Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Posts Tagged ‘Mortgage fraud’
Apr 09

What’s at the Bottom of the ‘Robosigning’ Scandal?

The problematic practice of robosigning – whereby banks and other lenders improperly foreclosed on properties through formulaically processing foreclosure documents – has been much in the news over the past couple of years. The feds have been investigating banks and individuals; state attorneys general have joined forces in pursuit of robosigners; and, unsurprisingly, there have been a number of class actions filed by consumers whose homes were foreclosed.

The fallout of these actions has been somewhat inconsistent. On the settlement side, banks and individuals are facing hefty penalties: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally entered into a massive $25 billion settlement with the Justice Department and state attorneys general (of 49 states) in early 2012. The mortgage servicing firm, Lender Processing Services (LPS), recently entered into a $120 million settlement with a coalition of state attorneys general (of 45 states). A founder of one of LPS’s subsidiaries, Lorraine Brown, pleaded guilty to federal conspiracy charges and Missouri state charges and faces not less than two years imprisonment.

Those defendants who have not settled may be faring better. In early March, a Nevada district judge threw out an entire case against two title officers of LPS who faced more than 100 felony counts. (The judge’s ruling was not merits-based but rather based upon prosecutorial misconduct.) A New Jersey federal judge recently dismissed a putative class action against Bank of America, noting the plaintiff’s failure to prove that robosigning constituted fraud.

Part of the challenge for cases that don’t settle out may be proving damages to homeowners who lost their homes: If a home was foreclosed on deadbeats, where are the damages in rapid-fire paper pushing? Some banking experts have found that, between 2009-2012, mortgage servicers created some 800,000 foreclosures that could have been avoided through loan modification programs. And foreclosure practices at BofA and Morgan Stanley subsidiaries were found to have violated the Servicemembers Civil Relief Act, which provides active servicemembers financial protection in matters such as civil proceedings, income tax disputes and foreclosures. But these two categories are only a small subset of foreclosures, which have amounted to between one million and four million each year for the last six years.

One lesson from these matters may be that settling is not always the best option. But another take-away that hasn’t come up is how banks and mortgage servicers got into the practice of robosigning in the first place. The issue faced by the banks and lenders was a glut of foreclosures and a related mountain of paperwork to process those foreclosures. How could they effectively address the problem and the dead weight on their ledgers? The answer was to institute an efficient, and automated, process. The problem with automation, though, is a lack of oversight or subjective inquiry – the very purpose behind much of the required foreclosure documents.

While the banks and processors are certainly to blame for false certifications and notarizations, their actions are not as nefarious as many make them out to be. How often are we all guilty of “robosigning” the terms and conditions for a new software program or credit card application? How often do we read all the new disclosures that financial institutions are required to send with each statement or loan request? Part of the problem is that we are faced with a mass of disclosures resulting from both regulation and excess litigation. The information overload is part of what has played out in the robosigning scandal.

The Government Accountability Office just released a report criticizing the Federal Reserve’s review of the robosigning matter, saying that the review itself has become cumbersome and inconsistent. The only problem is that there is no realistic resolution to the problem. Until we can devise a way to be both thorough and totally efficient in processing information, we will inevitably face new versions of the robosigning scandal.

Mar 05

Was This Identity Theft? Sixth Circuit Should Limit Meaning of That Term

What’s in a name?

When you think of identity theft, you typically think of someone taking a person’s name plus some other identifiers, like their address and Social Security number or credit card number, to go on a spending spree or drain the victim’s bank account. You may think of fraudulent impersonation. But what if someone falsely stated that another person gave him permission to use their joint property as collateral on a loan? That sounds like a false statement but not a case of stolen identity. Yet a federal district court in Tennessee found that just this scenario constituted identity theft in a current case against real estate broker David Miller.

Perhaps the court’s holding doesn’t sound too troubling. After all, identity theft is a crime and it’s clearly behavior that we want to deter. But expanding the reach of what may fall under the federal identity theft laws doesn’t really deter the behavior that Congress sought to address by statute. It just makes it harder to anticipate the bounds of the law, and that is troubling.

