A mortgage is a loan that is made to fund the purchase of a house or other piece of real property. The loan is secured by the property the purchase of which the loan funds. This means that if the loan is not paid back as provided in the loan agreement, usually through monthly payments of principal and interest, the lender can foreclose on the property. Foreclosure means forcing the sale of the property and using the proceeds of the sale to pay off the loan balance.
In federal law mortgage fraud is defined as “any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.” In its simplest form, mortgage loan fraud involves a loan applicant misrepresenting a fact on a mortgage application in order to obtain a mortgage. Of course, mortgage loan fraud can and does take many other forms. Any misstatement of fact, misrepresentation of information, or omission of relevant facts can become fraud in the context of mortgage lending.
The consequences of mortgage fraud can be severe. If a person’s lender learns that any part of a person’s loan application was false, it can demand immediate, full repayment of the mortgage loan. If the borrower is unable to pay, the lender can foreclose on the property. In addition, mortgage fraud is also a crime. It is also a growing problem.
Most people think of mortgage fraud as a homebuyer lying on an application for a mortgage loan, but there are actually two separate types of mortgage fraud. One type involves fraud on the part of mortgage lenders and brokers, appraisers, or real estate agents:
- Fraud for housing is the commonly understood context of mortgage fraud. This is where a homebuyer makes a misrepresentation in order to obtain or maintain ownership of their home by getting a first or second mortgage loan;
- Fraud for profit, however, is usually committed by insiders of the mortgage industry, such as brokers or appraisers, who have specialized knowledge about the industry and how it works. The purpose of fraud for profit is to abuse the system in order to steal money from lenders and/or homeowners. For example, mortgage brokers have been known to borrow money for a home purchase that is completely fictitious. There is no real borrower and no real property involved. Instead the broker pockets the loan proceeds. When the lender is not paid, the lender discovers that there is no real property on which to foreclose.
Federal authorities reportedly consider fraud for profit a higher priority for investigation than fraud for housing.
What Are the Elements of Mortgage Loan Fraud?
Mortgage fraud could be prosecuted by federal authorities in federal court or by local authorities in state courts.
If the crime is prosecuted by federal authorities in federal court, it would probably be charged as wire fraud or mail fraud, which have similar elements. In this case, the elements of the crime would be as follows:
- The perpetrator either:
- devised a “scheme to defraud”, or participated in a scheme to defraud knowing it was fraudulent, or
- participated in a scheme to obtain money or property through false representations
- The perpetrator acted with “intent to defraud”;
- The perpetrator used either the U.S. mail system or an electronic communication, such as a text message, email, or fax, to carry out the scheme to defraud or to obtain money or property through false representations.
In state courts, the definition of criminal fraud will vary from state to state. Generally, however, If the crime is prosecuted in a state court by a local authority, e.g. a city or county district attorney, then the elements would essentially be the following:
- The perpetrator purposefully made a misrepresentation of an important (“material”) fact;
- The perpetrator knew the misrepresentation was false;
- The misrepresentation was communicated to a victim who justifiably relied on the misrepresentation; and
- The victim suffered an actual loss as a result of relying on the misrepresentation.
What Are the Most Common Ways to Commit Mortgage Loan Fraud?
The best way to avoid an allegation of mortgage fraud is for an applicant to make sure that everything on their loan application is true and accurate to the best of their knowledge. Falsifying information on a mortgage application is one kind of mortgage loan fraud. This could encompass everything from a mortgage loan applicant falsifying information about their income to information about their credit card balances or other outstanding debts.
The following sets of facts can lead to a mortgage fraud investigation include:
- False Statements: Conduct such as falsifying information on a mortgage application, for example, leaving out information about outstanding debts of the applicant, and other misrepresentations and omissions that are intended to mislead the lender into making a loan that it would not make if the true facts were reported;
- Failure to Disclose: Concealing information or failing to inform the lender about certain crucial facts, such as having a second lender or a second mortgage;
- Identity Theft: Using another person’s name and information without that person’s knowledge and consent;
- Occupancy Fraud: Providing false information about the occupancy of the property, for example, not truthfully reporting whether it is intended to be the buyer’s primary residence, an investment property, or left vacant;
- Income Fraud: Making false statements about the applicant’s income level; or
- Straw Buyers: One person allowing another person to use their identity or credit information to obtain property when the actual buyer may not qualify for a mortgage or qualify for the best possible interest rates.
