Mortgage fraud is problem that has reached epidemic proportions in the United States (US) in general and in South Carolina (SC) in particular. The white collar practitioner should be aware that mortgage fraud is generally investigated by the United States Federal Bureau of Investigation (FBI), although other agencies routinely assist the FBI and/or take the lead in investigating a case. Some of the other federal agencies which investigate mortgage fraud crimes for criminal prosecution include, but are not limited to, the Internal Revenue Service-Criminal Investigative Division (IRS-CID), United States Postal Inspection Service (USPIS), U.S. Secret Service (USSS), U.S. Immigration and Customs Enforcement (ICE), U.S. Department of Housing and Urban Development-Office of the Inspector General (HUD-OIG), Federal Deposit Insurance Corporation-Office of the Inspector General (FDIC-OIG), the Department of Veterans Affairs-Office of the Inspector General (DVA-OIG) and U.S. Bankruptcy Trustees.
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The FBI works extensively with the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the United States Department of the Treasury, created in 1990, that collects and analyzes information about financial transactions in order to fight financial crimes, including mortgage fraud, money laundering and terrorist financing. The FinCEN network is a means of bringing people and information together to combat complex criminal financial transactions such as mortgage fraud and money laundering by implementing information sharing among law enforcement agencies and its other partners in the regulatory and financial communities. South Carolina lawyers can keep abreast of mortgage fraud developments by visiting the respective websites of the FBI and FinCEN.
In South Carolina, mortgage fraud is generally prosecuted by federal prosecutors. The United States Attorney's Office (USAO) and the U.S. Department of Justice's (DOJ) Criminal Fraud Section handle the criminal prosecutions of mortgage fraud cases. The USAO in South Carolina has about 50 prosecutors in the state, and has offices in Charleston, Columbia, Florence, and Greenville. In the investigation stage, a person with possible knowledge or involvement in a mortgage fraud may be considered a witness, subject or target of the investigation. A subject is generally a person the prosecutor believes may have committed a mortgage fraud crime, whereas a target is a person the prosecutor believes has committed a crime such as mortgage fraud and the prosecutor has substantial evidence to support a criminal prosecution. Criminal prosecutions of mortgage fraud felony cases are usually initiated through the federal grand jury process. A federal grand jury consists of between 16 and 23 grand jurors who are presented evidence of alleged criminal activity by the federal prosecutors with the aid of law enforcement agents, usually FBI special agents. At least 12 members of the grand jury must vote in favor of an indictment charging mortgage fraud. South Carolina criminal defense lawyers are not allowed entry into the grand jury at any time, and prosecutors rarely fail to obtain an indictment after presentment of their case to the grand jury.
Often targets of a mortgage fraud prosecution are invited by the prosecution to avail themselves of the grand jury process and to testify in front of the grand jury. Generally, a South Carolina criminal defense attorney should not allow a named target of a federal criminal mortgage fraud investigation to testify before the grand jury. Subjects and witnesses in a mortgage fraud prosecution are often subpoenaed by the prosecutors to testify before the grand jury. A criminal defense attorney should likewise generally advise a witness or subject to not testify if any part of the testimony would possibly incriminate the client. With respect to a federal mortgage fraud investigation, when a citizen receives a target letter, subject letter, or a subpoena to testify before the grand jury, or is contacted in person by a law enforcement officer such as an FBI special agent, a South Carolina criminal lawyer who is experienced in federal prosecutions should be consulted immediately. One of the biggest mistakes a mortgage fraud target, subject or witness can make is to testify before the grand jury or speak to criminal investigators prior to consulting with a criminal defense attorney. The 5th Amendment to the Constitution allows any person, including a target, subject or witness in a mortgage fraud prosecution, to not incriminate himself or herself. Interestingly, there is no 5th Amendment protection for a corporation. Obviously, if a defendant has been indicted or arrested for a federal mortgage fraud crime in South Carolina, an experienced SC mortgage fraud lawyer should be consulted immediately.
An important practice tip for South Carolina attorneys representing clients who have decided to testify before the grand jury is to accompany the client to the grand jury court room. While not allowed in the grand jury proceeding itself, the attorney can wait just outside of the court room and the client is allowed to consult with the attorney for any question which is posed to the client by prosecutors or grand jurors. This is an effective way to help minimize any potential damaging statements by the client, and a great way to learn the focus of the prosecutor's case. This approach makes it much easier to gain insights from the client as to the questions asked during the grand jury proceeding as opposed to debriefing the client after a sometimes long and grueling question and answer session which can last for hours.
