Case of the Week: Evidence of Lender Negligence Is Not Admissible to Defend Mortgage Fraud

In United States v. Lindsey, the 9th Circuit held that evidence of lender negligence is not a defense to wire fraud, intentional disregard of relevant information is not admissible as a defense to mortgage fraud, and that evidence of individual lender behavior is not admissible to disprove materiality of false statements. Lindsey’s convictions for wire fraud and identity theft were affirmed.

Lindsey, a mortgage loan officer and real estate broker, perpetrated a complex mortgage fraud scheme by using “straw buyers” to get loans on several properties. Lindsey submitted mortgage applications with fraudulent information, including inflated income and assets. Lindsey profited by receiving commissions, rent payments, and diverted escrow monies, while the properties went into foreclosure and damaged the credit of the straw buyers.

Lindsey was convicted of wire fraud and identity theft, but argued that he had been deprived of his right to defend himself because he was not permitted to admit evidence of the lending practices of particular lenders.

Lindsey’s scheme took place during the height of east lender practices by mortgage lenders in 2006 and 2007. Lindsey stated that lenders at the time would give “stated income” loans, where the borrower’s stated income would not be verified with independent fact-checking.

The charge of wire fraud required a showing of a scheme to defraud, the use of wire, radio, or television to further the scheme, and a specific intent to defraud. To show a scheme to defraud, there must be “material falsehoods”, meaning false statements that have a natural tendency to influence, or are capable of influencing, the decision making body to which it is addressed.

Essentially, Lindsey wanted to disprove the materiality of his false statements by showing that the lenders were careless in approving loan applications without requiring supporting documentation to prove a borrower’s income. However, the court applied an objective standard to the materiality of a false statement—the standard did not care about the statement’s subjective effect on the victim, only the objective capabilities of the false statement itself.

Lindsey was permitted to present evidence of general lending standards in the industry, but not of the specific practices of particular lenders.

Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your real estate matters.

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