Mortage Fraud Boot Camp: Basic Training on Defending a Criminal Mortage Fraud Case


	Print or Email This Page September/October 2007, Page 14 *Mortage Fraud Boot Camp: Basic Training on Defending a Criminal Mortage Fraud Case* By *Holly A. Pierson* Mortgage fraud has become part of the American lexicon.1 The precise scope of the mortgage fraud problem is unknown, but all indications are that it is massive and on the rise.2 A Westlaw search for newspaper articles with the phrase “mortgage fraud” in the headline or lead paragraph since January 1, 2007, for example, yielded 633 results. Suspicious activity reports (“SARs”) pertaining to mortgage fraud increased by over 1,000 percent between 1997 and 2005.3 Pending FBI mortgage fraud investigations jumped from 436 cases in fiscal year 2002 to 1,036 cases in March 2007.4 Estimated losses due to mortgage fraud in 2006 alone are between $946 million and $4.2 billion, and the expected losses associated with over half of the FBI’s currently pending cases exceed $1 million each.5 Industry experts and investigators have attributed the dramatic increase in mortgage fraud to a confluence of many factors, including the lure of very lucrative schemes,6 the relaxation of lender underwriting and quality control procedures,7 the increased usage of the Internet and other technologies that make the loan application process “faceless,”8 and the increased use of non-traditional mortgage products (such as no-document, low-document, interest only, and stated income loans) that require significantly less verification and other underwriting.9 Having stormed onto the scene, mortgage fraud shows no signs of abating. Industry experts estimate that it will take from three to five years to uncover the fraud in just the current book of mortgage business.10 Mortgage fraud schemes have gained traction with organized crime and terrorist organizations as a lucrative funding mechanism, and the attraction for mortgage fraud is likely to continue given the relative ease of committing these frauds, the light penalties in most state criminal systems, and the limits on law enforcement resources in prosecuting these schemes. The proliferation of mortgage fraud investigations and prosecutions increases the likelihood that criminal defense practitioners less familiar with mortgage fraud or other areas of white collar criminal defense may be called upon to represent alleged mortgage fraud participants. An understanding of the mortgage fraud basics is, therefore, increasingly important to criminal defense counsel. The Players and the Schemes The Investigators Mortgage fraud is investigated by numerous state and federal law enforcement agencies and is prosecuted by both state and federal prosecutors.12 While there is no federal mortgage fraud statute per se, federal law enforcement authorities have at their disposal a wide variety of existing criminal statutes to investigate and prosecute mortgage fraud schemes, including bank fraud, mail and wire fraud, and money laundering, which are commonly used.13 Mortgage fraud schemes are generally divided by law enforcement investigators into two basic categories — fraud for housing and fraud for profit.14 Fraud for housing occurs when the fraud is perpetrated only by the borrower for the purpose of obtaining a property for which he or she would otherwise not qualify. This fraud is usually limited to a single perpetrator and a single property. The bulk of criminal mortgage fraud cases originate from fraud for profit schemes, and these schemes are, therefore, the focus of this article. Fraud for profit or “industry insider fraud” is a scheme whose purpose is to profit from either creating fictitious properties or falsely creating high property values and then looting the value in the properties.15 The Participants Unlike fraud for housing, fraud for profit often involves multiple conspirators acting in concert. Adding to the complexity of these cases, it is not always obvious which participants in the loan process are involved in any given fraudulent scheme. A fundamental understanding of the participants and their roles in the mortgage process is important to assessing the client’s role in a criminal investigation or indictment. Here is a list of the typical participants and their roles in the mortgage loan process.16 The buyer or borrower is the person acquiring the property. The seller is the person divesting himself of the real estate in exchange for cash or other assets. The real estate agent is an individual or company that represents the buyer and/or seller and receives a commission based on the sale price of the house. An originator is a person or entity (i.e., a loan officer at the lender, a mortgage broker, or a correspondent) who assists a borrower with the loan application by gathering the necessary data to complete it. An appraiser is a person who prepares the written valuation of the property. An underwriter is the person who reviews the loan package and makes the decision for the lender as to whether to extend credit. The underwriter considers such information as the credit report, the appraisal, the verification of deposit, income, and employment. A lender is the entity that provides the funding for the loan. A warehouse lender is a short term lender for mortgage bankers that provides financing until the mortgage is sold to a permanent investor. A closing or settlement agent is the person who oversees the consummation of the mortgage transaction at which the legal documents are signed and the loan proceeds are disbursed. Some states require that the closing agent be an attorney. A mortgage banker is an individual or company that originates, purchases, sells, and/or services mortgage loans. A mortgage broker is an individual or company that receives a commission for pairing borrowers with lenders. A correspondent is a mortgage banker who originates mortgage loans that are sold to other mortgage bankers or to lenders. A title company is the company that verifies the title by researching the recorded ownership of and liens filed against real property. Key Documents In addition to the participants, mortgage loan transactions also have certain specific documents associated with them. These documents are often critical evidence in mortgage fraud cases, and the criminal