Federal Mortgage Fraud Charges: Real Estate Fraud Schemes.

Technically, there is no single “standalone” federal offense called mortgage fraud. Instead, federal prosecutors who target alleged mortgage fraud schemes rely on a variety of different fraud-related statutes.

Two of the key statutes involved in real estate mortgage schemes are, 18 U.S.C. Section 1014 (Loan and credit applications generally; renewals and discounts; crop insurance) and 18 U.S.C. Section 1344 (Bank Fraud). Under Section 1014, federal prosecutors must show that a defendant knowingly made a false statement or report, or willfully overvalued property or security, for the purpose of influencing an action by an institution or entity covered by the statute. Section 157 is the federal bankruptcy-fraud statute; it applies to schemes involving a bankruptcy petition, a document filed in a Title 11 proceeding, or a false or fraudulent representation concerning a Title 11 proceeding. While the two statutes appear similar on the surface, 18 U.S.C. §§ 1014 and 1344 each require proof of different elements and trigger different penalties.

The application of a residential or commercial real estate mortgage loan to a federally insured lender or mortgage institution is the locus of the typical federal mortgage fraud investigation. An application may be filed by mail or electronically; information may be provided over the phone; and application forms can be submitted to the lending institution online, via fax, or in person. While each of these forms of communication triggers different federal law requirements, each of these communications may trigger federal fraud charges as well.

These various communications trigger different offenses. A single residential or commercial real estate application submitted to a lender can trigger mail fraud, wire fraud, bank fraud, or even false statement charges (which are criminal offenses under 18 U.S.C. Section 1014). Each form of communication triggers additional counts of federal fraud, and each form of communication must be substantiated by the evidence and specific legal elements.

The mere fact that a bank denied the loan application does not necessarily preclude a criminal prosecution under any of the federal mortgage fraud statutes. Although the failure to secure the loan application avoids the final stage of an alleged real estate mortgage fraud, this does not necessarily shield a defendant from being charged. The denial of the application might be the best result possible for an individual or business facing a federal investigation, but the conclusion of a real estate transaction does not necessarily conclude the government’s investigation.

How Do Prosecutors Distinguish a Criminal Mortgage Misstatement from an Application Error?

Prosecutors can and do pursue mortgage fraud charges against borrowers, mortgage brokers, real estate appraisers, agents, mortgage lenders, and title company employees.

The specifics of the allegations will depend upon the facts involved. These allegations may include:

• False income, employment, asset, liability, occupancy, and property information on an application;
• False appraisal, inspection, or title work;
• Improper certification or filing of loan documentation;
• Improper use of the funds that is different from the stated purpose of the loan or mortgage;
• Illegal referral fees and kickbacks for loan origination, appraisal, or brokerage services; and
• Various other schemes and artifices designed to defraud a lender or buyer.

The specifics of each case are different. A residential or commercial real estate application that is entirely false will warrant closer scrutiny and present different challenges than one that is mostly true. A single material misstatement on an otherwise completely true application can establish criminal liability.

The focus on whether the statement was knowingly false and made for the purpose of influencing the institution is a key aspect of the investigation. A largely accurate application may still trigger a federal fraud investigation if it contains a knowing false statement made for the purpose of influencing a covered institution. Even if the statement is a minor one, if the government can show that it was knowingly false and made for the purpose of influencing a covered institution, a prosecution could follow.

Additionally, if a lender approved the loan application despite knowing that it contains material misstatements, then the evidence of its approval could be relevant to whether the statement was made for the purpose of influencing the lender. However, if the lender had knowledge of the misstatement when it approved the application, this fact alone cannot preclude a criminal prosecution.

The federal government may choose to prosecute one or all of the parties involved. While lenders’ negligent underwriting practices may warrant civil remedies and may result in administrative sanctions, negligent underwriting is not, in itself, sufficient to substantiate a fraudulent scheme for purposes of a federal criminal case. Additionally, while lenders’ involvement in alleged fraudulent activities may raise questions about a borrower’s or agent’s criminal intent, their direct encouragement of fraudulent activity does not eliminate criminal exposure.

