BILL ANALYSIS
SENATE COMMITTEE ON PUBLIC SAFETY
Senator Mark Leno, Chair S
2009-2010 Regular Session B
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SB 239 (Pavley)
As Amended April 15, 2009
Hearing date: April 28, 2009
Penal Code
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MORTGAGE FRAUD
HISTORY
Source: Santa Clara County District Attorney
Prior Legislation: AB 976 (Papan) - Ch. 757, Stats. 1998
Support: California District Attorneys Association
Opposition:Taxpayers for Improving Public Safety
KEY ISSUES
SHOULD LAWS INVOLVING FRAUDULENT LOANS SECURED BY REAL PROPERTY BE
RECAST IN A STAND-ALONE STATUTE?
SHOULD PROCEDURES FOR OBTAINING ESCROW AND OTHER FINANCIAL RECORDS
BE APPLIED TO MORTGAGE FRAUD INVESTIGATIONS?
PURPOSE
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The purposes of this bill are to 1) require that fraud involving
mortgages be defined in a specific section of the Penal Code;
and 2) apply procedures for the seizure of records in
investigations concerning fraudulent escrow and financial
transactions to mortgage fraud investigations.
Existing law provides that theft occurs where a person does any
of the following:
Steals, takes ? or drives away the personal property of
another;
Fraudulently appropriates property which has been
entrusted to him or her;
Knowingly and designedly, by any false or fraudulent
representation or pretense, defrauds another person of
money, labor or personal or real property;
Causes or procures others to report falsely of his or
her wealth or mercantile character and by thus imposing
upon any person, obtains credit and thereby fraudulently
gets or obtains possession of money, or property or obtains
the labor or service of another. (Penal Code 484.)
Existing law generally provides that theft is a misdemeanor
where the value of the property, labor or services involved in
the theft does not exceed $400. Theft is grand theft - an
alternate felony-misdemeanor - where the value of the property,
labor, or services involved in the theft exceeds $400.
Specified exceptions, with a lower threshold amount for grand
theft, apply to certain kinds of property, such as avocados and
shellfish. (Pen. Code 487.)
Existing law includes various separately defined forms of theft,
including larceny, embezzlement and fraud. (Pen. Code 484 et
seq., 503 et seq., 532 et seq.)
Existing law further describes various forms of fraud - the
obtaining of property, labor or services by means of false or
misleading statements. (Pen. Code 532.)
Existing law provides that fraud is a form of theft. Fraud is
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committed under these circumstances:
Where a person knowingly and designedly, by a false or
fraudulent representation or pretense, defrauds another
person of money, labor, real or personal property, whether
real or personal; and
Where a person causes or procures others to report
falsely of his or her wealth or mercantile character, and
thereby obtains credit, and thereby fraudulently gets
possession of money or property, or obtains the labor or
service of another, is punishable in the same manner and to
the same extent as for larceny of the money or property so
obtained. (Pen. Code 532, subd. (a).)
Existing law provides that fraud must be proved by a writing or
false token, or by a note or memorandum signed by or in the
handwriting of the defendant, or by the testimony of two
witnesses, or the testimony of one witness and corroborating
circumstances. (Pen. Code 532, subd. (b).)
Existing law describes specific offenses and penalties
concerning the making or adopting of false writings to obtain
specified things or benefits. These offenses and penalties are
as follows:
Any person who makes, or causes to be made, any written
false statement intending that it shall be relied upon to
establish the financial condition or ability to pay of the
person making the statement, or a person or entity for whom
the person is acting, and for the purpose of obtaining
property, money, credit or insurance, is guilty of a public
offense.
Any person who knowingly benefits from the procurement
of property, money credit or insurance from such a
fraudulent writing, or who procures such a benefit for a
person or entity with whom the person is interested, is
also guilty of a public offense.
Any person who, in obtaining a benefit noted above,
represents in writing that a previously made statement is
true, when the statement is not true and the person
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adopting the statement knows these facts, the person is
also guilty of a public offense. (Pen. Code 532a.)
Obtaining money, credit, property or insurance through a
fraudulent writing is a misdemeanor, unless other facts are
proved.