defense practitioner therefore should have a working knowledge of them.17 A loan application is the document that the borrower must complete (at times with assistance from a broker, real estate agent, etc.) to qualify for the loan. A traditional mortgage loan application will ask for such information as social security number, income, employment, purpose of the property for which the loan is sought, debts and assets, etc. The standardized loan application form used for residential mortgage transactions is Form 1003.18 The HUD-1 Form (also called the “closing statement” or “settlement sheet”) is a standardized form prescribed by the Department of Housing and Urban Development (“HUD”) that provides an itemization of funds paid at closing, such as real estate commissions, loan fees, points, taxes, escrow amounts, and other parties receiving distributions (i.e., seller). Form 4506 is the IRS form that authorizes the IRS to release past tax returns to lenders as part of the income verification process. A mortgage is the document that conveys real property to a mortagee (usually the lender) as collateral for repayment by the borrower (also called the mortgager). A quitclaim deed is a deed that transfers whatever interest or title the grantor has at the time of conveyance without warranty as to that interest or clear title. A warranty deed is a deed that transfers title with a warranty that the grantor has good title. A title opinion is a written opinion that an examination has been made of public records, laws and court decisions to ensure that the seller has a valid claim to the property. The opinion should disclose past and current facts regarding ownership of the property. A suspicious activity report or SAR is a standardized report that federally insured lenders and their affiliates are required to file as soon as there is a reasonable basis to believe that fraud of greater than $5000 or involving an industry insider has occurred. The form contains a variety of suspected offenses, including violations of federal criminal law, the Bank Secrecy Act and money laundering offenses.19 A verification of deposit is a written document sent to the borrower’s bank to confirm that the borrower has cash reserves sufficient for the down payment. A verification of employment is a written document sent to the borrower’s employer to confirm the employment and income listed on the loan application. Common Mortgage Fraud Schemes Mortgage fraud schemes are limited only by the imagination and ingenuity of their participants. Certain types of fraudulent schemes, however, recur with frequency. Property flipping is one of the oldest and most common mortgage fraud schemes.20 Flipping occurs when properties are purchased and then their value is artificially inflated (often through false or fraudulent appraisals) before they are quickly resold. This process is repeated several times by the co-conspirators until eventually the properties are foreclosed by the lenders.21 The scheme is designed to extract as much cash as possible from the property.22 While there are many variations on property flipping schemes, it is possible for the final buyer of the property in the flipping process to be an innocent owner unaware that he or she is purchasing the property at an artificially inflated value.23 Sophisticated perpetrators are using more complex tools — such as identity theft, straw borrowers and shell companies — to assist in flipping schemes.24 Equity skimming is a more complex scheme. In a common equity skimming case, the investor/fraudster uses a straw (also called a nominee) buyer to obtain a mortgage loan in the straw buyer’s name. After closing, the straw buyer signs the property over to the investor/fraudster in a quitclaim deed (which relinquishes all rights to the property but provides no title guaranty). The investor/fraudster rents the property out and pockets the rental payments, but he makes no payments toward the mortgage. Eventually the property is foreclosed by the lender for non-payment.25 Chunking occurs when a company recruits buyers by telling them that they can be landlords or own investment property. Often the recruited buyers are promised some combination of the following incentives: no down payment; that the company will provide tenants for the property or properties for a specified period of time; that the company will manage the property for that period of time; that the company will remit the payments to the lender; and that the company will sell the property on behalf of the buyer at a profit at the end of a specific time period.26 In reality, the company that recruits the buyer (and receives a large fee or commission upfront) usually fails to obtain tenants, does not make the mortgage payments, and does not arrange for the sale of the property.27 False down payment fraud occurs when the buyer colludes with a third party (i.e., a broker, a closing agent, the seller, etc.) to show a down payment that was not paid or whose source is disguised.28 When the down payment is disguised by the issuance of a second mortgage that is not reported to the lender, that scam is also called a silent second.29 Air loans are used when either there is non-existent or low value property. In the case of non-existent property, the broker invents borrowers and properties and establishes false accounts for payments and escrows.30 In another variation of this theme, a vacant piece of property worth a small amount of money (i.e., $10,000) is appraised as though it is worth significantly more (i.e., $10,000,000). Led by the appraisal to believe that the property is more valuable than it is, the lender makes a loan to a straw or nominee buyer, who distributes the monies to the other co-conspirators.31 Double selling occurs when a mortgage loan broker induces two or more lenders to fully fund an otherwise legitimate mortgage loan. The broker accomplishes this by either submitting the original documents from the legitimate buyer to one lender and a copy to the other lender(s), by submitting sets of “originals” after inducing the borrower to sign multiple copies of the same documents, or by submitting the original documents to one lender and stalling their submission to the other lender(s) by promising their imminent arrival.”32 The broker and any co-conspirators