What Follows a Federal Subpoena, Target Letter, or Investigator Contact?

If you are receiving a subpoena, a target letter, or an investigator contact, you are in the crosshairs of a federal mortgage fraud investigation. While the investigation may have been sparked by a civil matter, civil litigation, or even a settlement with a private lender, a civil settlement does not terminate or otherwise preclude a separate and independent federal prosecution. The federal government does not, and does not have to, wait for a private lender’s settlement agreement to take action on its own.

When you receive a federal subpoena, the subpoena will list the information or documents that federal investigators are seeking. These documents may include loan records, bank statements, electronic communications, and others. They may also include requirements for testimony. Federal investigators will use all of the evidence they obtain to build a case they then will present to the Department of Justice (DOJ). If the evidence obtained is sufficient, the DOJ will then decide whether to pursue an indictment or other charges.

In many cases, federal investigators will speak to individuals or entities who have cooperated with the investigation or who are not considered targets of the investigation. Those entities include lenders, escrow agents, real estate brokers, mortgage brokers, loan officer(s), appraisers, and other third-party professionals who assisted with the transaction. It is very common for federal investigators to contact these cooperating individuals or entities before contacting their primary targets.

What Do “Subject” Letters Mean?

If you receive a “subject letter,” this indicates that you are a “subject” of a federal investigation. Receiving this letter could mean anything; an indictment or charges could be on the horizon, or investigators could simply be evaluating the likelihood of filing charges against you. In either case, it is important to contact a lawyer to assist with your response and begin addressing the government’s investigation.

What Does a Grand-Jury Subpoena Mean?

A grand-jury subpoena indicates that the federal government is actively investigating mortgage fraud allegations. This is no longer just the possibility of an investigation. At this stage, you should contact a lawyer immediately.

How Can One Mortgage Transaction Produce Multiple Counts and a Much Higher Sentence?

A single mortgage application can trigger numerous federal fraud counts. Under 18 U.S.C. Section 1014, which imposes statutory maximums of up to thirty years’ imprisonment and a $1 million fine per violation, prosecutors will use false statements in a real estate transaction to establish criminal liability. To build an even bigger case, prosecutors will also use the nature and means of the communications involved in the residential or commercial real estate mortgage application to trigger additional federal fraud charges.

As an example, the transmission of a fraudulent loan application may support charges under the mail fraud statute (18 U.S.C. Section 1341) or the wire fraud statute (18 U.S.C. Section 1343), each carrying up to thirty years’ imprisonment and a $1 million fine per count when the violation affects a financial institution. In addition to these fraud charges, prosecutors will also try to seek a Bank Fraud charge under 18 U.S.C. Section 1344, which carries up to thirty years’ imprisonment and up to $1 million in fines.

Ultimately, the nature and proof required to sustain an indictment will depend on the scope of the investigation. The federal sentencing guidelines are calculated according to a set of criteria that takes into account the amount of loss (or the amount of loss intended), and defendants facing federal fraud charges need to address any issues related to the proof for these elements.

Under the federal sentencing guidelines, the dollar amount of the actual or intended loss at issue can materially affect the recommended sentencing range for individuals charged with a federal offense. For this reason, defendants in federal criminal mortgage fraud cases must carefully evaluate if the amount of loss claimed by prosecutors was calculated in accordance with the specific guidelines for loss calculation. In many cases, the actual loss and intended loss could be a hotly disputed sentencing issue, especially in complex transactions involving fraudulent documentation and inflated appraisals.

A defendant facing federal charges will need to be prepared to address all related aspects of the prosecution. In this regard, the loss calculation can be as important as the evidence of falsity and intent.

Talk It Through With a Lawyer

Every case turns on its own facts. Todd Spodek is the managing partner of Spodek Law Group, a second generation firm his father opened in 1976, and the firm takes federal criminal and white collar matters nationwide. Call 888 348 8028 to talk it through.