loan.” Id. at *3-*4. The Meis would make it seem that they were selling a particular property, which coincided with a sale in which the Meis would purchase, for the first time, the very same property. Id. at *4. In other words, they engaged in “flipping.” Id. at n.1.
The Meis would locate a property that was for sale, either by themselves or through a referral to whom they would pay a finder’s fee. Id. at *4-*5. They would then find a straw buyer for a parallel sham transaction that would be used to obtain an inflated loan, often using their own family members. Id. at *5. As the creditworthiness of the original straw buyers was depleted, the Meis needed to find other straw buyers. The contract for the transaction between one of the Mei realty companies and the straw buyer would list a price tens of thousand of dollars greater than the purchase price between the Mei realty company and the original seller. Id. They would then have one of their mortgage companies apply for a mortgage loan to fund the straw buyer’s purchase from the Mei realty company. Id.
In order to get a loan of a desired size, the Meis had to deceive the lender on a number of matters:
the lender had to believe that the Mei realty company already owned the home before it actually did. This required:
a counterfeit commitment of title, and
preventing the lender from learning of the transaction through which the Meis would actually acquire the property
the lender had to believe that the purchase price in the sham transaction was consistent with a reasonable market price. This required:
an appraisal that values the realty at a much higher price than what the Meis would spend to purchase the property.
the Meis had to falsify the straw buyer’s financial information to make him appear more credit-worthy than he actually was
the Meis had to ensure that no red flags were raised that would provoke unwanted inquiry from the lender. Since the true sale price of the property is often a matter of public record, any investigation by the lender could prevent the loan from being approved. Id. at *6-*7.
The Meis’ mortgage brokers were responsible for preparing the fraudulent loan packages which included the loan application form, the straw buyer’s employment verification, pay stubs, W-2s, tax returns, bank statements, the sham purchase contract, a uniform residential appraisal report from a licensed appraiser, and the counterfeit title commitment showing that the Mei realty company had unencumbered title. Id. at *7.
United States v. Bryson,
2004 U.S. App. LEXIS 6977 (7th Cir. 2004)This case, discussed supra in conjunction with mail fraud, also dealt with money laundering. The counts arose because the defendant was the closing agent for fraudulent loans, for which she prepared two sets of HUD statement for each transaction. Bryson at **12-**13. Two sets of HUDs were prepared under closing instructions that were not provided by the lender. Id. at **13. The defendant “signed and distributed checks from the fraudulent loan proceeds to her friends to cash and return part of the money to her for her ‘bonuses.'” Id. The fraudulently obtained money was laundered to conceal that she “was getting an extra cut in addition to what she was getting under the table.” Id.
Mortgage Fraud Prosecuted Under 18 U.S.C. § 2314 (Interstate Transfer of Funds)
18 U.S.C. § 2314 (2007).
Section 2314 has a number of violations associated with it.
The CrimeIt is a crime for a person to
transports, transmits, or transfers in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more,
knowing the same to have been stolen, converted or taken by fraud.
It is also a crime for a person, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, to
transport or cause to be transported, or
induce any person or persons to travel in, or to be transported in interstate or foreign commerce in the execution or concealment of a scheme or artifice to defraud
that person or those persons of money or property having a value of $5,000 or more.
It is furthermore, a crime for a person, with unlawful or fraudulent intent, transport in interstate or foreign commerce any
falsely made, forged, altered, or counterfeited securities or tax stamps,
knowing the same to have been falsely made, forged, altered, or counterfeited.
It is also a crime under this section for a person, with unlawful or fraudulent intent, to
transport in interstate or foreign commerce any traveler’s check bearing a forged countersignature.
It is a crime for a person with unlawful or fraudulent intent, to
transport in interstate or foreign commerce,
any tool, implement, or thing used or fitted to be used in falsely making, forging, altering, or counterfeiting any security or tax stamps, or any part thereof.
ExceptionsThis section shall not apply to any falsely made, forged, altered, counterfeited or spurious representation of an obligation or other security of the United States, or of an obligation, bond, certificate, security, treasury note, bill, promise to pay or bank note issued by any foreign government.
This section also shall not apply to any falsely made, forged, altered, counterfeited, or spurious representation of any bank note or bill issued by a bank or corporation of any foreign country which is intended by the laws or usage of such country to circulate as money.
The PunishmentThe punishment for a violation of section 2314 is
a fine under this title, imprisonment for not more than ten years, or both.
