Reform Will Shape Mortgage LendingAttorney: Banks Should Prep for Future Compliance
"Where some of these older regulations are all geared toward protecting the lenders from fraudsters perpetrating mortgage fraud, on the reverse side a lot of these vulnerable individuals have been subject to predatory practices by the lenders themselves," he says. "Congress has been very active in trying to initiate some consumer protection programs and initiatives."
Those new protections, Lafferty says, will push banks and credit unions to focus on compliance. "It puts a good burden on the lenders in the mortgage industry," he says.
It comes down to accountability, and financial institutions that do not comply with the reformed lending laws run the risk of liability, from a government perspective as well as from civil and criminal perspectives. Lenders also could be exposed to a consumer-driven plaintiff's lawsuit, Lafferty says.
In this interview, Lafferty, discusses:
- New mortgage-fraud schemes that take advantage of depressed mortgage markets;
- The roles certain governmental bodies, such as the Federal Reserve, are playing in regulating consumer lending practices;
- And how banking institutions should brace and prepare themselves for big changes in regulatory compliance mandates.
Latour "LT" Lafferty leads the White Collar Crime, Government Investigations and Corporate Compliance and Ethics practice for Florida-based law firm Fowler White Boggs.
Lafferty is a former federal prosecutor who spent most of his time prosecuting white collar criminals, including those charged with mortgage fraud. He also has served on the Florida Commission on Ethics.
TRACY KITTEN: Despite dramatic decreases in mortgage lending, mortgage fraud continues to plague the financial industry. A number of regulatory initiatives, however, including amendments to the SAFE Act, and more guidance from the Federal Reserve, are having an impact. What steps can financial institutions take to protect their customers and members, and how is new legislation and guidance expected to impact mortgage fraud and its prosecution? L.T. Lafferty is a former federal prosecutor who now heads the White Collar Crime and Government Investigations and Corporate Compliance and Ethics for Florida-based law firm Fowler, White, Boggs. L.T., your office is located in one of the most hard hit mortgage markets in the country. Could you please tell the audience about the types of schemes you are seeing most often, as well as a bit about the entities you work with, and the mortgage cases you have been involved with through your practice at Fowler, White Boggs?
L.T. LAFFERTY: It's interesting that for the last four years, Florida has been ranked No. 1 by the Lexus Nexus Mortgage Asset Research Institute for the number of mortgage fraud or new mortgage fraud cases in the United States. And, just recently, the FBI issued its 2009 Mortgage Fraud Report, and in that report, it identified Florida as one of the top states in the country for mortgage fraud. But there are a lot of other states that are hit by mortgage fraud. It's just that Florida is particularly good for mortgage fraud because of the recent real estate boom that it has gone through. In fact, it's the greatest real estate boom and bust since the 1920s, and we all know how that ended up, with the Great Depression. I've had the opportunity, though, to work with a variety of different clients on mortgage fraud cases -- everything from helping protect lenders who are responding to government investigations as victims of mortgage fraud, to actually representing individual clients who are being investigated and charged for mortgage fraud. And the unique thing about mortgage fraud is that it really encompasses a wide variety of different types of cases.
The FBI distinguishes between fraud for profit and fraud for property. One of the big differences is that a lot of people exaggerate or lie on loan applications to get a piece of property, but they are not in default. So the government is not investigating them. And then, a lot of people actually took it one step further and lied on mortgage loan applications to get money out of that property, call it equity skimming if you want. Those are the majority of the government investigations, because they went into default. In that respect, I have represented anyone from a common employee who allowed their credit to be used as in a mortgage fraud case, to title agents who breached their fiduciary duty to oversee that process for their own profit, to legitimate investors who actually got engaged in legitimate real estate investing but got in over their head -- when the real estate market crashed, they may have done something they shouldn't have done in order to keep their real estate portfolio afloat. And then you have the real bad people, mortgage lenders or mortgage brokers who were unscrupulous in trying to profit on the real estate boom. We've also had some cases called "king of flipping," and they are essentially Ponzi schemes for the real estate industry, rather than the securities industry. It involves constantly flipping homes, because they can pull the equity out of it. We have seen a side variety of different types of mortgage fraud cases in Florida.
