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FROM REAL ESTATE CLOSINGS TO

MORTGAGE FRAUD TO FORECLOSURE: HOW WE

GOT TO THE REAL ESTATE CRISIS AND

HOW WE ARE DEALING WITH THE FALLOUT

Prepared in connection with a Continuing Legal Education course presented at New York County Lawyers’ Association, 14 Vesey Street, New York, NY

scheduled for December 3, 2013

Program Co-sponsor: NYCLA’s Young Lawyers’ Section

Faculty: Jacob Inwald, Director of Mortgage Foreclosure Prevention Litigation, Legal Services NYC ; Brian King, Law Office of David S. Smith LLC; Alexander Suslensky,

The Law Firm of Alexander Suslensky, P.C

This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3 Transitional and Non-Transitional credit hours; 1Skills; 1.5 Professional Practice; .5 Ethics.

This program has been approved by the Board of Continuing Legal education of the Supreme Court of New Jersey for 3 hours of total CLE credits. Of these, .5 qualify as hours of credit for ethics/professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal law, workers compensation law and/or matrimonial law.

ACCREDITED PROVIDER STATUS: NYCLA’s CLE Institute is currently certified as an Accredited Provider of continuing legal education in the States of New York and New Jersey.

Information Regarding CLE Credits and Certification

From Real Estate Closings to Mortgage Fraud to Foreclosure: How We Got to the Real Estate Bubble and Mortgage Crisis … and How We Are Dealing

With the Fallout December 3, 2013; 6:00 PM to 9:00 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your

course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at

the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time

you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

From Real Estate Closings to Mortgage Fraud to Foreclosure: How We Got to the Real Estate Bubble and Mortgage Crisis … and How We Are

Dealing With the Fallout December 3, 2013; 6:00 PM to 9:00 PM

AGENDA

Program Co-sponsor: NYCLA's Young Lawyer Section Program Chair: Anna Mitchell, Law Office of Bernard D’Orazio & Associates Faculty: Jacob Inwald, Director of Mortgage Foreclosure Prevention

Litigation, Legal Services NYC; Brian King, Law Office of David S. Smith LLC; Alexander Suslensky, The Law Firm of Alexander Suslensky, P.C.

: 5:30 PM – 6:00 PM Registration 6:00 PM – 6:10 PM Introductions and Announcements 6:10 PM – 9:00 PM Discussion

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An Overview of the Judicial Foreclosure Process in New

York StateJacob Inwald

Director of Foreclosure Prevention LitigationLegal Services NYC

December 3, 2013

WHAT DO LSNYC FORECLOSURE ADVOCATES DO?

• A RANGE OF LEGAL SERVICES ADDRESSING FORECLOSURE CRISIS AND PREDATORY LENDING THAT LARGELY TARGETED LOW-INCOME HOMEOWNERS IN MINORITY COMMUNITIES: – AFFIRMATIVE LITIGATION CHALLENGING PREDATORY

LENDING AND DISCRIMINATORY LENDING SCHEMES: toxic loans; deed theft scams; property flipping schemes; hard money lender scams

– DEFENSIVE: FULL REPRESENTATION OF HOMEOWNERS IN FORECLOSURE ACTIONS IN NY STATE SUPREME COURT: NY IS A JUDICIAL FORECLOSURE STATE AND FORECLOSURE IS COMPLEX LITIGATION

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WHAT DO LSNYC FORECLOSURE ADVOCATES DO (continued)?

• MORE LIMITED REPRESENTATION: REPRESENTATION IN NY STATE MANDATORY SETTLEMENT CONFERENCES AND LITIGATION AND MOTION PRACTICE RELATING TO CONFERENCES

• ASSISTANCE WITH SEEKING LOAN MODIFICATIONS UNDER HAMP PROGRAM AND OTHERWISE

• COURT BASED CLINICS, ASSISTANCE TO PRO SE LITIGANTS

• POLICY ADVOCACY CONSISTENT WITH LSC REQUIREMENTS

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Legislative Response to Foreclosure Crisis

• NY legislature has responded to abusive lending and foreclosure crisis in NY, incl.:– Pre-foreclosure notices.– Mandatory settlement conferences.– Brokers must act in borrower’s interest, act

with reasonable skill, care, diligence. Banking Law 590-b

– Court rules: Attorney Affirmation Requirement in Response to Robo-Signing; Supplanted by Certificate of Merit as of 8/30/13

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Legislative Reponses to Crisis• Distressed property consultants: up-front

payments prohibited; written contracts required. RPL 265-b: Addresses pervasive problem of loan mod scammers.

• Criminalization of residential mortgage fraud. Penal Law 187.

• Reciprocal Attorneys’ fees for borrowers. RPL 282.

• Foreclosing plaintiff who obtains judgment of foreclosure and sale required to maintain property. RPAPL 1307.

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Other Responses to Crisis• New York Sate Department of Financial Services (f/k/a Banking

Department) regulations relating to loan servicing require greater accountability to borrowers—Part 419

• Court Process: greater scrutiny than in the past. Settlement conferences provide a venue for litigating servicer’s failure to negotiate in good faith as required by NY law

• Home Affodable Modification Program (HAMP): federal program promoting affordable loan modifications

• National Mortgage Servicing Settlement (5 major servicers): detailed requirements for loan modification process

• Consumer Financial Protection Bureau (CFPB): created by Dodd Frank: mortgage servicing regulations effective January 2014

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Overview of NYS Foreclosure

Process

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Judicial Foreclosure State

• Homeowner must be taken to court• Cases brought in NY Supreme Court in

county where property is found• Cases commenced by filing lis pendens,

summons and complaint

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Pre-Foreclosure Events

Lender must provide homeowner with notice of default and list of local housing counseling agencies at least 90 days before commencing suit. “90-day Notice.” This is a condition precedent, absent which foreclosure is subject to dismissal. Aurora Loan Servs., LLC v Weisblum, 85 AD3d 95 (2d Dep’t 2011)

• Applies to “home loans” as defined in RPAPL 1304 (2008 law; amended 2009)

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Pre-Foreclosure Events

RPAPL 1304 definition of “home loans”:– Owner occupied– One to four family or condominium– Debt incurred for personal, family, household

purpose– Note: coops are not real property and

foreclosure on mortgages secured by coop shares is a non-judicial UCC lien foreclosure

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Pre-Foreclosure Events

Notice of default and acceleration if required by mortgage agreement:– Information about default and amount owed– 30 days to cure

Debt collection notice sent by attorney as per FDCPA (Fair Debt Collection Practices Act generally applies to foreclosure plaintiffs’ law firms)

Foreclosure typically filed when homeowner about 4

months behind in payments

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Filing Requirements

• Summons and Complaint– Heightened pleading requirements for subprime and

high cost loans. RPAPL 1302.

• “Help for Homeowners in Foreclosure” notice served with summons and complaint; colored paper, bold, large font. RPAPL 1303. This is condition precedent which can be asserted at any time, and is grounds for dismissal. First Nat'l Bank of Chicago v. Silver, 73 A.D. 3d 162, 899 N.Y.S.2d 256 (2nd Dep't 2010)

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Filing Requirements

• Request for Judicial Intervention “RJI” with special foreclosure addendum for “home loans” (RPAPL 1304 definition) – filed together with affidavits of service for

summons and complaint. Uniform Rule 202.12-a.

– Court’s internal mechanism to assign a case to a judge and, in cases of residential foreclosure, to direct case to settlement conference

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Foreclosure RJI Triggers: 1) Mandatory settlement conference

(2008; amended 2009)2) “Attorney Affirmation” (AO-431-11)(effective 10/20/10) required with RJI: certifying communication with plaintiff representative; personal knowledge and confirmed factual accuracy of allegations and notarizations contained in supporting documents3) “Shadow Docket” Problem4) Supplanted by Certificate of Merit (RPAPL 3012-B) (filed with summons and complaint, not with RJI)

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Mandatory Settlement Conference

• Court sends notice scheduling settlement conference within 60 days of RJI filing.

