Criminal fraud charges can be brought by either the State of Arizona in state court, or by the United States Attorneys in federal court, on a wide range of mortgage fraud:
- Conspiracy to commit bank fraud
- False statements to influence a financial institutions
- Conspiracy to commit transactional money laundering
- Conspiracy to commit wire fraud
The most common Mortgage Fraud charges are based on schemes like:
- The Cash Back/Kickback Mortgage Fraud Scheme
- The Reverse Mortgage Fraud Scheme
- The Bankruptcy Foreclosure Mortgage Fraud Scheme
- The Loan Modification Mortgage Fraud Scheme
- The Short Sale Mortgage Fraud Scheme
- Equitable Mortgage Fraud Schemes
In addition, the Arizona Attorney General’s Office will sometimes bring civil Consumer Fraud actions based on these schemes under A.R.S. §44-1522. However, the definition of mortgage fraud is very broad, and includes any a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan. Because the definition is so broad and can potentially include a large number of innocent parties, it is important for all parties involved to hire a skilled Arizona Mortgage Fraud defense attorney to challenge the government’s charges. The following is a list of common mortgage fraud schemes in which prosecutors typically file criminal charges.
The Cash Back / Kickback Scheme
In a “Cash Back” scheme, the investor (or home buyer) offers to purchase a property for more than the asking price, with the intention to obtain a loan from a lender for the inflated price, pay the seller their true asking price, and the buyer would keep the cash difference between the inflated price and the seller’s true asking price. There are many innocent parties involved in this situation who could potentially face criminal charges for their involvement. The seller agrees to the sale because they are receiving their full asking price, unaware they may be committing a crime.
Often, a real estate agent is involved in the transaction who is also unaware that the selling price has been inflated. Usually a “straw buyer” is used to facilitate the Cash Back scheme. A straw buyer is someone recruited by the investor to take out a mortgage and purchase a house in their own name. The straw buyer would not live in the house nor be responsible for the mortgage payments. In return for their services, the straw buyer would be paid a fee. The investor often prepares a Uniform Loan Application, also known as a Form 1003, for the straw buyer. A lender uses this form to record relevant financial information about an applicant who applies for a mortgage. The investor facilitating the Cash Back scheme falsely represents the buyer’s assets and income, conceals mortgages and other debts, and misrepresents sources of intended down-payments and intent to occupy the properties as primary residences, all in an effort to qualify the straw buyer for a mortgage.
In signing the loan application at the direction of the investor, the straw buyer acknowledges that “the information provided in the application is true and correct” and that “any intentional or negligent misrepresentation(s) contained in this application may result in civil liability and/or criminal penalties…”. Thus, the straw buyer is heavily at risk for criminal and civil liability in this situation.
A title or escrow company is also involved in the transaction, and is used to hold the subject property for safekeeping pending satisfaction of a contractual contingency or condition. Once the conditions are met, the escrow agent will deliver the property to the party proscribed by the contract. The escrow agent also submits to lenders a preliminary HUD-1 known as a “Pre-audit.” The Pre-audit HUD-1 lists fees and payments to be made in connection with the proposed loan and is reviewed by the lender. If the lender approves the Pre-audit HUD-1, funds are wired to the title or escrow company to disburse accordingly.
The lender instructions specify that the escrow agent must notify the lender of any material changes to the HUD-1 and receive the lender’s approval prior to fund disbursement. After receiving the loan documents and funds from the lender and facilitating the buyer and seller signing, escrow agents prepare a “Final” HUD-1, “Settlement Statement” wherein details of the actual fund disbursements are listed for the lender’s records. Thus, the escrow agent could also be exposed to criminal and civil liability for their involvement in a cash back mortgage fraud transaction.
The “Cash Back” scheme puts the loan at a greater risk as the loan originates with negative equity in the property (meaning the house is not worth the loan amount). For that reason, lenders do not allow a buyer to receive cash at closing of the origination of a loan.
Among the programs established and regulated by the U.S. Department of Housing and Urban Development (“HUD”) is the Real Estate Settlement Procedures Act (“RESPA”), found in Title 12, United States Code, Section 2607(a). RESPA was enacted to protect all parties involved in residential real estate purchases and specifically prohibits “kickbacks.” The regulation established that “No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
“Settlement Services” are defined as:
Any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement.
Obviously, any person rendering settlement services could be unwittingly pulled into a mortgage fraud scheme. In order to demonstrate innocence, the complete records of the transaction must be found and accounted for, and each individual participant’s involvement in the various aspects of this complicated transaction must be chronologically established to prove lack of any fraudulent intent.