Congress passed the Identity Theft and Assumption Deterrence Act of 1998 in order to address the growing problem of fraudsters taking people’s personal information to either steal from their existing accounts or to run up debt in the victims’ names. The act criminalized fraud in connection with the theft and misuse of personal identifying information. (Before the law was passed, only fraud in connection with identification documents was a federal crime.) But there was some concern that prosecutors were not vigorously going after identity theft cases. So Congress passed the Identity Theft Penalty Enhancement Act of 2004. Again, this measure was aimed squarely at penalizing identity thieves who were attacking consumers’ financial accounts and credit. The bill’s sponsor, Rep. John Carter (R-Tex.), said identity theft is “a crime that we need to address and address seriously … for the protection of the credit of American citizens.”

Years later, the Department of Justice appears to have gotten the message and is actively prosecuting identity theft cases. All is well and good with the DOJ’s ordinary efforts in this area. On its website, the DOJ discusses identity theft issues in a familiar context, relating concerns over the misuse of “your Social Security number, your bank account or credit card number, your telephone calling card number, and other valuable identifying data.”

It also provides exemplary cases, which are again in keeping with the general understanding of what constitutes identity theft: (1) a woman pleaded guilty for using a stolen Social Security number to obtain thousands of dollars in credit and then filing for bankruptcy in the name of her victim; (2) a man pleaded guilty after obtaining private bank account information about an insurance company’s policyholders and using that information to deposit counterfeit checks; (3) a defendant was indicted on bank fraud charges for obtaining names, addresses, and Social Security numbers from a Web site and using those data to apply for a series of car loans over the Internet.

So with a pretty clear understanding of congressional intent and a fairly clear depiction of the scope of federal identity theft laws, it seems a bit like prosecutorial overreach for the DOJ to turn around and use these laws in a case like that against David Miller. Not in keeping with the sample cases above, Miller’s “theft” involved him “using the names of two individuals in a document that stated Miller had the authority to pledge real property as collateral for the loan when he had no such authority.” He was not trying to impersonate them to create new accounts or steal from their existing accounts. There are other laws to prosecute what Miller did – and he was found guilty of making false statements to a bank.

The concern here is that adding the identity theft count to Miller’s sentence is a misuse of the Identity Theft Penalty Enhancement Act and an overexpansion of what behavior falls under the rubric of identity theft. What is next? Will the department uses this law to prosecute those who lie about references on a job application?

The general rule is that criminal laws should be strictly construed in favor of the defendant. The ruling against Miller seems a case in point where the Rule of Lenity was not applied. Miller has appealed to the U.S. Court of Appeals for the Sixth Circuit, which will hopefully bring the law back within its intended scope.

Jun 04

DOJ’s Response to Grassley Gives Details, but Not the Right Details

The Justice Department showed off some fancy dance moves in a recent sidestep it used to respond to an inquiry from Senator Chuck Grassley (R-Iowa). Grassley wanted detail from Justice to support its claims that it has brought thousands of mortgage fraud cases, including numerous convictions against Wall Street execs, following the 2008 housing crisis. Justice provided detail . . . but not detail responsive to Grassley’s request.

The senator had submitted a letter to Justice in March as a follow-on to a Senate Judiciary Committee hearing on the DOJ’s prosecutorial record. At the hearing, Grassley criticized the DOJ for its “terrible” record on prosecuting mortgage fraud, in particular for its failure to go after the higher-ups at Wall Street firms ultimately responsible for the financial crisis. The agency later retorted that it had brought “thousands of mortgage fraud cases over the past three years, and secured numerous convictions against CEOs, CFOs, board members, presidents and other executives of Wall Street firms and banks for financial crimes.” Grassley asked for the details, particularly requesting that the agency indicate which convictions were obtained against executives.

We previously wrote about the Iowa senator’s request and questioned whether he was doing a bit of grandstanding and overstating prosecutorial issues. But Justice’s response gives one pause to question whether the agency has been lax in investigating Wall Street, and trying to gloss over this reality.

