Mortgage Fraud in South Carolina – A Primer for SC Criminal Attorneys, Lawyers and

Law Firms

Mortgage fraud is problem that has reached epidemic proportions in the United
States (US) in general and in South Carolina (SC) in particular. Mortgage fraud is
generally investigated by the United States Federal Bureau of Investigation (FBI),
although other agencies routinely assist the FBI and/or take the lead in investigating
a case. Some of the other federal agencies which investigate mortgage fraud
crimes for criminal prosecution include, but are not limited to, the Internal Revenue
Service-Criminal Investigative Division (IRS-CID), United States Postal Inspection
Service (USPIS), U.S. Secret Service (USSS), U.S. Immigration and Customs
Enforcement (ICE), U.S. Department of Housing and Urban Development-Office of
the Inspector General (HUD-OIG), Federal Deposit Insurance Corporation-Office of
the Inspector General (FDIC-OIG), the Department of Veterans Affairs-Office of the
Inspector General (DVA-OIG) and U.S. Bankruptcy Trustees.

The FBI works extensively with the Financial Crimes Enforcement Network (FinCEN).
FinCEN is a bureau of the United States Department of the Treasury, created in
1990, that collects and analyzes information about financial transactions in order to
fight financial crimes, including mortgage fraud, money laundering and terrorist
financing. The FinCEN network is a means of bringing people and information
together to combat complex criminal financial transactions such as mortgage fraud
and money laundering by implementing information sharing among law
enforcement agencies and its other partners in the regulatory and financial
communities.

Mortgage fraud is generally prosecuted by federal prosecutors. The United States

Attorney’s Office (AUSO) and the U.S. Department of Justice’s (DOJ) Criminal Fraud
Section handle the criminal prosecutions of mortgage fraud cases. In the
investigation stage, a person with possible knowledge or involvement in a mortgage
fraud may be considered a witness, subject or target of the investigation. A subject
is generally a person the prosecutor believes may have committed a mortgage
fraud crime, whereas a target is a person the prosecutor believes has committed a
crime such as mortgage fraud and the prosecutor has substantial evidence to
support a criminal prosecution. Criminal prosecutions of mortgage fraud felony
cases are usually initiated through the federal grand jury process. A federal grand
jury consists of between 16 and 23 grand jurors who are presented evidence of
alleged criminal activity by the federal prosecutors with the aid of law enforcement
agents, usually FBI special agents. At least 12 members of the grand jury must vote
in favor of an indictment charging mortgage fraud. South Carolina criminal defense
lawyers are not allowed entry into the grand jury at any time, and prosecutors
rarely fail to obtain an indictment after presentment of their case to the grand jury.

Often targets of a mortgage fraud prosecution are invited by the prosecution to

avail themselves of the grand jury process and to testify in front of the grand jury.
Generally, a South Carolina criminal defense attorney should not allow a named
target of a federal criminal mortgage fraud investigation to testify before the grand
jury. Subjects and witnesses in a mortgage fraud prosecution are often subpoenaed
by the prosecutors to testify before the grand jury. A criminal defense attorney
should likewise generally advise a witness or subject to not testify if any part of the
testimony would possibly incriminate the client. With respect to a federal mortgage
fraud investigation, when a citizen receives a target letter, subject letter, or a
subpoena to testify before the grand jury, or is contacted in person by a law
enforcement officer such as an FBI special agent, a South Carolina criminal lawyer
who is experienced in federal prosecutions should be consulted immediately. One
of the biggest mistakes a mortgage fraud target, subject or witness can make is to
testify before the grand jury or speak to criminal investigators prior to consulting
with a criminal defense attorney. The 5th Amendment to the Constitution allows any
person, including a target, subject or witness in a mortgage fraud prosecution, to
not incriminate himself or herself. Interestingly, there is no 5th Amendment
protection for a corporation. Obviously, if a defendant has been indicted or arrested
for a federal mortgage fraud crime in South Carolina, an experienced SC mortgage
fraud lawyer should be consulted immediately.