KITTEN: One of the types of fraud that we hear a lot about is the mortgage rescue scheme. How can financial institutions find and prevent those types of schemes?
LAFFERTY: The FBI, in its report, distinguishes the mortgage fraud schemes that were trying to take advantage of the real estate boom five years ago with the mortgage fraud schemes that exist today -- the new emerging schemes that are trying to take advantage of the depressed real estate market. Foreclosure rescue schemes that we are seeing now would be part of that. Five years ago, it was equity skimming, real estate flipping and false loan-origination statement cases. But, from a lender perspective, it's important for the lenders to try to protect themselves, and some of the regulations go into this. First and foremost is basic awareness. The reason the regulators and the FBI issue these reports is to make the lenders aware of the different types of schemes that are taking place. They want to make the lenders aware of some of the emerging schemes so that they can be aware of them and can be on the lookout for them. They then can protect themselves. Second is increased vigilance. So, if you are aware of the particular schemes that are taking place, you can be more vigilant in protecting yourself. You can be on the lookout, so you can identify suspicious activity. And third, you can report that suspicious activity to the regulatory agencies. Fourth, and probably most importantly, the regulators are going to go push increased accountability all the way around. Everybody has some responsibility to protect themselves from mortgage fraud or unscrupulous lending practices, as well as fraudulent practices by people attempting to defraud the lenders. That increased accountability all the way across the board is important.
KITTEN: What other emerging schemes are regulators and the courts keeping their eyes on, and are some of those schemes more punishable offenses than others?
LAFFERTY: There is no general mortgage fraud offense. If you ask me, "Well, what's a securities fraud case or a healthcare fraud case?" I can tell you there are particular statutes that criminalize that type of conduct. But, if you open up the Federal Code, there is no specifically defined mortgage fraud offense; it's really a hodgepodge of other federal offenses that are used under the category of mortgage fraud. From a general standpoint, most of those cases have the same elements, but they are not going to be the same statutory offenses. For example, if you use bank fraud or mail or wire fraud, those offenses are going to have statutory maximums. But if you just use a false-statements count or charge, the statutory maximum on that case would only be five years. The prosecutors and investigators have wide discretion on which one of those charges they bring. It's important, because the statutory maximum between the two could be five years or 30 years.
The FBI's report identifies what the emerging schemes, and lenders should be aware of this. Whereas, loan origination fraud in the past was sort of taking advantage of the relaxed lending guidelines, today lenders are not complacent in it anymore. There is still loan origination fraud taking place, but today there are more of the foreclosure rescue schemes. These particular types of schemes target vulnerable victims such as senior citizens, subprime borrowers, people who are especially vulnerable. Some other areas are short-sale flipping. This is going to require some complacency with a real estate agent. The lenders are defrauded on a short sale, where the owner of the property and the real estate agent falsely represent what the maximum sale price of the home is, in order to get the lender to sign off on it. They then turn around and immediately sell the property to a prearranged buyer at an inflated price and split the profit. Other possible schemes are reverse mortgages, which prey on senior citizens or other vulnerable victims. The FBI is reporting that there are increased reports of commercial real estate fraud, rather than residential real estate fraud. They estimate that they expect more than $100 billion in losses by the end of 2010 in the commercial market. And finally, you've got to be careful about property theft from the lenders who are holding some of these mortgages, or holding some of these properties that are in foreclosure. You have some predators that are coming in and actually selling these properties or renting them to unwitting tenants, when the properties are actually owned by the banks or the lenders.
KITTEN: A number of new rules and proposals are coming down that relate to consumer protection in mortgage lending and have been passed down this month from the Fed; some rules have been announced that relate to consumer protections, unfair, abusive and deceptive lending. How are those impacting financial institutions, and what impact do you expect those to have over the course of the next 12 months? How can the industry prepare?