What Grassley received from Justice in response to his request (weeks after his deadline) was an extensive list of cases. Glaringly missing were specifics on prosecutions against executives for mortgage fraud. The DOJ noted in its letter that it “does not maintain [such] statistical data” and thus could not generate a list based on business titles. Nonetheless, it then identified several cases against high-level officers and executives across financial crimes, including cases for insider trading and Ponzi schemes.

Anyone considering the DOJ’s response for more than a minute should see the game it was playing. If Justice could provide a list of cases, why could it not pluck data from the list on business titles of the defendants? If it could provide a list of prosecutions of executives across financial crimes, why could it not isolate that list to the immediate question of how many have been prosecuted for mortgage fraud?

Grassley noted that the DOJ’s response “substantiates my suspicion” that it “isn’t going after the big banks, big financial institutions or their executives” and instead is hiding behind numbers. If Justice wants to allay Grassley’s concerns, as well as the general public’s concerns, and prove that it indeed has been proactive in investigating mortgage fraud up and down the ladder – and not just going after smaller fraudsters – it needs to come up with a better response than it has to date.

Justice recently announced yet another working group, the Residential Mortgage-Backed Securities (RMBS) Working Group, to address mortgage fraud. Perhaps this group will be able to better provide some answers. But, as the working group’s predecessors have proved, simply having a bunch of task forces is insufficient, especially in light of some questionable track records.


Ifrah Law is a leading white-collar criminal defense firm that specializes in federal criminal defense including mortgage fraud defense and securities fraud defense.





May 11

Sentencing Panel Amends Guidelines for Mortgage Fraud

Responding to a requirement in the Dodd-Frank Act that it review, and if appropriate, amend, the federal sentencing guidelines for mortgage fraud, the U.S. Sentencing Commission set forth on April 13, 2012, two new provisions that will affect sentencing for this type of crime.

Mortgage fraud became a significant issue in the recent financial crisis and the housing downturn, so the Commission’s changes are being closely watched in the financial services industry.

First, the Commission’s proposals, which will take effect on November 1, 2012, if not disapproved by Congress, add language to the “credits against loss” rule that affects the amount of loss to be considered for sentencing purposes in mortgage fraud cases. The determination of loss must be reduced by any money returned to the victim before the offense was detected and by the fair market value of any collateral that may not have been disposed of at the time of sentencing.

The problem is that often, if the collateral has not been disposed of by the time of sentencing, its fair market value may be hard to determine, and the absence of a uniform process for determining the value may result in disparities in sentencing.

The Commission decided that the value of the collateral should be determined as of the date on which the guilt of the defendant was established, and it established a rebuttable presumption that the most recent tax assessment value of the collateral constitutes a reasonable estimate of its fair market value. The commission said its intent is to provide a uniform practicable method for determining the fair market value of undisposed collateral while providing sufficient flexibility for courts to address differences among jurisdictions regarding how closely the most recent tax assessment tracks the fair market value.

Second, the Commission amended the application of an existing four-level increase in sentence if the offense involved specific types of financial harms such as jeopardizing the safety and soundness of a financial institution – such as making the institution insolvent, forcing it to reduce its benefits to pensioners or insureds, and the like.

The amendment adds as a new consideration whether one of the listed harms was likely to result from the offense, but did not in fact occur because of federal government intervention, such as a bailout. The Commission took the view that a defendant should not avoid the application of the four-level increase merely because the harm that was otherwise likely to result from the conduct did not occur because of fortuitous federal government intervention.

In some circumstances, this amendment could have the result of significantly increasing an offender’s sentence. We would expect prosecutors to argue that many interventions by the government, short of a fully announced “bailout,” should be taken into account and that sentences should be increased because of the “but-for” aspect of the defendant’s conduct: Had the government not stepped in, the defendant’s actions would have jeopardized a financial institution.

Apr 16

$25 Billion Mortgage Fraud Settlement Marks Turning Point for Industry

On April 4, the $25 billion national mortgage servicing settlement, which was announced in February, was finalized by a judge in the U.S. District Court for the District of Columbia. The settlement with the nation’s five largest mortgage servicers — Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc. (formerly GMAC) — was negotiated by 49 state attorneys general and the federal government. The complaint alleged that the servicers’ misconduct “resulted in the issuance of improper mortgages, premature and unauthorized foreclosures, violation of service members’ and other homeowners’ rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds.”

