BILL ANALYSIS
SB 239
Page 1
Date of Hearing: June 23, 2009
Counsel: Kathleen Ragan
ASSEMBLY COMMITTEE ON PUBLIC SAFETY
Juan Arambula, Chair
SB 239 (Pavley) - As Amended: May 5, 2009
SUMMARY : Provides for a new alternate misdemeanor/felony for
the offense of mortgage fraud, as specified. Specifically, this
bill :
1)Creates the offense of "mortgage fraud", a public offense
punishable by imprisonment in the state prison or in a county
jail for not more than one year.
2)States that mortgage fraud may only be prosecuted when the
value of the alleged fraud meets the threshold for grand
theft, as specified.
3)Contains legislative findings and declarations, including, but
not limited to, the following:
a) California is one of the leading states in the incidence
of mortgage fraud.
b) Mortgage fraud has a profoundly harmful impact on the
citizens of this state and its economy.
c) 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, etc.
d) 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.
e) Time is of the essence in the investigative stage of
real estate fraud-related cases, which are dependent on the
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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.
4)States legislative intent in enacting this bill to accomplish
all of the following:
a) Encourage and facilitate a shift of prosecution of
mortgage fraud cases to prosecution under one specifically
dedicated felony mortgage fraud statute that carries the
same penalties as the currently utilized general felony
theft statutes.
b) 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.
c) 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.
d) Provide an efficient method to obtain necessary
documents from real estate record holders in fraud-related
cases.
5)Provides that a person commits mortgage fraud if, with the
intent to defraud, the person commits specified acts,
including but not limited to deliberately making 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; deliberately uses or facilitates the
use of any misstatement or omission, knowing the same to
contain a misrepresentation or omission; receives any proceeds
or any other funds in connection with a mortgage loan closing
that the person knew resulted from a violation of the
provisions of this bill; or files or causes to be filed with
the county recorder any document the person knows to contain a
deliberate misstatement, misrepresentation, or omission.
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6)States that 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 process.
7)Allows a judge to issue an ex parte order for the production
of all relevant records held by any real estate record holder,
providing the ex parte application specifies with
particularity the records to be produced, which shall relate
to a party or parties in the criminal investigation.
EXISTING LAW :
1)Defines "grand theft" as an alternate misdemeanor/felony where
the value of the property, labor, or services involved in the
theft exceeds $400. Specifies exceptions to the $400
threshold for certain types of property, such as avocados and
shellfish. (Penal Code Section 487.)
2)Includes various separately-defined forms of theft, including
larceny, embezzlement, and fraud. (Penal Code Sections 484 et
seq.; 503 et seq.; 532 et seq.)
3)Describes various forms of fraud, such as the obtaining of
property, labor, or services by means of false or misleading
statements. (Penal Code Section 532.)
4)Specifies that fraud is committed under the following
circumstances [Penal Code Section 532(a)]:
a) Where a person knowingly and designedly, by a false or
fraudulent representation or pretense, defrauds another
person of money, labor, real or personal property; and,
b) 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.
5)States that fraud is punishable in the same manner and to the
same extent as larceny of the money or property so obtained.
[Penal Code Section 532(a).]
6)Provides that fraud must be proved by a writing or false
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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. [Penal Code Section 532(b).]
7)States that a person subject to prosecution under the
fraudulent writing provisions in Penal Code Section 532(a) is
also subject to prosecution under any other law.
8)Makes it a public offense to make a false statement in
writing, with the intent that it be relied upon, respecting
the financial condition or ability to pay for the purpose of
procuring in any form the payment of cash, the making of a
loan or the extension of credit and other specified
transactions. [Penal Code Section 532a(1).]
9)States that a person who makes any of the false financial
statements or other written statements specified in Penal Code
Section 532a is guilty of an alternate felony/misdemeanor
punishable by a fine not exceeding $5,000 or by imprisonment
in the state prison or by both such fine and imprisonment, or
by a fine not exceeding $2,500 or by imprisonment in the
county jail not exceeding one year, or by both such fine and
imprisonment. [Penal Code Section 532a(4).]