The Reverse Mortgage Fraud Scheme
Home Equity Conversion Mortgages (HECMs) are also known as “Reverse Mortgages”. Although reverse mortgages themselves are legal, it can become a criminal activity if the intention of the parties is to defraud a lender through “Equity Theft” or “Equity Stripping.” The typical way a Reverse Mortgage Fraud scheme occurs is that Person A will purchase a foreclosed, distressed, or abandoned property in a straw buyer’s name, claiming that the straw buyer will use the property as their primary residence. Person A then transfers the deed of the property to a senior citizen who they have recruited with false and misleading promises, with no exchange of money.
After the senior citizen lives in the home for 60 days, Person A will arrange for the senior to obtain an HECM (with the aid of the falsely inflated appraisal) and encourage the senior to request a lump sum disbursement of the equity in the home (i.e., cash back). The “theft” occurs when Person A, by means of fictitious liens and loans, arranges for the loan proceeds to be distributed to themselves or the straw buyer (if involved) at closing. Once he (or they) receive the money, they then abscond, leaving the senior citizen on the hook and living in a house that is unpaid for.
The most unfortunate aspect in a scheme of this type is that not only is the person who facilitated the scheme likely to be charged (Person A), but also the unwitting senior and straw buyer, since the facilitator (Person A) is unlikely to be found and identified.
Bankruptcy Foreclosure Rescue Mortgage Fraud Scheme
Foreclosure Rescue Schemes usually consist of a defendant soliciting a homeowner in foreclosure and offering to “rescue” them from losing their home for a fee. These schemes can involve either bankruptcy or loan modification. In a Bankruptcy Foreclosure Rescue Mortgage Fraud Scheme, the defendant targets a distressed homeowner through advertisement. The defendant will then offer to provide the homeowner with assistance designed to prevent them from losing their home in exchange for an upfront fee (usually $200 to $1,000). Many times the defendant will direct the homeowner to continue making their monthly mortgage payment directly to the defendant. They also tell them to cease any communication with the lender. Lastly, the defendant will direct the homeowner to complete a Bankruptcy petition, which they then file with the Bankruptcy Court (sometimes with a forged signature).
Once the Bankruptcy petition is filed, an automatic “stay” occurs which stops the imminent foreclosure for the time being. It also prevents any collection calls and letters from being sent to the homeowner during the pendency of the bankruptcy process. Because of this, homeowners (being unaware that the Bankruptcy petition was filed) feel that the defendant has fulfilled their obligations. Sometimes, the defendant will tell the homeowner to ignore court notices directing them to appear at Bankruptcy hearings. Once they miss these hearings, then the foreclosure process begins again.
A second version of the Bankruptcy Foreclosure Rescue Mortgage Fraud Scheme involves a defendant convincing a homeowner to sign a “Quit-Claim” deed to the defendant in exchange for a $1 fee. The defendant then claims he will rent the home back to the homeowners until the mortgage problems are resolved, at which point, the homeowner is able to repurchase the property with a portion of the profits if the defendant sells the property. Sometimes homeowners are directed to transfer only a fractional interest of the property, and then that interest is transferred to another individual or entity (usually fictitious). This occurs every time one of the automatic stays are lifted by the Bankruptcy Court, thereby delaying foreclosure for months on end. Eventually, the property will be foreclosed upon and the homeowner might be accused by the prosecutor of being involved in the fraud itself. In addition, another individual who purchased a fractional interest in the property (thinking he was an investor), will often find themselves charged with a crime that they unwittingly participated in.
Loan Modification Foreclosure Rescue Mortgage Fraud Scheme
The Loan Modification Foreclosure Rescue scheme typically occurs where persons solicit homeowners who are at risk for foreclosure with offers to help them stop the foreclosure process for a fee. They falsely tell the homeowner that their mortgages will be renegotiated, their monthly payments will be reduced, and delinquent loan amounts can be renegotiated in regards to the principal. They require an upfront fee ranging from $1,500 to $5,000 from the homeowner. They will also tell the homeowners to stop payments and communications with their lenders. When the homeowner receives delinquency and foreclosure notices, the defendants will often convince them that their loan was renegotiated, but that the lender needs a good faith payment to secure a new account. Problems arise once the house is finally foreclosed because the homeowner thought that their payments had gone to the loan company when in actuality they had never received any payments.
Another type of loan Modification Foreclosure Rescue is when the homeowner is targeted and convinced that they are obtaining a reverse mortgage. However, they never obtain such a reverse mortgage, rather the perpetrator instead gets a straw buyer, orders fraudulent home repairs, completes an inflated appraisal, and obtains a forward mortgage subsequently transferring the property away from the homeowner and the perpetrator pockets the equity. The homeowner is later notified by the new owner to either repurchase the home at a higher price or find alternative living arrangements.
