The Mortgage Bankers Association wants lawmakers to provide more funding for mortgage fraud prevention and prosecution, not pass new laws targeting the crime.
Federal mail and wire fraud statutes already give law enforcement agencies the authority they need to combat mortgage fraud, the MBA maintains in a newly published position paper, and new laws could do more harm than good.
According to The Mortgage Asset Research Institute (MARI), suspected mortgage fraud incidents were up 30 percent during 2006. A private risk management firm, The Prieston Group, projects mortgage fraud losses for the year could total $4.2 billion.
But some proposals for fighting mortgage fraud — such as creating a federal “private right of action” to provide victims a means of legal redress — would only add to lenders’ problems, the MBA argues. Overly broad statutes “could easily be abused in the hands of private litigants who may not exercise the same restraint as law enforcement personnel in pursuing remedies,” the trade association warned.
The MBA is also concerned that lawmakers are not clear on the differences between predatory lending and mortgage fraud, and will attempt to deal with both issues in the same legislation.
Mortgage fraud typically involves fraudulent misrepresentations that cause the victim — the lender — to fund a loan it would have stayed away from if all the facts were known. The victim in predatory lending is usually the borrower, and fraud is not always involved.
There are many laws and regulations on the books governing predatory lending that impose “substantial civil penalties” on lenders who violate them, the MBA maintains. The penalties tend to be proportionate to the harm caused. If mortgage fraud is defined too broadly, “some actions may be subject to penalties that are disproportionate to any harm caused and far more severe than ever intended.”
A bill sponsored by Sen. Barack Obama — SB 1222, the “STOP FRAUD Act” — would impose a fine of up to $5 million and imprisonment of up to 35 years for mortgage fraud. But in interpreting the bill’s language, courts might define “a broad range of activities that are not fraudulent” as mortgage fraud — such as a lender’s recommendation on a mortgage that a borrower later decides is not in his or her best interest, the MBA said.
Several other of the bill’s provisions “have little, if anything, to do with mortgage fraud as that term is understood by law enforcement officials and the mortgage industry,” the MBA claims. Provisions the industry association found troublesome include heightened foreclosure requirements on some subprime loans and the creation of assignee liability in cases of “deceptive practices,” a term the MBA views as “vague and undefined.”
Assignee liability gives borrowers who claim they were taking advantage of the ability to sue not only loan originators but investors who buy their loan in the secondary market. While some lawmakers and consumer groups say assignee liability would reduce the incentive for originators to make predatory loans, critics say it would scare investors away from mortgage-backed securities and raise the cost of borrowing.
SB 1222 would also require lenders to provide counseling services to borrowers about activities or practices that are likely to increase the risk of foreclosure.
“Whether one believes such provisions have merit as a matter of public policy, they are not directly related to mortgage fraud,” the MBA said, but “clearly are intended to address concerns related to ‘predatory’ lending.”
Existing mail and wire fraud statutes are “applicable to any and all instances of mortgage fraud,” the MBA maintains, and allow courts to impose large fines and long prison sentences on mortgage fraud perpetrators.
The MBA said it supports some of the ideas put forward in Obama’s bill, including the creation of a database of debarred or censured mortgage professionals and increased funding for monitoring and law enforcement.
“Rather than drafting new legislation, the focus should be on providing the structure and resources needed by law enforcement officials to combat mortgage fraud,” the MBA paper concluded. “While law enforcement has all the legal tools it needs at its disposal, it requires more resources and a more efficient framework to use those tools effectively.”
Earlier this year, the MBA asked Congress to set aside $31.25 million over a five-year period to hire more FBI investigators and prosecutors.
In addition to advocating more funding for mortgage fraud prevention and prosecution efforts, the MBA wants to see an office dedicated to mortgage fraud created within the Department of Justice.
Staffed with prosecutors and investigators with experience in mortgage fraud, a federal Office of Mortgage Fraud Enforcement could coordinate with state attorneys general and prosecutors to detect and prosecute crimes against lenders. The MBA also envisions an intergovernmental database, with lenders contributing information that would prevent “serial offenders” from employing the same scheme in different communities.