– NY CPLR 3408; Uniform Rule 202.12-a.

• Motions are supposed to be held in abeyance until completion of settlement conferences.

– Uniform Rule 202.12-a(c)(7).

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Mandatory Settlement Conference

• If conferences successfully end with modification or other resolution, foreclosure action is discontinued.

• CPLR 3408 requires vacatur of lis pendens and discontinuance of foreclosure action within 150 days of modification or settlement.

Settlement Conferences in Real Life

• Affirmative Duty to Negotiate in Good Faith spelled out in CPLR 3408(f)

• Expressed preference for averting foreclosures, with a loan modification if possible

• Legal Obligation to appear with representative with settlement authority

• Statute contemplates a real settlement conference: consideration of the rights of the parties under the governing loan documents

• Good faith standard rarely met: prevailing delays for lost packages, shifting demands, phantom investor restrictions: delay causes tangible harm to homeowners

• Settlement conferences have become venue for attempting to negotiate HAMP and other loan modifications, short sales, or other resolutions

• Refusal to discuss merits issues; appearance by per diem attorneys

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Settlement Conference Motion Practice Ensues

• Procedures Vary• Relief: compel appearance by rep with

authority; compel production of claimed investor restriction; toll/bar interest and fees; discontinue or stay case until compliance with good faith obligation

• Problems: relief available only to those with counsel; enormous drain on resources

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A Sampling of Decisions on Settlement Conference Issues

• Deutsche Bank Natl. Trust Co. v Izraelov, 2013 NY Slip Op 51482(U) (Kings Cty. September 10, 2013 (confirming referee R & R and tolling interest as remedy for plaintiff’s failure to negotiate in good faith)

• Wells Fargo Bank, N.A. v. Meyers, 108 AD3d 9 (2d Dep’t 2013) (affirming finding of violation of duty to negotiate in good faith where plaintiff commenced foreclosure action in violation of loan modification offer promising not to do so, and, during settlement conference process, delayed process and ffered unaffordable loan modification, but remanding for new remedy, holding that court improperly directed parties to execute final loan modification based on terms of original modification proposal, holding that CPLR 3408 did not authorize court to impose terms of a modification on the parties)

• Wells Fargo Bank, N.A. v Van Dyke, 101 AD3d 638 (1st Dep’t 2012) (lender did not fail to negotiate in good faith by insisting on documentation of rental income where defendant had no written lease and supplied bank statements for only three months, but rejecting argument that compliance with good faith requirement is established merely by proving the absence of fraud or malice, holding that determination of good faith must be based on the totality of the circumstances and that CPLR 3408 is a remedial statute)

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Dual Tracks: Settlement Conferences and the Underlying Legal Action

• Homeowner must answer or move to dismiss within 20-30 days of service of summons and complaint

• Referral to conference part

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The Legal Action

BACKGROUND: PRESUMPTION OF NO HOMEOWNER

PARTICIPATION

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If homeowner does not answer:

• Plaintiff files ex parte application for order of reference

• Referee appointed to compute amount owed

• Referee issues report• Plaintiff moves for “judgment of

foreclosure and sale”

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Auction

• At least 30 days after court enters judgment of foreclosure and sale

• Right of redemption ends• Surplus/deficiency: RPAPL 1371:

Deadlines can cut-off right to deficiency judgment

• Third-party buyer or lender takes title (“REO” property)

• Eviction proceeding in housing court

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If homeowner timely responds to complaint…

• Answer or motion to dismiss• Discovery• Motion(s) for summary judgment• If plaintiff’s motion granted: order of

reference, motion for JFS, etc.• Borrower can seek dismissal based on

various defenses• Trial

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Common Borrower Motions

• OSC to file a late answer or motion to dismiss. CPLR 3012(d) requires reasonable excuse for delay or default

• OSC to vacate default judgment. CPLR 5015 requires excusable default and meritorious defenses.

• Motion to amend answer

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Common Borrower Motions

• OSC to restore or refer case to conferences

• Motion/OSC to bar interest, for sanctions, dismissal, and/or other relief for plaintiff’s failure to negotiate in good faith in settlement conferences. CPLR 3408(f).

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Motions: when made and heard

• Motions and OSCs related to legal action and filed while conferences are pending governed by Uniform Rule 202.12-a(b)(7): supposed to be stayed pending conferences

• Motions related to settlement conferences: practices vary from county to county, ranging from informal applications to formal motion practice to mini-trials

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Attorneys’ Fees

• Parties cannot charge the other side for costs or fees related to settlement conference appearances (CPLR 3408(h)), but mysterious fees for law firms typically appear on pay-off statements

• Access to Justice in Lending Act: Reciprocal right of borrower to recover attorneys’ fees. RPL 282

Legal Claims and Defenses

An Overview

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Common Defenses and Counterclaims to Foreclosure

1. Service of process2. Conditions precedent to suit: statutory

notices and acceleration notices3. Standing and capacity to sue4. Banking Law 6-L and 6-M5. Truth in Lending Act & HOEPA6. Equitable defenses: HAMP, FHA,

unclean hands7. Fraud

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Common Defenses and Counterclaims (cont’d.)

7. Real Estate Settlement Procedures Act (RESPA)

8. General Business Law 349 (Deceptive Practices Act)

9. Unconscionability10. Failure to Negotiate in Good Faith at

Mandatory Settlement ConferencesNot an exhaustive list

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Conditions Precedent

RPAPL 1303 notice “Help for homeowners in foreclosure” is a condition precedent to suit.

First National Bank of Chicago v. Silver, 899 NYS2d 256 (2d Dep’t 2010)

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Conditions Precedent

Similarly, RPAPL 1304 90-Day notice is a condition precedent to suit.

Bank of America NA Successor by merger to LaSalle Bank NA as Trustee for Washington Mutual Mortgage Pass-Through Certificates Wmalt Series 2006-3 Trust v. Guzman, 892 NYS2d 846 (Sup. Ct. Queens Cty. 2009)

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Conditions Precedent

• 30-day notice of default and acceleration required by most mortgages and is a condition precedent to suit.

• Failure to send notice warrants dismissal.

Standing and Capacity to Sue

• Standing: Does this party have the right to foreclose?

• Why is this even an issue? Mortgage Securitization and Use of Mortgage Electronic Registration System (“MERS”) to avoid multiple recording of securitized mortgages

• Distinction between the Note and the Mortgage

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Standing and Capacity to Sue (continued)

• Capacity to Sue: Does this plaintiff have the ability to prosecute a lawsuit in court (e.g., is it a minor, a trust, a foreign corporation that has not filed to do business in NY, a corporation that no longer exists?

• Standing: assesses this Plaintiff’s connection to this claim: in a foreclosure case, a plaintiff who was not the holder or assignee of the note prior to commencement of the action lacks standing. In many cases plaintiffs are incapable of establishing this requirement because typically they assigned mortgages (a nullity) but not notes, which actually represent ownership of the debt

• Procedural Issues: failure to assert can lead to waiver of these defenses

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Standing in a Foreclosure Case

• Foreclosing plaintiff must own the note and the mortgage at the inception of the action. Deutsche Bank National Trust Co. v. Barnett, 88, A.D. 3d 636, 931 N.Y.S. 2d 630, (2d Dep’t 2011); Kluge v. Fugazy, 145 A.D. 2d 537, 536 N.Y. S. 2d 92 (2d Dep’t 1988)

• Note and Mortgage: assignment of the mortgage without assignment of the debt, i.e. the note, is a nullity.

• Note: represents contractual debt obligationMortgage: represents collateral security for debt

Assignment Must Be Complete BeforeForeclosure Action Commenced

• Assignment can be by written assignment or by physical delivery of note and mortgage (if it is a negotiable instrument, i.e. made out to bearer).