The settlement of this major mortgage fraud case requires that servicers provide a minimum of $20 billion in benefits directly to borrowers through a series of national homeowner relief effort options, and pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government). Eligible borrowers who lost their homes to foreclosure from January 1, 2008 through December 31, 2011, and suffered servicing abuse may each qualify for an estimated $1,500 cash payment, and eligible homeowners whose homes are currently underwater may qualify for principal reduction.

While these payments will assist homeowners who have already fallen victim to servicers’ mortgage fraud, perhaps the most important development to emerge from this settlement is the creation of new servicing standards that will take effect over the next two to six months.

The standards seek to improve consumer access to help and information by requiring servicers to provide a single point of contact for borrowers seeking information about their loans and adequate staff to handle calls. These servicing standards set procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. Finally, they will stop many past foreclosure abuses by requiring servicers to evaluate homeowners for other loan mitigation options before resorting to foreclosure, forbidding banks from foreclosing while the homeowner is being considered for a loan modification, requiring strict oversight of foreclosure processing, and prohibiting abuses such as robo-signing and improper mortgage documentation.

To ensure that the servicers comply with the terms of the settlement and prevent future mortgage fraud, a monitor has been appointed to work with non-compliant institutions to establish corrective plans, or to recommend penalties or to seek injunctive relief to enforce the settlement. The U.S. Department of Justice and state attorneys general can enforce through the court process compliance with the servicing standards and the banks’ financial obligations. The settlement does not prohibit further relief for individuals, and borrowers and mortgage investors can pursue individual, institutional or class action cases without restriction.

We hope that this $25 billion settlement is enough to get the attention of servicers engaged in unscrupulous practices and to ensure that they change their operations moving forward. We also hope that now that this cloud over the industry is dissipating, it can proceed to provide and service mortgages in a way that is legal and ethical and that will aid in facilitating a housing recovery that is still only on the horizon.

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Apr 09

Grassley’s Case Against DOJ Stance on Financial Fraud Is Vastly Overstated

In recent weeks, Sen. Charles Grassley (R-Iowa) has criticized the Department of Justice’s handling of executives that some argue are responsible for the financial crisis.

Sen. Grassley, the ranking minority member of the Senate Committee on the Judiciary, held a hearing in February that looked at mortgage fraud, foreclosure abuse and lending discrimination practices. During his opening statement at that hearing, Sen. Grassley stated, “The department’s message is that crime does pay. They also invite crimes of this sort against similar future victims. How are the department’s enormous resources being used?”

In his statement at the hearing, Sen. Grassley expressed anger that no criminal charges were brought by the DOJ Criminal Division against former Countrywide Financial CEO Angelo Mozilo. Sen. Grassley stated, “The Justice Department has brought no criminal cases against any of the major Wall Street banks or executives who are responsible for the financial crisis.” He concluded his statement by saying, “All that matters is results – prosecutions and conviction. The American people are still waiting.”

Grassley was also disappointed with the terms of the Bank of America/Countrywide Financial settlement with DOJ of $335 million, which was the largest settlement of its kind in DOJ history. According to Sen. Grassley, the settlement will provide only $1,700 per victim, which he said will do very little, if anything, to prevent these homeowners from defaulting on their mortgages. Sen. Grassley noted in his statement to the Judiciary Committee that one third of all Countrywide mortgages ended in default and said that this settlement was a “mere cost of doing business.”

A spokesman for DOJ responded to the statement from Sen. Grassley by stating, “The Department of Justice, through our U.S. Attorney’s Office and litigating divisions, has brought thousands of mortgage fraud cases over the past three years, and secured numerous convictions against CEOs, CFOs, board members, presidents and other executives of Wall Street firms and banks for financial crimes.”