abscond with the proceeds from the additional loans. Foreclosure fraud (also known as “mortgage rescue” fraud) is a specific form of equity skimming, and it has emerged as a strong new trend as the housing market has cooled.33 There are several variations on the fraudulent foreclosure theme, but common to all of them is that the fraudsters identify homeowners who are at risk of defaulting on loans or who are already in foreclosure.34 The schemes then can take a number of forms and have a number of names, including “phantom help,” “bailout,” and “bait and switch.”35 In a “phantom help” scheme, the rescuer/fraudster charges outrageous fees to either make a few simple phone calls and do light paperwork on the distressed homeowner’s behalf or for the promise of more active representation that never happens. The “bailout” scheme involves the rescuer/fraudster offering to help the distressed homeowner save his or her home by having the homeowner surrender title of the property to the rescuer/fraudster, often under the guise of securing better interest rates on a re-financing. The homeowner believes that he or she will remain a renter and buy the property back over a longer period of time. Usually the terms permitting buy back of the property cannot be met and the homeowner is stripped of both the ownership and the equity in the home. The “bait and switch” scheme is similar to the bailout, but the distressed homeowner does not realize that he or she is surrendering ownership of the house in exchange for a rescue. Badges of Fraud To perpetrate any of these common mortgage fraud schemes, the conspirators must utilize a combination of certain tactics. In handling a criminal mortgage fraud matter, defense attorneys should be alert for the presence or absence of these badges of fraud. False documentation is by far the most common aspect of all mortgage fraud schemes. Without falsifying the loan application and supporting documentation, most of the mortgage fraud schemes simply could not be executed.36 False statements on the loan application are the most prevalent example of false documentation. According to the Mortgage Asset Research Institute Inc. (“MARI”), false statements in the loan application occurred in 55 percent of mortgage fraud cases in 2006 and in 64 percent of cases in 2005 and 2004.37 These false statements typically relate to the applicant’s income and employment,38 the purpose of the subject property (whether primary residence or investment property), and the source of funding for the down payment.39 In a fraud scheme involving identity theft, false names, addresses, dates of birth and social security numbers will also be on the application.40 Documents other than the loan application are also routinely falsified, altered or forged to provide the necessary backup for the loan application and to otherwise perpetrate the mortgage fraud scheme. Frequent examples include false or forged financial documents including tax documents, HUD-1 forms, verification of deposit forms, verification of employment forms, escrow and other closing documents, and credit reports.41 Appraisal fraud is a linchpin in many mortgage fraud cases. Because the core goal in most schemes is to inflate the price of the property, a falsely inflated appraisal (or a series of them) is often critical to the success of the scam. Examples of appraisal fraud include inflating comparable values or using outdated comparables, falsifying the true condition of the property, and failing to include negative factors that affect the property’s true value.42 Identity theft or fraud is sometimes part of these cases. In an increasing number of mortgage fraud schemes, an unsuspecting person’s identity is stolen to be utilized by the straw buyers or straw sellers in the transaction.43 In other cases, a fraudster obtains confidential personal information (i.e., social security numbers, name, date of birth) about a person who owns a particular property and then uses that information to apply for a home equity line of credit on that property.44 Defending the Mortgage Fraud Client Criminal mortgage fraud cases present unique challenges for defense counsel because of their hybrid nature. On the one hand, mortgage fraud cases are the typical white collar crime investigations, which are usually historical and document intensive. On the other hand, law enforcement is utilizing the proactive investigative techniques more traditionally associated with street crime, such as undercover operations, wiretaps, and surveillance, with increasing frequency in mortgage fraud investigations.45 Additionally, prosecutors often indict mortgage fraud cases as multi-level, multi-defendant conspiracies, an indictment structure often seen in drug conspiracy cases. Given this hybrid nature of mortgage fraud investigations, defense counsel should take into account the characteristics of both white collar and street crime prosecutions in developing defense strategies. Mortgage fraud is constantly evolving. Every mortgage fraud scheme is unique and has its own distinct participants, which makes hard and fast rules about defending such cases difficult to prescribe. Defense counsel should consider the benefit of the following steps in preparing a client’s defense. 1. Investigate Usually by the time a client or defense counsel becomes aware that the client is the subject or target of a criminal mortgage fraud investigation, the government has long since begun its investigation. Defense counsel, therefore, are often in the position of trying to play “catch up” without the same resources and power to compel production of documents and other evidence that the government has in its arsenal. It is important that defense counsel take available measures to investigate the criminal allegations. While interviewing the client is a solid first step in this process, experience informs that the client’s version of the story is necessarily subjective, often incomplete, and in some cases inaccurate or untrue. Defense counsel must, therefore, “trust, but verify” by performing an independent investigation of the allegations and participants. Such an investigation will usually include obtaining relevant documents, interviewing and investigating participants, tracing the flow of money, and possibly hiring a forensic appraiser. Obtain