• Difficult for plaintiff to prove physical delivery prior to commencement. Evidentiary standards on summary judgment usually cannot be met.

• If written assignment involved, execution date generally controls and conclusory affidavits of prior physical delivery are highly suspect.

• Back dated assignment ineffective absent proof of prior physical delivery. Wells Fargo v. Marchione, 69 A.D. 3d 204, 887 N.Y. S. 2d 615 (2d Dep’t 2009); see also New Century Mtge. Corp. v. Kogan, 2013 NY Slip Op 50047(U) (Kings Cty. Jan. 14, 2013 (no standing where plaintiff commenced foreclosure action twelve days after it assigned mortgage and note to another party and therefore did not own note and mortgage when it commenced the action.)

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Particular Standing Issues Implicated in Foreclosure Cases

• Assignments and Chain of Title, including timing, suspicious endorsements and allonges, assignments from MERS as nominee, lack of documented authority of parties signing assignments, assignees signing on behalf of assignors

• Robo-signing of assignment documents

• Mortgage-Backed Securities Investment Vehicles: Pooling and Servicing Agreements and non-compliance with trust closing dates and other terms

MERS and Standing

• Assignment from MERS when MERS is designated merely as nominee of lender, and never owned note, is ineffective to confer standing on its assignee. Bank of New York v. Silverberg, 86 A.D. 3d 274, 926 N.Y.S. 2d 532 (2d Dep’t 2011).

MERS, STANDING, SUMMARY JUDGMENT

• Homecomings Financial, LLC v. Guldi, 108 A.D.3d 506, 969 N.Y.S.2d 470 (2d Dep’t 2013) (reversing grant of summary judgment to plaintiff; Upon search of Record, awarding summary judgment to defendant dismissing foreclosure complaint because plaintiff failed to prove that MERS was the lawful holder of mortgage and note when action was commenced.

– Mortgage language identifying MERS as nominee and purporting to authorize it to foreclose insufficient to overcome requirement that foreclosing party be both holder or assignee of subject mortgage and holder of the underlying note when the action is commenced.

– Note specifically identified lender as a different party and plaintiff failed to submit any evidence demonstrating that note was physically delivered to MERS prior to action's commencement.

– Evidence that MERS assigned the mortgage instrument to plaintiff during the course of the action was ineffectual, because such an assignment would not render plaintiff the holder of the note because "MERS could not transfer that which id did not hold."

– Plaintiff's servicing agent's affidavit stating that the note was delivered to custodian of records of plaintiff during the course of the action was also insufficient, and, in any event, provided no factual details of the physical delivery of the note).

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Summary Judgment and Issues of Proof –continued

• U.S. Bank Natl. Assn. v. Guy, 2013 NY Slip Op 51532 (U) (Kings Cty., Schmidt, J. August 22, 2013) (granting defendant’s motion to dismiss for lack of standing: Plaintiff failed to prove delivery of note prior to commencement where “possession affidavit” offered by document custodian was not based on personal knowledge and asserted physical delivery on a date that was inconsistent with complaint's allegations. Plaintiff's reliance on undated allonge was misplaced where the note had room for further endorsements and the allonge was not firmly affixed to the note as required by the UCC. Court also rejected Plaintiff's assertion that Defendant's acceptance of a HAMP modification was a ratification of plaintiff's ownership of the note, which was unsupported by any legal authority).

Summary Judgment and Issues of Proof –(cont.)

• Bank of N.Y. Mellon v. Dean, 2013 NY Slip Op 23224 (Kings Cty., Battaglia, J. July 11, 2013) (plaintiff failed to establish prima facie entitlement to judgment of foreclosure: Assignment of mortgage from MERS to plaintiff, which did not purport to assign note, was insufficient to confer standing; unauthenticated Pooling and Servicing Agreement excerpts did not suffice to establish plaintiff's standing; affidavit in support of summary judgment motion of physical delivery was neither based on personal knowledge nor adequately specific and failed to establish that assignor to plaintiff ever had possession of the note).

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Equitable Defenses Relating to Requirements of Federal Programs

Federal National Mortgage Association v. Ricks, 372 NYS2d 485 (Sup. Ct. Kings Cty. 1975): Mortgagee noncompliance with HUD handbook guidelines could make a party ineligible for equitable relief.

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Equitable Defenses: FHA Loans

Regulatory noncompliance with rules for loans insured by the Federal Housing Administration is a defense to foreclosure.

See Wells Fargo Home Mortgage Inc. v. Neal, 398 Md. 705 (Md. 2007)

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Equitable Defenses: HAMPHAMP: Home Affordable Modification Program promotes

affordable loan modifications in order to stem the foreclosure crisis. Most major mortgage servicers signed up and obligated themselves to a loan modification process governed by detailed federal loan modification regime. Handbook section entitled “Protections Against Unnecessary Foreclosure,” prohibits a referral to foreclosure until either:

- Borrower has been evaluated and determined ineligible for HAMP;

- Reasonable solicitation efforts have failed.--- MHA Handbook Version 3.2, Section 3.Dual Tracking Issues

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HAMP Decision in 2d Dept

Aames Funding Corp. v. Houston, 2011 NY Slip Op 05642 (2d Dep’t 2011): Trial court should have granted borrower’s OSC to stay sale where borrower’s HAMP application was still under review.

Settlement Conferences: typically involve applications for HAMP modifications and courts routinely cite violations of HAMP requirements as indicia of plaintiffs’ failure to comply with settlement conference law

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Counterclaims: RESPA

For example: Failure to respond to a Qualified Written Request, 12 USC 2605(e):

Actual damages, costs and attorneys’ fees; plus $1000 per violation if pattern and practice of noncompliance

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Counterclaims: GBL 349

Prohibits “deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state…”

Can apply to loan servicing and loan origination issues.

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GBL 349

Must show (1) deceptive acts were directed at consumers, (2) acts are misleading in a material way, and (3) plaintiff has been injured as a result.

Unlike fraud, does not require showing of intent.

Broadly construed.

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GBL 349

Remedies include:1. Injunctive relief against deceptive acts

and practices2. Actual damages3. Treble damages up to $1000 if violation

was willful or knowing, and 4. Attorneys’ fees.

AFFIRMATIVE LITIGATIONS BY HOMEOWNERS

• Deed Thefts and Property Flipping Scams• Fair Lending Claims—No Income No Asset and

Other Equity Stripping Predatory Loan Products primarily marketed in low income minority communities

• FDCPA/RESPA/NY GBL 349 and Contract Claims Arising from Breaches of Loan Modification Agreements and Abusive Servicing, Failure to Convert HAMP Trial Payment Plans to Permanent Modifications

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CONCLUDING THOUGHTS

• Foreclosure is Litigation: NY is a judicial foreclosure state, and a debt obligation (a mortgage loan) cannot be enforced by way of foreclosing on the security for the debt (a home) by way of foreclosure unless plaintiff is able to prove its case.

• Just because there has been a default on a mortgage loan does not entitle a plaintiff to a judgment without establishing its case. A default neither suspends operation of rules of civil procedure or the rules of evidence. 54

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Jacob Inwaldjinwald@ls-nyc.org

Criminal Law: Introduction to Defending Against

a Federal Mortgage Fraud Prosecution

By:

Brian King, Esq.

Law Office of David S. Smith, LLC

148 East 78th Street

New York, New York 10075

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OVERVIEW

The goal of the following presentation is to provide attorneys an introduction to the

representation of clients facing federal criminal prosecutions based upon allegations of mortgage

fraud.1 There are many steps a criminal defense attorney must take to provide effective

representation for their clients. This presentation will explain some of those initial steps and

explore their practical application to some hypothetical mortgage fraud cases.

As an initial step, the attorney should become familiar with the terminology, relevant

history, and dynamics of the particular industry, setting, and actors involved in the matter.

