The Fraud Enforcement and Recovery Act expands federal fraud laws to encompass independent mortgage companies, which are not currently covered by antifraud statutes that apply to traditional banks. Such independent mortgage companies originated approximately half of all subprime loans in 2005 and 2006. The bill defines a financial institution that will be covered by the fraud statutes as any business that finances or refinances mortgages. The Act expands the mortgage-related violations that are subject to both criminal and civil punishments. Additionally, the legislation makes it a crime to appraise a property falsely, an effort to prevent the purposeful inflation of home value appraisals that contributed to the housing bubble and the resulting housing crisis.
The Fraud Enforcement and Recovery Act strengthens protections against attempts to defraud the federal government, particularly through the Troubled Asset Relief Program and the economic stimulus package; expands the financial instruments that are covered by the securities fraud statute; and clarifies a money laundering statute. The Act provides $490 billion in spending for investigation and prosecution of mortgage fraud, securities fraud, and fraud cases involving federal economic assistance.
Finally, the Act establishes a Financial Markets Commission to investigate the causes of the financial and economic crisis.
The Middle-Class Position:
Reckless and fraudulent lending practices, permitted by lax regulation and regulators asleep at the switch, are a leading cause of the mortgage crisis that has put millions of middle-class homeowners at risk of losing their homes. Approximately half of the subprime loans originated in 2005 and 2006 were made by independent mortgage companies which are less regulated than traditional bank lenders. Operating beneath the radar, these mortgage companies issued abusive mortgages that often targeted the aspiring middle class and minority households. The Fraud Enforcement and Recovery Act strengthens protections against the worst abuses by independent mortgage companies, such as inflated appraisals and other fraudulent activities. Increased resources for the investigation and prosecution of mortgage fraud and fraud involved with the $4 trillion financial bailout will help root out and punish those who take advantage of middle-class Americans and American taxpayers.
From the Experts:
“The nation’s current financial crisis has demonstrated how bad mortgages can affect the health of the banking system and the overall economy. Mortgage lending businesses should be held accountable in the same way as traditional financial institutions, given the impact of their businesses on federally insured and federally regulated institutions. These provisions will help do that.” – Rita Glavin, Assistant Attorney General, February 11, 2009
“Now, with $700 billion going out the door under TARP, additional hundreds of billions (if not trillions) of credit being provided through the Federal Reserve, and additional hundreds of billions through the proposed stimulus bill, we stand on the precipice of the largest infusion of government funds over the shortest period of time in our nation's history. Unfortunately, history teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally…To fully address this potential criminal vulnerability, it is essential that the appropriate resources be dedicated to meet the challenges of deterring and prosecuting fraud in connection with these programs.” – Neil Barofsky, Special Inspector General of the Troubled Asset Relief Program, February 11, 2009
Beyond this Bill:
The Fraud Enforcement and Recovery Act patches several holes in an outdated regulatory system. However, the Act only addresses fraudulent behavior, while much of the most abusive lending practices remain perfectly legal. Bolder regulatory steps – like mandating determinations of a potential homebuyer’s ability to repay a mortgage and a ban on compensation of mortgage brokers based on the terms of mortgage loans, a practice that leads to higher interest rates for borrowers – are critical. Middle-class households remain at risk of unscrupulous lenders willing to exploit their dreams of owning a home.
Number of Suspicious Activity Reports (SARs), which record suspicious transactions, alleging mortgage fraud in 2008: 62,084
Percentage increase in the number of SARs filed between July of 2007 and June of 2008 over the same period the previous year: 44
Increase in the number of FBI mortgage task forces permitted by the additional funds provided by the Fraud Enforcement and Recovery Act: 24
Total value of all direct spending, loans, and guarantees provided in conjunction with the federal government’s financial stability efforts, in dollars: 4 trillion
Funds committed by investors to a fraudulent investment scheme using the Troubled Asset Relief Program, in dollars: 5 million
Number of civil and criminal investigations into fraud related to the financial bailout opened by the Special Inspector General for the Troubled Asset Relief Program, as of April 2009: 20
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