and study relevant documents. Because the government’s evidence in almost every mortgage fraud case is going to include the mortgage documents, defense counsel must attempt to obtain copies of all documents pertinent to the transactions at issue from all of the participants who should have them — the client, the lender, the broker, the appraiser, the real estate agent, the closing agent or attorney, the borrower, and the seller. Gathering these documents pre-indictment may present a challenge if these other participants are unwilling to provide the documents voluntarily, but every effort should be made to collect from as many participants as possible. After obtaining the documents, study them. Look for inconsistencies between sets of documents from different sources (i.e., is the information on the application from the lender different from the information on the application from the client?) and inconsistencies between the documents themselves (i.e., is the information in the application inconsistent with the information in the credit report?). A cursory or single review of the documents in a mortgage fraud case is insufficient. Reviewing the documents several times during the investigative phase as well as in preparation for trial is critical. Items that do not seem important at first blush may take on a new significance as the facts unfold. Indeed, experienced federal prosecutors have identified defense counsel’s failure to know and understand the relevant mortgage fraud documents as one of the most serious mistakes made in these cases. Here are some suggested inquiries with regard to specific documents in the mortgage loan process that may raise red flags or, at a minimum, require additional investigation and explanation.46 Loan Application Is the income on the application accurate? How was it verified and by whom? Do any of the supporting documents appear to be forged or fraudulent? Is the employment on the application accurate? How was it verified and by whom? Do any of the supporting documents appear to be forged or fraudulent? Are the assets and debts on the application accurate? How were they verified and by whom? Do any of the supporting documents appear to be forged or fraudulent? If the application indicates that the purpose of the property is for a primary residence, is this accurate? How was this information verified? Is the source of the down payment on the application accurate? How was it verified and by whom? Do any of the supporting documents appear to be forged or fraudulent? Is the application signed and dated? HUD-1 Are there multiple, inconsistent versions of the HUD-1? If so, is there a plausible explanation for this? Are there large disbursements on the form to parties other than the seller? If so, can these disbursements be verified? For example, where repair work was the subject of a disbursement, is there documentation showing that the work was, in fact, performed? Were disbursements made at closing that were not reflected on the HUD-1? Is the HUD-1 consistent with the closing instructions from the lender? Is the HUD-1 consistent with the loan application approved by the lender? If not, has the lender’s permission been obtained for the changes? Are the disbursements in the HUD-1 consistent with the closing agent’s disbursement records, such as the escrow account records? Supporting Documentation Are there any discrepancies in the font sizes or other obvious signs of alteration? Did the lender order its own credit report and verifications? Does the borrower have a credit history or bank accounts? If not, are there other indicia of identity theft? How does the borrower’s current credit report compare to the submitted credit report? How do the borrower’s actual bank statements compare to the submitted bank statements? How do the borrower’s actual tax records (i.e., W-2, tax return) compare to the submitted tax records? Appraisals Are the comparables appropriate? Is the same appraiser used for multiple properties or in all of the comparables for the subject property? Was the appraisal prepared by a trainee appraiser? If so, was he or she properly supervised by the lead appraiser? Is the appraisal consistent with the tax assessment of the same property? Was the appraiser informed of the property’s purchase price prior to the appraisal’s preparation? Is the appraiser’s fee based upon a percentage of the purchase price? Did the appraiser visit the subject property? If not, how was the property’s condition assessed and taken into account? Title Paperwork Is the seller on the title? Has the seller owned the property for a short time? If so, what is the explanation for the timing of the sale? Is this an indication of a property flip? Does the chain of title include holding companies, LLCs or the like? If so, what is the explanation? Does the chain of title include other participants such as the buyer, the realtor, or the broker? Did the lender delegate the title insurance process to another party? If so, why? Interview relevant participants and witnesses. To flesh out the document gathering and review process, defense counsel should attempt to interview all witnesses and participants that can be identified in any given criminal investigation. As in all criminal cases, however, counsel should be careful to exercise caution and good judgment in the interviewing process so as to avoid allegations of witness tampering or obstruction of justice. When possible, interviews should be conducted in pairs. The second person (often a junior associate or investigator) can create a contemporaneous written record of the interview and is available to corroborate what occurred (or did not occur) during the interview. Because defense counsel do not have access to compulsory process at the pre-indictment stage (unlike the discovery tools available in civil cases and the government’s grand jury subpoena power in criminal investigations), securing the interviews — particularly with other individuals who are under investigation — may present a challenge. Follow the money. The government’s most tried and true method of investigating a white collar fraud is to follow the money, and mortgage fraud is no exception.47 If necessary, hire an accountant, a consultant or other appropriate investigator to trace the proceeds from the