Second, the attorney must possess a comprehensive knowledge of the applicable laws. Third,

through the prism of that legal knowledge, the attorney should then gain a complete

understanding of the relevant facts. Fourth, by applying those facts to the applicable laws, the

attorney can then develop the appropriate arguments and strategy that will best serve the client.

In this presentation, I will provide an introduction to each of those steps. And, the first

place I will start is with the definitions of commonly used terms and a simplified explanation of

the purchase of a house with a mortgage loan used as the financing for the purchase.

DEFINITIONS OF COMMONLY USED TERMS

Closing - The last step of a real estate sale. It primarily involves the transfer of property

ownership and distribution of monetary proceeds. See below for a more detailed explanation.

Department of Housing and Urban Development (“HUD”) - HUD is a cabinet department in

the executive branch of the federal government. According to its website, “HUD’s mission is to

create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is

working to strengthen the housing market to bolster the economy and protect consumers; meet

the need for quality affordable rental homes: utilize housing as a platform for improving quality

of life; build inclusive and sustainable communities free from discrimination; and transform the

way HUD does business.” http://portal.hud.gov/hudportal/HUD

Distressed seller - Someone who wants to sell their property immediately because he or she

cannot afford to pay the mortgage on the property any longer.

Federal Housing Administration (“FHA”) - The FHA is a federal government agency. The

FHA insures certain loans made by banks and other lenders.

1 This presentation will not cover the sentencing phase of such prosecutions because that topic

warrants its own class just to provide even a basic understanding of it.

3

HUD-1 settlement statement (“HUD-1”). “This form is to be used as a statement of actual

charges and adjustments paid by the borrower and the seller, to be given to the parties in

connection with the settlement. The instructions for completion of the HUD-1 are primarily for

the benefit of the settlement agents who prepare the statements and need not be transmitted to the

parties as an integral part of the HUD-1.” http://www.gpo.gov/fdsys/pkg/CFR-2012-title24-

vol5/pdf/CFR-2012-title24-vol5-part3500-appA.pdf

Occupancy affidavit - An affidavit a borrower signs affirming that he or she will being living in

the home connected to the mortgage.

Settlement agent - The bank’s representative (an attorney most times) at the closing of a

mortgage loan where his or her primary task is to distribute the proceeds of the loan.

Short sale - A short sale is where a lender or mortgage holder agrees to take less than the

mortgage debt to release the lien.

Strawbuyer - Someone who purchases a property on behalf of someone else.

A SIMPLIFIED EXPLANATION OF A REAL ESTATE PURCHASE WITH A

MORTGAGE LOAN

Buyer/borrower (“B”) applies for a mortgage loan from a bank or other lender to use the loan

proceeds to purchase property from a seller (“S”).

B must fill out and submit a loan application to the lender.

Along with the application, B must present to the lender a letter of employment, proof of

available funds, pass a credit check, and have a down payment ready.

If the lender approves the loan, the closing occurs in person, usually in an office conference

room.

At the closing, B and S are present with their respective attorneys.

The lender’s settlement agent, which is usually an attorney, is also present.

There is a transfer of the deed from S to B.

The bank sends the loan funds to its settlement agent. The agent normally holds them in an

attorney escrow account.

The settlement agent fills out the HUD-1 form and sends it back to the lender for approval.

The settlement agent must also follow all closing instructions from the lender. Those

instructions are usually in written form and provided to the settlement agent before the closing

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Arguably the most important instructions are the anti-fraud provisions. They seek full disclosure

of all material information to the lender.

If the lender provides its approval, the settlement agent distributes the loan proceeds.

HISTORICAL BACKGROUND2

Americans have long considered home ownership to be a symbol of financial stability

and success. Unfortunately, most people cannot afford that dream with their own money. As

such, banks and other lending institutions provide buyers with loans to enable those purchases.

In exchange for the loan, lenders hold a note and secure a lien on the buyer’s property. The

borrower satisfies the note, which removes the lien, by paying the loan back in full with interest.

If the borrower fails to repay the loan, the lender can enforce the lien by repossessing the home

through a process called foreclosure.

In the later part of the 20th century, home ownership had slowed. There was also a

statistical disparity along racial lines, with white people having better mortgage loan approval

rates than black and latino people. To address those issues, the federal government intervened in

various ways. Starting in the 1970s and continuing into the 1990s, the government passed laws,

including the Community Reinvestment Act of 1977, that pressured lenders to extend mortgages

to less than qualified candidates. Those loans are often referred to as subprime mortgages. The

Dream Downpayment Act then allowed the government to subsidize the down payments of

prospective home buyers whose incomes were below a certain level. The government then

instructed the Federal Housing Administration to insure a portion of those subprime loans. The

government also put laws and policies in place that instructed Fannie Mae and Freddie Mac to

purchase subprime mortgages from lenders. In addition, the government allowed the loans to be

bundled together and converted into a security in which people could invest. On the other side of

that investment, people were allowed to purchase insurance on the chance that the mortgage

backed security failed. Those insurance policies were called credit default swaps. Unlike most

insurance policies, however, people who did not own the investment could still buy that

insurance policy. Consequently, if that investment failed, the insurance policy would have to be

paid out not just to the owners of the underlying security, but everyone who purchased the credit

default swap. That area of the market was the one with the most risk, but, ironically, was also

the area with almost no regulation.

That confluence of events transformed the mortgage loan industry into a virtual powder

keg. The Federal Reserve then added the wick for that explosive by lowering interest rates from

6.5% to 1% in the early 2000s. The practical effect of those events was that banks lowered their

2 My sources for this section were The Housing Boom and Bust: Revised Edition by Thomas Sowell and “Why

Mortgage Fraud Matters” by the Honorable Benjamin B. Wagner.

5

lending standards, issued more subprime loans, and were less invested in the repayment of those

loans because they could pass the risk of default onto another entity and make a quick profit. In

fact, two thirds of mortgages in the country were sold to other financial institutions in 2004.

As one might expect, that liberal lending environment led to a boom in the real estate

industry. There was a dramatic increase in mortgage loans which, in turn, caused a steep rise in

the price of homes in certain areas throughout the country. From 2000 to 2005, the median sales

price of a U.S. single family home rose by more than 50%, from $143,600 to $219,600.

The boom could not go on forever though. To control inflation, the Federal Reserve

raised interest rates. Banks, in turn, raised the interest rates of their mortgage loans. That

increase affected the then current borrowers with adjustable rate mortgages because their

monthly payments became higher. It also dissuaded many prospective borrowers from getting

new loans because they could not afford to pay the higher rates. As a result, there was a decrease

in the issuance of new mortgage loans. Fewer loans meant less demand for housing. Less

demand caused housing prices to sink. In fact, the value of many borrowers’ houses decreased

below their mortgage debt. Soon after, borrowers began defaulting on their loans in massive

numbers.

Because the loans had been sold to third and fourth parties and transformed into

investment vehicles for the public, the effect of the defaults was felt nationwide. As such, the

domino effect of the defaulting mortgages sent shock waves through the national economy,

leading to its ultimate crash in 2008.

In the wake of that collapse, investigations uncovered what the government believes to be

the primary culprit of the mortgage loan industry’s implosion -- fraud. As we will explain

below, mortgage fraud has taken many forms and involved collusion amongst various actors. In

its simplest form, however, mortgage fraud has occurred when there is a presentation of false

information to obtain a mortgage loan.

Mortgage fraud is a crime. And since 2009, the federal government has taken an

aggressive approach to investigating and prosecuting certain individuals involved in those

crimes. For example, on November 17, 2009, by executive order, President Obama created the

Financial Fraud Enforcement Task Force (FFETF). That coalition brings together high-ranking

officials from various government agencies to address issues relating to mortgage fraud and

many other serious financial crimes. One of the crucial components of the FFETF is the

Mortgage Fraud Working Group, which is engaged in coordinating a national strategy to combat

mortgage fraud.