South Carolina white collar criminal attorneys need to be aware of the types of
mortgage fraud that are prevalent in the state in order to effectively identify and
represent clients who are involved in mortgage fraud activities. Consumers need
to be aware of the variations of mortgage fraud so that they do not unwittingly
become a part of a scheme to defraud a bank or federally backed lending
institution. Federal mortgage fraud crimes in South Carolina are punishable by up
to 30 years imprisonment in federal prison or $1,000,000 fine, or both. It is
unlawful and fraudulent for a person to make a false statement regarding his or her
income, assets, debt, or matters of identification, or to willfully overvalue any land
or property, in a loan or credit application for the purpose of influencing in any way
the action of a federally backed financial institution.

Some of the applicable federal criminal statutes which may be charged in mortgage
fraud indictments include, but are not limited to, the following:

• 18 U.S.C. § 1001 - Statements or entries generally

• 18 U.S.C. § 1010 - HUD and Federal Housing Administration Transactions

• 18 U.S.C. § 1014 - Loan and credit applications generally

• 18 U.S.C. § 1028 - Fraud and related activity in connection with identification

documents

• 18 U.S.C. § 1341 - Frauds and swindles by Mail

• 18 U.S.C. § 1342 - Fictitious name or address

 • 18 U.S.C. § 1343 - Fraud by wire

• 18 U.S.C. § 1344 - Bank Fraud

• 18 U.S.C. § - Aiding and Abetting

• 18 U.S.C. § 371 - Conspiracy

• 42 U.S.C. § 408(a) - False Social Security Number

While the states experience the highest number of mortgage fraud cases are
California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, Utah,
Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina,
Tennessee, and Virginia, the state of South Carolina has seen a huge rise in the
number of mortgage fraud cases being prosecuted by the USAO, DOJ and FBI.

In South Carolina, a disproportionate number of mortgage fraud cases have

occurred in the coastal region. Some of the South Carolina counties with high
concentrations of mortgage fraud or bank fraud cases include Horry County,
Florence County, Georgetown County, Charleston County, Berkeley County,
Dorchester County, Beaufort County, Colleton County and Jasper County. Some of
the South Carolina cities with high concentrations of mortgage fraud or bank fraud
cases include Little River, North Myrtle Beach, Myrtle Beach, Murrells Inlet,
Georgetown, Awendaw, Mt. Pleasant, Charleston, North Charleston, James Island,
Isle of Palms, Sullivan’s Island, Folly Beach, Kiawah Island, Hollywood, Ravenel,
Beaufort, Blufton and Hilton Head Island. The reason for the increased number of
mortgage fraud and bank fraud criminal prosecutions in these areas is because
large number of condominium, condotels, townhouse and similar real estate
projects which proliferated in these areas. These real estate developments were
popular in areas close to the waterfront and bank lenders were willing to loan
money at a furious pace due to a perceived enormous demand.

There are a wide variety of schemes, artifices and conspiracies to perpetrate

mortgage frauds and band frauds with which the South Carolina white collar
criminal defense lawyer and consumers must be familiar. Typical mortgage fraud
schemes or conspiracies that have occurred in South Carolina and elsewhere
throughout the United States include the following:

Air Loans. The air loan mortgage fraud scheme is a loan obtained on a nonexistent
property or for a nonexistent borrower. Professional scam artists often work
together to create a fake borrower and a fake chain of title on a nonexistent
property. They then obtain a title and property insurance binder to present to the
bank. The scam artists often set up fake phone banks and mailboxes in order to
create fake employment verifications and W-2s, home addresses and borrower
telephone numbers. They may establish accounts for payments, and maintain
custodial accounts for escrows. Phone banks are used to impersonate an employer,
an appraiser, a credit agency, a law firm, an accountant, etc..., for bank verification
purposes. The air loan scam artists obtain the loan proceeds and no property is
ever bought or sold, and the bank is left with an unpaid loan that never had any
collateral.

Appraisal fraud. Appraisal fraud is often an integral part of most mortgage fraud
scams and occurs when a dishonest appraiser fraudulently appraises a property by
inflating its value. In most cases, after the seller receives the closing proceeds, he
will pay a kickback to the appraiser as a quid pro quo for the fake appraisal. In
most cases, the borrower doesn't make any loan payments and the house or
property goes into foreclosure.