property transactions at issue. The parties to whom the money is flowing and the amount of money received will be critical to the government’s determination of complicity. And, as a practical matter, defense counsel needs to understand the flow of the proceeds to assess the government’s probable view of his or her client’s culpability, the client’s credibility, and the potential criminal charges, such as money laundering. Consider hiring a “forensic appraiser.” If the scheme is alleged to involve inflated or fraudulent appraisals, hire an independent appraiser to perform an objective appraisal of the same property or properties. Appraisals are not an exact science; they are necessarily based on some subjective factors such as adequate comparables in the area, adjustments up or down for various positive and negative characteristics, and the like. Often it will be difficult to prove whether the appraisal was actually inaccurate, and if so, whether that inaccuracy was the result of negligence or intentional misconduct. Criminal liability can turn on that very issue, and an independent, forensic appraisal can help defense counsel in assessing where the subject appraisal falls on the continuum. Exercise care in selecting the appraiser for this purpose. He or she must have a reputation above reproach and be uninvolved in any way with the alleged fraud at issue or with any of the participants in the alleged fraud. Note that the attorney should hire the appraiser as an expert consultant in order to protect the privileged nature of the product. Investigate other alleged participants. Gather all information possible on the other alleged participants in the scheme — their financials, their relationship with the client and with each other, the status of their licenses (if applicable), and any other information from available sources, including the Internet. Check PACER and other reliable sources to determine if any of them have pleaded guilty to a crime or are involved in civil litigation relating to this alleged scheme or other alleged schemes. Unfortunately, the government is likely to keep guilty pleas of related co-conspirators under seal until it has completed its investigation, but a thorough search for records should nonetheless be undertaken and can reveal much useful information. 2. Assess the Client’s Culpability and Bargaining Position Once defense counsel has completed the investigation of the allegations and the other participants (or enough of it to make an assessment), he or she must make a frank and honest assessment of the client’s culpability or lack thereof. In making this assessment, counsel must consider not only what the client has told counsel and the results of the investigation, but also the likely perception of the case from the government’s perspective. If the investigation exonerates a client, he or she is obviously in a strong position. In most cases, though, defense counsel is unable to complete the investigation, at least pre-indictment, to a point where the client’s lack of involvement can be definitively established. In those cases, defense counsel may assess the client’s culpability as unlikely, but must bear in mind that the government may have information or documents to which the client or defense counsel have not been privy. If the client admits culpability or the investigation strongly indicates some level of complicity, then defense counsel should assess the severity or degree of the client’s part in the fraudulent scheme. As in a drug conspiracy case, counsel must evaluate where his or her client falls on the totem pole of the conspiracy. The client’s relative role in the fraud will likely dictate the severity of the government’s position and the value of any cooperation the client may be able to provide. Defense counsel’s assessment of the client’s relative position in the case will help inform the next steps. 3. Take Appropriate and Timely Action Particularly in federal cases, defense counsel should take the opportunity to be proactive with the relevant prosecuting authority. Based on the results of defense counsel’s own investigation and liability assessment, set up a meeting with the prosecutor and the investigative agents. The content and form of this meeting will depend heavily on the facts and stage of the government investigation, but a meeting early on in the legal representation is useful in almost all circumstances if handled correctly. If the client appears from everything known to be uninvolved in the fraud or even a victim of the fraud, counsel’s presentation to law enforcement should highlight the documents and anecdotal evidence that support this conclusion in an attempt to persuade the government not to indict the client. This presentation should further the client’s factual case, and it should also demonstrate to the prosecuting authority that defense counsel is actively involved in investigating and defending the client’s case. Even if the prosecutors and investigators do not immediately accept the client’s lack of culpability, they are likely to look into the issues that defense counsel raises after the meeting. And, if the meeting occurs pre-indictment when defense counsel is not yet entitled to discovery, the meeting can provide potentially valuable information otherwise unavailable. If the prosecutor or investigators have solid evidence that they believe refutes some or all of defense counsel’s position, they will often share some information or documents to substantiate their position. If counsel’s assessment reveals that the client does have some exposure to criminal charges, a meeting with the prosecuting authority will shed light on where the government’s investigation is in relation to the client, the possibility of evading criminal charges despite some complicity, the likelihood of negotiating a deal for the client, the likely charges and sentencing range involved in a deal, and the relative value of any cooperation that the client could provide to the government. The government will insist on interviewing and debriefing the client in person at some point if he or she strikes a deal to plead guilty and agrees to cooperate. During the negotiation stages, however, an attorney proffer providing an overview of the client’s probable testimony should be sufficient. This proffer