Needless to say, a person or entity being investigated or prosecuted by the federal

government faces an avalanche of resources. Despite their good intentions, all of the

government’s representatives operate with the same point of view and motivation. At times, that

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bias causes mistakes, leading to the prosecution of the innocent and/or the unfairly harsh

punishment of the culpable. In most instances, a criminal defense attorney is the only advocate a

defendant has to hold the government to its burden and guard against those injustices.

As referenced above, a criminal defense attorney must take various steps to be an

effective advocate. One of them is to develop a mastery of the applicable laws. The following

sections will provide an introduction to the most common charges in a mortgage fraud case.

MAIL AND WIRE FRAUD STATUTES

18 U.S.C. §1341 - MAIL FRAUD

18 U.S.C. §1343 - WIRE FRAUD

18 U.S.C. §1346 - DEFINITION OF "SCHEME OR ARTIFICE TO DEFRAUD"

ELEMENTS OF MAIL AND WIRE FRAUD

The mail and wire fraud statutes require the same elements of proof except that mail

fraud requires the use of mailings while wire fraud requires the use of wires. U.S v. Males, 459

F.3d 154, 157 fn. 2 (2d Cir. 2006).

There are three general elements of mail and wire fraud - (1) a scheme to defraud; (2) to

deprive a victim of money, property, or honest services; (3) furthered by the use of the mail or

wires. U.S. v. Burke, 445 Fed.Appx. 395, 396-397 (2d Cir. 2011). Each one of those elements

has case law that has interpreted its meaning.

ELEMENT 1 - SCHEME TO DEFRAUD

A scheme to defraud is defined as “any plan, device, or course of action that deprives

another of money or property by means of false or fraudulent pretenses, representations or

promises.” U.S v. Males, 459 F.3d 154, 157 (2d Cir. 2006). “It is, in other words, a plan to

deprive another of money or property by trick, deceit, deception, swindle or overreaching.” Id.

This element has two important aspects to it that deserve further explanation. Two

critical components of a scheme to defraud are the defendant’s (1) intent to defraud and (2)

responsibility for a material misrepresentation or omission.

(A) INTENT TO DEFRAUD

To establish the defendant’s intent to defraud, the government usually must prove that the

defendant contemplated some harm to the victim that goes to the nature of the bargain itself.

U.S. v. Burke, 445 Fed.Appx. 395, 396 (2d Cir. 2011). The proof must show that the defendant

consciously knew of the fraud. Id. at pp. 396-397.

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In some instances, the government may also establish the defendant’s intent to defraud by

resorting to a lesser standard of proof. Specifically, it is sometimes sufficient for the government

to prove only the defendant’s conscious avoidance (a.k.a. willful blindness) of the fraud.

Conscious avoidance has two basic requirements: (1) the defendant must subjectively believe

that there is a high probability of a fraud, and (2) the defendant must take deliberate actions to

avoid learning of the fraud. U.S. v. Goffer, 721 F.3d 113, 128 (2d Cir. 2013)(citing Global-Tech

Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2070 (U.S. 2011)).

(B) MATERIAL MISREPRESENTATION OR OMISSION

A misrepresentation is material where it would naturally tend to lead or is capable of

leading a reasonable person to change his or her conduct. U.S. v. Rybicki, 354 F.3d 124, 145 (2d

Cir. 2003).

An omission of information can also serve as the basis of mail and wire fraud. “To be

material, the information withheld either must be of some independent value or must bear on the

ultimate value of the transaction.” United States v. Mittelstaedt, 31 F.3d 1208, 1217 (2d Cir.

1994). The defendant must also have a duty to disclose the information. In general, that duty

arises in two situations. The first is where the defendant is a fiduciary of the alleged victim and

the omission can or does result in harm. Id. “A duty to disclose can also arise in a situation

where a defendant makes partial or ambiguous statements that require further disclosure in order

to avoid being misleading.” U.S. v. Autuori, 212 F.3d 105, 119 (2d Cir. 2000).

ELEMENT 2 - THE GOAL OF THE SCHEME MUST BE TO DEPRIVE THE VICTIM

OF MONEY, PROPERTY, OR HONEST SERVICES

“[T]he government is not required to show that the intended victim was actually

defrauded.” U.S. v. Ulloa, 511 Fed.Appx. 105, 3 (2d Cir. 2013)(quoting U.S. v. Wallach, 935

F.2d 445, 461 (2d Cir. 1991)). “[I]t is sufficient to show ‘that the defendant contemplated some

actual harm or injury.’” Id. at pp. 3-4.

Pursuant to 18 U.S.C. §1346, that harm can be to deprive a private company or the

government of its agent’s honest services. In Skilling v. U.S., 130 S.Ct. 2896 (2010), the

Supreme Court construed §1346 to cover only “fraudulent schemes to deprive another of honest

services through bribes or kickbacks . . . .” Id. at p. 2928. The Court excluded from the statute’s

reach conduct that merely constituted “undisclosed self-dealing by a public official or private

employee — i.e., the taking of official action by the employee that furthers his own undisclosed

financial interests while purporting to act in the interests of those to whom he owes a fiduciary

duty.” Id. at p. 2932.

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ELEMENT 3 - THERE MUST BE A MAILING OR WIRE IN FURTHERANCE OF THE

ALLEGED SCHEME

The defendant does not have to be the one who personally sends the suspect mailing or

wire. U.S. v. Slevin, 106 F.3d 1086, 1089 (2d Cir. 1996). Instead, the government needs to

prove only that (1) it was reasonably foreseeable to the defendant that the mailing or wire would

result from the scheme’s execution, and (2) the mailing or wire was incidental to an essential part

of the scheme. Id. There is no requirement that the mailing or wire precede the fraud. Id.

BANK FRAUD STATUTES

18 U.S.C. §1344 - BANK FRAUD

18 U.S.C. §20 - FINANCIAL INSTITUTION DEFINED

18 U.S.C. §27 - MORTGAGE LENDING BUSINESS DEFINED

12 U.S.C. §2602 - DEFINITIONS

ELEMENTS OF BANK FRAUD

The often quoted statement in the Second Circuit setting forth the elements of bank fraud

is as follows:

The well-established elements of the crime of bank fraud are that the defendant

(1) engaged in a course of conduct designed to deceive a federally chartered or

insured financial institution into releasing property; and (2) possessed an intent to

victimize the institution by exposing it to actual or potential loss.

U.S. v. Norris, 513 Fed.Appx. 57, 59 (2d Cir. 2013)(citing U.S. v. Barrett, 178 F.3d 643, 647-48

(2d Cir. 1999)).

Practically speaking, however, the crime of bank fraud has the same elements as mail and

wire fraud except for the jurisdictional element that makes the charges federal - instead of state -

crimes. U.S. v. Jones, 648 F.Supp. 241, 244 (S.D.N.Y. 1986). For mail and wire fraud, that

element requires there be a mailing or wire in furtherance of the scheme. Id. Bank fraud has no

such requirement. Id. Its link to federal jurisdiction is the requirement that the intended victim

be a “financial institution” as defined in 18 U.S.C. §20. Id. As of 2009, mortgage lending

businesses whose activities affect interstate or foreign commerce now fall within that definition.

18 U.S.C. §27.

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ATTEMPT AND CONSPIRACY TO COMMIT MAIL, WIRE, OR BANK FRAUD

18 U.S.C. §1349 - Statutory Language

“Any person who attempts or conspires to commit any offense under this chapter shall be

subject to the same penalties as those prescribed for the offense, the commission of which was

the object of the attempt or conspiracy.”

MONEY LAUNDERING STATUTES

18 U.S.C. §1956. LAUNDERING OF MONETARY INSTRUMENTS

18 U.S.C. §1957 - ENGAGING IN MONETARY TRANSACTION IN PROPERTY

DERIVED FROM SPECIFIED UNLAWFUL ACTIVITY

ELEMENTS OF MONEY LAUNDERING UNDER 18 U.S.C. §1956

Section 1956 of title 18 is a lengthy and fairly complicated statute. Subsection (a)(1)

actually defines four types of money laundering. Subsection (c) then contains the definitions of

various words and phrases in subsection (a)(1). Each type of money laundering set forth in

subsection (a)(1) has the same first three elements but different fourth elements. Those fourth

elements concern the specific intent of the crime.

