In the wake of the subprime mortgage fiasco, there have been repeated pronouncements that the parties responsible for the collapse of the banking industry will be prosecuted to the fullest extent of the law. Much of the blame has been directed at misstatements and misrepresentations used to obtain credit to people who otherwise would not have qualified.
Mortgage fraud describes a category of offenses related to fraudulent misrepresentation of material facts in conjunction with obtaining a home mortgage. Similar to the common phrase "white collar crime," there is no statutory crime of mortgage fraud. Rather, federal prosecution of mortgage fraud is through crimes of federal bank fraud, federal wire fraud, or federal mail fraud statutes. In the state system in Texas, district attorneys can seek indictment for crimes of false statement to obtain credit or securing the execution of a document by deception.
A description of prohibited practices can be found in Regulation Z, the statute that provides the teeth to implement the federal Truth in Lending Act. Regulation Z establishes uniform methods for disclosing the actual costs and terms of consumer credit terms; these are part of the many acknowledgments and disclosures you sign at closing when buying a house. Section 226.34 enumerates the prohibited acts in connection with consumer mortgage loans. Pursuant to Regulation Z, a creditor extended mortgage credit shall not:
(1) Home improvement contracts. Pay a contractor under a home improvement contract from the proceeds of a mortgage covered by Sec. 226.32, other than:
(i) By an instrument payable to the consumer or jointly to the consumer and the contractor; or
(ii) At the election of the consumer, through a third-party escrow agent in accordance with terms established in a written agreement signed by the consumer, the creditor, and the contractor prior to the disbursement.
(2) Notice to assignee. Sell or otherwise assign a mortgage subject to Sec. 226.32 without furnishing the following statement to the purchaser or assignee: ``Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor.''
(3) Refinancings within one-year period. Within one year of having extended credit subject to Sec. 226.32, refinance any loan subject to Sec. 226.32 to the same borrower into another loan subject to Sec. 226.32, unless the refinancing is in the borrower's interest. An assignee holding or servicing an extension of mortgage credit subject to Sec. 226.32, shall not, for the remainder of the one-year period following the date of origination of the credit, refinance any loan subject to Sec. 226.32 to the same borrower into another loan subject to Sec. 226.32, unless the refinancing is in the borrower's interest. A creditor (or assignee) is prohibited from engaging in acts or practices to evade this provision, including a pattern or practice of arranging for the refinancing of its own loans by affiliated or unaffiliated creditors, or modifying a loan agreement (whether or not the existing loan is satisfied and replaced by the new loan) and charging a fee.
(4) Repayment ability. Engage in a pattern or practice of extending credit subject to Sec. 226.32 to a consumer based on the consumer's collateral without regard to the consumer's repayment ability, including the consumer's current and expected income, current obligations, and employment. There is a presumption that a creditor has violated this paragraph (a)(4) if the creditor engages in a pattern or practice of making loans subject to Sec. 226.32 without verifying and documenting consumers' repayment ability."
On October 1, 2009, additional restrictions will be added to Regulation Z. Initially, paragraph (a)(4) regarding repayment ability will be amended to read as follows:
(4) Repayment ability. Extend credit subject to Sec. 226.32 to a consumer based on the value of the consumer's collateral without regard to the consumer's repayment ability as of consummation, including the consumer's current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.
(i) Mortgage-related obligations. For purposes of this paragraph (a)(4), mortgage-related obligations are expected property taxes, premiums for mortgage-related insurance required by the creditor as set forth in Sec. 226.35(b)(3)(i), and similar expenses.
(ii) Verification of repayment ability. Under this paragraph (a)(4) a creditor must verify the consumer's repayment ability as follows:
(A) A creditor must verify amounts of income or assets that it relies on to determine repayment ability, including expected income or assets, by the consumer's Internal Revenue Service Form W-2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer's income or assets.
(B) Notwithstanding paragraph (a)(4)(ii)(A), a creditor has not violated paragraph (a)(4)(ii) if the amounts of income and assets that the creditor relied upon in determining repayment ability are not materially greater than the amounts of the consumer's income or assets that the creditor could have verified pursuant to paragraph (a)(4)(ii)(A) at the time the loan was consummated.
(C) A creditor must verify the consumer's current obligations.
(iii) Presumption of compliance. A creditor is presumed to have complied with this paragraph (a)(4) with respect to a transaction if the creditor:
(A) Verifies the consumer's repayment ability as provided in paragraph (a)(4)(ii);
(B) Determines the consumer's repayment ability using the largest payment of principal and interest scheduled in the first seven years following consummation and taking into account current obligations and mortgage-related obligations as defined in paragraph (a)(4)(i); and
(C) Assesses the consumer's repayment ability taking into account at least one of the following: The ratio of total debt obligations to income, or the income the consumer will have after paying debt obligations.