10)States that Penal Code Section 532a shall not preclude the
applicability of any other provision of the criminal law which
may apply to any transaction. [Penal Code Section 532a(5).]
11)Defines, in federal law, the term "mortgage banking business"
as an organization which finances or refinances any debt
secured by an interest in real estate, including private
mortgage companies and any subsidiaries of such organization,
and whose activities affect interstate or foreign commerce.
(18 U.S.C. Section 27.)
12)Defines, in federal law, the term "financial institution" as
including, among other entities, a mortgage lending business
or any person or entity that makes in whole or in part a
federally related mortgage loan, as defined. (18 U.S.C.
Section 20.)
13)Defines, in federal law, "bank fraud" as follows: "Whoever
knowingly executes, or attempts to execute, a scheme or
artifice to defraud a financial institution or to obtain any
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of the moneys, funds, credits, assets, securities, or other
property owned by, or under the custody or control of, a
financial institution, by means of false or fraudulent
pretenses, representations, or promises, shall be fined not
more than $1 million or imprisoned not more than 30 years, or
both." (18 U.S.C. Section 1344.)
14)States, in federal law, that a person convicted of wire fraud
in connection with a financial institution shall be fined not
more than $1 million or imprisoned for not more than 30 years
or both. (18 U.S.C. Section 1343.) The elements of a wire
fraud case are relatively straight forward: "a scheme or
artifice to defraud" and use of interstate wire communications
to facilitate that scheme." [United States v. Bailey, 327 F.
3d 1131, 1140 (10th Circuit 2003.] The United States Supreme
Court has added an element that the fraud must be material.
[Neder v. United States, 527 U.S. 1, 25 (1999.)]
15)States that an order for escrow or title records shall be
issued by a judge only upon an ex parte application by a peace
officer showing specific and articulable facts that there are
reasonable grounds to believe that the records or information
sought are relevant and material to an ongoing investigation
of a felony violation of money laundering or of any felony
subject to the enhancement set forth in the statute regarding
multiple felonies involving fraud or embezzlement. [Penal
Code Sections 1326.2(a), 186.10, and 186.11.]
16)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. [Penal Code Sections 1326.2(d).]
17)Generally allows a party to a lawsuit to obtain records
pursuant to a subpoena duces tecum if good cause is shown.
[Code of Civil Procedure Section 1985 et seq.; Evidence Code
Section 1560 et seq.]
18)Provides, in cases other than those involving utility,
escrow, and title records, that 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. (Government
Code Section 7476.)
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FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Statement : According to the author, "The author is
seeking these changes on behalf of the California District
Attorneys Association, in an effort to enhance California's
efforts to fight mortgage fraud. The bill is part of a
nationwide movement to address one of the most tragic
by-products of California's economic downturn - the
proliferation of fraud for profit actions that have brought
significant financial harm to distressed borrowers and the
nation's financial markets. The nation's foreclosure crisis
has uncovered an all too 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.
Reports of mortgage fraud nationwide rose by more than 1,400%
between 2000 and 2008.
"In 2002, California ranked 30th among the states in the
incidence of mortgage fraud. Over the next six years,
mortgage fraud reports have skyrocketed and California is now
ranked eighth in the nation. California currently ranks
eighth in the nation in a population-adjusted measure of
suspected mortgage fraud. Among the 56 Federal Bureau of
Investigation (FBI) regions in the country, Los Angeles, San
Francisco, and Sacramento ranked first, third and seventh
respectively in mortgage fraud complaints.
"[I]t is crucial that California law is strengthened to assist
law enforcement in the handling of mortgage fraud cases.
Dishonest mortgage brokers often prey on the most vulnerable
people in our society. They have abused elderly, low-income
and non-English speaking borrowers, deceiving them into taking
out expensive sub-prime loans they cannot afford. A separate
and revised mortgage fraud statute is needed to send a clear
signal to mortgage brokers who defraud homeowners about the
penalties for these crimes. It will also enhance the ability
of law enforcement to make efficient determinations as to
whether mortgage loan crimes have occurred, and if so, to
prosecute those crimes."
