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Evidence of lender negligence or intentional disregard is inadmissible as defense against charges of criminal mortgage fraud.
U.S. v Lindsey (9th Cir, June 28, 2016, No. 14–10004) 2016 US App Lexis 11763, modified (9th Cir, June 28, 2016) 2016 US App Lexis 11827 (unpublished opinion)
A mortgage loan officer who was also a real estate broker (Broker) perpetrated a criminal, complex mortgage fraud scheme by finding and using five straw buyers (one of whom was his sister) on nine home loans, involving eight different properties. Essentially, Broker fraudulently submitted loan applications for these buyers containing hugely inflated earned income and asset numbers and representing that these out-of-state buyers intended to reside in the Nevada homes. The homes went into foreclosure, costing the (secondary) lenders losses and ruining the credit of the five straw buyers. Broker was convicted on nine criminal charges of wire fraud under 18 USC §1343 and one charge of aggravated identity theft under 18 USC §1028A, with a total sentence of 132 months including enhancements. He appealed his convictions, arguing in part that the district court had erred by prohibiting him from giving evidence in his defense on lender negligence. The Ninth Circuit affirmed the convictions and held that Broker could not use evidence of lender negligence, or even a lender’s intentional disregard, as a defense against charges of criminal mortgage fraud.
To prove mortgage fraud here, the prosecutor had to show that Broker
· Concocted a scheme to defraud by making material falsehoods;
· Used wire, radio, or television to achieve his fraudulent scheme; and
· Had a specific intent to defraud.
Broker argued the materiality prong was missing in his case because the loans in question were “stated income” or “no doc” loans (which have been called “liar’s loans”). Broker alleged the lenders negligently and intentionally failed to review the loan applications and arguably would have approved the loans regardless of the responses. However, materiality is subject to an objective test and focuses on the nature of the statements made. Here, the Ninth Circuit adopted a “bright-line test” and held, “as a matter of law, that when a lender requests specific information in its loan applications, false responses to those specific requests are objectively material for purposes of proving fraud.” 2016 US App Lexis 11763 at *14. In a criminal context, the prosecutor need not prove reliance. Thus, the Ninth Circuit joined four sister circuits (Third, Fourth, Fifth, and Eleventh) in holding that criminally fraudulent conduct can victimize a negligent lender. The Ninth Circuit further held that even a lender who intentionally disregards the loan application may be victimized in a mortgage fraud scheme.
THE EDITOR’S TAKE: This was a prosecution for violation of a federal wire fraud statute. As the court says, the elements of that offense are
A scheme to defraud;
The use of wire, radio, or television to further it; and
A specific intent to defraud.
Reliance is not mentioned in that last element, but as this case indicates, it comes in the back door by treating the scheme component as including falsehoods that were “material”, which (under federal law) does not require actual reliance by the victim. Therefore, Lindsey was guilty even if these were regarded as liars’ loans by the banks.
I’m not sure the result would have been the same had this been a California state prosecution or California civil action. (Technically, it would have been a Nevada lawsuit, but I know only California law.) Our high court has noted (in Engalla v Permanente Med. Group, Inc. (1997) 15 C4th 951, 974) that:
The elements of fraud that will give rise to a tort action for deceit are: “‘(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.’”
The court thus gives reliance a prominent position in the definition. With regard to that component, Miller & Starr, California Real Estate (4th ed) §1:167 (Reliance by injured party—Justifiable reliance required) says:
Whether the fraud is based on an intentional or negligent misrepresentation, or the failure to disclose a material fact, the reliance by the defrauded party on the representation or concealment is an essential element of the cause of action. The reliance must be reasonable and justified under the circumstances, except that the requirements for reliance are softened when there is an intentional fraud. Reasonable and justifiable reliance requires that the misrepresented, concealed or undisclosed fact be “material.”
Thus, had these lenders sued civilly, expert testimony about careless treatment of “no doc” or “stated income” loan applications might have been admissible and relevant.
The opinion also says that Lindsey was ordered to pay over $2 million in restitution, thus somewhat obviating the need for more relief for the victims, except in a companion unpublished opinion (U.S. v Lindsey (9th Cir, June 28, 2016, No. 14–10004) 2016 US App Lexis 11827), the court vacated that award, saying it was incorrect if it had been based on the amounts initially loaned, since the loans had been resold into the secondary market, perhaps at discounts. “The correct restitution calculation in this circumstance begins with the amount the victim paid for the loan and/or collateral, and subtracts the amount recouped from the resale of the collateral at foreclosure.” 2016 US App Lexis 11827 at *7.—Roger Bernhardt
39 Real Property Law Reporter 120 (Cal CEB Sept. 2016), © The Regents of the University of California, reprinted with permission of CEB.