Fraud Enforcement and Recovery Act of 2009 ("FERA")
In the wake of the subprime crisis and economic crisis, Senator Patrick Leahy (D-Vt.) and Senator Chuck Grassley (R-Iowa) have recently introduced the Fraud Enforcement and Recovery Act of 2009 (“FERA”) to provide the federal government with more tools to investigate and prosecute financial fraud in the mortgage industry. See Fraud Enforcement and Recovery Act, S.386, 111th Cong. § 2 (2009). Section 2(a) and 2(b) of FERA broadens the definition in Title 18 of “financial institution” to include “mortgage lending business,” which is defined as “an organization … which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries” whose activities affect interstate commerce. Id.
The amendments assure that private mortgage brokers and companies are held accountable under federal fraud laws. Without the amendments, for example, the financial institution bribery statute would not extend beyond traditional banks and financial institutions. See 18 U.S.C. § 215; see also 18 U.S.C. § 1344 (bank fraud statute); 18 U.S.C. § 225 (continuing financial crimes enterprise); 18 U.S.C. § 1005 (false statement, entry or record). The new definitions would also provide for greater sentences for institutions affected by mail and wire fraud.
Similarly, Section 2(c) of FERA would amend the false loan application statute (18 U.S.C. § 1014) to include making materially false statements or to willfully overvalue a property in order to influence any action by a “mortgage lending business.” Other changes proposed by the Section 2 of FERA include amending the federal major fraud statute (18 U.S.C. § 1031) and its enhanced penalties to include fraud associated with the Troubled Asset Relief Program (“TARP”) or any economic stimulus package and amending the securities fraud statute (18 U.S.C. § 1348) to include commodities fraud. See Fraud Enforcement and Recovery Act, S.386, 111th Cong. § 2(d)-(e) (2009).
Critics of Section 2 of FERA may argue that the bill is unnecessary and counterproductive. For example, the mail and wire fraud statutes already reach all fraud perpetuated against a “mortgage lending business” because those statutes are not limited to crimes involving financial institutions. See 18 U.S.C. §§ 1341, 1343. Also, any fraud associated with the TARP funds and any other economic relief can presently be prosecuted under the mail and wire fraud statutes. Id. The penalties under both statutes are severe, up to $1 million in fines and 30 years in prison.
With respect to Section 2(c) of FERA, the critics argue that amending § 1014 is unnecessary because the mortgage lending businesses do not operate in a vacuum, and any false statement made on a mortgage application to a mortgage lending business will eventually influence another organization along the financial or real estate spectrum. Critics also argue that amending the securities fraud statute to include commodities fraud is unnecessary because commodities fraud can be prosecuted under many statutes, like theft, embezzlement, mail and wire fraud statutes, and violations of the Commodities Futures Trading Commission regulations.
FERA is still in its initial stages of the legislative process. On February 11, 2009, a hearing took place in the Senate regarding the “The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn.” While it remains to be seen whether the current version Section 2 of FERA actually becomes law, given the current economic crisis and political climate, some changes are likely to come, even if, as the critics claim, they are redundant and unnecessary.
(With appreciation to Amit Shah, Esq., for contributing this entry)