2)Sponsor's Statement : According to the California District
Attorneys Association (a co-sponsor of this bill), "This bill
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would clarify the statutes as they relate to penalties for
mortgage fraud and create greater investigatory tools for law
enforcement combating such crimes.
"Nationally, between 2000 and 2007, reports of suspected
mortgage loan fraud submitted by federally insured
institutions increased 1,404% with the number of mortgage
fraud reports among loans made last year growing 26% from
2007. Moreover, it has been estimated that the number of
suspected fraud cases could be several times higher because
independent mortgage banking companies originate the majority
of sub-prime mortgage loans and those companies do not have
reporting requirements.
"Mortgage loan fraud can be divided into two broad categories:
fraud for housing and fraud for profit. Fraud for housing is
committed by home buyers attempting to buy homes for their
personal use. Fraud for profit involves the fraudulent
acquisition of loan proceeds and fees through schemes
perpetrated by industry professionals such as real estate
agents, appraisers, and mortgage brokers.
"[F]raud for profit schemes are frequently perpetrated without
the knowledge of the borrowers and they are of much greater
concern to law enforcement than incidents of fraud for
housing. A recent study of mortgage loans with early payment
defaults found that up to 70% of those loans had fraudulent
misrepresentations on the original loan applications. Losses
to lenders from mortgage fraud have been estimated in the
billions annually and the harms suffered by unsuspecting
borrowers caught up in fraud for profit schemes can be
devastating.
"[I]n order to clarify the penalties for mortgage fraud, this
bill rewrites Penal Code Section 532f. The measure clarifies
that mortgage fraud is punishable as an alternate
misdemeanor/felony (wobbler) to reflect current practice.
Because the existing Penal Code Section 532f only provides
misdemeanor punishment, prosecutors, more often than not, will
charge a person suspected of mortgage fraud under Penal Code
Section 487 (grand theft) or Penal Code Section 532 (general
fraud), both of which are punishable as wobblers. To the
extent this measure specifies that per se mortgage fraud is
punishable as a wobbler, the bill does not represent a penalty
increase, nor does it expose anyone to felony liability that
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is not already exposed.
"[T]his proposal provides the ability for investigators to get
all necessary transaction-related documents via court order,
while at the same time respecting the rights of the parties
involved. [C]urrent law provides for a peace officer to get
an ex parte court order for the production of escrow and title
records for the investigation of certain felonies. While
incorporating much of the language of [current law], this
proposal allows a peace officer, upon a sufficient showing, to
get an ex parte court order for the production of broker and
lender records in addition to escrow and title records. This
will significantly enhance the ability of law enforcement to
make efficient determinations as to whether crimes have
occurred, and if so, to prosecute those crimes.
"Mortgage fraud is one of the linchpins in the demise of the
California real estate market and the related crises in the
financial sectors. It is critical that something is done to
assist law enforcement in handling the flood of mortgage fraud
complaints they continue to receive."
3)Subprime Loans : "Subprime" is a classification of loans
offered at rates greater than the prime rate to individuals
unable to qualify for prime rate loans. This usually occurs
when borrowers have poor credit and, as a result, the lender
views them as higher risk.
"Loan qualification is based on a number of factors including
income, assets, and credit rating. In most cases, subprime
borrowers have question marks surrounding them in one or more
of these areas; such as a poor credit rating or an ability to
prove income. For example, someone with a credit rating of
620 or with no assets will likely not qualify for a
traditional mortgage and will need to get a subprime loan to
gain the necessary financing.
"In addition to having higher interest rates than prime rate
loans, subprime loans often come with higher fees. And,
unlike prime rate loans, which are quite similar from lender
to lender, subprime loans vary greatly. A process known as
risk-based pricing is used to calculate mortgage rates and
terms - the worse your credit, the more expensive the loan.