Equity Skimming. In an equity skimming mortgage fraud scheme, an investor often

uses a straw buyer, false income documents, and false credit reports to obtain a
mortgage loan in the straw buyer's name. After the closing, the straw buyer signs
the property over to the investor in a quit claim deed which relinquishes all rights to
the property and provides no guaranty to title. The investor does not make any
mortgage payments, and rents the property until foreclosure takes place several
months later. Equity skimming also occurs when a scam artist purchases a
residential property whose owner is in default on his mortgage and/or his real estate
taxes, and then diverts rental income from the property for personal gain and does
not apply this rental income toward mortgage payments, the payment of taxes and
other property-related expenses.

Flipping. A flipping scheme occurs when the seller intentionally misrepresents the
value of a property in order to induce a buyer’s purchase. Flipping mortgage fraud
schemes usually involve a fraudulent appraisal and a grossly inflated sales price.

Foreclosure schemes. Foreclosure scheme scam artists prey on people with

mounting financial problems that that place them in danger of losing their home.
Homeowners in the early stages of foreclosure may be contacted by a fraudster
who represents to the homeowner that he can get rid of his debt and save his house
for an upfront fee, which the scam artist takes and then disappears. In a similar
foreclosure scheme, Homeowners are approached by a scam artist who offers to
help them refinance the loan. The homeowners are fraudulently induced to sign so-
called “refinance” documents only to later find out that they actually transferred
title to the house to the fraudster and then face eviction.

Nominee Loans/Straw buyers. One of the most frequent types of mortgage fraud
occurs when a "straw buyer" is used to hide the identity of the true borrower who
would not qualify for the mortgage. The straw buyer or nominee buyer generally
has good credit. The scam artist usually fills out the loan application for the straw
buyer, and falsifies the income and net worth of the straw buyer in order to qualify
for the loan. These fraud scams were popularized with the advent of the “stated
income” loans which did not require a borrower to prove his true income and net
worth – the bank just believed the income and net worth that was “stated” on the
loan application. Straw buyers are often duped into thinking that they're investing
in real estate that will be rented out, with the rental payments paying the
mortgage, and are sometime paid a nominal fee outside of closing. In most case,
no payments are made and the lender forecloses on the loan. Sometimes straw
buyers are actually in on the scam and are getting a cut of the proceeds.

Silent Second. In the silent second mortgage fraud scheme, the buyer borrows the
down payment for the purchase of the property from the seller through the
execution of a second mortgage which is not disclosed to the lending bank. The
lending bank is fraudulently led to believe that the borrower has invested his own
money for the down payment, when in fact, it is borrowed. The second mortgage is
generally not recorded to further conceal its status from the primary lending bank.

A mortgage fraud is usually reported to the FBI by the financial institution upon
which the fraud has been committed. Pursuant to the Bank Secrecy Act of 1970
(BSA), a bank must file a Suspicious Activity Report (SAR) with FinCEN if a
customer's actions indicate that the customer is laundering money or otherwise
violating a federal criminal law such as committing mortgage fraud. See 31 C.F.R. §
103.18(a). A bank is required to file a SAR no later than 30 calendar days after the
date of initial detection by the bank of facts that may constitute a basis for filing a
SAR, unless no suspect was initially identified on the date of the detection, in which
case the bank has up to 60 days to file the SAR. See 31 C.F.R. § 103.18(b). Once
FinCEN has analyzed the information contained in the SAR, if a criminal activity is
found to have occurred, then the case is turned over to the FBI and the DOJ or AUSO
for investigation and prosecution. The rise in FBI SARs reports involving mortgage
fraud went from approximately 2,000 in 1996 to over 25,000 in 2005. Of those
2005 SARs reports, 20,000 of involved borrower fraud, approximately 7,000
involved broker fraud, and approximately 2,000 involved appraiser fraud.

The FBI has identified a number of indicators of mortgage fraud of which the South
Carolina criminal white collar lawyer needs to be aware. These include inflated
appraisals or the exclusive use of one appraiser, increased commissions or bonuses
for brokers and appraisers, bonuses paid (outside or at settlement) for fee-based
services, higher than customary fees, falsifications on loan applications,
explanations to buyers on how to falsify the mortgage application, requests for
borrowers to sign a blank loan application, fake supporting loan documentation,
requests to sign blank employee forms, bank forms or other forms, purchase loans
which are disguised as refinance loans, investors who are guaranteed a re-purchase
of the property, investors who are paid a fixed percentage to sell or flip a property,
and when multiple “Holding Companies” are used to increase property values.