Where the fraudulent writing involves the use of a
fictitious personal or business name, business address or
social security number, or where the person otherwise
represents himself or herself to be another person or
business, the crime is an alternate felony-misdemeanor,
with a maximum fine of $2,500 and $5,000 for a misdemeanor
and felony respectively.
A person subject to prosecution under the fraudulent
writing provisions in Penal Code Section 532a is also
subject to prosecution under any other applicable law.
Existing law (Pen. Code 532f) provides the following
concerning false statements made in connection with loans
secured by real property where such statements violate Penal
Code Section 532a:
A violation of Section 532a by a person other than the
real property loan applicant is a misdemeanor, punishable
by a maximum jail term of one year, a fine of up to
$10,000, or both.
A violation of Section 532a by the real property loan
applicant is a misdemeanor, punishable by a maximum jail
term of six months, a fine of up to $10,000, or both.
The fact that a transaction can be the basis of
prosecution under this section does not preclude
prosecution under any other law.
Existing law allows a peace officer to obtain a judicial order
to receive a person's financial information, utility records, or
escrow and title records under specified circumstances. (Pen.
Code 1326.1-1326.2.)
Existing law allows the financial institution, holder of utility
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records, or holder of escrow and title records to notify the
customer of the above judicial order unless the court orders the
institution to withhold notice based on a finding that notice
to the customer would impede the peace officer's investigation.
(Pen. Code 1326.1-1326.2.)
Existing law declares that a financial institution, holder of
utility records, or holder of escrow and title records shall not
be civilly liable for following a judicial order to disclose
financial information to a peace officer, or to withhold notice
to the customer. (Pen. Code 1326.1-1326.2.)
Existing law generally allows a party to a lawsuit to obtain
records pursuant to a subpoena duces tecum if good cause is
shown. (Code of Civil Proc. 1985 et seq.; Evid. Code 1560
et seq.)
Existing law provides, in cases other than those involving
utility, escrow and title records, if the party wishes to obtain
financial records, the party must give the customer an
opportunity to quash the subpoena or the party must follow
specific procedures in a grand jury proceeding. (Gov. Code
7476.)
This bill includes the following legislative findings:
California has a high incidence of mortgage fraud.
Mortgage fraud profoundly harms citizens and the
economy.
Mortgage fraud is particularly harmful because:
o it disproportionately affects low-income
borrowers;
o fraud leads to foreclosures and loss of
property values; and
o mortgage fraud is a component of credit
paralysis and economic chaos.
Mortgage fraud can be prosecuted as a felony as theft or
general fraud crimes, although a specific mortgage fraud
crime, which need not be used for prosecutions, is a
misdemeanor.
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Mortgage fraud must be investigated fully and quickly
investigated or evidence will be destroyed.
This bill includes the following legislative declarations and
statements of intent:
Mortgage fraud definitions and investigations should be
consistent and organized.
Mortgage fraud should be prosecuted under one statute so
as to eliminate confusing and redundant elements in felony
crimes applicable to mortgage fraud under existing law.
Mortgage fraud should be tracked so as to allow
investigators to uncover related schemes and discover
recidivists and to demonstrate a need for federal funds.
Mortgage fraud investigations should be efficient and
thorough, as is the case with investigations of escrow
fraud.
This bill defines mortgage fraud as a separate form of fraud, in
which the fraudulent acts involve loans secured by real property
and places mortgage fraud in a stand-alone section, but with the
same alternate felony-misdemeanor penalties as the general crime
of fraud.
This bill applies the procedures for obtaining escrow and
financial records - production of record pursuant to a court
order upon a showing of reasonable grounds to believe the
records are necessary to investigate felony fraud - to mortgage
fraud investigations.
This bill eliminates an alternative form of misdemeanor mortgage
fraud in existing law.
RECEIVERSHIP/OVERCROWDING CRISIS AGGRAVATION IMPLICATIONS
California continues to face a severe prison overcrowding
crisis. The Department of Corrections and Rehabilitation (CDCR)
currently has about 170,000 inmates under its jurisdiction. Due
to a lack of traditional housing space available, the department
houses roughly 15,000 inmates in gyms and dayrooms.
