Mortgage Loan Fraud: Examples, Penalties and Defenses

A mortgage is a loan made to fund the purchase of a home or another piece of real property. This loan is secured by the property that is purchased with the funds.

This means that if a mortgage loan is not paid back as provided in the loan agreement, typically through monthly principal and interest payments, the lender can foreclose on the property. A foreclosure is the forced sale of a property that uses the proceeds from the sale to pay off the loan balance.

What Is Mortgage Loan Fraud?

Under federal law, mortgage fraud may include any material misrepresentation, misstatement, or omission that is relied upon by a lender or underwriter to fund, insure, or purchase a loan. Mortgage loan fraud occurs when a loan applicant misrepresents a fact on a mortgage application to obtain a mortgage.

It is important to note, however, that in the context of mortgage lending, and of the following may constitute fraud:

• Any misstatement of fact;
• Any misrepresentation of information; or
• Any omission of relevant facts.

If an individual engages in mortgage fraud, they may face severe consequences. If a lender learns that any part of an individual’s loan application was false, it can demand immediate and full repayment of the mortgage loan.

If the borrower cannot pay, the lender can foreclose on the property. Individuals need to be aware that mortgage fraud is also a crime.

What Are the Elements of Mortgage Loan Fraud?

Federal authorities may prosecute mortgage fraud in federal court or by a local authority in state court. If federal authorities prosecute mortgage fraud, it will likely be charged as wire or mail fraud with similar elements.

In these cases, the elements of the crime would be as follows:

• The perpetrator either:
  • Devised a scheme to defraud or participated in a scheme to defraud, knowing it was fraudulent; or
  • Participated in a scheme used to obtain property or money through a false representation;
• The perpetrator acted with intent to defraud;
• The perpetrator used either the United States mail system or an electronic communication, such as a text message, email, or fax, to carry out the scheme to defraud or to obtain money or property through false representations.

In a state court, the definition of criminal fraud will vary by state. In general, however, if a local authority prosecutes a crime in a state court, such as a city or county, the elements would include:

• The perpetrator purposefully made a misrepresentation of an important or material fact;
• The perpetrator knew the misrepresentation was false;
• The misrepresentation was communicated to another individual who justifiably relied on that misrepresentation; and
• The victim suffered a loss as a result of their reliance on the misrepresentation.

What Are the Most Common Ways to Commit Mortgage Loan Fraud?

A mortgage applicant can avoid an allegation of mortgage fraud by ensuring that everything on their loan application is true and accurate to the best of their knowledge. Falsifying information on a mortgage application is one type of mortgage fraud.

This may include everything from falsifying information about their income to information about their credit card balances or other outstanding debts on the mortgage loan application. The following issues may lead to a mortgage fraud investigation:

• False statements: Conduct, such as falsifying information on a mortgage application, for example, leaving out information about outstanding debts of the applicant, and other misrepresentations and omissions that are intended to mislead a lender into providing a loan that it otherwise would not have if the true facts had been reported;
• Failure to disclose: Failing to inform a lender or concealing information about certain crucial facts, for example, having a second lender or a second mortgage;
• Identity theft: Using another person’s name and information without that individual’s knowledge and consent;
• Occupancy fraud: Providing false information about the occupancy of the property, for example, not truthfully reporting whether it is intended to be the buyer’s primary residence, an investment property, or left vacant;
• Income fraud: When the applicant makes false statements about their income level; or
• Straw buyers: One individual allows another to use their identity or credit information to obtain property when the buyer may not qualify for a mortgage or the best possible interest rates.

What Are the Penalties for Mortgage Loan Fraud?

As with other criminal offenses, the penalty for mortgage loan fraud may include prison time, fines, and restitution. Typically, mortgage fraud is charged as a felony offense.

If the amount involved is below $1,000, it may be charged as a misdemeanor. Punishments may include:

• A prison sentence: In federal court, the sentence can be as long as 30 years; the possible prison sentence in a state court will vary from state to state but could be in the five-year range;
  • A jail sentence for a misdemeanor offense can be up to one year;
• A fine: In federal court for a federal offense, the fine can be as much as $1,000,000. In a state court, the fine may range from a few thousand dollars to $100,000, depending on whether the crime was charged as a misdemeanor or as a felony;
  • The fine usually reflects the seriousness of the crime, meaning the fine will increase as the amount increases;
• Restitution: Restitution means that the defendant has to compensate the victim for their loss;
  • In cases of ordinary consumer mortgage fraud, this may involve a payment to the mortgage lender; and
• Probation: Probation is a system of monitoring a convicted defendant by a probation authority;
  • It typically follows a prison or jail sentence;
  • Probation involves:
    • reporting to probation officers;
    • not committing further criminal acts; and
    • submitting to random drug tests.

Are There Any Defenses to Mortgage Fraud?

There may be defenses available to an individual who has been charged with mortgage loan fraud. If they are successful, they may allow the individual to avoid mortgage fraud punishments.

One defense to mortgage fraud in a federal court is the good faith defense. If the individual honestly, and in good faith, believed that the misrepresentations that they made were true, they cannot be convicted of the crime.

In addition, in a federal court, a prosecutor may ask a judge to reduce or suspend the sentence of a defendant convicted of mortgage fraud. This may occur if they provide substantial assistance to the prosecution in the identification, arrest, or conviction of any other individual who was engaged in the scheme to defraud.

The perpetrator’s conviction would stand in this case, but their sentence may be suspended or reduced. It is always a defense if the defense can negate an element of the crime.

One of the most likely elements in a mortgage fraud case the defendant could negate is intent. If the prosecution cannot prove, beyond a reasonable doubt, that the defendant intentionally made false representations of material fact on a loan application, then the defendant cannot be convicted.

Should I Talk to a Lawyer About My Mortgage Loan Fraud Case?

If you have any issues, questions, or concerns related to mortgage loan fraud, it is important to consult with a mortgage lawyer. Your lawyer can advise you about your mortgage loan application and how mortgage lenders process loan applications.

If you are not sure how to complete your mortgage application, your lawyer can assist you with completing the application so you can avoid any issues. If you have been charged with loan fraud, it is important to consult with a criminal defense attorney who can advise you of your rights.

Your defense attorney may also be able to negotiate with the prosecutor to avoid charges. Because of this, it is important to consult with your attorney as soon as possible.