States Complain Federal Government Impeded Ability to Prevent Mortgage Fraud

While the Financial Crisis Inquiry Commission (FCIC) held a series of panels over the last two days in order to investigate the cause of the financial crisis, two panels on Thursday wound up focusing more on mortgage fraud and the government’s attempt to circumvent it.

Thursday’s panels, which included Eric Holder, U.S. Attorney General, spoke of the attempts the state and federal government were taking to prosecute mortgage fraud. Holder noted that the FBI is currently in the process of investigating over 2,800 cases of mortgage fraud, an increase of more than five times from 2004. 

Of those cases, 1,842 involved more than $1 million in losses. As of November, federal charges relating to mortgage fraud were pending against 826 defendants. Reverse mortgage fraud was alluded to in the written testimony of Lanny Breuer, Assistant Attorney General, Criminal Division, but was not specifically a focus of the inquiry or any of the panelists.


During the panels, an interesting issue was raised by Illinois Attorney General Lisa Madigan and Colorado Attorney General John W. Suthers. Both attorney generals complained that the federal government had impeded their attempts at investigating mortgage fraud—especially on a larger scale.

Suthers, in his written remarks, wrote, “With respect to the few laws we did have back in 2005, we were largely powerless to enforce those laws against national banks and their lending affiliates and subsidiaries due to the aggressive stance federal regulators took to preempt state law, even with respect to predatory lending and deceptive advertising.”

Wrote Madigan, “In fact, in response to aggressive actions at the state level, federal regulators took unprecedented steps to shield national lenders and their subsidiaries from state enforcement and from the growing number of state anti-predatory lending laws on the books. The states have been leaders in enacting regulation to address the worst abuses in the mortgage industry.”

These issues were expanded upon during the panel testimony. Alleged Madigan, “In the years preceding the crisis, federal regulators often showed no interest in exercising their regulatory authority, or worse, actively hampered state authority.” It remains unclear what recommendations will emerge as a result of the FCIC’s investigation. Their report is due on December 15, 2010.

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  • When it comes to mortgages on 1-4 unit residential housing, why are nationally chartered banks exempt from anything? Yes, yes, certain banking transactions still need exemption, but why do these mortgage transactions? OK, let’s continue exempting mortgages on homes whose property boundaries extend over more than one state. But is there any, and I mean any, reasonable or rational excuse for exempting mortgages on homes whose property boundaries lie strictly in one state?

    While there may have been little way to separate the banking activities of a national bank from the mortgage activities of that same bank in 1890, the same cannot be said today. Otherwise, how could the national banks promote and justify firewalls to prevent violation of the HERA cross selling rules in 2010? The national banks should not have it both ways.

    Alexander Hamilton passed away in 1804, a little over two centuries ago. Yet a lot of the rational for blanket exemption of national banking activities comes from that era or earlier. After over 200 years, it is time to lift “the blanket” and readjust what should be “under it.” It is about time to put “all 1 to 4 unit mortgage teams” on the same level playing field.

    If a transaction violates state law why should it matter who the employer of the loan officer is? National bank employees should be held to a higher standard not a lower one.

    Without naming names, national bank mortgage training directors brag all the time about the superior education their firms provide. Well then, it is no loss if that system of training has to endure state law training as well. These training directors have been able to hide behind the state law exemption for years. It is time that their superior skills be put to the test.

    Is it any wonder that reverse mortgage transactions in particular are so highly concentrated in the hands of a few national banks? Very few in their right mind would argue that the concentration would dissipate if the exemption were removed, so why not remove the exemption? If it is archaic as to the kind of mortgages discussed in this comment, then remove it. If not, it should be justified in open debate.

    • The_Cynic, you state that “if a transaction violates state law”. In those cases, there is no legal mechanism that keeps a state from going after the bank (Mr. Cuomo seems to understand this).

      First, most states already explicitly exempt federally chartered banks (and state-chartered banks as a matter of fact) from state laws that apply to mortgage lending.

      If states remove the federal preemption, low population states like Alaska, Rhode Island, Hawaii, etc. will be out of luck. The big boys won't even bother to offer mortgages there.

      • b_j_l,

        I bow to your superior knowledge of federal and state laws, except that ….

        (Please correct me where I go wrong.) Last I checked on it HERA (PL 110-289) is a federal law. Section 1053 of HERA defines certain terms related to the S.A.F.E. act which governs the NMLS. Part (11) of Section 1503 defines state originators and specifically excludes depository bank employees. Then Section 1504(b) in subsection (5) mandates that state originators take an exam but not depository bank employees.

        [Last I checked Mr. Cuomo has no authority to come in and require that any depository bank employee (or federally chartered credit union for that matter) will have to take the exam. But then please correct me where I go wrong.]

        Unless I am totally mistaken, this sounds, feels, looks, tastes, and even smells like a federal exemption but you are wiser and more knowledgeable so please clarify where I am going so so wrong.

        You state: “…there is no legal mechanism that keeps a state from going after the bank…” Seems like one of us is mistaken; I apologize that I do not have the time nor the legal education to point out more.

      • If someone violates state law during the transaction, they broke the law. Banks can do things that the little mortgage shops can't since they are regulated by the same laws. It is frustrating but that is how the laws are written.

      • b_j_l,

        This sentence literally makes no sense: “Banks can do things that the little mortgage shops can't since they are regulated by the same laws.” If both are regulated by the same laws, how can one do something and one not?

        I guess you gave up on the fact that there are federal exemptions preempting state law. Sometimes it is the nationally chartered bank or federally charted credit union that is the little guy and your “little mortgage shops” that are the big guys.

        I understand that when federal and state laws are in conflict, the federal law trumps. However, if there is no federal law on point, generally the state law controls. When federal law and state law are not in conflict but cover the same subject, generally it is the stricter of the two that governs.

        Many are of the legal opinion that while federally chartered banks must follow those state laws that directly impact the transaction those that are of a compliance nature are optional. For example, if state requires a longer rescission period, the national banks must abide by that but if the state has a disclosure law that is covered by federal law or regulation, there is a belief that compliance is optional. I am not legal counsel.

        Why shouldn’t all originators take the NMLS exam? It seems there are two classes of originators. I agree with Lance Jackson that originators learn much more about the reverse mortgage industry when they are outside of the influence of the nationally chartered banks.

    • That certainly seems like a viable solution. For both forward and reverse mortgage loan originators, the registration, fingerprinting, background checks and testing should be required. Then all borrowers would be assured of a certain cautionary degree of security in dealing with loan officers. Of course, as pointed out by bjl, if the states exempt federal and state chartered banks from state laws, they have to expect to be frustrated in their investigations by federal agencies.

      While bjl says that low population states would suffer if “the big boys” are forced to pay attention to state laws, I have to agree with the critic. Alexander Hamilton died a long time ago and even as his bones are interred on Wall Street, the privileges shrouding the mortgage banking activities of the nationally chartered banks should also be buried. If their practices and standards as well as their education of their loan officers are indeed so high, the exposing light that can be shed on them by both federal and state regulating and law enforcing agencies will not adversely affect them and will help the borrowing public.

      • Louise321,

        While you are not the first to mistake The Critic for The Cynic, it is terribly disappointing that it happens. My comments are far more cynical.

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