INTRODUCED BY   Senator Pavley
   (Coauthor: Senator Hancock)

                        FEBRUARY 24, 2009

   An act to repeal and add Section 532f of the Penal Code, relating
to crimes.


   SB 239, Pavley. Mortgage fraud.
   Existing law provides that a person, other than the loan
applicant, who makes false financial statements in connection with an
application for a loan to be secured by real property is guilty of a
misdemeanor, punishable by a fine not exceeding $10,000, by
imprisonment in a county jail not exceeding one year, or by both the
fine and imprisonment; and by restitution to the victim, as
   This bill would delete this provision and provide instead for the
offense of mortgage fraud, as defined, a violation of which would be
a public offense punishable by imprisonment in the state prison or in
a county jail for not more than one year. The bill would provide
that mortgage fraud may only be prosecuted when the value of the
alleged fraud meets the threshold for grand theft, as specified. The
bill would set forth legislative findings, declarations, and intent
with respect to its enactment. By revising existing crimes and
creating new crimes, this bill would impose a state-mandated local
   The California Constitution requires the state to reimburse local
agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
   This bill would provide that no reimbursement is required by this
act for a specified reason.


  SECTION 1.  (a) The Legislature finds and declares the following:
   (1) California is one of the leading states in the incidence of
mortgage fraud.
   (2) Mortgage fraud has a profoundly harmful impact on the citizens
of this state and its economy.
   (3) The harms associated with mortgage fraud include foreclosures
that disproportionately affect low-income borrowers, the
deterioration of neighborhoods stricken by foreclosures and
plummeting property values, the proliferation of fraudulent loan
modification scams aimed at defrauding desperate borrowers, the
paralysis of the free flow of credit in the lending market, and chaos
in the economy characterized by massive increases in unemployment,
bankruptcies, and investor capital losses.
   (4) While perpetrators of mortgage fraud are currently subject to
prosecution under general felony theft statutes, the only California
statute specifically dedicated to mortgage fraud treats the crime as
a misdemeanor.
   (5) Time is of the essence in the investigative stage of real
estate fraud-related cases, which are dependent on the timely
acquisition of documents held by parties to real estate transactions
such as mortgage brokers, title and escrow companies, and lenders.
The current statutory scheme hampers the ability of law enforcement
to efficiently gather those documents and determine whether crimes
have occurred.
   (b) It is the intent of the Legislature in enacting this measure
to do all of the following:
   (1) Encourage and facilitate a shift of prosecution of mortgage
fraud cases that otherwise would be prosecuted under misdemeanor and
general felony theft statutes to prosecution under one specifically
dedicated felony mortgage fraud statute that carries the same
penalties as the currently utilized general felony theft statutes.
   (2) Facilitate the tracking of mortgage fraud cases, which will
assist law enforcement in accessing federal funds for the purpose of
combating mortgage fraud to the extent they are available.
   (3) Eliminate confusion about the elements of the crime of
mortgage fraud and the penalties for that crime and help to ensure
that acts that should be prosecuted as felonies are not
inappropriately prosecuted as misdemeanors.
   (4) Provide an efficient method to obtain necessary documents from
real estate recordholders in fraud-related cases.
  SEC. 2.  Section 532f of the Penal Code is repealed.
  SEC. 3.  Section 532f is added to the Penal Code, to read:
   532f.  (a) A person commits mortgage fraud if, with the intent to
defraud, the person does any of the following:
   (1) Deliberately makes any misstatement, misrepresentation, or
omission during the mortgage lending process with the intention that
it be relied on by a mortgage lender, borrower, or any other party to
the mortgage lending process.
   (2) Deliberately uses or facilitates the use of any misstatement,
misrepresentation, or omission, knowing the same to contain a
misstatement, misrepresentation, or omission, during the mortgage
lending process with the intention that it be relied on by a mortgage
lender, borrower, or any other party to the mortgage lending
   (3) Receives any proceeds or any other funds in connection with a
mortgage loan closing that the person knew resulted from a violation
of paragraph (1) or (2) of this subdivision.
   (4) Files or causes to be filed with the recorder of any county in
connection with a mortgage loan transaction any document the person
knows to contain a deliberate misstatement, misrepresentation, or
   (b) An offense involving mortgage fraud shall not be based solely
on information lawfully disclosed pursuant to federal disclosure
laws, regulations, or interpretations related to the mortgage lending
   (c) (1) Notwithstanding any other provision of law, an order for