"Subprime loans are usually used to finance mortgages. They
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often include prepayment penalties that do not allow borrowers
to off the loan early, making it difficult and expensive to
refinance or retire the loan prior to the end of its term.
Some of these loans come with balloon maturities, which
require a large final payment. Still others come with
artificially low introductory rates that ratchet upward
substantially, increasing the monthly payment by as much as
50%.
"Borrowers often do not realize that a loan is subprime because
lenders rarely use that terminology. From a marketing
perspective, 'subprime' is not an attractive term." (Smith.
Subprime Lending: Helping Hand or Underhanded?
()
4)Mortgage Fraud: According to the FBI's Web site, mortgage
fraud is one of the fastest growing white collar crimes in the
United States. "Mortgage fraud is defined as a material
misstatement, misrepresentation, or omission relied upon by an
underwriter or lender to fund, purchase, or insure a loan.
There are two types of mortgage fraud: fraud for property and
fraud for profit. Fraud for property, also known as 'fraud
for housing', usually involves the borrower as the perpetrator
on a single loan. The borrower makes a few
misrepresentations, usually regarding income, personal debt,
and property value or there are down payment problems. The
borrower wants the property and intends to repay the loan.
Sometimes industry professionals are involved in coaching the
borrower so that they qualify. Fraud for property/housing
accounts for 20% of all fraud.
"Fraud for profit involves industry professionals. There are
generally multiple loan transactions with several financial
institutions involved. These frauds include numerous gross
misrepresentations including: income is overstated; assets
are overstated, collateral is overstated, the length of
employment is overstated or fictitious employment is reported,
and employment is backstopped by co-conspirators. The
borrower's debts are not fully disclosed, nor is the
borrower's credit history, which is often altered.
"Often, the borrower assumes the identity of another person (a
'straw' buyer). The borrower states he intends to use the
property for occupancy when he/she intends to use the property
for rental income, or is purchasing the property for another
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party (nominee.) Appraisals almost always list the property
as owner-occupied. Down payments do not exist or are borrowed
and disguised with a fraudulent gift letter. The property
value is inflated (faulty appraisal) to increase the sales
value to make up for no down payment and to generate cash
proceeds in fraud for profit." (See
)
5)Typical Fraud Schemes : Typical mortgage fraud schemes may
include the following:
a) Backward Applications : After identifying a property to
purchase, a borrower customizes his/her income to meet the
loan criteria.
b) Air Loans : These are non-existent property loans where
there is usually no collateral. An example would be where
a broker invents borrowers and properties, establishes
accounts for payments and maintains custodial accounts for
escrows. The broker may establish an office with a bank of
telephones, each one used as the employer, appraiser,
credit agency, etc., for verification purposes.
c) Silent Seconds : The buyer of a property borrows the
down payment from the seller through the issuance of a
non-disclosed second mortgage. The primary lender believes
the borrower has invested his own money in the down payment
when, if fact, it is borrowed. The second mortgage may not
be recorded to further conceal its status from the primary
lender.
d) Nominee Loans : The identity of the borrower is
concealed through the use of a nominee who allows the
borrower to use the nominee's name and credit history to
apply for a loan.
e) Property Flips : Property is purchased, falsely
appraised at a higher value, and then quickly sold. What
makes property flipping illegal is that the appraisal
information is fraudulent. The schemes typically involve
fraudulent appraisals, doctored loan documents, and
inflation of the buyer's income.
f) Foreclosure Schemes : The subject identifies homeowners
who are at risk of defaulting on loans or whose houses are
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already in foreclosure. Subjects mislead the homeowners
into believing that they can save their homes in exchange
for a transfer of the deed and upfront fees. The subject
profits from these schemes by re-mortgaging the property or
pocketing the fees paid by the homeowner.
g) Equity Skimming : An investor may use a straw buyer,
false income documents, and false credit reports to obtain
a mortgage loan in the straw buyer's name. Subsequent to
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." (Id.)
