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From Banking and Finance Law Daily, February 14, 2017

‘Laughable’ loan applications might cost Bank of America $900,000 restitution

By Richard A. Roth, J.D.

A U.S. district judge should not have ordered defendants convicted of mail fraud to pay Bank of America $893,015 in restitution without considering the bank’s responsibility for its losses, the U.S. Court of Appeals for the Seventh Circuit has decided. The judge was told he should consider whether fining the defendants in the same amount would be a better choice (U.S. v. Litos, Feb. 10, 2017, Posner, R.).

The three defendants were convicted of scheming to induce B of A to make mortgage loans to straw buyers that they knew the buyers could never repay. The properties were bought from the defendants, who furnished the buyers with necessary down payments and helped them complete loan applications. When the purchases were complete, the defendants ended up with the loan proceeds, and the loans went into default.

Bank’s complicity. In ordering restitution, the judge should not have relied on a claim by a bank employee that B of A would not have made the loans if it had known the source of the down payments, the appellate court said. The bank "ignored clear signs" of problems with the loans, the court said, and the bank’s lack of clean hands made the restitution order questionable.

The appellate court made its scorn for B of A’s practices clear, beginning by charging the bank with "a long history of blunders and shady practices." Statements by the district judge that the loan applications were "a joke on their face" and "laughable" were supported by the loans, the appellate court said. B of A made multiple mortgage loans to individuals in short spans of time, based on financial claims in loan applications that were clearly untrue—the most notable transactions being the extension of six loans over only 10 days to a borrower who falsely claimed to own two other properties, to have $3,400 in monthly gross income, and to have $320,000 in a bank account.

The fraud was "transparent," the court charged—if the bank had done any investigation, it would have discovered that the borrowers’ applications were fraudulent and that the loans would not be repaid. B of A was not negligent, it was reckless, ignoring the risk of the loans because it intended to sell the loans and transfer the risk to Fannie Mae. The district judge needed to consider whether a reckless bank is entitled to restitution, the appellate court said.

The case is No. 16-1384, No. 16-1385, No. 16-2248, No. 16-2249, and No. 16-2330.

Attorneys: Gary T. Bell, U.S. Attorney's Office, for the United States. Thomas Lee Kirsch II (Winston & Strawn LLP) for Minas Litos, Adrian Tartareanu, and Daniela Tartareanu.

Companies: Bank of America

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