is particularly preferable at this early juncture, as it provides the government with the relevant information it needs to make a decision about the terms of a possible plea deal while still providing protection of the attorney-client and work product privileges. It also serves to shield the client from direct contact with law enforcement before defense counsel can fully prepare him or her to be debriefed.48 Whatever the exact form of defense counsel’s presentation or meeting — whether an informal verbal proffer or an elaborate PowerPoint presentation — counsel should take care with the length and tone so as not to insult, offend, or simply bore the prosecutors and investigators. The presentation should be thorough, but no longer than necessary to convey the relevant points. In short, exercise good common sense and judgment in both the content and length of these presentations. Timing is also an important consideration in obtaining the full benefit of any cooperation the client is able to provide. Conventional wisdom is that federal cases get stronger for the government as time passes. If the client has useful information and decides to cooperate against other participants in a mortgage fraud scheme, then defense counsel should put this process in motion as soon as possible. The client’s cooperation in the early stages of the investigation (especially before other participants are cooperating) is much more valuable to the government and ultimately should result in greater credit in the form of a more significant sentence reduction. By the same token, the longer a client waits to cooperate, the more likely it is that other participants will beat the client to the punch. As a result, the value of the client’s information late in an investigation may be diminished or even non-existent. Indeed, a significant misstep identified by federal prosecutors experienced in this area is the failure of a complicit client to cooperate in a timely manner. 4. Tips for Mortgage Fraud Trials If the government indicts the client and/or is unwilling to offer the client a deal that he or she will accept, then the case will be decided at trial. While many trial lawyers welcome the prospect of going to trial, the decision to take a federal criminal case of any kind to trial should not be made lightly, as the government’s conviction rate is estimated to exceed 90 percent. The strategies regarding whether to go to trial and how to conduct that trial are beyond the scope of this article, but a few tidbits specific to mortgage fraud cases are worth considering if defense counsel is faced with a trial. First, counsel should carefully consider the risks before advancing a defense theory that “blames the industry.” In some cases, the defense has relied upon the theory that the lender, rather than the defendant, caused or encouraged the fraud through loose internal controls because the lender was interested only in making money by making more loans. A corollary of this theory is that the fraudulent statements on the mortgage documents were not “material misstatements” as required for fraud because the lender looked the other way. According to experienced mortgage fraud prosecutors, juries are not receptive to this line of reasoning. Second, federal prosecutors involved in these cases also advise that the defendant rarely helps his or her case by taking the stand and testifying. In fact, prosecutors often use cross-examination of the defendant as an opportunity to tie up loose ends in the case that might otherwise go unaddressed. While the defendant has a constitutional right to testify if he or she so chooses, defense counsel should consider a strong admonition against this decision in many cases. Finally, a defense theory that has resonated with some prosecutors in making charging decisions and plea deals focuses on the issue of intent. A client may admit that he or she has committed certain acts (such as acting as a straw borrower or straw seller) but deny that he or she understood that the scheme was illegal or fraudulent. Although the strength of this theory will depend on the nature of the client and the other evidence, this approach is one possible avenue for defense counsel to explore. Conclusion The tumultuous state of the mortgage industry, combined with increasing reports of millions of dollars of loss from mortgage fraud schemes, has created the perfect storm for law enforcement initiatives. Given the increased focus by both state and federal law enforcement in this area, criminal practitioners are well served to have a solid understanding of the mortgage fraud basics. Due to the uniqueness of each case and to the constantly evolving variations in mortgage fraud schemes and tactics, managing criminal mortgage fraud cases is challenging even to experienced white collar defense practitioners. These complex cases, therefore, may particularly benefit from the involvement of experienced mortgage fraud consultants, investigators, or local counsel. Defense counsel should give due consideration to engaging expert assistance to aid in investigating, analyzing, and defending criminal mortgage fraud cases. Grateful appreciation for assistance in preparing this article is extended to Joseph Burby, a partner at Powell Goldstein and former AUSA in the Northern District of Georgia, to Lucas Westby, a 2007 summer associate for Nelson Mullins Riley & Scarborough, and to the numerous federal prosecutors in Georgia and North Carolina who graciously provided their insight and experience into mortgage fraud cases for the benefit of this article. Key Documents In addition to the participants, mortgage loan transactions also have certain specific documents associated with them. These documents are often critical evidence in mortgage fraud cases, and the criminal defense practitioner therefore should have a working knowledge of them.17 A loan application is the document that the borrower must complete (at times with assistance from a broker, real estate agent, etc.) to qualify for the loan. A traditional mortgage loan application will ask for such information as social security number, income, employment, purpose of the property for which the loan is sought, debts and assets, etc. The standardized loan application form used for residential mortgage transactions is Form 