The range of defendants that a SC criminal lawyer will represent in a typical

mortgage fraud case may include straw borrowers or nominee borrowers, real
estate agents, developers, appraisers, mortgage brokers, and sometimes even
closing attorneys and bankers. Bankers often get involved in mortgage fraud scams
because they are receiving kickbacks from the borrowers or are paid bonuses for
the volume of loans made and thus ignore proper banking loan requirements and
protocols in order to make more money. Close scrutiny should be given to bank
loan applications, appraisals, HUD-1 closing statements, borrower’s W-2 and tax
returns when analyzing a potential mortgage fraud case for a potential client.

Federal judges who impose sentences for mortgage fraud normally rely upon the
United States Sentencing Guidelines, which are now advisory as a result of the U.S.
v. Booker case, when determining a sentence. A federal court calculates a
particular guideline range by assessing a defendant's criminal history, the
applicable base offense level, and the amount of the actual or intended loss.
Section 2B1.1 of the USSG sets forth a loss table which increases the base offense
level according to the amount of money involved in the mortgage fraud. Generally,
the more money which is lost in a mortgage fraud scam, the greater the sentence
the defendant receives. In some cases, a defendant may be subjected to
sentencing enhancements which means the defendant receives a greater sentence.
A defendant may receive an enhancement for the role in the offense if the court
determines that the defendant was an organizer, supervisor, or a recruiter, or used
a sophisticated means to facilitate a crime, abused a position a trust, or targeted a
vulnerable victim such as a disabled or elderly person. However, federal judges
now have wide latitude for imposing a sentence because they must consider the
broad statutory factors set forth in 18 U.S.C. 3553(a)which include the nature and
circumstances of the offense and the history and characteristics of the defendant,
the need for the sentence imposed to reflect the seriousness of the offense, to
promote respect for the law, and to provide just punishment for the offense, the
need to afford adequate deterrence to criminal conduct, the need to protect the
public from further crimes of the defendant, the need to provide the defendant with
needed educational or vocational training, medical care, or other correctional
treatment in the most effective manner, the kinds of sentences available, the
sentence recommended by the Sentencing Guidelines and any applicable guidelines
or policy statement therein, the need to avoid sentence disparities, and the need for
restitution.

There are some important strategic decisions which need to be made for the
defendant who has been charged or indicted for mortgage fraud. The defendant
should seriously consider the consequences of pleading guilty if he has in fact
committed the crime. A mortgage fraud defendant can receive up to a 3 level
downward departure for pleading guilty. A criminal lawyer representing a mortgage
fraud defendant can also file a motion for a downward departure and/or a motion
for a variance and argue factors to the court in support of an additional decrease in
a defendant’s sentence. An experienced federal attorney will be able to assess the
mortgage fraud defendant’s circumstances in order to help minimize the amount of
time served. Mitigating factors such as disparate sentences, 5K departures for
cooperation, aberrant behavior, property values, disparate sentences, family ties,
extraordinary restitution, diminished capacity, and extraordinary rehabilitation
should be considered as possible justifications for a lesser sentence.

A white collar criminal defense attorney in South Carolina must have an

understanding of the basics of the mortgage fraud in order to adequately represent
clients who have been charged or indicted with mortgage fraud violations. A white
collar bank fraud or mortgage fraud criminal conviction can have life altering
consequences for those defendants convicted of the same. A defendant who is
charged or indicted with the federal crime of mortgage fraud should consult with a
SC criminal lawyer who is knowledgeable about the substantive law regarding
mortgage fraud as well as the applicable federal sentencing guidelines.

Joseph P. Griffith, Jr.

SC Mortgage Fraud Attorney

SC Mortgage Fraud Lawyer

Joe Griffith Law Firm, LLC

7 State Street

Charleston, South Carolina 29401

(843) 225-5563

http://www.joegriffith.com

© 2010 Joseph P. Griffith, Jr.