(iv) Exclusions from presumption of compliance. Notwithstanding the previous paragraph, no presumption of compliance is available for a transaction for which:
(A) The regular periodic payments for the first seven years would cause the principal balance to increase; or
(B) The term of the loan is less than seven years and the regular periodic payments when aggregated do not fully amortize the outstanding principal balance.
(v) Exemption. This paragraph (a)(4) does not apply to temporary or ``bridge'' loans with terms of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months.
Additionally, the new regulations create additional prohibited acts or practices in connection with credit secured by a consumer's principal dwelling pursuant to Section 226.36:
(a) Mortgage broker defined.
For purposes of this section, the term ``mortgage broker'' means a person, other than an employee of a creditor, who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. The term includes a person meeting this definition, even if the consumer credit obligation is initially payable to such person, unless the person provides the funds for the transaction at consummation out of the person's own resources, out of deposits held by the person, or by drawing on a bona fide warehouse line of credit.
(b) Misrepresentation of value of consumer's dwelling--
(1) Coercion of appraiser. In connection with a consumer credit transaction secured by a consumer's principal dwelling, no creditor or mortgage broker, and no affiliate of a creditor or mortgage broker shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of such dwelling.
(i) Examples of actions that violate this paragraph (b)(1) include:
(A) Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer's principal dwelling;
(B) Excluding an appraiser from consideration for future engagement because the appraiser reports a value of a consumer's principal dwelling that does not meet or exceed a minimum threshold;
(C) Telling an appraiser a minimum reported value of a consumer's principal dwelling that is needed to approve the loan;
(D) Failing to compensate an appraiser because the appraiser does not value a consumer's principal dwelling at or above a certain amount; and (E) Conditioning an appraiser's compensation on loan consummation.
(ii) Examples of actions that do not violate this paragraph (b)(1)include:
(A) Asking an appraiser to consider additional information about a consumer's principal dwelling or about comparable properties;
(B) Requesting that an appraiser provide additional information about the basis for a valuation;
(C) Requesting that an appraiser correct factual errors in a valuation;
(D) Obtaining multiple appraisals of a consumer's principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value;
(E) Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract; and
(F) Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.
(2) When extension of credit prohibited. In connection with a consumer credit transaction secured by a consumer's principal dwelling, a creditor who knows, at or before loan consummation, of a violation of paragraph (b)(1) of this section in connection with an appraisal shall not extend credit based on such appraisal unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling.
(3) Appraiser defined. As used in this paragraph (b), an appraiser is a person who engages in the business of providing assessments of the value of dwellings. The term ``appraiser'' includes persons that employ, refer, or manage appraisers and affiliates of such persons.
(c) Servicing practices.
(1) In connection with a consumer credit transaction secured by a consumer's principal dwelling, no servicer shall--
(i) Fail to credit a payment to the consumer's loan account as of the date of receipt, except when a delay in crediting does not result in any charge to the consumer or in the reporting of negative information to a consumer reporting agency, or except as provided in paragraph (c)(2) of this section;
(ii) Impose on the consumer any late fee or delinquency charge in connection with a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier payment, and the payment is otherwise a full payment for the applicable period and is paid on its due date or within any applicable grace period; or
(iii) Fail to provide, within a reasonable time after receiving a request from the consumer or any person acting on behalf of the consumer, an accurate statement of the total outstanding balance that would be required to satisfy the consumer's obligation in full as of a specified date.
(2) If a servicer specifies in writing requirements for the consumer to follow in making payments, but accepts a payment that does not conform to the requirements, the servicer shall credit the payment as of 5 days after receipt.
(3) For purposes of this paragraph (c), the terms ``servicer'' and ``servicing'' have the same meanings as provided in 24 CFR 3500.2(b), as amended.
(d) This section does not apply to a home equity line of credit subject to Sec. 226.5b.
Finally, there are specific criminal penalties contained within the Truth in Lending Act. However, given that a violation imposes a relatively small penalty when compared to the other statutes, Section 1611 is a catch-all provision of last resort:
§ 1611. Criminal liability for willful and knowing violation [of the Truth in Lending Act]
Whoever willfully and knowingly
(1) gives false or inaccurate information or fails to provide information which he is required to disclose under the provisions of this subchapter or any regulation issued thereunder,
(2) uses any chart or table authorized by the Board under section 1606 of this title in such a manner as to consistently understate the annual percentage rate determined under section 1606 (a)(1)(A) of this title, or
(3) otherwise fails to comply with any requirement imposed under this subchapter, shall be fined not more than $5,000 or imprisoned not more than one year, or both.