1003.18 The HUD-1 Form (also called the “closing statement” or “settlement sheet”) is a standardized form prescribed by the Department of Housing and Urban Development (“HUD”) that provides an itemization of funds paid at closing, such as real estate commissions, loan fees, points, taxes, escrow amounts, and other parties receiving distributions (i.e., seller). Form 4506 is the IRS form that authorizes the IRS to release past tax returns to lenders as part of the income verification process. A mortgage is the document that conveys real property to a mortagee (usually the lender) as collateral for repayment by the borrower (also called the mortgager). A quitclaim deed is a deed that transfers whatever interest or title the grantor has at the time of conveyance without warranty as to that interest or clear title. A warranty deed is a deed that transfers title with a warranty that the grantor has good title. A title opinion is a written opinion that an examination has been made of public records, laws and court decisions to ensure that the seller has a valid claim to the property. The opinion should disclose past and current facts regarding ownership of the property. A suspicious activity report or SAR is a standardized report that federally insured lenders and their affiliates are required to file as soon as there is a reasonable basis to believe that fraud of greater than $5000 or involving an industry insider has occurred. The form contains a variety of suspected offenses, including violations of federal criminal law, the Bank Secrecy Act and money laundering offenses.19 A verification of deposit is a written document sent to the borrower’s bank to confirm that the borrower has cash reserves sufficient for the down payment. A verification of employment is a written document sent to the borrower’s employer to confirm the employment and income listed on the loan application. Notes 1. "Mortgage Fraud" is defined as a "material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." See Financial Crimes Section, FBI, FBI Financial Crimes Report to The Public (Sept. 2006), http://www.fbi.gov/publications/financial/fcs_report2006/financial_crime_2006.htm (hereinafter “2006 FBI Financial Crimes Report”). 2. See 2006 FBI Financial Crimes Report, supra note 1. While the FBI and other industry groups utilize data gathered from suspicious activity reports or SARs to assess mortgage fraud escalation and losses, only federally insured financial institutions are required to file these reports. The information from SARs, therefore, represents only a portion of the mortgage fraud picture. See Merle Sharick et al., Mortgage Asset Research Institute, Ninth Periodic Mortgage Fraud Report to Mortgage Bankers Ass’n 2 (April 2007) (hereinafter “2007 MARI Mortgage Fraud Report”). Additionally, federal law enforcement has the resources to pursue only a fraction of mortgage fraud cases; thus, the number of pending FBI investigations is at best a rough proxy for the seriousness of the problem. 3. See Regulatory Policy and Programs Div., Financial Crimes Enforcement Network, Mortgage Loan Fraud: An Industry Assessment Based On Suspicious Activity Report Analysis 1 (Nov. 2006), available at http://www.fincen.gov/MortgageLoanFraud.pdf (hereinafter “2006 FinCen Mortgage Loan Report”). For a definition of SARs, see page 16 of this article. 4. See FBI, Mortgage Fraud: New Partnership to Combat Problem (March 9, 2007), available at http://www.fbi. gov/ page2/march07/mortgage030907.htm. 5. Id. 6. See FFIEC Fraud Investigations Symposium, The Detection, Investigation, and Deterrence of Mortgage Loan Fraud Involving Third Parties: A White Paper 2 (Oct. 27- Nov. 7, 2003), available at http://www. ffiec.gov/exam/3P_Mtg_Fraud_wp_oct04.pdf (hereinafter “FFIEC Mortgage Loan White Paper”); see also S.C. Dept. of Consumer Affairs: Mortgage Fraud Rpt. 3 (March 2007), available at http://www. scconsumer. gov/licensing/mortgage_brokers/ 2007_mortgage_fraud_report. pdf (hereinafter “S.C. Mortgage Fraud Report”). 7. See FFIEC Mortgage Loan White Paper, supra note 6 at 2; see also S.C. Mortgage Fraud Report, supra note 6 at 2. 8. See 2006 FinCen Mortgage Loan Report, supra note 3 at 5. 9. See id.; see also S.C. Mortgage Fraud Report, supra note 6 at 2. 10. See 2007 MARI Mortgage Fraud Report, supra note 2 at 6. 11. See FFIEC Mortgage Loan White Paper, supra note 6 at 4; see also 2006 FBI Financial Crimes Report, supra note 1. 12. The agencies that investigate and prosecute mortgage fraud cases include U.S. Attorney’s Offices, the FBI, the Department of Housing and Urban Development (“HUD”), the U.S. Secret Service, the FDIC, the IRS, the U.S. Postal Service, the Social Security Administration, the Federal Trade Commission, state Attorney General’s Offices, state Banking Commissions, and local district attorneys. 13. The following criminal statutes are most commonly used to prosecute mortgage fraud participants: 18 U.S.C. � 1005 (false entries to federally insured institutions); 18 U.S.C. � 1014 (false statements on a loan or credit application); 18 U.S.C. � 1028 (identity theft); 18 U.S.C. � 1029 (credit card fraud); 18 U.S.C. � 1030 (computer fraud); 18 U.S.C. � 1341 (mail fraud); 18 U.S.C. � 1343 (wire fraud); 18 U.S.C. � 1344 (bank fraud); 18 U.S.C. � 1519 (obstruction of justice); 18 U.S.C. �� 1951-1961 (RICO); 18 U.S.C. � 1956 (promotion and concealment money laundering); 18 U.S.C. � 1957 (monetary transactions with illegal proceeds); 18 U.S.C. � 1349 (conspiracy); 18 U.S.C. � 1342 (use of fictitious name or address in fraud); 18 U.S.C. � 2314 (transportation of stolen goods or securities); 18 U.S.C. � 1010 (false statements in HUD transactions); 42 U.S.C. � 408 (fraud related to Social Security documents). 14. See, e.g., 2006 FBI Financial Crimes Report, supra note 1; see also FFIEC Mortgage Loan White Paper, supra note 6 at 3-4. As the FFIEC Mortgage Loan White Paper points out, these two categories are not really different crimes; instead, they describe different motives for the same criminal acts. Id. 15. See 2006 FBI Financial Crimes Report, supra note 1. According to this report, approximately 80 percent of all reported fraud losses involve industry insiders. 16. See FFIEC Mortgage Loan White Paper, supra note 6 at 4-5, 37-42. 17. Id. at 37-42. 18. Id. at 9. 