Short Sale Mortgage Fraud Scheme
In a Short Sale Mortgage Fraud scheme, an investor locates and solicits homeowners undergoing foreclosures, sometimes through a hired real estate agent. Once a suitable homeowner is found, the investor (or their authorized agent) will then enter into an agreement with the homeowner in which the homeowner will deed their property to them in the form of a land trust, and the investor will contact the lender and negotiate a sale of the house. The homeowner is listed as the beneficiary of the trust and the investor or his real estate agent is listed as the trustee. The defendant will then negotiate a short sale with a lender, purchasing the home for less than the mortgage price. Immediately after the short sale, the new homeowner (aka the investor) will sell the property “for profit” to a previously identified buyer for a price that is above the short sale price.
However, the lender and the homeowner were not notified of the investor’s intentions to immediately sell the home for a profit; the investor did not adequately disclose his intentions for the property after the short sale is completed. In essence, the investor fraudulently buys the property for less than the mortgage and resells the property (often the very next day) for a profit.
An “Equitable Mortgage” is a financial transaction that courts treat as if it were a regular mortgage even though the financial documents do not call the transaction a “mortgage.” These financial transactions are often used in an attempt to skirt the legal requirements of “mortgages.” If the court finds that a transaction, although not labeled a mortgage, functions as a mortgage and therefore is an equitable mortgage, the parties are civilly and criminally liable for any fraudulent activities conducted pursuant to that agreement. A typical financial transaction often deemed an equitable mortgage is when a quit claim deed to their property is given by a distressed homeowner (the “grantor”) to what would be the traditional lender (the grantee) in exchange for a “Lease Back” and an option to repurchase the home from the grantee.
This “Sale/Lease-Back with Option to Buy” transaction resembles a mortgage in four ways
- The grantor (i.e., the borrower in a traditional mortgage) receives monetary benefit from the grantee (the lender in a traditional mortgage). In a typical mortgage this is the money used to buy the property, but in the Sale/Lease situation the grantee pays the mortgage arrearage of the distressed grantor.
- The grantor resides in the property in both transactions.
- The grantor makes payments to the grantee (these “mortgage” payments are called “lease” payments in the Sale/Lease Agreement).
- If the grantor fails to make payments to the grantee, he forfeits his interest in the property (foreclosure is the remedy with a traditional mortgage, the option to repurchase is extinguished in the Sale/Lease-Back context).
Financial transactions such as Sale / Lease-Back transactions are used to attempt to avoid the legal niceties attendant to mortgages. For example, people who sell mortgages are required to be licensed mortgage brokers per A.R.S. §6-703, A.R.S. §6-909(B) and A.R.S. §6-943(A). Also, in a traditional mortgage, the homeowner has a right to redemption even if he falls in arrears and the homeowner is entitled to his equity in the property that exceeds the mortgage amount. Moreover, a mortgage requires a specific statutory procedure for foreclosure that involves a public sale of the property.
In contrast, in a Sale/Lease-Back the borrower cannot make up arrears since the option to repurchase is void as soon as the first lease payment is not made. There is no foreclosure and no public sale of the property. Once the option to repurchase expires the lender has title by virtue of the quit claim deed with no possibility that the borrower will ever acquire ownership. The borrower loses all equity in the property. The equitable mortgage doctrine is simply an equitable doctrine created by courts to avoid these harsh results.
The Merryweather v. Pendleton Case
Merryweather v. Pendleton is the leading Arizona case on determining whether a financial transaction should be treated as an equitable mortgage rather than a bone fide sale. The Arizona Supreme Court in Merryweather set forth six nonexclusive factors to be considered:
- the prior negotiations of the parties, to discern if such negotiations contemplated a mere security for a debt;
- the financial distress of the grantor of the quit claim deed
- the fact that the amount advanced was about the amount that the grantor needed to pay an existing indebtedness;
- the amount of the consideration paid in comparison to the actual value of the property in question;
- a contemporaneous agreement to repurchase; and
- the acts of the parties in relation to each other, i.e., whether their acts are ordinarily indicative of a vendor-purchaser relationship or that of a mortgagor and mortgagee
Once a court determines the transaction is an Equitable Mortgage, the frequent remedy is for the grantor to receive his equity in the property, which would have occurred had a genuine mortgage foreclosure sale taken place.
The statutory definition of “mortgage” is broad and encompasses both traditional and equitable mortgages. A.R.S. §33-702(A) provides:
Every transfer of an interest in real property, other than in trust, or a trust deed subject to the provisions of chapter 6.1 of this title, made only as a security for the performance of another act, is a mortgage. The fact that a transfer was made subject to defeasance on a condition may, for the purpose of showing that the transfer is a mortgage, be proved except against a subsequent purchaser or encumbrancer for value and without notice, notwithstanding that the fact does not appear by the terms of the instrument.