South Carolina white collar criminal attorneys need to be aware of the types of mortgage fraud that are prevalent in the state in order to effectively identify and represent clients who are involved in mortgage fraud activities. Consumers need to be aware of the variations of mortgage fraud so that they do not unwittingly become a part of a scheme to defraud a bank or federally backed lending institution. Federal mortgage fraud crimes in South Carolina are punishable by up to 30 years imprisonment in federal prison or $1,000,000 fine, or both. It is unlawful and fraudulent for a person to make a false statement regarding his or her income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan or credit application for the purpose of influencing in any way the action of a federally backed financial institution.
Some of the applicable federal criminal statutes which may be charged in mortgage fraud indictments include, but are not limited to, the following:
• 18 U.S.C. § 1001 - Statements or entries generally
• 18 U.S.C. § 1010 - HUD and Federal Housing Administration Transactions
• 18 U.S.C. § 1014 - Loan and credit applications generally
• 18 U.S.C. § 1028 - Fraud and related activity in connection with identification documents
• 18 U.S.C. § 1341 - Frauds and swindles by Mail
• 18 U.S.C. § 1342 - Fictitious name or address
• 18 U.S.C. § 1343 - Fraud by wire
• 18 U.S.C. § 1344 - Bank Fraud
• 18 U.S.C. § 2 - Aiding and Abetting
• 18 U.S.C. § 371 - Conspiracy
• 42 U.S.C. § 408(a) - False Social Security Number
While states experiencing the highest number of mortgage fraud cases are California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, Utah, Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina, Tennessee, and Virginia, the state of South Carolina has seen a huge rise in the number of mortgage fraud cases being prosecuted by the USAO, DOJ and FBI.
In South Carolina, a disproportionate number of mortgage fraud cases have occurred in the coastal region. Some of the South Carolina counties with high concentrations of mortgage fraud or bank fraud cases include Horry County, Florence County, Georgetown County, Charleston County, Berkeley County, Dorchester County, Beaufort County, Colleton County and Jasper County. Some of the South Carolina cities with high concentrations of mortgage fraud or bank fraud cases include Little River, North Myrtle Beach, Myrtle Beach, Murrells Inlet, Georgetown, Awendaw, Mt. Pleasant, Charleston, North Charleston, James Island, Isle of Palms, Sullivan's Island, Folly Beach, Kiawah Island, Hollywood, Ravenel, Beaufort, Bluffton and Hilton Head Island. The reason for the increased number of mortgage fraud and bank fraud criminal prosecutions in these areas is because large number of condominium, condotels, townhouse and similar real estate projects which proliferated in these areas. These real estate developments were popular in areas close to the waterfront and bank lenders were willing to loan money at a furious pace due to a perceived enormous demand.
There are a wide variety of schemes, artifices and conspiracies to perpetrate mortgage frauds and band frauds with which the South Carolina white collar criminal defense lawyer and consumers must be familiar. Typical mortgage fraud schemes or conspiracies that have occurred in South Carolina and elsewhere throughout the United States include the following:
Air Loans. The air loan mortgage fraud scheme is a loan obtained on a nonexistent property or for a nonexistent borrower. Professional scam artists often work together to create a fake borrower and a fake chain of title on a nonexistent property. They then obtain a title and property insurance binder to present to the bank. The scam artists often set up fake phone banks and mailboxes in order to create fake employment verifications and W-2s, home addresses and borrower telephone numbers. They may establish accounts for payments, and maintain custodial accounts for escrows. Phone banks are used to impersonate an employer, an appraiser, a credit agency, a law firm, an accountant, etc..., for bank verification purposes. The air loan scam artists obtain the loan proceeds and no property is ever bought or sold, and the bank is left with an unpaid loan that never had any collateral.
Appraisal fraud. Appraisal fraud is often an integral part of most mortgage fraud scams and occurs when a dishonest appraiser fraudulently appraises a property by inflating its value. In most cases, after the seller receives the closing proceeds, he will pay a kickback to the appraiser as a quid pro quo for the fake appraisal. In most cases, the borrower doesn't make any loan payments and the house or property goes into foreclosure.