LAFFERTY: That's the flip side of the coin. Where some of these older regulations are all geared toward protecting the lenders from fraudsters perpetrating mortgage fraud, on the reverse side, a lot of these vulnerable individuals have been subject to predatory practices by the lenders themselves; and Congress has been very active in trying to initiate some consumer protection programs and initiatives. We are seeing the benefit of those now, from a consumer protection standpoint. Those regulations are intended to protect the consumers, where the other regulations were intended to protect the lenders themselves, and ultimately our financial system. Now, some of the things that the lenders can do are focus increased efforts on compliance initiatives. They're going to have to comply with all of these different regulations and consumer protection initiatives, as well as protect themselves from being defrauded. So, it puts a good burden on the lenders in the mortgage industry.
KITTEN: What impact could some of these regulations, these changing laws, have on the prosecution of mortgage fraud? Could it help lessen the gap that you mentioned earlier -- the wide range of different types of mortgage schemes that we see?
LAFFERTY: Well, I think it should definitely make it easier for the government to prosecute mortgage fraud, maybe not so much from the consumer lending standpoint, that's going to make it easier for consumers to bring class action lawsuits; but the law enforcement initiatives are definitely going to make it tougher for people to be able to perpetrate mortgage fraud. That should make it easier for the government to investigate those cases and actually bring them against the perpetrators. The government has implemented these task forces and these working groups that are all geared toward sharing information, data-mining, reviewing suspicious activity reports, which are all new requirements for the lenders that have been implemented over the last couple of years. Those should make it easier for the prosecutors to pursue those cases.
KITTEN: I want to point to a specific case. It was actually a $2.4 million settlement between a Florida-based mortgage rescue company and the Federal Trade Commission. What has the industry learned from mortgage cases, such as this one, that have been settled in the courts?
LAFFERTY: I think that goes back to responsibility and accountability. What it shows us is that everybody has some role in this process and has some accountability in this process. We need to be vigilant, responsible and accountable. Fortune Magazine published an article a couple of years ago in which they actually assigned blame to the different players and identified everybody from the appraisers and the borrowers who participated in the real estate fiasco of five years ago, to the mortgage brokers, mortgage lenders, Wall Street and the rating agencies. Ultimately, they placed the greatest amount of blame on the Federal Reserve, because they had the ability to regulate it and they failed to do so. So what I think these settlements show us is that it is not just criminal conduct that we have to be aware of; it's also civil-fraud conduct, and accountability and responsibility ideals that we have to be careful of. The federal government is going to be a lot more active now and the consumers are going to be a lot more attentive; lenders are a lot more attentive, and it all boils down to accountability.
KITTEN: Over the next 12 months, could you tell us where you expect to see the greatest changes in mortgage lending?
LAFFERTY: I think the greatest changes over the next 12 months are going to be in how these new consumer protection regulations impact the industry, because they are just coming into play now. I think the greatest changes and the greatest impact on the mortgage-lending industry and the financial industry is going to be in complying with those new consumer-protection regulations. It is ironic, because these new consumer protection regulations are coming into play right as a lot of lenders are finally relaxing some of their lending guidelines. And, as a matter of fact, the Federal Reserve just issued their quarterly survey of senior bank loan officers, and in that survey, they reported that during the period of April through June, only one in 10 lenders had added increased mortgage lending guidelines. Two years prior to that, eight in 10 lenders had done that same thing. So, the Federal Reserve is finally pointing to some relaxed lending guidelines. At the same time, you also have a large number of new consumer protection regulations coming in to play. I think those are going to be the biggest changes.
KITTEN: What changes do you expect to have the greatest impact on banking institutions and other mortgage lenders?
LAFFERTY: That's going to be compliance. All of this ultimately comes down to accountability. But, from the lender's perspective, the financial institution's perspective, their greatest challenge over the next year is going to be one from the compliance perspective. They have a lot of new laws and regulations that they have to become familiar with, and they have to make sure that they are in compliance with those new laws and regulations, because they have the risk of exposure to liability, from a government perspective, from a civil and from a criminal perspective. The also have the risk of exposure from a plaintiff-lawsuit perspective from the consumers. They have a lot on their plate right now.