6)Federal Law Enforcement Is Working With State and Local Law
Enforcement, Regulators, and the Financial Institution
Industry to Combat the Problem : Some of these coordinated
actions have included the Office of Federal Housing Enterprise
Oversight (OFHEO) has passed a regulation requiring Freddie
Mac and Fannie Mae to report suspicious mortgage fraud
activity on a mortgage incident notice. Additionally, the
FBI, OFHEO and the Financial Crimes Enforcement Network are
working to establish a reporting device similar to the banking
industry's suspicious activity report. The FBI, HUD Office of
Inspector General (OIG), the United States Postal Service
(USPS) and the Internal Revenue Service (IRS) conduct criminal
investigations into mortgage fraud activity with a goal of
disrupting and dismantling mortgage fraud rings. "We strongly
support joint investigations to effectively utilize all of our
limited resources while strengthening investigations by
tapping into everyone's expertise." (Id.)
"One of the best tools the FBI has in its arsenal for combating
mortgage fraud is its long-standing partnerships with other
federal, state, and local law enforcement. This is not a new
tool employed by the FBI. Collaboration, communication, and
information-sharing have long been a proven solution to the
nation's most difficult crimes." (FBI Deputy Director John S.
Pistole, Statement Before the House Committee on the
Judiciary, April 1, 2009.)
7)Federal Indictments: According to the FBI's Internet Web
site, from July 2005 to October 27, 2005 the FBI, HUD OIG,
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USPS, IRS, in coordination with the United States Department
of Justice, indicted 156 mortgage fraud subjects. A total of
81 arrests were made. A total of 89 convictions were
obtained, and 60 subjects were sentenced during this
[relatively short] period of time. The combined loss to the
industry by the foregoing subjects was reported to be
$606,830,604.
8)Top "Hot Spots" for Mortgage Fraud Activity : According to the
FBI, in 2003 the top 10 hot spots, per capita, for mortgage
fraud activity were California, Nevada, Utah, Colorado,
Missouri, Illinois, Michigan, South Carolina, Georgia, and
Florida. In 2004, the top 10 hot spots were California,
Nevada, Utah, Arizona, Colorado, Missouri, Illinois, Maryland,
Georgia and Florida. In 2006, the top 10 mortgage fraud area
were California, Florida, Georgia, Illinois, Indiana,
Michigan, New York, Ohio, Texas, and Utah. States with
significant mortgage fraud problems in 2008 were listed in the
following order: Rhode Island, Florida, Illinois, Georgia,
Maryland, New York, Michigan, California, Missouri, and
Colorado. Note that California was eighth on the list of
states with significant mortgage fraud problems in 2008.
9)Correlation between Mortgage Fraud and Foreclosures :
According to the FBI's Internet Web site, "There is a strong
correlation between mortgage fraud and loans which result in
default and foreclosure. Recent statistics suggest that
escalating foreclosures provide criminals with the opportunity
to exploit and defraud vulnerable homeowners seeking financial
guidance. Perpetrators are exploiting the home equity line of
credit application process to conduct mortgage fraud, check
fraud, and potentially money laundering activities." This
statement support the statements of a number of this bill's
supporters, including the California District Attorneys
Association (a co-sponsor of this bill).
(.)
10)This Bill Constitutes an Important Additional Tool in the
Coordinated Attack on Mortgage Fraud Initiated by Federal,
State, and Local Law Enforcement Officials: According to
background information furnished in the author's fact sheet,
since 2005 Georgia, Arizona, Nevada, and North Carolina have
enacted dedicated mortgage fraud statutes, providing for
increased punishment for individual and multiple offenders.
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(See, e.g., G.C. 16-8-1000 et seq.; A.R.S. 13-2320; N.R.S.
205.372; N.C. G.S. 14-118.10 et seq.)
The fact sheet also states, "In the federal arena, mortgage
fraud is treated more seriously, with offenders subject to
upwards of 30 years in prison for the commission of various
fraud-related offenses. Federal investigations are
facilitated by advantageous and speedy subpoena procedures."