First Element - The defendant conducted a financial transaction

Subsection (c)(4) defines “financial transaction” as -

(A) a transaction which in any way or degree affects interstate or foreign

commerce

(i) involving the movement of funds by wire or other means, or

(ii) involving one or more monetary instruments, or

(iii) involving the transfer of title to any real property, vehicle, vessel, or

aircraft, or

(B) a transaction involving the use of a financial institution which is engaged in,

or the activities of which affect, interstate or foreign commerce in any way or

degree

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Second Element - The financial transaction involved proceeds of specified unlawful activity

Subsection (c)(7) defines “specified unlawful activity”

- under (c)(7)(A), that definition includes any act or activity constituting an offense listed

in 18 U.S.C. §1961(1) except an act which is indictable under subchapter II of chapter

53 of title 31

- mail fraud, wire fraud, and bank fraud are all offenses listed in 18 U.S.C. §1961(1)(B),

so they qualify as “specified unlawful activity” under (c)(7) of 18 U.S.C. §1956

Third Element - The defendant knew those proceeds were from some form of unlawful

activity

According to subsection (c)(1), the unlawful activity must be a felony under State,

Federal, or foreign law

Fourth Element - Specific Intent

The defendant acted with one of the following specific intents listed under

subsection (a)(1):

- with the intent to promote the carrying on of the specified unlawful activity -

(a)(1)(A)(i), or

- with the intent to commit tax fraud - (a)(1)(A)(ii), or

- knowing that the transaction is designed in whole or in part to conceal or

disguise the nature, the location, the source, the ownership, or the control of

the proceeds of specified unlawful activity - (a)(1)(B)(i), or

- to avoid currency transaction reporting laws - (a)(1)(B)(ii).

ELEMENTS OF MONEY LAUNDERING UNDER 18 U.S.C. §1957

First Element - The defendant engaged or attempted to engage in a monetary transaction

Subsection (f)(1) defines “monetary transaction” as “the deposit, withdrawal, transfer, or

exchange, in or affecting interstate or foreign commerce, of funds or a monetary

instrument (as defined in section 1956(c)(5) . . .) by, through, or to a financial institution

(as defined in section 1956 . . .), including any transaction that would be a financial

transaction under section 1956(c)(4)(B) . . ., but such term does not include any

transaction necessary to preserve a person's right to representation as guaranteed by the

sixth amendment to the Constitution.”

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Second Element - The defendant knew that transaction involved criminal derived property

Subsection (f)(2) defines “criminally derived property” as “any property constituting, or

derived from, proceeds obtained from a criminal offense . . . .”

Third Element - The property was derived from specified unlawful activity

Subsection (f)(3) states that “specified unlawful activity” shall have the same meaning

given those terms in 18 U.S.C. §1956.

Fourth Element - The property was worth more than $10,000

MAJOR DIFFERENCES BETWEEN 18 U.S.C. §§1956 AND 1957

Section1957 is narrower than section 1956 in two ways. First, it concerns monetary

transactions with financial institutions. Section 1956, on the other hand, reaches any financial

transaction that affects interstate or foreign commerce whether it involves a financial institution

or not. Second, section 1957 requires that the subject property be worth more than $10,000

while there is no minimum value requirement for the subject property under section 1956.

Section 1957 is also broader than section 1956 in two respects. First, it does not contain

the additional specific intent element that section 1956 requires. Second, it requires that the

defendant know that the subject proceeds came from a crime, but it could be any crime. In

contrast, section 1956 requires that crime be a felony.

CONSPIRACY TO COMMIT MONEY LAUNDERING

18 U.S.C. §1956(h) - Statutory Language

“Any person who conspires to commit any offense defined in 18 U.S.C. §§1956 or 1957

shall be subject to the same penalties as those prescribed for the offense the commission of

which was the object of the conspiracy.”

CONSPIRACY LIABILITY - CASE LAW

“A conspiracy conviction requires proof ‘that two or more persons agreed to participate

in joint venture intended to commit an unlawful act.’” U.S. v. Hawkins, 547 F.3d 66, 71 (2d Cir.

2008) )(quoting U.S. v. DiSimone, 119 F.3d 217, 223 (2d Cir. 1997). Because a conspiracy is

ultimately an agreement among the conspirators, “[a] meeting of the minds is required.” U.S. v.

Rosenblatt, 554 F.2d 36, 38 (2d Cir. 1977). There must be an agreement on the “essential nature

of the plan and on the kind of criminal conduct … in fact contemplated.” U.S. v. Gleason, 616

F.2d 2, 17 (2d Cir. 1979). “Proof that the defendant knew that some crime would be committee

is not enough.” U.S. v. Rodriguez, 392 F.3d 539, 545 (2d Cir. 2004)(emphasis in original).

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For a defendant to be guilty of conspiracy, “there must be some evidence from which it

can reasonably be inferred that the person charged with conspiracy knew of the existence of the

scheme alleged in the indictment and knowingly joined and participated in it.” Hawkins, 547

F.3d at 71 (quoting U.S. v. Snow, 462 F.3d 55, 68 (2d Cir. 2006)). “An individual defendant’s

membership in a conspiracy may not be established simply by his presence at the scene of a

crime, nor by the fact he knows that a crime is being committed.” Id. (quoting DeSimone, 119

F.3d at 223). “Nor is a defendant’s ‘mere association with those implicated in an unlawful

undertaking [sufficient] to prove knowing involvement.’” Id. (quoting U.S. v. Nusraty, 867 F.2d

759, 764 (2d Cir. 1989)). “Instead, membership requires proof of purposeful behavior aimed at

furthering the goals of the conspiracy.” DeSimone, 119 F.3d at 223

“Nevertheless, ‘[t]the government need not prove that the defendant knew the details of

the conspiratorial scheme or the identities of all of the conspirators.’” Id. (quoting U.S. v.

Downing, 297 F.3d at 57). And, “[t]he defendant’s participation in the conspiracy with the

requisite criminal intent may be established through circumstantial evidence.” Id.

ACCOMPLICE LIABILITY

18 U.S.C. §2 - Statutory Language and Case Law

“(a) Whoever commits an offense against the United States or aids, abets, counsels, commands,

induces or procures its commission, is punishable as a principal.

(b) Whoever willfully causes an act to be done which if directly performed by him or another

would be an offense against the United States, is punishable as a principal.”

The statute here sets forth the actus reas of accomplice liability. Case law then explains

the requisite mens rea as follows:

[A] defendant may be convicted of aiding and abetting a given crime where the

government proves that the underlying crime was committed by a person other

than the defendant, that the defendant knew of the crime, and that the defendant

acted with the intent to contribute to the success of the underlying crime.

U.S. v. Hamilton, 334 F.3d 170, 180 (2d Cir. 2003).

ACCESSORY AFTER THE FACT

18 U.S.C. § 3 - Statutory Language

“Whoever, knowing that an offense against the United States has been committed,

receives, relieves, comforts or assists the offender in order to hinder or prevent his apprehension,

trial or punishment, is an accessory after the fact.

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Except as otherwise expressly provided by any Act of Congress, an accessory after the

fact shall be imprisoned not more than one-half the maximum term of imprisonment or

(notwithstanding section 3571 [18 USCS § 3571]) fined not more than one-half the maximum

fine prescribed for the punishment of the principal, or both; or if the principal is punishable by

life imprisonment or death, the accessory shall be imprisoned not more than 15 years.”