the production of any or all relevant records possessed by a real
estate recordholder in whatever form and however stored may be issued
by a judge upon a written ex parte application made under penalty of
perjury by a peace officer stating that there are reasonable grounds
to believe that the records sought are relevant and material to an
ongoing investigation of a felony fraud violation.
   (2) The ex parte application shall specify with particularity the
records to be produced, which shall relate to a party or parties in
the criminal investigation.
   (3) Relevant records may include, but are not limited to, purchase
contracts, loan applications, settlement statements, closing
statements, escrow instructions, payoff demands, disbursement
reports, or checks.
   (4) The ex parte application and any subsequent judicial order may
be ordered sealed by the court upon a sufficient showing that it is
necessary for the effective continuation of the investigation.
   (5) The records ordered to be produced shall be provided to the
peace officer applicant or his or her designee within a reasonable
time period after service of the order upon the real estate
   (d) (1) Nothing in this section shall preclude the real estate
recordholder from notifying a customer of the receipt of the order
for production of records, unless a court orders the real estate
recordholder to withhold notification to the customer upon a finding
that this notice would impede the investigation.
   (2) If a court has made an order to withhold notification to the
customer under this subdivision, the peace officer who or law
enforcement agency that obtained the records shall notify the
customer by delivering a copy of the ex parte order to the customer
within 10 days of the termination of the investigation.
   (e) (1) Nothing in this section shall preclude the real estate
recordholder from voluntarily disclosing information or providing
records to law enforcement upon request.
   (2) This section shall not preclude a real estate recordholder, in
its discretion, from initiating contact with, and thereafter
communicating with and disclosing records to, appropriate state or
local agencies concerning a suspected violation of any law.
   (f) No real estate recordholder, or any officer, employee, or
agent of the real estate recordholder, shall be liable to any person
for either of the following:
    (1) Disclosing information in response to an order pursuant to
this section.
    (2) Complying with an order under this section not to disclose to
the customer the order, or the dissemination of information pursuant
to the order.
   (g) Any records required to be produced pursuant to this section
shall be accompanied by an affidavit of a custodian of records of the
real estate recordholder or other qualified witness which states, or
includes in substance, all of the following:
   (1) The affiant is the duly authorized custodian of the records or
other qualified witness and has authority to certify the records.
   (2) The identity of the records.
   (3) A description of the mode of preparation of the records.
   (4) The records were prepared by the personnel of the business in
the regular course of business at or near the time of an act,
condition, or event.
   (5) Any copies of records described in the order are true copies.
   (h) A person who violates this section is guilty of a public
offense punishable by imprisonment in the state prison or in a county
jail for not more than one year.
   (i) For the purposes of this section, the following terms shall
have the following meanings:
   (1) "Person" means any individual, partnership, firm, association,
corporation, limited liability company, or other legal entity.
   (2) "Mortgage lending process" means the process through which a
person seeks or obtains a mortgage loan, including, but not limited
to, solicitation, application, origination, negotiation of terms,
third-party provider services, underwriting, signing and closing, and
funding of the loan.
    (3) "Mortgage loan" means a loan or agreement to extend credit to
a person that is secured by a deed of trust or other document
representing a security interest or lien upon any interest in real
property, including the renewal or refinancing of the loan.
   (4) "Real estate recordholder" means any person, licensed or
unlicensed, that meets any of the following conditions:
   (A) Is a title insurer that engages in the "business of title
insurance" as defined by Section 12340.3 of the Insurance Code, an
underwritten title company, or an escrow company.
   (B) Functions as a broker or salesperson by engaging in any of the
type of acts set forth in Sections 10131, 10131.1, 10131.2, 10131.3,
10131.4, and 10131.6 of the Business and Professions Code.
   (C) Engages in the making or servicing of loans secured by real
   (j) Fraud involving a mortgage loan may only be prosecuted under
this section when the value of the alleged fraud meets the threshold
for grand theft as set out in subdivision (a) of Section 487.
  SEC. 4.  No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of the
Government Code, or changes the definition of a crime within the
meaning of Section 6 of Article XIII B of the California