(SB 239 Fact Sheet, p. 2.)
A 2009 FBI fact sheet notes that as of April 30, 2009, there
were 65 pending FBI mortgage fraud task forces and working
groups and 2,440 pending FBI investigations. As of April 30,
2009, 965 federal cases had been opened, compared with 136
cases in all of Fiscal Year 2004. In Fiscal Year 2008, there
were 574 FBI-initiated indictments, with 354 convictions.
(.)
11)Arguments in Support :
a) According to the District Attorney, County of Santa
Clara , "This bill would clarify the statutes as they relate
to penalties for mortgage fraud and create greater
investigatory tools for law enforcement combating such
crimes.
"Mortgage loan fraud can be divided into two broad
categories: fraud for housing and fraud for profit. Fraud
for housing is committed by home buyers attempting to buy
homes for their personal use. Fraud for profit involves
the fraudulent acquisition of loan proceeds and fees
through schemes perpetrated by industry professionals such
as real estate agents, appraisers, and mortgage brokers.
"Fraud for profit schemes are frequently perpetrated without
the knowledge of the borrowers and they are of much greater
concern to law enforcement than incidents of fraud for
housing. A recent study of mortgage loans with early
payment defaults found that up to 70% of those loans had
fraudulent misrepresentations on the original loan
applications. Losses to lenders from mortgage fraud have
been estimated in the billions annually and the harms
suffered by unsuspecting borrowers caught up in fraud for
profit schemes can be devastating.
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"In order to clarify the penalties for mortgage fraud, this
bill rewrites Penal Code Section 532f. The measure
clarifies that mortgage fraud is punishable as an alternate
misdemeanor/felony (wobbler) to reflect current practice.
Because the existing Section 532f only provides misdemeanor
punishment prosecutors, more often than not, will charge a
person suspected of mortgage fraud under Penal Code
Section 487 (grand theft) or Penal Code Section 532
(general fraud), both of which are punishable as wobblers.
To the extent that this measure specifies that per se
mortgage fraud is punishable as a wobbler, the bill does
not represent a penalty increase, nor does it expose anyone
to felony liability that is not already exposed.
"This proposal provides the ability for investigators to get
all necessary transaction-related documents via court
order, while at the same time respecting the rights of the
parties involved. Penal Code Section 1326.2 currently
provides for a peace officer to get an ex parte court order
for the production of escrow and title records for the
investigation of certain felonies. While incorporating
much of the language of Penal Code Section 1326.2, this
proposal allows a peace officer, upon a sufficient showing,
to get an ex parte court order for the production of broker
and lender records, in addition to escrow and title
records. This will significantly enhance the ability of
law enforcement to make efficient determinations as to
whether crimes have occurred, and if so, to prosecute those
crimes.
b) According to the District Attorney, City and County of
San Francisco , "This bill eliminates ambiguities in current
law relating to mortgage loan fraud and improves law
enforcement's ability to fight mortgage fraud.
"As the housing market continues to unfold, strong laws
prohibiting exploitative practices are necessary to protect
at-risk residents. Despite widespread reports of suspected
mortgage fraud across the state, the California Penal Code
does not have a unified mortgage fraud statute. Under
current law, prosecutors must rely on a patchwork of laws
relating to grand theft, fraudulent loan transactions and
general fraud to prosecute mortgage fraud.
"As the District Attorney for the City and County of San
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Francisco, my office encounters a wide variety of financial
and real estate scams directed at elders and low-income
communities. I am concerned that these scams will grow
unless perpetrators of fraud face swift and clear
consequences. California needs tough laws against mortgage
fraud and investment fraud. SB 239 clarifies the statutes
as they relate to penalties for mortgage fraud and creates
greater investigatory tools for law enforcement to address
mortgage fraud. This will go a long way to help fight
against mortgage fraud. SB 239 is an important bill for
California and I urge your support."
c) According to the Los Angeles County District Attorney's
Office , "Between 2000 and 2007, reports of mortgage fraud
by federally insured financial institutions increased by
over 1,400%. Moreover, the actual rate of fraud could be
significantly greater because independent mortgage brokers
originate the majority of subprime mortgage loans and those
companies do not have reporting requirements. In 2002,
California ranked 30th in the nation in mortgage fraud
cases; today, California ranked fourth in the nation.