Case Law Interpreting Section 2314United States v. Grintjes,
237 F.3d 876 (7th Cir. 2001)The defendant in this case, a mortgage broker, became involved in a scheme concocted by one of his clients. Grintjes at 877. The scheme was a variant of the kind of property flipping practice where the plan was to obtain inflated appraisals of properties, use the inflated appraisals to obtain mortgages, purchase the properties for significantly less than the amount of the mortgage, and pocket the rest of the loan. Id.
The government indicted the defendant for aiding and abetting a fraudulent scheme involving the interstate transfer of funds. Id. at 878. He claimed that he had no reason to know that the documents, the inflated appraisals, his client provided with him were fraudulent. Id.
Mortgage Fraud Prosecuted Under 26 U.S.C. § 7206(2) (Filing False Tax Returns)
United States v. Lefkowitz, 125 F.3d 608 (8th Cir. 1997).Details of the scheme in Lefkowitz can be found in the discussion of 18 U.S.C. § 225, supra. The defendant in this case was charged and convicted on 10 counts of filing false tax returns (four concerning low-income housing tax credits the defendant’s company claimed for a project not yet completed, and six relating to credits based upon false placed-in-service dates). Lefkowitz at 618.
To sustain a conviction under 26 U.S.C. § 7206(2), “the evidence must show that [the] defendant willfully caused the preparation of a materially false tax return.” Id. The defendant argued that the government failed to prove willfulness “because he only mistakenly supplied incorrect information to his accountants.” Id. at 618-19. The court noted, however, that trial testimony of the company’s accountants provided ample evidence that the defendant “(i) instructed a [company] accountant to claim credits on a project he knew was incomplete, and (ii) willfully provided false placed-in-service dates to his accountants.” Id. at 619. The court found that testimony to be sufficient. Id. (citing United States v. Kouba, 822 F.2d 768, 773 (8th Cir. 1987)).
The defendant also argued that “false placed-in-service dates will not sustain these convictions because low-income housing tax credits also require proof that a building is a ‘qualified low-income building'” under 26 U.S.C. § 42(f)(1). Id. However, he told his accountants that the projects were pre-leased to low-income tenants so that the company could begin taxing tax credits when the apartments were placed in service. Id. Since he knew that the false placed-in-service dates would cause his accountants to wrongfully claim tax credits, which was sufficient to sustain the section 7206(2) convictions. Id.
Mortgage Fraud Prosecuted Under 42 U.S.C. § 408 (Use of Another’s SSN).
42 U.S.C. § 408 (2007).
The operative language under this statute is 42 U.S.C. § 408(a)(7)(B) which prohibits a person from falsely representing, with intent to deceive, a number to be the social security account number assigned by the Commissioner of Social Security, when it is in fact someone else’s number. This behavior applies if it is done for the purpose of causing an increase in any payment authorized under 42 U.S.C. §§ 401 et seq. (or any other program financed in whole or in part from Federal funds), or for the purpose of causing a payment under 42 U.S.C. §§ 401 et seq. (or any such other program) to be made when no payment is authorized thereunder, or for the purpose of obtaining (for himself or any other person) any payment or any other benefit to which he (or such other person) is not entitled, or for the purpose of obtaining anything of value from any person, or for any other purpose.
The PunishmentA person who violates section 408(a)(7)(B) is subject to
a fine, imprisonment for not more than five years, or both.
Case Law Interpreting Section 408United States v. Bates, 2005 U.S.App.LEXIS 10358 (7th Cir. 2005) (No. 04-3230).Defendant was charged and convicted on two counts of using another person’s SSN with the intent to deceive, in violation of 42 U.S.C. § 408(a)(7)(B). Bates at *1. The defendant, along with another woman, contracted with a residential brokerage to purchase a residence in Milwaukee. Id. at *1-*2. The defendant lied about her name and social security number on a buyer information form she completed for the realtor. Id. at *2. The defendant and the other woman (who provided her real name and social security number, gave the broker a counterfeit check to cover the required earnest money. Id. A counterfeit cashier’s check was also offered to the broker, which also acted as the settlement agent at the closing, to cover the balance of the purchase price plus the closing costs. Id. The checks were deposited and closing duties conducted in which the broker laid out $68,570. Id. Shortly after the closing, the check for the earnest money was dishonored, which the defendant replaced with yet another counterfeit check. Id. at *2-*3. Once the broker discovered the fraud, it requested that the seller and her mortgage company refund the money paid at closing, “but neither acceded.” Id. at *3. Not wishing to seek recourse from the seller, the broker accepted a quitclaim deed from the seller, and the broker succeeded in selling the property for $74,500. Id.