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California's prison population has increased by 125% (an average
of 4% annually) over the past 20 years, growing from 76,000
inmates to 171,000 inmates, far outpacing the state's population
growth rate for the age cohort with the highest risk of
incarceration.<1>
In December of 2006 plaintiffs in two federal lawsuits against
CDCR sought a court-ordered limit on the prison population
pursuant to the federal Prison Litigation Reform Act. On
February 9, 2009, the three-judge federal court panel issued a
tentative ruling that included the following conclusions with
respect to overcrowding:
No party contests that California's prisons are
overcrowded, however measured, and whether considered
in comparison to prisons in other states or jails
within this state. There are simply too many
prisoners for the existing capacity. The Governor,
the principal defendant, declared a state of emergency
in 2006 because of the "severe overcrowding" in
California's prisons, which has caused "substantial
risk to the health and safety of the men and women who
work inside these prisons and the inmates housed in
them." . . . A state appellate court upheld the
Governor's proclamation, holding that the evidence
supported the existence of conditions of "extreme
peril to the safety of persons and property."
(citation omitted) The Governor's declaration of the
state of emergency remains in effect to this day.
. . . the evidence is compelling that there is no
relief other than a prisoner release order that will
remedy the unconstitutional prison conditions.
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<1> "Between 1987 and 2007, California's population of ages 15
through 44 - the age cohort with the highest risk for
incarceration - grew by an average of less than 1% annually,
which is a pace much slower than the growth in prison
admissions." (2009-2010 Budget Analysis Series, Judicial and
Criminal Justice, Legislative Analyst's Office (January 30,
2009).)
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. . .
Although the evidence may be less than perfectly
clear, it appears to the Court that in order to
alleviate the constitutional violations California's
inmate population must be reduced to at most 120% to
145% of design capacity, with some institutions or
clinical programs at or below 100%. We caution the
parties, however, that these are not firm figures and
that the Court reserves the right - until its final
ruling - to determine that a higher or lower figure is
appropriate in general or in particular types of
facilities.
. . .
Under the PLRA, any prisoner release order that we
issue will be narrowly drawn, extend no further than
necessary to correct the violation of constitutional
rights, and be the least intrusive means necessary to
correct the violation of those rights. For this
reason, it is our present intention to adopt an order
requiring the State to develop a plan to reduce the
prison population to 120% or 145% of the prison's
design capacity (or somewhere in between) within a
period of two or three years.<2>
The final outcome of the panel's tentative decision, as well as
any appeal that may be in response to the panel's final
decision, is unknown at the time of this writing.
This bill does not appear to aggravate the prison overcrowding
crisis outlined above.
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<2> Three Judge Court Tentative Ruling, Coleman v.
Schwarzenegger, Plata v. Schwarzenegger, in the United States
District Courts for the Eastern District of California and the
Northern District of California United States District Court
composed of three judges pursuant to Section 2284, Title 28
United States Code (Feb. 9, 2009).
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COMMENTS
1. Need for This Bill
According to the author:
The nation's foreclosure crisis has given rise to a
variety of mortgage fraud scams that are targeting
distressed homeowners -- in particular, the widespread
practice of mortgage brokers using false information
to obtain loans for borrowers, who are in turn often
misled about the terms of those loans. The Federal
Bureau of Investigation (FBI) currently estimates
annual losses from fraudulent schemes in the amount of
$4 billion to $6 billion. The harms suffered by
unsuspecting borrowers caught up in fraud for profit
schemes can be devastating.
The investigations of mortgage fraud complaints are
complex and document driven. Time is of the essence
in these cases, especially in cases of foreclosure,
but frequently victim borrowers do not possess
important transaction related documents that would aid
investigators. Recovery of those documents from
lenders and escrow companies is necessary but
extremely time consuming, made ever more difficult by
the avalanche of cases and the increasing number of
companies that are going out of business. The bill
would also allow law enforcement to obtain crucial
real estate records more quickly via a court order.
2. Peace Officers May Obtain Financial, Utility, and Escrow
Records under Specified Conditions; this Bill Applies that
Process to Mortgage Documents
Under existing law a peace officer may obtain a judicial order
to receive a person's financial information, utility records, or
escrow and title records if all of the following is true:
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The peace officer makes a written application to the
judge (which does not require notice to the other person).