"The dramatic increase of mortgage fraud has led to record
levels of home foreclosures disproportionately affecting
low income and minority borrowers saddled with subprime
mortgages; the deterioration of neighborhoods stricken by
foreclosures and plummeting property values; a boom in
fraudulent 'loan modification' scams; and the loss of
billions of dollars annually by our financial institutions.
"[B]ecause of the harm caused by mortgage fraud and the low
punishment available under current law, prosecutors
routinely charge a defendant accused with mortgage fraud
with grand theft or general fraud, both of which are
already alternate felony/misdemeanors, rather than
misdemeanor mortgage fraud. Making mortgage fraud an
alternate felony/misdemeanor is not a true penalty increase
[and will not] expose any defendant to new felony liability
since prosecutors are using California's grand theft and
general fraud provisions currently.
"SB 239 also provides mortgage fraud investigators with
greater tools to conduct their investigations. Mortgage
fraud investigations are document intensive investigations
(paper cases.) [T]ime is of the essence in these cases,
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especially in cases of foreclosure; however, the gathering
of the needed documents from lenders and escrow companies
is extremely time-consuming. This process has become even
more time consuming and frustrating for victims and
investigators by the avalanche of mortgage fraud cases and
the increasing number of companies that are going out of
business.
"SB 239 provides mortgage fraud investigators with the
ability to get all of the needed transaction-related
documents in order. [Current law] provides for ex parte
court orders for the production of escrow and title records
for the investigation of certain specified felonies. SB
239 incorporates much of the language from [the current
statute] and would additionally allow investigators upon a
proper showing to get an ex parte court order for the
production of broker and lender records in addition to
escrow and title records. This will enhance the ability of
investigators to make efficient determinations whether or
not a crime has occurred."
12)Argument in Opposition : According to the Taxpayers for
Improving Public Safety (TiPS), "[A]lthough a major issue in
the current national financial crisis, this proposed
legislation will do little to resolve past conduct while the
Federal Government, through new regulations of the lending and
banking industry is addressing this issue, which will preempt
any California statute.
"There is no justification for fraud of any type. However, the
proposed criminal sanction will do little, if anything to
correct past wrongs.
"Of greater concern, there is no empirical evidence to suggest
that the proposed sentencing structure will reduce the type of
crime which it seeks to sanction. California's prisons are
currently overcrowded and likely will soon face a court order
setting an inmate population cap. Recognizing that prisons,
as with any other resource, have limited capacity, should
California devote such a limited resource to the incarceration
of the individuals targeted by this legislation, or should
California leave it to the Federal Government? TiPS concludes
that California prisons would be placed to their highest and
best use by housing violent individuals who are a threat to
public safety instead, not those targeted by this
SB 239
Page 17
legislation."
13)Prior Legislation : AB 1231 (Umberg), Chapter 482, Statutes
of 1993, added Penal Code Section 532f, making false financial
statements in connection with an application for a loan
secured by real property an alternate felony/misdemeanor to
any person other than the loan applicant, and a misdemeanor
punishable by a fine not to exceed $10,000 and imprisonment in
a county jail not to exceed six months as to the loan
applicant.
REGISTERED SUPPORT / OPPOSITION :
Support
California District Attorneys Association (Co-Sponsor)
Consumers Union
District Attorney, City and County of San Francisco
District Attorney, Los Angeles County
District Attorney, Santa Clara County
Opposition
Taxpayers for Improving Public Safety
Analysis Prepared by : Kathleen Ragan / PUB. S. / (916)
319-3744