TYPES OF MORTGAGE FRAUD SCHEMES

There are virtually countless ways mortgage fraud can occur.3 Here are the basic

definitions for some of the more common types of mortgage fraud schemes that have drawn the

attention of the criminal justice system:

LOAN ORIGINATION SCHEMES

FRAUD FOR PROPERTY - This scheme normally involves one property transfer

where a borrower presented false information to a lender, usually in his or her loan

application, for the purpose of obtaining a mortgage loan to purchase property.

FRAUD FOR PROFIT - This scheme normally involves at least two property transfers

(like the purchase and sale of a house) where the presentation of false information to a

lender was done to skim the illegal profits from the transactions.

SHORT SALE SCHEMES

When someone is defaulting on their mortgage payments and headed towards

foreclosure, lenders will sometimes approve the pre-foreclosure sale of the underlying

property for an amount that is less than mortgage debt. That transaction is called a “short

sale.” There usually certain pre-requisites to executing a short sale. For example,

the short sale buyer must usually affirm that the buyer has no hidden relationship or

arrangement with the seller and that the buyer cannot transfer the property back to the

seller or sell it to someone else for a certain period of time. Fraud can occur where

someone falsifies any of those representations.

FORECLOSURE RESCUE SCHEMES

These schemes can occur when a person convinces a homeowner in the midst of a

foreclosure to transfer the property to him or her under false pretenses.

3 The source of these definitions is the FBI’s 2010 Mortgage Fraud Report, which you can find at

http://www.fbi.gov/stats-services/publications/mortgage-fraud-2010.

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EXAMPLES OF MORTGAGE FRAUD SCHEMES

There are many different ways that the foregoing schemes may actually transpire. In this

section, I will provide a hypothetical example of each type mentioned above. For each example,

I will select one or two of the people involved in the transaction and examine their possible

defenses to a criminal prosecution. I will expand on the defense arguments in more depth during

our class time.

EXAMPLE 1 - FRAUD FOR HOUSING

A borrower fraudulently obtains a mortgage loan by including false information in his or

her loan application.

- e.g. - A borrower represents that they are working when they are actually unemployed

by presenting a fake W-2 or letter of employment to the lender in support of his or her

loan application.

Potential Targets of Prosecution

Borrower’s Lawyer

The borrower’s lawyer is normally not involved in the loan application process. Her

duties are usually limited to protecting her client’s interests during the closing of loan, execution

of the contract for sale, and transfer of title to the property. As such, there should be no credible

proof that the borrower’s lawyer knew about the false information the borrower presented to the

lender. In addition, the borrower’s lawyer usually has no duty to verify the authenticity of the

borrower’s employment information. So unless there is other evidence that raises the lawyer’s

suspicion on that issue, there should also be insufficient proof of conscious avoidance.

Settlement Agent

The settlement agent should have the same defense as the borrower’s lawyer. He also is

usually not involved in the loan application process. His duties are limited to protecting the

lender’s interests during the closing of the loan, execution of the contract for sale, transfer of title

to the property, securing of the lien, and distribution of the loan proceeds

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EXAMPLE 2 - FRAUD FOR PROFIT

A broker buys property from a seller for $200,000.

Within a few weeks, the broker pays an appraiser an extra $5,000 to produce a false

inflated appraisal of $300,000 for the property.

The appraiser justifies the increase in value by pointing to substantial improvements the

broker made to the property.

In reality, the broker made only cosmetic improvements to make it appear that he made

the substantial changes.

The broker then pays a strawbuyer $5,000 to obtain a mortgage loan for $270,000. The

broker convinces the strawbuyer to purchase the house based upon the assurance that the broker

will find someone else to whom they can quickly resell the property.

To obtain the loan, the strawbuyer submits an occupancy affidavit that affirms his

intention to live in the house as his primary residence when he has no intention to live there at

all.

Because the strawbuyer is in cahoots with the broker, he does not pay the broker-seller

any money other than what he is due from the loan proceeds.

After expenses from the sale, the broker-seller receives $250,000.

So, after subtracting the purchase price of the property ($200k), extra payment to the

appraiser ($5k), and the payment to the strawbuyer ($5k), the broker’s profit is $40,000.

The broker helps the strawbuyer make a few payments on the mortgage. Those payments

soon stop, however, and the broker does not find a new buyer. As a result, the mortgage goes

into default.

The bank will foreclose on the property which will be worth only $200,000 and will sell

for even less on the foreclosure market.

Potential Targets of Prosecution

Strawbuyer

Because the strawbuyer lied on his occupancy affidavit, he will not have much of a

technical defense. A defense attorney may still successfully appeal to a prosecutor’s sympathies

by pointing out how the broker manipulated the strawbuyer and left him to deal with the

consequences of a foreclosure. If the strawbuyer agrees to cooperate against the broker, there is

a chance the prosecution and the Court will show significant leniency towards the strawbuyer.

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Borrower’s Attorney

As referenced above, the borrower’s attorney would not necessarily know that the

strawbuyer lied on his occupancy affidavit. The submission of that affidavit occurs during the

loan application process with which the borrower’s attorney has no involvement.

The borrower’s attorney may have some suspicion about the transaction though. It is

concerning that the broker bought the property only weeks earlier and was selling it for $100k

more based upon improvements that were supposedly made. To verify the existence of those

improvements, it would probably be reasonable for the borrower’s attorney just to ask her client

about them. In response to those questions, the strawbuyer would likely have assured his

attorney that the improvements were made. Consequently, the borrower’s attorney would have a

strong defense that she did not know about the crime.

EXAMPLE 3 - FORECLOSURE RESCUE SCHEME

A middle man convinces a distressed seller to sell her property to a strawbuyer with the

understanding that the seller can continue to live in the home.

The strawbuyer obtains a loan, affirming in an occupancy affidavit that he will be living in the

house as his primary residence.

The loan proceeds from the sale will pay off the seller’s pre-existing mortgage.

In exchange for the middle man’s help in avoiding foreclosure, the seller agrees to give the

middle man the excess loan funds owed to the seller. The middle man promises to use some of

those funds to make the first year’s payments on the mortgage (which is now in the strawbuyer’s

name) while the seller saves her own money.

The purported plan is for the seller to save enough money to buy the property back from the

strawbuyer one day at a low price.

At the closing, the seller convinces the settlement agent to write a check to a third party company

for the excess loan proceeds that were owed to her. She explains to the settlement agent that

check is to repay a separate debt she has with the third party company. Unbeknownst to the

settlement agent, the middle man owns that company and there is no legitimate debt to the

company.

On the HUD-1 form, the settlement agent does not indicate that any of the loan proceeds went to

the third party company. Instead, he represents that all of the seller’s money went to her.

After the closing, the middle man makes only a few mortgage payments and walks away with the

profits. The lender forecloses on the home under the strawbuyer’s name and the seller is kicked

out.

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Potential Targets of Prosecution

Settlement Agent

The settlement agent has two problems. First, he chose to write a check to a third party

company concerning an unrelated debt. He is not the seller’s personal banker. He is at the

closing to protect the lender’s best interests. As such, it is improper for him to be writing a

check for the seller concerning an unrelated debt. Second, he did not explicitly inform the bank

about the payment to the third party company.

The settlement agent does have some credible defense arguments though. First, he could

argue that the rights to the money, which the third party company received, did first transfer to

the seller at the time of the closing. So he was just following the seller’s request to write a check

on her behalf. While it may have been unprofessional for him to do so, there is nothing outright

illegal about it.

He may also argue that he did not indicate the payment on the HUD-1 form because there

is no space for such payments. The HUD-1 form captures settlement charges related to the

closing, not payments for unrelated debts. On the HUD-1 form, he represented that money as

going to the seller because he believed the ownership of the money did, in fact, transfer to her at

the time of the closing even though she did not take possession of it. He could then argue that

the check to the third party company was a post-closing payment, so it did not belong on the

HUD-1 form.