In response, Sen. Grassley wrote the letter to DOJ asking for details on the “thousands of mortgage fraud cases” that the Department of Justice has brought. The full text of the letter is available here.  Sen. Grassley asked DOJ to respond to his request by March 31. A DOJ spokesman has said the agency is reviewing the letter. The reply has not yet been received.

Sen. Grassley has taken a very strong stance that may not be justified. The Department of Justice has created task forces and has devoted a wealth of resources to investigating crimes associated with the financial crisis, such as mortgage fraud, and in many cases has elected not to prosecute. Assistant Attorney General Lanny Breuer told CBS that he believes that the Department of Justice was “bringing every case that we believe can be made.”

Some argue that the lack of prosecutions is evidence that criminal behavior may not have taken place or that there is insufficient evidence to prove it. There was surely some poor business decision making, but simply because there was a loss does not mean that there criminal intent or that a crime has occurred.

Sen. Grassley’s letter is also ignoring the fact that there have been dozens of civil cases brought by the government against firms and individuals involved in mortgage fraud and other abuses associated with the financial crisis. Over $2 billion in penalties have been ordered in connection with the SEC’s investigations alone.

There is no evidence to support the outrage that Sen. Grassley expressed in his letter. This type of grandstanding relates to an area of the law that is already garnering sufficient attention from law enforcement. Those individuals who have been charged and convicted are receiving more than adequate sentences for their actions, and those who have not been charged, in all probability, did not deserve to face criminal sanctions.

Mar 05

DOJ Goes After Smaller Fraudsters, Lets Big Fish Escape

Successful criminal prosecutions of mortgage fraud seem to have one thing in common: a fraud figure well below $10 million. One of the recent cases that generated a fair amount of press involved the convictions of co-conspirators in a mortgage scheme carried out by an ex-NFL player. That scheme, which took place during the housing boom in the early 2000’s, resulted in 10 convictions. Former Dallas Cowboy linebacker Eugene Lockhart is facing jail time of up to 10 years. The nine other individuals are looking at sentences of roughly two to five years.

The mortgage scheme – which led to convictions for wire fraud, conspiracy to commit wire fraud, and making false statements to a federal agency – seems pretty typical of the conduct that prosecutors have been going after: the use of “straw borrowers” to apply for loans on home purchases; falsification of data on loan applications to ensure that straw borrowers would qualify for home loans; and creation of artificially high appraisal values for the homes to be purchased by the straw borrowers. In the case of Lockhart and his cohorts, the Justice Department alleges that the scheme resulted in an actual loss to lenders of roughly $3 million.

While $3 million is not a trivial sum, it is a very tiny portion of the housing industry. Even the total amount in all similar prosecutions nationwide is quite small. Recent headline prosecutions involving similar schemes include a Florida case valued at $8 million in loan proceeds, an Alabama case valued at $2 million, and a New York case valued at $82 million in loan proceeds. At least the latter is a more aggressive number (as apparently was one of the defendants in the New York case, who moonlighted as a dominatrix in a Manhattan club).

The government has been touting these prosecutions as a part of a major crackdown on the mortgage business. The DOJ press statements note that “[m]ortgage fraud is a major focus of President Barack Obama’s Financial Fraud Enforcement Task Force.” But these are comparatively minor matters if one looks to the real causes of the housing crash that led to the 2008 financial crisis. Bank of America, Goldman Sachs, JPMorgan Chase, and Wells Fargo, who were all in the business of packaging and selling subprime mortgages, have been more or less covered with Teflon.

The lack of criminal prosecutions against the big banks in the subprime crisis has been written about many times. But that doesn’t mean it’s not worth repeating. Something seems just wrong about the DOJ’s focus on the smaller fraudsters and its soft approach to the bigger players.

Hopefully, the SEC’s recent decision to send Wellsnotices to Goldman Sachs, JPMorgan Chase, and Wells Fargo indicating possible enforcement proceedings, means that at least these banks could face some civil liability for their role in the housing crash. And Bank of America recently settled a False Claims Act case with the Feds for $1 billion. But approaching the banks with civil actions, and skirting individual culpability, sends the message that once you reach a certain level of success, you are above the law.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, health care, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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