Equity Skimming. In an equity skimming mortgage fraud scheme, an investor often uses a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer's name. After the closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments, and rents the property until foreclosure takes place several months later. Equity skimming also occurs when a scam artist purchases a residential property whose owner is in default on his mortgage and/or his real estate taxes, and then diverts rental income from the property for personal gain and does not apply this rental income toward mortgage payments, the payment of taxes and other property-related expenses.
Flipping. A flipping scheme occurs when the seller intentionally misrepresents the value of a property in order to induce a buyer's purchase. Flipping mortgage fraud schemes usually involve a fraudulent appraisal and a grossly inflated sales price.
Foreclosure schemes. Foreclosure scheme scam artists prey on people with mounting financial problems that that place them in danger of losing their home. Homeowners in the early stages of foreclosure may be contacted by a fraudster who represents to the homeowner that he can get rid of his debt and save his house for an upfront fee, which the scam artist takes and then disappears. In a similar foreclosure scheme, Homeowners are approached by a scam artist who offers to help them refinance the loan. The homeowners are fraudulently induced to sign so-called "refinance" documents only to later find out that they actually transferred title to the house to the fraudster and then face eviction.
Nominee Loans/Straw buyers. One of the most frequent types of mortgage fraud occurs when a "straw buyer" is used to hide the identity of the true borrower who would not qualify for the mortgage. The straw buyer or nominee buyer generally has good credit. The scam artist usually fills out the loan application for the straw buyer, and falsifies the income and net worth of the straw buyer in order to qualify for the loan. These fraud scams were popularized with the advent of the "stated income" loans which did not require a borrower to prove his true income and net worth - the bank just believed the income and net worth that was "stated" on the loan application. Straw buyers are often duped into thinking that they're investing in real estate that will be rented out, with the rental payments paying the mortgage, and are sometime paid a nominal fee outside of closing. In most case, no payments are made and the lender forecloses on the loan. Sometimes straw buyers are actually in on the scam and are getting a cut of the proceeds.
Silent Second. In the silent second mortgage fraud scheme, the buyer borrows the down payment for the purchase of the property from the seller through the execution of a second mortgage which is not disclosed to the lending bank. The lending bank is fraudulently led to believe that the borrower has invested his own money for the down payment, when in fact, it is borrowed. The second mortgage is generally not recorded to further conceal its status from the primary lending bank.
A mortgage fraud is usually reported to the FBI by the financial institution upon which the fraud has been committed. Pursuant to the Bank Secrecy Act of 1970 (BSA), a bank must file a Suspicious Activity Report (SAR) with FinCEN if a customer's actions indicate that the customer is laundering money or otherwise violating a federal criminal law such as committing mortgage fraud. See 31 C.F.R. § 103.18(a). A bank is required to file a SAR no later than 30 calendar days after the date of initial detection by the bank of facts that may constitute a basis for filing a SAR, unless no suspect was initially identified on the date of the detection, in which case the bank has up to 60 days to file the SAR. See 31 C.F.R. § 103.18(b). Once FinCEN has analyzed the information contained in the SAR, if a criminal activity is found to have occurred, then the case is turned over to the FBI and the DOJ or AUSO for investigation and prosecution. The rise in FBI SARs reports involving mortgage fraud went from approximately 2,000 in 1996 to over 25,000 in 2005. Of those 2005 SARs reports, 20,000 of involved borrower fraud, approximately 7,000 involved broker fraud, and approximately 2,000 involved appraiser fraud.
The FBI has identified a number of indicators of mortgage fraud of which the South Carolina criminal white collar lawyer needs to be aware. These include inflated appraisals or the exclusive use of one appraiser, increased commissions or bonuses for brokers and appraisers, bonuses paid (outside or at settlement) for fee-based services, higher than customary fees, falsifications on loan applications, explanations to buyers on how to falsify the mortgage application, requests for borrowers to sign a blank loan application, fake supporting loan documentation, requests to sign blank employee forms, bank forms or other forms, purchase loans which are disguised as refinance loans, investors who are guaranteed a re-purchase of the property, investors who are paid a fixed percentage to sell or flip a property, and when multiple "Holding Companies" are used to increase property values.
