Restitution Ordered for Banks After Loan Fraud
(CN) - Fraudulent property-loan applications infringed on bank property rights, the 9th Circuit ruled Thursday, ordering restitution to CitiGroup Inc. and JPMorgan Chase & Co.
Marco Luis and his marijuana-dealing friend, real estate agent Joshua Hester, began investing in property using Hester's drug money, according to the ruling. In 2006, they used Hester's girlfriend, Kelsey Widenhoefer, as the straw buyer for a piece of property in Rancho Sante Fe, Calif., worth $2.05 million.
Luis falsely stated on loan documents that Wiedenhoefer earned $420,000 through self-employment, and lied about her employment history and the source of the down payment.
A preapproval letter Luis obtained from Dennis O'Connor falsely said O'Connor had prepared Wiedenhoefer's tax returns and could verify that she was self-employed.
Washington Mutual relied on these representations in approving mortgages for $1.64 million and $204,750. Hester then made the down payment and monthly mortgage payments, which were interest only, using Wiedenhoefer's bank account.
Luis and Hester bought 10 acres of property in Palomar, Calif., in 2007 for $560,000, this time using Jay Hansen as the straw buyer. Citi issued two mortgages in the amounts of $448,000 and $112,000 based on false purchasing paperwork stating that Hansen made $12,500 a month detailing cars.
The Palomar loans went into default in December 2008 and the Rancho Sante Fe loans went into default in September 2009. A larger investigation into Hester's illegal marijuana distribution led to the discovery of the fraudulent loans. Hansen, Hester, Wiedenhoefer and Luis were all charged in connection with the purchase of the two properties.
Luis pleaded guilty to two counts of conspiracy to engage in prohibited monetary transactions in property for his part in the scheme. He was sentenced to 48 months in custody and ordered to pay restitution in the amount of $545,029.
In trying to sort out restitution, a federal judge heard testimony from the vice president for Chase that, when the bank purchased Washington Mutual Bank's assets and liabilities in 2008, it obtained a group of loans totaling about $120 billion of unpaid debt. Chase paid $90 billion for those loans, which included the Rancho Sante Fe property loans.
The property had an outstanding unpaid principal balance of $1.84 million at foreclosure and was bought at auction for $1.23 million, according to testimony
A business operations analyst with Citi testified that the bank chose not to foreclose on the Palomar property loans but instead sold the first mortgage for $230,068. At the time, the unpaid balance on the first mortgage was $447,977. Citi wrote off the unpaid balance of the second mortgage, which was $111,858.
After subtracting the foreclosure sale price from the unpaid principal balance on the first mortgage, and combining that figure with the unpaid principal balance on the second mortgage, the U.S. District Court in San Diego ordered $615,935 in restitution to Chase.
It also ordered $329,767 in restitution to Citi using the same method.
Ordering the figure for Chase revised Thursday, a three-judge panel with the 9th Circuit found that the formula improperly relied on the unpaid principal loan balance rather than the value of the loans when Chase purchased them.
"The restitution formula for a loan originator begins with the amount of the unpaid principal balance due on the fraudulent loan, while the restitution formula for a loan purchaser begins with 'how much the victim paid for the fraudulent loan (or the value of the loan when the victim acquired it),'" Judge N. Randy Smith wrote for the panel (parentheses in original). "The applicable amount is then offset 'by the amount of money the victim received in selling the collateral.'"
Using the loan-originator formula for a loan purchaser would likely cause recovery to exceed the victim's actual losses, the court found.
The panel otherwise shot down claims that a crime "against property" required physical damage to property.
"Chase and Citi suffered pecuniary loss when the Rancho Sante Fe property and Palomar property loans went unpaid," Smith wrote. "Luis's offenses occasioned these losses."
Luis also failed to challenge Chase's status as a victim for restitution purposes, the court said, finding that a loan purchaser is a victim "if the defendant fraudulently obtained the loan and the fraud was not discovered until after the purchase."
"This makes good sense, because the loan purchaser would not know that the loan's value was less than it would otherwise appear to be, due to the unlikelihood of debtor payment," Smith wrote.