Sunday, July 03, 2016

Case o' The Week: Better a Lender than a Borrower Be - Lindsey and Mortgage Fraud Defenses

 “Two wrongs do not make a right.”
Hon. Judge Ronald Gould
(Particularly if you’re the schmoe with the wrong that leads to a federal fraud conviction).
United States v. Lindsey, 2016 WL 3536659, *4. (9th Cir. June 28, 2016), decision available here.

Players: Decision by Judge Gould, joined by Judges Noonan and Friedland.  

Facts: Lindsey was a mortgage officer and real estate broker. Id. at *1. He was part of a complex mortgage fraud scheme. Id. The properties purchased by straw borrowers foreclosed, but Linsey earned commissions, rent payments, and diverted escrow moneys. Id. After trial he was convicted of nine counts of wire fraud, and one count of aggravated theft. Id. To contest the “materiality” of the false representations at trial, Lindsey tried to present evidence of the lenders’ practice and policies – but was thwarted by the district court during openings, and was warned off the issue of lender negligence later in trial. Id. at *1, *2.

Issue(s): “[Lindsey] appeals his convictions on the ground that he was denied his constitutional right to present a defense.” Id. “[He] contends that the district court erred by preventing him from presenting evidence about the ‘stated income/ no doc’ loans, thus barring him ‘from challenging the materiality of false statements on a loan type that invites the applicant to state their income without justification or support.’ According to Lindsey, this prevented him from presenting a complete defense, a right that is constitutionally protected.” Id. at *3.

Held: “[W]e hold that lender negligence in verifying loan application information, or even intentional disregard of the information, is not a defense to fraud, and so evidence of such negligence or intentional disregard is inadmissible as a defense against charges of mortgage fraud. We further hold that, when a lender requests specific information in its loan applications, that information is objectively material as a matter of law, regardless of the lenders' policies or practices with respect to use of that information.” Id. at *1. “We join several of our sister circuits in holding that a victim's negligence is not a defense to wire fraud. Evidence of lender negligence is thus not admissible as a defense to mortgage fraud.” Id. at *4.

Of Note: “But everyone was doing it,” is the first protest of our mortgage fraud clients. The second is, “the lenders knew precisely what was going on, and didn’t care about what was on the application.” For whatever its worth, Judge Gould acknowledges this fairness concern: he understands “the desire to see lenders should responsibility for their role in the mortgage crises of the last decade.” Id. at *3. Unfortunately, that sympathy is not enough to earn a defense on the materiality charge.

How to Use: What if (as we all know), the lenders were intentionally blind to these “liar loans” during the feeding frenzy of greed that produced the mortgage crisis? Surely these loan misstatements aren’t “material,” when made to lenders who were effectively co-conspirators? Not so much, sadly. Judge Gould pens a new Ninth rule: “We adopt the First Circuit's bright-line test, and hold, as a matter of law, that when a lender requests specific information in its loan applications, false responses to those specific requests are objectively material for purposes of proving fraud.” Id. at *5. Take note: this new rule effectively vitiates the materiality requirement for federal mortgage fraud, making these tough cases even more difficult to defend.
For Further Reading: Over several years, thirty-seven folks in two sweeps were prosecuted by ND Cal USAOP, for low-level drug sales in S.F.’s Tenderloin. They were all African American. This was despite the fact that many Asian, Latino, and White drug dealers also call the ‘Loin home. For over a year, the FPD fought for discovery on these cases based on selective prosecution and selective enforcement. The office commissioned statistical studies, undertook analysis of hundreds of incident reports, interviewed drug addicts --it was an unprecedented collaborative effort, headed by AFPD Galia Amram. 
  On June 30, 2016, the Honorable Judge Edward Chen granted the discovery motion based on selective enforcement, in a lengthy, carefully-reasoned opinion that is one of the first to find the defense had cleared the necessary Armstrong evidentiary hurdles. It is a remarkable opinion, both for its detailed analysis and its sobering account of the SF Police Department’s treatment of African Americans. See decision here. 
  It has been one hundred and thirty years since San Francisco’s treatment of Chinese launderers lead to the Supreme Court’s decision in Yick Wo, 188 U.S. 356 (1886). Sadly ironic that another historic discrimination opinion now comes from the City by the Bay. See article here

Steven Kalar, Federal Public Defender, N.D. Cal. Website at


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