Federal prosecutors investigating a hush payment made by President Donald Trump’s embattled personal attorney Michael Cohen to adult film star Stephanie Clifford (a.k.a. “Stormy Daniels”) could seize on so-called “Know Your Customer” regulations that require home equity loan applicants to accurately report the purpose of the credit line, according to news reports, lending experts and lawyers. But Cohen’s use of the credit in this way is also no “slam dunk” when it comes to leveling charges.
Cohen, Trump’s longtime lawyer, reportedly paid Clifford $130,000 in hush money obtained through a home equity line of credit from First Republic Bank, according to a Wall Street Journal article published Sunday. Although using such a loan for purposes other then refinancing is neither uncommon nor illegal, lending experts told Inman that federal bank fraud laws prevent borrowers from obtaining mortgage loans by “false or fraudulent pretenses, representations, or promises.”
“There’s an acknowledgement and agreement [on the form] that everything on the application is truthful,” Ralph Roberts, an author, realtor and mortgage fraud expert told Inman. “If you lied on the application, you’re committing a crime.”
It’s unclear at this time if Cohen lied on his application. The penalty for bank fraud, which includes fraud related to mortgages and other loans, is up to 30 years in prison and up to $1 million in fines, according to federal law (18 U.S. Code 1344).
Cohen allegedly made the payment to Clifford, known professionally as Stormy Daniels, in a bid to silence her from speaking publicly about an extramarital affair between she and the President in 2006. The payment was made 12 days before the 2016 presidential election and prosecutors are also investigating possible campaign finance violations as well as wire fraud.
Following a subpoena by federal authorities, First Republic launched an investigation of the home equity loan and later filed several “suspicious activity reports,” which are frequently submitted to the U.S. Treasury Department’s Financial Crimes Enforcement Network when a bank transaction appears abnormal. Subsequently, reports last week alleged Cohen was also behind a $1.6 million payoff to a former Playboy Playmate on behalf of Elliott Broidy, a Republican National Committee deputy finance chairman who resigned in disgrace last week after his dalliance with the model was revealed by The Journal.
Cohen, according to The Journal, may have been asked to disclose the purpose of the home equity line of credit from First Republic Bank, due to “Know Your Customer” rules, which were enacted in 2001, as part of the Patriot Act while Robert Mueller, now a special prosecutor investigating collusion between the Trump campaign and Russia, served as FBI Director.
The regulations advise banks to verify a customer’s identity to confirm they are real and not on any government watchlist as well as assess their risk factors, according to Fin. The main purpose of the law is to combat money laundering and financing of terrorist organizations, so it asks banks to do their due diligence including asking for what purpose any funds will be used.
There is no standard procedure laid out in the law outside of the identification process, and it’s up to each bank to determine what information they require from applicants. First Republic Bank specifically touts a home equity line of credit on its website that can be used for numerous investments, not just home repairs or purchasing a second home.
First Republic Bank did not respond to Inman’s request for comment in time for this article’s publication.
Commonly, mortgage loan applications will inquire as to the purpose of the loan. On a 1003 Uniform Residential Loan Application, for example, the application asks the borrower if they plan to use the loan for “purchase, construction, refinance, construction permanent or other.” If the borrower chooses other, they are expected to explain the purpose honestly.
But home equity lines of credit are typically open-ended, said Marx Sterbcow, an attorney in Louisiana who specialized in real estate law. Banking customers frequently withdraw money from those credit lines to pay off lawsuits, Sterbcow told Inman, adding he’d be shocked if Cohen is charged for using a home equity line of credit for something other than his home.
“That happens all the time,” said Sterbcow. “That’s not unusual, to be honest with you. If they’re going to charge him for that, that would be the most nit-picky of nit-picky things. This happens every day.”
“Generally, home equity lines are pretty open ended,” added Ken Trepeta, the executive director of Real Estate Services Providers Council. “If you were doing the refinance for a particular purpose, that is one thing, but an equity line… you can pretty much use it for anything.”
In March, a New Jersey man was sentenced to 12 years in prison for a host of charges that included bank fraud. An investigation by the U.S. Attorney’s Office — which is also investigating Cohen — found that Mark Andreotti, a former settlement agent, used his own company to refinance his mortgage. When the bank transferred the $650,000 to the company’s account for the refinance, Andreotti used the money for personal funds instead of paying off the first mortgage.
The investigation also found Andreotti helped a real estate attorney obtain $480,000 through similar fraudulent actions.
In 2009, Congress passed the Fraud Enforcement and Recovery Act of 2009, which authorized additional funds to prosecute fraud at various government agencies and enhanced federal enforcement of fraud laws, including mortgage fraud.
That law, too, was enacted while Mueller served as FBI director.