One of the first and biggest South Carolina mortgage fraud prosecutions occurred in the Charleston Division in the 1990's. It involved nominee borrowers and straw loans made by Citadel Federal Saving and Loan. Over 10 straw purchasers were enticed into the real estate loans by getting paid fees for signing up for the loans. They did not put up any of their own money as part of the deal and when the loans went sour the bank was left with properties that were upside down, that is, the real estate was worth less the the amount of the loan. Some bank insiders were part of the scheme and got convicted for their respective roles.
The range of defendants that a SC criminal lawyer will represent in a typical mortgage fraud case may include straw borrowers or nominee borrowers, real estate agents, developers, appraisers, mortgage brokers, and sometimes even closing attorneys and bankers. Bankers often get involved in mortgage fraud scams because they are receiving kickbacks from the borrowers or are paid bonuses for the volume of loans made and thus ignore proper banking loan requirements and protocols in order to make more money. Close scrutiny should be given to bank loan applications, appraisals, HUD-1 closing statements, borrower's W-2 and tax returns when analyzing a potential mortgage fraud case for a potential client.
Federal judges who impose sentences for mortgage fraud normally rely upon the United States Sentencing Guidelines, which are now advisory as a result of the U.S. v. Booker case, when determining a sentence. A federal court calculates a particular guideline range by assessing a defendant's criminal history, the applicable base offense level, and the amount of the actual or intended loss. Section 2B1.1 of the USSG sets forth a loss table which increases the base offense level according to the amount of money involved in the mortgage fraud. Generally, the more money which is lost in a mortgage fraud scam, the greater the sentence the defendant receives. In some cases, a defendant may be subjected to sentencing enhancements which means the defendant receives a greater sentence. A defendant may receive an enhancement for the role in the offense if the court determines that the defendant was an organizer, supervisor, or a recruiter, or used a sophisticated means to facilitate a crime, abused a position a trust, or targeted a vulnerable victim such as a disabled or elderly person. However, federal judges now have wide latitude for imposing a sentence because they must consider the broad statutory factors set forth in 18 U.S.C. 3553(a)which include the nature and circumstances of the offense and the history and characteristics of the defendant, the need for the sentence imposed to reflect the seriousness of the offense, to promote respect for the law, and to provide just punishment for the offense, the need to afford adequate deterrence to criminal conduct, the need to protect the public from further crimes of the defendant, the need to provide the defendant with needed educational or vocational training, medical care, or other correctional treatment in the most effective manner, the kinds of sentences available, the sentence recommended by the Sentencing Guidelines and any applicable guidelines or policy statement therein, the need to avoid sentence disparities, and the need for restitution.
There are some important strategic decisions which need to be made for the defendant who has been charged or indicted for mortgage fraud. The defendant and his lawyer should seriously consider the consequences of pleading guilty if he has in fact committed the crime. A mortgage fraud defendant can receive up to a 3 level downward departure for pleading guilty. A criminal lawyer representing a mortgage fraud defendant can also file a motion for a downward departure and/or a motion for a variance and argue factors to the court in support of an additional decrease in a defendant's sentence. The mortgage fraud defendant's criminal attorney should closely scrutinize the circumstances of the case and the defendant's background and criminal history in order to help minimize the amount of time to be served. A valuable tip for an attorney representing a criminal mortgage fraud defendant in South Carolina is to consider mitigating factors such as disparate sentences, 5K departures for cooperation, aberrant behavior, property values, family ties, extraordinary rehabilitation, diminished mental capacity, extraordinary restitution should be considered as possible justifications for a lesser sentence.
A white collar criminal defense attorney in South Carolina must have an understanding of the basics of the mortgage fraud in order to adequately represent clients who have been charged or indicted with mortgage fraud violations. Recognizing the difference between the status of being a target, subject or witness can have important consequences in how a case is handled. A white collar bank fraud or mortgage fraud criminal conviction can have life altering consequences for those defendants convicted of the same. A defendant who is charged or indicted with the federal crime of mortgage fraud should consult with a SC criminal lawyer who is knowledgeable about the different types of these scams, how the scams are carried out, the law enforcement investigatory process, the grand jury process, substantive law regarding mortgage fraud, the applicable federal sentencing guidelines and approaches available to minimize a defendant's potential sentence.
© 2010 Joseph P. Griffith, Jr.
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