Even if the settlement agent is correct, however, his lack of candor with his own client is

problematic. As a fiduciary of the lender, he was responsible to inform the lender of all material

information. So the issue becomes whether the lender would have refused to extend the loan if it

knew about the suspect payment. As a defense attorney, you should check the written closing

instructions the lender gave to the settlement agent. Those instructions may have ordered the

agent to inform the lender of such third party payments. If they did, the settlement agent’s

defense will be severely weakened.

If the instructions did not have such an order, the prosecution may still argue that the

lender needed to know about the suspect payment so it could have investigated the situation

further. For example, the lender could have asked for documentary proof of the seller’s debt to

the third party company and also researched information about the third party company. If the

seller could not produce other proof of the debt or the company was a dormant shell, the suspect

payment would have looked even more suspicious. As such, the lender could have refused to

give the loan on that basis.

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The settlement agent may argue that the only true material facts of the closing were the

value of the house as collateral for the loan, the borrower’s ability to repay the loan, and the

borrower’s intention to reside in the house. He may argue that the check to the third party

company is immaterial because that money would have gone to the seller anyway.

In the end, the settlement agent will have a tough defense. The prosecution will likely

concede that, at first glance, a payment to a third party for an unrelated debt may not be

significant to a lender. But, the prosecution will point out that, in this situation and others like it,

that payment is significant because it is the tip of the iceberg of fraud which lies underneath it.

Ultimately, the question of materiality would be for a jury to decide.

EXAMPLE 4 - SHORT SALE FRAUD

John Doe buys a house for $200,000.

As financing for that purchase, he first obtained a loan for $140,000 and then obtained a loan for

$40,000. He also made a down payment of $20,000.

A year after his purchase, the value of his house sinks and he loses his job, so he cannot pay his

mortgage loans.

A buyer offers to purchase the home on a short sale for $100,000.

If the sale was executed, all proceeds, after deducting expenses, would go to the first lender

because the outstanding debt for the first loan is more than the purchase price.

The second lender must consent to the short sale though. In this scenario, however, the second

lender would receive no money.

Without the first lender’s knowledge, the second lender pressures the buyer into paying it

$15,000 in exchange for its consent to the short sale.

Potential Targets of Prosecution

Buyer

The prosecution may argue that the buyer deprived the second lender of its honest

services by essentially bribing one or more of its employees to consent to the short sale. The

buyer’s defense could be that he did not misrepresent or omit any material facts to the second

lender. In fact, the buyer could stress that the employee or employees of the second lender not

only knew about the side payment but were the ones who initiated the request for the payment

and pressured him for it. If just one low level employee of the second lender was involved in the

side payment and he pocketed the money for himself, that employee’s action will likely not be

attributed to the lender. If, however, there were multiple employees, supervisors, and/or officers

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of the lender involved, the buyer’s argument would be stronger. The argument would gain even

more strength if the money went to the lender.

The prosecution might then argue that the buyer defrauded the first lender by not

informing it of the secret $15,000 payment to the second lender. If the first lender knew about

that payment, it may not have approved the short sale. The buyer might have a defense here as

well. He may be able to show that he did not affirmatively lie to the first lender. He can then

argue that he was under no duty to disclose the side payment to the first lender. He was not a

fiduciary of the first lender and he did not make any other partial or ambiguous statements to the

first lender that required further disclosure to avoid them being misleading. To determine the

true strength of those arguments, the defense attorney must find and review every

communication between the lenders and the buyer to determine what representations the buyer

made and the scope and details of his responsibilities to disclose information to the lenders.

CONCLUSION

Mortgage fraud has been, and will continue to be, a significant subject of criminal

prosecutions in this country. Given the government’s aggressive approach, a defense attorney’s

job is ever more critical to prevent unjust convictions and unfair sentences. No matter the

allegations, every defendant is entitled to effective representation and zealous advocacy from his

or her attorney to protect their constitutional rights and present their best defense. I hope that

these materials provided you with a basic understanding of the knowledge and tools you will

need to accomplish that goal.

There is much more for an attorney to know before attempting to represent a client facing

this type of criminal case. If you are interested in handling these kinds of cases, you should learn

about the sentencing phase of a criminal case, study mortgage fraud cases around the country,

and gain a deeper and more detailed understanding of the mortgage industry and the process of

purchasing a house with a mortgage loan. Considering that, in many of these cases, your client’s

freedom will be at stake, there is no room for error on your part. Please take your education and

preparation for these cases with utmost seriousness, so that you can provide your clients with the

high level of proficiency they deserve.

Good luck with your future endeavors and thank you for taking this class.

Brian King, Esq.

Law Office of David S. Smith, LLC

148 East 78th Street

New York, New York 10075

Faculty Biographies

Faculty Biographies

Jay Inwald joined the Legal Support Unit at Legal Services NYC as Director of Foreclosure Prevention Litigation in April of 2009, after nearly 25 years of practice as a commercial litigator at several law firms in New York City (most recently Sonnenschein Nath & Rosenthal LLP). He is a litigator with a broad range of substantive experience representing clientele in diverse industries, and has litigated disputes in federal and state courts, as well as before administrative bodies and arbitral tribunals. His practice before joining the LSU covered such diverse subjects as commercial and contract, business torts, securities and commodities fraud, shareholder derivative actions, corporate governance and dissolution, RICO, entertainment, advertising, communications and media, employment and executive compensation, restrictive covenants, non-competition agreements, trade secret, trademark, copyright, patent and unfair competition, antitrust and dealer termination. Since 1993, Jay has served as pro bono arbitrator in the Civil Court of the State of New York, Small Claims Division. After graduating from George Washington University Law School in 1984, where he was Notes Editor of the Law Review, Jay served as a law clerk at the United States Court of Appeals for the Ninth Circuit in San Francisco, California before returning to his native New York to begin practicing law. Jay graduated summa cum laude, with High Honors in History, from Brandeis University in 1981.

Brian King, Esq. graduated from Quinnipiac University School of Law in May 2005, where he won the Outstanding Legal Scholarship Award and Distinguish Academic Achievement Award for Trial Practice. As a law student, Mr. King also completed prestigious internships at the United States Attorney’s Office and for the Honorable Alfred V. Covello of the United States District Court in Connecticut. After graduating from law school, Mr. King worked at Tacopina, Seigel, & Turano, P.C. as an associate for five years. In that time, Mr. King worked on some of New York City's most high profile cases and excelled as a litigator, handling a wide array of civil and criminal matters in both State and Federal Court. Since joining the Law Office of David S. Smith, LLC, Mr. King has developed an expertise in handling various white collar matters, including those involving mortgage, insurance, and securities fraud, in their investigative and prosecution stages at the State and Federal Court levels as well as before the Securities and Exchange Commission and FINRA. Most importantly, working alongside David Smith, Esq., Mr. King has continued to employ his tireless work ethic and passionate approach in an effort to achieve the best results possible for all of the firm’s clients. Mr. King is admitted to practice in New York and Connecticut, as well as before the Eastern and Southern Districts of New York, the District of Connecticut, and the Second Circuit Court of Appeals.

Alexander Suslensky spent many years working as an attorney at large NYC law firms before founding the Law Firm of Alexander Suslensky, P.C. Given Mr. Suslensky’s experience and dedication to his clients, the motto of his firm became “Big Firm Experience; Small Firm Individual Attention”. Today, he continues to offer a broad range of legal services in NY and NJ. Alexander, who was born in the U.S.S.R., is fluent in Russian. “Alex”, as he is known, grew up in Bergen County, NJ, but has been a New Yorker since 1994 and a graduate of Fordham University School of Law. He lives on the Upper East Side of Manhattan with his family. He Alex enjoys spending time with his family the most, but also tries to make some time in his busy schedule to train and race with the Asphalt Green Cycling Team. The Law Firm of Alexander Suslensky, P.C. is a proud sponsor of the Asphalt Green Cycling Team.

Anna Mitchell is an associate at the Law Office of Bernard D’Orazio & Associates. She is a member of NYCLA’s Young Lawyers Section and a graduate of Benjamin Cardozo School of Law.