Tougher Penalties for Fraudulent Lenders

Fraudulent Lenders Face Tougher Penalties, as U.S. Mulls New SAR Requirements

By Matt Squire

moneylaundering.com

Mortgage lenders will face greater scrutiny from law enforcement agencies and federal regulators following the passage of an anti-mortgage fraud bill and the announcement that further regulations may be coming.

President Obama signed the measure, called the Fraud Enforcement and Recovery Act (FERA), on Wednesday. The act allocated additional funding to combating mortgage fraud and amends criminal statutes in an effort to give investigators and prosecutors more leeway in handling cases tied to fraudulent mortgages.

Specifically, the law allows investigators to use a bank fraud law against fraudulent mortgage lenders that would otherwise be prosecuted for mail or wire fraud. The application of the bank fraud statute increased the maximum penalties for criminal lenders from 20 to 30 years.

The law may have its greatest impact by increasing its statute of limitations on investigations from five to 10 years, a change that gives the government "breathing room," according to Samuel Seymour, a lawyer with Sullivan & Cromwell in New York and a former federal prosecutor.

The statute's 30-year maximum penalty "is good for headlines" but the increase in investigation time "is very significant," he said. "If you are a prosecutor and you are assuming that the most serious mortgage fraud happened in your case three years ago, those cases would ordinarily have to be brought within the next two years, which is fast by investigative standards," he said.

Investigators may use the law to pursue frauds that had previously been off limits under the past statute of limitations, according to Courtney Linn, a lawyer with law firm Orrick, Herrington & Sutcliffe in Sacramento, California.

"You may think you are in the clear, but now the government may argue that they have another five years to look at the [fraud]," he said.

Pursuing mortgage fraud cases through mail or wire fraud statutes posed difficulties in some large fraud schemes because law enforcement agents had to prove materiality and intent to defraud, he said, adding FERA "removes a lot of those hurdles."

The FBI's mortgage fraud caseload has increased from 295 cases opened in 2003 to 734 cases in 2008, according to the agency's Web site. The agency currently has over 2,000 mortgage fraud cases pending and annual losses from the crime are estimated to range from between $4 billion to $6 billion, according to the site.

The rise in cases coincides with proposals that the U.S Treasury Department require non-bank lenders to file suspicious activity reports (SARs) on mortgage fraud with the Financial Crimes Enforcement Network (FinCEN). On Wednesday, FBI Director Robert Mueller said that the bureau had spoken with FinCEN and the Mortgage Bankers Association to develop a more efficient "mortgage fraud reporting mechnaism."

Whether such requirements might be imposed and how they would be applied remains unclear however. FinCEN is in the "early stages" of discussions, said bureau spokesman Bill Grassano, in an interview. Calls to the FBI and the Mortgage Bankers Association were not returned at press time.

In testimony before the U.S. House Judiciary Committee on Wednesday, Mueller said that suspicious activity reports filed by regulated financial institutions on mortgage fraud rose 36 percent in 2008 to 63,173. FinCEN has received a total of 33,291 mortgage fraud SARs so far in 2009, he said.

In addition to granting more leverage to investigators, FERA allocated more than $330 million over the next two years to various federal agencies. Under the measure, the FBI will get $140 million, United States Attorneys offices $100 million and the criminal, civil and tax divisions of the Justice Department $80 million of the funds over the next two years.

The extra resources could be welcomed at the FBI, said Mueller at the hearing, adding that "unfortunately, there is no sign that our mortgage fraud caseload will decrease in the near future."