19. See id. at 35; see also 12 C.F.R. � 21.11 (addressing requirements of lenders to file SARs). 20. See 2006 FBI Financial Crimes Report, supra note 1. 21. See id.; see also Loretta Salzano & A. Michelle Canter, Identifying and Stopping Mortgage Fraud, 61 Consumer Fin. L. Q. Rep. 16, 17 (Spring 2007). 22. See FFIEC Mortgage Loan White Paper, supra note 6 at 16. 23. Id. 24. See 2006 FBI Financial Crimes Report, supra note 1. 25. See 2006 FBI Financial Crimes Report, supra note 1; see also McNabb Associates, When the FBI Comes Calling, available at http://www.federalcrimes. com/mortgagefraud.htm. 26. See The Legal Description, Industry Skullduggery: Understanding the Who, What, Where, When and How of Mortgage Fraud (pt. 1) (Nov. 8, 2004), www.mortgagefraudblog.com/.../2004-11-08_-_Legal_ Description_-_Industry_Skullduggery_-_ Part_I_-_11-8-04.pdf; see also FFIEC Mortgage Loan White Paper, supra note 6 at 14. 27. See, e.g., FFIEC Mortgage Loan White Paper, supra note 6 at 14. A version of the chunking scheme can also occur in the form of a “builder bailout,” when the builder makes these promises to a recruited buyer to entice them to finance the construction of a new home. A builder bailout can also take another fraudulent form, such as when the builder needs to dispose of the last remaining unsold homes in a tract or subdivision. In those cases, the builder may utilize a variety of schemes and tactics to close these deals, including the use of a hidden seller with assisted financing as a front or the use of inflated property values. Id. at 13. 28. Id. at 15. Usually the down payment source is "disguised" or not truthfully reflected when disclosure would raise red flags. For example, if the true source of the down payment is the seller, the broker, or a participant other than the buyer, fraudfeasors will take steps to hide this fact. 29. See FBI, Operation Quick Flip (Dec. 14, 2005), available at http://www.fbi.gov/ page2/dec05/operationquickflip121405. htm; see also McNabb Associates, supra note 25. 30. See FBI, Operation Quick Flip, supra note 29. 31. See FBI, 2005 Operation Quick Flip Stats (Dec. 2005), available at http:// www. fbi.gov/page2/dec05/chartsandgraphs. pdf (describing a typical air loan scheme) (hereinafter “2005 FBI Quick Flip Stats ”); see also, Operation Quick Flip, supra note 29. 32. See FFIEC Mortgage Loan White Paper, supra note 6 at 14; see also 2005 FBI Quick Flip Stats, supra note 31 (providing examples of double sold loans). 33. “Recent statistics suggest that escalating foreclosures provide criminals with the opportunity to exploit and defraud vulnerable homeowners seeking financial guidance.” 2006 FBI Financial Crimes Report, supra note 1. 34. Steve Tripoli & Elizabeth Renuart, Nat’l Consumer Law Ctr. Report, Dreams Foreclosed: The Rampant Theft of Americans’ Homes Through Equity-Stripping Foreclosure “Rescue Scams” 8 (June 2005); see also 2005 FBI Quick Flip Stats, supra note 31 (defining Foreclosure Schemes); McNabb Associates, supra note 25 (same). 35. See Tripoli & Renuart, supra note 34 at 8; see also Anna-Katrina S. Christakis, Consumer Legislation, Regulation, and Litigation Update, 61 Consumer Fin. L. Q. Rep. 4, 10 (Spring 2007). 36. See 2007 MARI Mortgage Fraud Report, supra note 2 at 10-11; see also BSA Advisory Group, SAR Activity Review: Trends, Tips & Issues, Issue 10 at 15-16 (May 2006), available at http://www.fincen.gov/ sarreviewissue10.pdf (hereinafter “SAR Activity Review”); see also FFIEC Mortgage Loan White Paper, supra note 6 at 9. 37. See 2007 MARI Mortgage Fraud Report, supra note 2 at 11. 38. In fact, the most common types of fraud in 2006 originations were false statements regarding employment and claimed income. Id. at 1. 39. See Salzano and Canter, supra note 21 at 17. 40. See FFIEC Mortgage Loan White Paper, supra note 6 at 9. 41. Id. 42. Id. at 9-10. 43. See, e.g., Salzano and Canter, supra note 21 at 17; see generally FFIEC Mortgage Loan White Paper, supra note 6 at 12. 44. See Travis P. Nelson, Mortgage Fraud at Financial Institutions: Prevention and Response, ABA Newsletter, March 2007, at 5, available at www.abanet. org/buslaw/ committees/CL130000pub/ newsletter/ 200703/nelson.pdf. 45. See, e.g., Peter J. Henning, Defense Discovery in White Collar Criminal Prosecutions, 15 Ga. St. U. L. Rev. 601, 602-603 (Spring 1999); see also Chris Swecker, Asst. Director, Criminal Division, FBI, Remarks Before the House Financial Servs. Subcomm. on Housing and Community Opportunity (Oct. 7, 2004), available at http://www.fbi.gov/congress/congress04. htm (discussing the use of undercover operations and wiretaps in mortgage fraud investigations). 46. See generally FFIEC Mortgage Loan White Paper, supra note 6 at 18-30 (discussing relevant documents and red flags). 47. IRS, Real Estate Fraud: Facts, Figures and Closed Cases (April 2007) (discussing investigative technique of following the money in mortgage fraud cases), available at http://www.irs.gov/compliance/enforce ment/article/0,,id=162992,00.html. 48. If the government insists on interviewing the client in person, and defense counsel and the client determine that participation in the interview is a good strategic choice, counsel should consider whether to insist on a proffer letter (also called a “Queen for A Day” letter) that limits the client’s exposure for certain types of information shared during the interview. These letters can also serve to waive some of the client's important rights, especially in jurisdictions in which the letters have been "enhanced" beyond the standard use immunity provisions. Defense counsel should also review the terms of this letter carefully and attempt to negotiate more favorable terms with the prosecutor where possible. See, e.g., Jon May, Queen for a Day From Hell: How to Handle a Troubling Proffer Letter, The Champion (Sept./Oct. 2006). In short, government interviews are a significant danger zone for the client, and most of the standard immunity letters leave open significant areas of exposure for the client. Defense counsel should obtain a thorough understanding of the letter's contents and be sure that advantages and limitations are thoroughly explained in detail to the client prior to any interview. � Holly A. Pierson, 2007. All rights reserved.
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