What If My Lender Committed Mortgage Loan Fraud?
Fraud on the part of lenders was a factor that contributed to the subprime mortgage crisis of 2008. When foreclosures became widespread, many mortgage lenders could not produce the loan documents they needed to foreclose on their loans. In many cases, lenders created new, forged documents in order to proceed with foreclosure.
In many cases, the forged documents were prepared carelessly, with misspellings, incorrect names and dates, and other clear errors. As a result, many judges relaxed the rules, and they became more willing to consider mortgage fraud as a defense to foreclosure.
New regulations have improved the reliability of the lending process in the United States, but there is always a risk of fraud in any transaction. The best practice is to report the truth on a mortgage loan application. If a person believes that they are a victim of lender fraud, it is in their best interest to consult a real estate attorney as soon as possible.
What Are the Penalties for Mortgage Loan Fraud?
As with other crimes, the mortgage loan fraud penalty can include prison time as well as fines and possibly restitution. Reportedly, the average mortgage fraud jail time is 28 months.
Mortgage fraud is usually charged as a felony offense, although if the amount involved is below $1,000, it can be charged as a misdemeanor. Punishments can include the following:
- A prison sentence: In federal court, the sentence can be as long as 30 years; the possible prison sentence in a state court will vary from state to state but could be in the five year range. A jail sentence for a misdemeanor offense can be up to one year.
- A fine: Again, in federal court for a federal offense, the fine can be as much as $1,000,000. In state courts, the fine may range from a few thousand dollars to $100,000, depending on whether the crime was a misdemeanor or a felony; the fine usually reflects the seriousness of the crime, so if tens of thousands or millions of dollars were stolen via the fraud, the fine will be higher than if the loss is minor;
- Restitution: Restitution means that the perpetrator must compensate the victims for their loss; in the case of ordinary consumer mortgage fraud, this might involve a payment to the mortgage lender.
- Probation: Probation is a system of monitoring by probation authorities; usually it follows a prison or jail sentence. It involves reporting to probation officers, not committing further criminal acts, and submitting to random drug tests.
In state courts, the same penalties will apply to a conviction for mortgage loan fraud, although the exact amounts of fines and length of possible prison times will vary from state to state.
There are defenses to a charge of mortgage loan fraud. If deployed successfully, they could allow a person to avoid mortgage fraud punishments.
A defense to the crime of mortgage fraud in a federal court is the so-called “good faith” defense. If the perpetrator honestly and in good faith believed that the misrepresentations were true, then they cannot be convicted of the crime.
Also in federal courts, the prosecutor may ask a judge to reduce or suspend the sentence of a perpetrator convicted of mortgage fraud. This can happen if the person provides substantial assistance to the prosecution in the identification, arrest or conviction of any other person who was engaged in the scheme to defraud. So, the perpetrator’s conviction would stand, but their sentence would be reduced or suspended, i.e. not executed.
It is always a defense to a crime to negate an element of the crime. The most likely element to defend against in a mortgage loan fraud case would be the element of intent. If the prosecution cannot prove beyond a reasonable doubt that the perpetrator intentionally made false representations of material fact on a loan application, then the crime is not proven and the perpetrator cannot be convicted.
Should I Talk to a Lawyer About My Mortgage Loan Fraud Case?
If you are concerned about mortgage loan fraud, it is in your best interest to talk to an experienced mortgage lawyer. The right lawyer can give solid advice about mortgage loan applications and how mortgage lenders process loan applications. If you are unsure about how to complete a mortgage application, an experienced real estate lawyer can help you complete an application so as to avoid problems.
If you have been accused of loan fraud, an experienced Criminal Defense Attorney can help you protect your rights and advise you of the best way to move forward with your case. A criminal defense attorney may be able to negotiate with prosecutors to avoid charges, so it is smart to consult an experienced criminal defense attorney as soon as you learn you are being investigated.
If you believe you are the victim of mortgage fraud, consulting a mortgage lawyer can help you determine what rights you have against your lender, and what path to take.
In any case you are most likely to get the best possible outcome if you have an experienced lawyer representing your interests.