CHICAGO (CN) – The Seventh Circuit issued Bank of America a stinging rebuke, finding it should not recover $893,000 from three convicted fraudsters because its own reckless mortgage lending showed deliberate indifference to the risk of losing the money.
Minoas Litos and Adrian and Daniela Tartareanu were convicted of fraud for falsifying loan applications and financing the sale of their own properties to buyers in Gary, Ind. They walked away with the purchase price of the property, minus the amount of the down payment.
As required by federal law, the fraudsters were ordered to pay restitution to their victim - Bank of America – in the amount of $893,015, on the ground that they cheated the bank by pretending that the buyers were the source of the down-payment money.
On appeal, the Seventh Circuit vacated the restitution order Friday and condemned the bank’s pre-2008 financial crash lending practices.
“The order of restitution is questionable because Bank of America, though not a coconspirator of the defendants, does not have clean hands. It ignored clear signs that the loans that it was financing at the behest of the defendants were phony,” Judge Richard Posner wrote for a three-judge panel.
Even the trial judge remarked that the loan applications submitted to the bank “were a joke on their face. They are just, I think, laughable.”
Litos and the Tartareanus helped one man apply and qualify for nine mortgages within a three-month period based on false claims that he had $1 million in assets and earned $10,000 a month. Another applicant who claimed homes he did not own as assets was awarded eight mortgages in two and a half months. A third was granted six mortgages in 10 days when she claimed $320,000 in a nonexistent bank account, according to Friday’s ruling.
All of these loans, and others, were issued in late 2007 and 2008 during the housing bubble when Bank of America regularly issued mortgages to people who could not afford them, then sold the bad loans to Fannie Mae or Freddie Mac at a profit.
“Had the bank done any investigating at all, rather than accept at face value obviously questionable claims that the mortgagors were solvent, it would have discovered that none of them could make the required down payments, let alone pay back the mortgages,” Posner said. (Emphasis in original.)
He continued, “To say the bank was merely negligent would be wrong. Recklessness is closer to the mark.”
The Seventh Circuit panel called restitution for a reckless bank a “dubious remedy,” although it had no desire to let the defendants off the hook.
“We don’t understand why the district judge, given his skepticism concerning the entitlement of Bank of America to an award for its facilitating a massive fraud, did not levy on the defendants a fine of $893,015,” the 10-page opinion states.
If the court levied a fine, rather than restitution, the money would go to the U.S. Treasury, “a far worthier recipient of it than Bank of America in this case,” Posner said.
Appeals courts have previously ruled that a lender’s greed is not a factor to consider when awarding restitution, but the panel said Bank of America’s conduct went beyond mere greed.
“Here, in contrast, Bank of America was deliberately indifferent to the risk of losing its own money, because it intended to sell the mortgages and transfer the risk of loss to Fannie Mae for a profit,” Posner wrote.
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