Everybody LOVES bank fraud!

Is it just me, or do loan orginators routinely encourage bank fraud? First, the background: There are a variety of federal and state laws that make it a VERY serious crime to mislead a lender for purposes of getting a mortgage. At the federal level, 18 USC sec 1014 makes it a crime to “knowingly make any false statement or report . . . for the purpose of influencing in any way the action of” a commercial lender. (Emphasis added). The penalty? A cool million dollar fine and/or 30 years in federal prison. Yup, not a misprint: 30 years in Club Fed. On the state level, RCW 19.44.080 makes it a crime to “knowingly make any misstatement, misrepresentation, or omission during the mortgage lending process knowing that it may be relied on by a mortgage lender.” (Emphasis added). The penalty? Its a class B felony, so 10 years in the joint and/or $20 grand.

As indicated by these laws, as a society we cherish honesty to lenders and believe very strongly that anyone who is dishonest AT ALL in order to secure a loan has committed a very serious crime. The problem, of course, appears to be that nobody in the RE industry agrees. Rather, it appears that the RE industry treats this type of bank fraud (misleading a lender in order to facilitate getting a loan) to be something akin to taking a second serving of dessert: bad form, sure, but if nobody knows…

You may be thinking: “What on earth is Craig talking about? Everyone I know is honest and abides by the law!” Well, think further, and in particular think about a buyer’s inspection contingency response. The NWMLS provides a Form 35R specifically for resolution of the inspection contingency. By its terms, the 35R and any other notices or addenda relating to any modifications or repairs becomes a part of the contract, and of course the lender has the right to receive (and buyer has the obligation to provide to the lender) the entire contract.

How many agents out there have used the Form 35R to request repairs and/or price reductions? And have you gotten any feedback from the loan originator once he or she receives a copy of the signed form? I have. The 35R had the fourth box checked (buyer proposes modifications) and the text below, “Sale price reduced to $440k.” About as simple as can be — but apparently still likely to arouse the suspicions of the underwriters, thus complicating the process. The loan originator’s request? “Toss” the 35R and instead use a Form 34 for a simple price reduction.

The problem? That clearly violates the state law above, and probably the federal law too (at least it will when the buyer signs at escrow a statement indicating that he has provided the lender with all requested information, including a complete copy of the PSA). In other words, even LENDERS encourage violation of the laws designed entirely to protect lenders.

And one wonders how we inflated the housing bubble…..