Federal law provides that anyone who knowingly makes a false statement to a Federal Deposit Insurance Corp.-insured institution for the purpose of influencing its action on any application or loan or deferring action on them "shall be fined not more than $1,000,000 or imprisoned for not more than thirty years, or both."
To say the least, this criminal law, intended to protect banks and hence the deposit insurance fund, is very, very rarely enforced against consumers. Why?
How is a U.S. attorney to know that a customer has defrauded a bank by giving false information, unless the case is referred to him or her by the bank? And we're not doing that, at least not for mortgages, credit cards or other everyday consumer lending.
Hence, the plethora of consumers giving willfully and materially false information to banks on applications and during loan servicing has mushroomed. With "liar's loans," this went from a cottage industry to an epidemic.
Are there too many instances to prosecute? No doubt. But widespread belief holds that millions of people lie on their tax returns — which is also illegal.
The IRS cannot possibly prosecute all the violators. Hence, it prosecutes a select few, but with tremendous fanfare. And virtually all of those they prosecute go to prison. Surely this policy reduces the prevalence of criminal tax evasion, though it cannot dissuade everyone. It teaches to all who can read the clear lesson that lying on your taxes is a crime, and if you commit that crime you risk going to jail.
On the contrary, the news often encourages consumers to believe that you can lie to get a loan, or to forestall collection action, and that this is perfectly normal, common and acceptable. After all, "he told me that my income would not be verified." Nonverification, even if advertised in advance, is not an invitation to lie, and it does not exempt the liar from criminal consequences.
Occasionally you can see a newspaper story about a tattoo parlor operator who managed to buy six houses with nothing down and false applications. But the multiple and professional fraudsters are relatively few. Surely the great bulk of the fraudulent applications come from individuals who just want to buy and live in the house, or to do so on better terms.
In days gone by, some loan application forms included, in bold type at the bottom, an excerpt from the criminal law that I summarized above, defining fraud and specifying the penalties for it. Even before "the class of 2006," we stopped doing that. After all, it reduced loan volume — both by discouraging bad applications and by increasing the decline rate based on less inflated claims by applicants.
Let's now do a thought experiment with "the bank where I work." Suppose you let it be known to applicants and loan customers that your policy is to detect and to refer for prosecution cases in which a knowingly false statement is made by an applicant or borrower. What would happen then?
"Well, then they would all go across the street, to my competitor."
We can certainly hope that the fraudsters would do so! And that your loan losses would correspondingly decline, giving you a dramatic edge over that competitor. You could charge lower rates and still earn a higher return.
But why would the honest customer have any fear of doing business with you? He knows what his income, occupation and phone number are. He knows what property he owns.
He also knows that honest errors will not be punished.
Would this customer, the typical and desired customer, rather deal with a bank that bases its loan decisions on honestly declared information? Or with a bank that he views as encouraging or ignoring fraud — often at the ultimate expense of the U.S. taxpayer, for instance, through Fannie Mae and Freddie Mac? Will he prefer to make his deposits in a bank that carelessly approves bad loans — or that made bad loans because it knew it could sell them and make taxpayers cover the losses?
The same law aims to punish borrowers who lie — for instance about their income, assets or expenses — in order to forestall or evade collections. Do borrowers know about this? They do not. Would collections operate more fairly, efficiently and effectively if borrowers were aware that lying to a bank collector can be a federal crime? I think so.
What is the best way to make defaulters aware of their potential criminal liability if they lie? Send all of them a brochure from a reputable, independent organization laying out the law and giving a few examples.