Mortgage Fraud Defendants: Part 2

The government has succeeded mightily in its pursuit of mortgage fraud defendants in recent years, and it’s done so by using the wire fraud statute to great advantage. Wire fraud essentially criminalizes a “scheme to defraud.” Defining that somewhat open-ended phrase can be subjective, however, as seen in the shallow interpretation by the Second Circuit and Third Circuit.

Borrowing from these cases, the government has repeatedly argued that the “focus is on the violator.” Because mortgage fraud defendants misrepresented facts on loan applications, the government asserts that defendant borrowers committed wire fraud. But the government says the probe should stop right there — with the borrowers – while the banks go free.

The inquiry should stop even though the banks knew the applications were pure fiction, even though the banks sought out defendants and urged them to file fake documents, even though the banks essentially orchestrated the fraud for their own benefit. No, says the government, the fraud starts and stops with the borrowers. These clever souls totally whamboozled the most sophisticated global banking giants and tricked them into turning over boatloads of cash.  As the government says, the “focus is on the violator.”

Not surprisingly, the U.S. Court of Appeals for the Seventh Circuit has a more thoughtful interpretation of the wire fraud statute. Perhaps the best circuit court in the land says that it “would not do to criminalize business conduct that is customary rather than exceptional and is relatively harmless. The cases carve a safe harbor for the type of misrepresentation that, being so commonplace as to be ‘normal,’ is not likely to fool anyone.”   This interpretation can be found in Seventh Circuit’s opinion in United States v. Coffman, at 94 F.3d 330.

Thus, if the misrepresentation is “normal” then it’s not criminal. If it’s not likely to fool anyone, it’s not criminal. Well, it’s obvious that no-doc loans and faked loan applications were indeed normal during that time. It’s the way business was done. It was done that way because the banks made billions doing it that way. They were not fooled by anyone.

Yet, mortgage fraud defendants were presented to juries as rogue fraudsters managing to sucker large global banking giants with phony applications – even though a quick credit check would have knocked out most of them – and juries found them guilty.

Given the unique events of that time, the actions of the mortgage fraud defendants were indeed normal and within the safe harbor. They were just fodder for the global banking machine. They may have been unsavory characters. But they are not criminals.