The application reflects specific and articulable facts
that provide reasonable grounds to believe the records are
relevant and material to an ongoing felony investigation.
The application specifies the particular records to be
produced.
Without this authorization for a judicial order for seizure of
escrow and title records, a peace officer would be required to
obtain a search warrant. But to obtain a search warrant, the
officer must prove that there is probable cause to believe that
he or she will find evidence of a crime in a particular
location.
The United States Constitution does not prohibit obtaining
financial or escrow records through an application by a peace
officer showing reasonable grounds to believe the record.
Federal constitutional law does not acknowledge that a person
has a right to privacy in his or her financial records or
telephone records that are maintained by a third party. (4
Witkin & Epstein, Cal. Criminal Law (3rd ed. 2000) Illegal Evid.
197-198, pp. 830-832.)
This bill would make mortgage documents subject to the existing
process that applies where law enforcement obtains a judicial
order to obtain escrow records through a statement that the
records are relevant to an ongoing felony investigation.
Arguably, the interests and concerns in criminal investigations
of fraudulent mortgage activity are similar to those relating to
fraudulent escrow activity. In a typical real property escrow,
the escrow company holds loan amounts for transfer in accordance
with specific instructions. Arguably, fraud in the obtaining of
a mortgage is of the same gravity as fraud in connection with an
escrow.
3. Senate Judiciary Analysis of Mortgage Fraud Bill from 1997 -
AB 1231 (Umberg), Chapter 482, Statutes of 1997 - Argument
Summary and Application to this Bill
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The Senate Judiciary Committee analysis of AB 1231 of 1997,
a mortgage fraud bill that created Penal Code Section 532f,
stated:
Proponents argue that the existing penalties -- 6
months jail and/or $1,000 fine -- are simply
inadequate to deter mortgage fraud, the rewards of
which often exceed $100,000. This bill would increase
the penalty for loan applicants making knowingly false
statements in connection with a loan application from
the current $1,000 fine to a possible $10,000 fine.
The present six months jail sentence would remain the
same.
For persons (brokers, appraisers, etc.) who knowingly
assist in the mortgage fraud, however, the penalties
would be significantly increased. Instead of six
months and/or a $1,000 fine, a violator would face a
one year sentence and/or a $10,000 fine. In addition,
the defendant would be required to make full
restitution to the lender for its economic losses
incurred as a result of the defendant's acts. (This
restitution requirement was added by the July 12
amendments, in place of the previously proposed
$100,000 fine, which was believed to be excessive for
a misdemeanor.) Proponents assert that AB 1231 would
create a financial deterrent to a financial crime, and
is a significant step in the effort to fight mortgage
fraud.
The Judiciary Committee analysis in 1997 did not note an
important consideration: The bill included a provision stating
that mortgage fraud could be prosecuted under any other
applicable provision of law.
Mortgage fraud can be prosecuted under the most general fraud
statute - Penal Code Section 532, which prohibits the use of a
false or fraudulent representation to obtain credit, property,
money, labor or services. The determination as to whether a
crime charged under the general fraud statute is a misdemeanor
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or alternate felony-misdemeanor (wobbler) turns on the value of
the property, labor, et cetera, involved in the offense. The
nature of the crime is determined with reference to the crime of
larceny (theft). Where the value of the property (or other
object of the fraud) is $400 or less, the crime is a
misdemeanor. Where the value of the property is greater than
$400, the fraud is a wobbler.
It also appears that mortgage fraud can be charged as making of
a false financial statement, as defined by Penal Code Section
532a. Section 532a is a general fraud statute concerning
fraudulent writings, not a law addressing a certain form of
fraud. Penal Code Section 532a is a felony where the defendant
used a false personal name or otherwise falsely represented
himself or herself to be another person or business.
The amendments to the mortgage fraud statute in 1997 did not
truly raise the penalties for a fraud involving mortgages per
se. Rather, the amendments only raised the misdemeanor
penalties for an alternative provision for prosecuting mortgage
fraud.