This definition is broad by making a mortgage “every transfer of an interest in real property . . . . made only as security for the performance of another act.” The second sentence of §33-702(A) explains that the transfer that was “subject to defeasance on a condition” can be proved except to a subsequent purchaser or encumbrancer for value and without notice.” This protects an innocent third party who unknowingly purchases the property from the original grantee of the distressed homeowner’s quit claim deed. Should this third party purchaser be charged with any sort of fraudulent activity based on this transfer, they would need a mortgage fraud lawyer to not only fight any criminal charges based on the transactions, but also to help them acquire the title to the property that is lawfully theirs.
Remember: just because parties have labeled their transaction as something different than a mortgage does not mean that the government cannot bring charges against those parties based on fraud in that transaction.
Possible Punishment for Mortgage Fraud
In a state charge in Arizona, a first offense Mortgage Fraud scheme is a class two (2) felony which includes a range of punishment from:
- Probation with zero (0) days in jail up to one (1) year in jail, or prison of three (3) to twelve and one half (12.5) years of incarceration.
- If the person has one (1) allegeable historical prior conviction, then the “prison only” range is from four and one half (4.5) years to twenty-three and one quarter (23.25) years of incarceration.
- If the defendant has two (2) allegeable historical prior convictions, then the “prison only” range is ten and one half (10.5) to thirty-five (35) years of incarceration.
- If the amount of benefit received by the defendant is valued at $100,000 or more, then probation is not available and the only punishment available is the prison range.
As your lawyers we would argue for the lowest prison sentence possible. Mortgage fraud crimes charged at the federal felony level include a wide range of punishments and tend to carry lengthy prison sentences as well.
Possible Defenses To Mortgage Fraud Scheme Charges
Mortgage Fraud schemes are a very detailed and intricate area of the law, and a successful defense requires a detailed knowledge of the law. Additionally, mortgage fraud schemes and laws are so large and broad that countless amounts of people can be charged with crimes arising out of one transaction, even though most people are unwittingly pulled into the scheme (such as real estate agents, homeowners, and even the new purchaser of the property). A highly skilled Arizona Mortgage Fraud defense attorney is necessary to defend those who should never have been charged in the first place.
When defending Mortgage Fraud charges, it is important to hire a lawyer who understands all of the complexities involved with each type of alleged Mortgage Fraud Scheme. At DM Cantor, we know all of the existing Mortgage Fraud schemes which the government charges, and we are aware of the defenses to each and every one of these charges. The main defense to all Mortgage Fraud charges is lack of knowledge on the part of the defendant that any illegal or fraudulent activity was occurring. This is a very real and believable defense because some of these alleged schemes (such as “Equitable Mortgages”) are so difficult to understand, that even many real estate lawyers will approve contracts for their client without realizing that they are potentially exposing their client to criminal liability.
We have had many cases where we were able to use the “Lack of Knowledge” and “Lack of Intent” defenses based upon the fact that our clients had sought out competent legal advice from a real estate attorney prior to entering into the real estate contracts in question. If the defendant received bad legal advice it should be a defense to the charge. Again, a skilled Arizona Mortgage Fraud defense attorney will thoroughly review all documents and interview all witnesses in order to get the charges dropped.
Additionally, because our law firm fights conviction from all angles, we would use wide range of defenses and challenges to constitutional violations that apply in all criminal cases. One of those we frequently assert is a violation of your Miranda rights. In Arizona, the standard of whether any incriminating statement (i.e., a statement which tends to admit guilt) is admissible into evidence is based upon a “voluntariness” standard. If we can demonstrate that the police coerced you (intimidated or tricked you) into making a false statement, or they did not properly read you your rights. If that is the case, we can suppress those statements and any evidence gathered as a direct result of those statements.
Other Possible Defense Tactics
In addition, the “denial of right to Counsel” is another common defense which is often raised. This occurs when a suspect is in custody and requests to speak to their attorney, but is denied and questioning continues. Other defenses may include challenging the validity of any search warrant, or whether there were any “forensic flaws” during the investigation of your case. Depending on what else you have been charged with, this could include fingerprints analysis, computer analysis/cloning hard drive procedures; forensic financial accounting reviews; etc.
Lastly, one of the most common defense tactics is exposing sloppy or misleading police reports which include everything from misstatements, false statements, flawed photo line-ups and inaccurate crime scene reconstruction. It is important to hire a skilled Mortgage Fraud defense lawyer to defend you who has knowledge of all the possible defenses to assert in your case.