Mortgage bankers have warned about passing new mortgage fraud legislation that could have unintended consequences. Instead, they pointed to provisions of legislation from a Democratic presidential candidate and cautioned against confusing predatory lending with loan fraud.
New legislation carries with it the risk of unexpected interpretations while federal law enforcement officers can apply existing law with confidence, the 24-page report from the Mortgage Bankers Association said. New proposals could potentially do more harm to the mortgage lenders — the primary victim in mortgage fraud.
“Rather than drafting new legislation, the focus should be on providing the structure and resources needed by law enforcement officials to combat mortgage fraud,” the report said. “While law enforcement has all the legal tools it needs at its disposal, it requires more resources and a more efficient framework to use those tools effectively.”
MBA suggested that this could be accomplished by providing additional funding for fraud prevention and prosecution efforts, and intergovernmental cooperation in prosecuting mortgage fraud as well as assuring that investigative and prosecutorial resources are committed to mortgage fraud prevention.
Mortgage fraud, as defined in the report, is understood as the “material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.”
This type of fraud has cost the mortgage industry between $946 million and $4.2 billion in 2006 alone, according to a cited Federal Bureau of Investigation’s mortgage fraud report. Additionally, the FBI’s mortgage-related Suspicious Activity Reports from 2005 to 2006 rose 44 percent, the report said.
Current federal laws already provide law enforcement with authority to prosecute all instances of mortgage fraud, it added.
“MBA recommends that new federal legislations, if any, be crafted so as to fit comfortably within the established framework of laws addressing mortgage fraud.”
New statutes could have negative consequences, the report concluded.
“Because of the inherent difficulty in knowing how a new statute will be interpreted or applied in every context, new statutes can have unwanted or unintended consequences,” it said. “Terms may not be as broad or expansive as thought, and may result in unintended loopholes or gaps in coverage.”
Case in hand, some legislative proposals have sought to create a federal “private right of action” for mortgage fraud, the report stated, which is the ability of individuals to seek civil damages when federal or state law has been violated.
This approach is unnecessary, MBA said, because victims of mortgage fraud already have private rights of action under state law and opening it up to federal law could create frivolous and unnecessary litigation, proving costly to the industry.
“Since state laws already provide private litigants with an abundance of private rights of action to address mortgage fraud, the main impact of a federal private right of action would be the creation of new possibilities for nationwide class actions against mortgage lenders,” the report explained.
Effective provisions in preventing mortgage fraud found in Senator Barack Obama’s “Stopping Mortgage Transactions which Operate to Promote Fraud, Risk, Abuse, and Underdevelopment Act,” or the “STOP FRAUD Act,” do show that federal law could play an important role in combating fraud, the report said.
In particular, the report listed additional mandatory reporting requirements to industry participants such as the government sponsored enterprises, appraisers, mortgage and real estate brokers, title companies, etc., and increased communications between the industry and law enforcement.
Other concepts put forth by the STOP FRAUD Act are the creation of a database of debarred or censured mortgage professionals that can be accessed by consumers, as well as, additional funding for appraisal monitoring and law enforcement.
The MBA, however, also advised in its report that any new federal legislation should target mortgage fraud, not predatory lending, which is an “undefined term that generally describes negative practices that are harmful to consumers.”
“Because the actions and targets of mortgage fraud and predatory lending differ, actions taken to remedy one rarely, if ever, will remedy the other,” the report said. “Conflating the two creates the danger that solutions appropriate only to one will be applied to both.”
And any new state legislation, “if desired, should reference or be closer patterned on well-established federal law.“