4. Organization of Mortgage Fraud Crime and Investigation
Provisions in One Section
This bill essentially places the two major forms of mortgage
fraud - grand theft and fraud or false pretenses - and places
them in one section of the Penal Code. The bill does not appear
to define as criminal acts that are not criminal under existing
law. The use of materially false statements, misrepresentations
and omissions to obtain loans secured by real property is a
felony under existing law.
This same section includes provisions for obtaining, through a
court order based on belief that specified documents contain
evidence of mortgage fraud, loan documents other than escrow
documents. It appears that the document seizure provisions are
new, although arguably the bill essentially extends the existing
procedures for obtaining escrow and certain financial documents
to additional mortgage documents.
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The sponsor of the bill - the Santa Clara County District
Attorney - argues that placing various forms of mortgage fraud
in one section and using consistent terms concerning loans
secured by real property will make the law clearer for
prosecutors, brokers, lenders and attorneys and advisors to
parties to mortgages. Further, under existing law prosecutors
must use a combination of investigative tools to obtain escrow
documents, financial records and loan document. Allowing access
to all loan documents through a single process will simplify the
investigative process for prosecutors and interested parties.
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DOES THIS BILL ORGANIZE VARIOUS FORMS OF THEFT AND FRAUD
CONCERNING MORTGAGES INTO A SINGLE AND COHERENT SECTION?
DOES THIS BILL, IN APPLYING AN EXISTING PROCEDURE FOR OBTAINING
ESCROW AND FINANCIAL RECORDS PURSUANT TO A COURT ORDER TO
MORTGAGE DOCUMENTS SIMPLIFY AN INHERENTLY COMPLEX PROCESS FOR
EXAMINING DOCUMENTS RELATED TO MORTGAGE FRAUD?
5. Suggested Amendments to Clarify the Intent and Materiality
Elements of Mortgage Fraud
The bill appears to contain some inartful, inconsistent and
perhaps confusing terms. For example, the bill provides that a
person commits fraud where he or she "knowingly makes any
deliberate misstatement, misrepresentation . . . with the
intent that it be relied on by" a lender, borrower or other
party. The term "deliberate" conveys a purposeful and
well-considered state of mind. Generally, the term "knowingly"
simply conveys or means that a person did not act accidentally
or unconsciously. A person who acts knowingly need not intend a
particular result. Arguably, the use of the term "knowingly" is
inconsistent with the element in this crime that the person
intended that his or her statement or omission be relied upon by
a party to the loan or loan process.
The mortgage fraud described by the bill does not include a
requirement that a person's statement or omission be "material"
to the loan process. In the context of a mortgage process, a
statement or omission is "material" where it would likely
determine whether or not a person obtained a loan. As such, the
bill could base criminal liability on a relatively
inconsequential item that would not determine whether or not the
person received a loan.
It is suggested that the relevant provisions in the bill state
that a person commits mortgage fraud where he or she
deliberately makes any material misrepresentation or omission
with the intent that it be relied on by a party to a mortgage
transaction.
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6. Suggested Amendment to Clarify that this Bill does not Expand
what Constitutes Grand Theft or Fraud
This bill concerns fraud involving loans secured by real
property. In virtually any foreseeable case, the value of the
fraud would exceed $400, the threshold value for grand theft.
Nevertheless, it is conceivable that a person could commit
mortgage fraud as to a home-equity line of credit where the
amount taken was $400 or less.
It is suggested that the bill be amended to provide that fraud
concerning loans secured by real property can be prosecuted
under Penal Code Section 532f if the amount involved in the
fraud meets the threshold for grand theft as set out in Penal
Code Section 487, subdivision (a).
SHOULD THE BILL BE AMENDED TO STATE THAT FRAUD INVOLVING LOANS
SECURED BY REAL PROPERTY CAN BE CHARGED UNDER THE MORTGAGE FRAUD
STATUTE - AN ALTERNATE FELONY-MISDEMEANOR - IF THE VALUE OF THE
ALLEGED FRAUD MEETS THE THRESHOLD FOR GRAND THEFT AS DEFINED IN
PENAL CODE SECTION 487, SUBDIVISION (a)?
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