Mortgage fraud bill proposed by Santa Clara County prosecutors close to becoming law

By Mark Gomez

mgomez@mercurynews.com
Posted: 08/26/2009 04:55:52 PM PDT
Updated: 08/27/2009 03:13:47 AM PDT

Santa Clara County prosecutors are hoping they will soon have a new tool that allows them to put crooked mortgage brokers out of business more efficiently.

Prosecutors are awaiting a signature from Gov. Arnold Schwarzenegger on a bill that will make it easier to obtain financial documents of mortgage brokers and lenders to determine if fraud has been committed. The legislation, SB 239, sailed through the Legislature with unanimous votes in both houses and could be approved by the governor in the next few weeks.

The legislation was originally drafted earlier this year by a Santa Clara County prosecutor as a way to better handle the growing number of complaints about mortgage fraud.

"We found it increasingly difficult to handle all of the complaints," prosecutor Mike Fitzsimmons said. "We were barely keeping our head above water. Not only us, but prosecutors all across the state."

Under current law, prosecutors must obtain search warrants to get financial records from brokers and lenders, a process that can be "time-consuming and expensive," according to Fitzsimmons.

Under the proposed law, prosecutors will need only a court order to obtain those records, Fitzsimmons said.

"This will be a much more efficient way for us to evaluate cases," he said

The Santa Clara County District Attorney's real estate fraud unit began receiving more and more complaints about crooked mortgage brokers about three years ago. In doing research
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for the legislation, Fitzsimmons found a report that indicated reports of mortgage fraud rose more than 1,400 percent from 2000 to 2008.

SB239, authored by Sen. Fran Pavley, D-Santa Monica, and sponsored by the California District Attorneys Association, will create a provision to existing mortgage fraud law that will classify the crime as a felony or misdemeanor. Currently, mortgage fraud has only misdemeanor status in California, and prosecutors are forced to pursue serious cases under other statutes, such as grand theft.

To get the measure through the Senate and Assembly, prosecutors had to assure legislators that the law would not send more people to prison, Fitzsimmons said. The legislation is intended to help prosecutors obtain financial documents from lenders and brokers

"We're not going to be putting a demand on prison beds," Fitzsimmons said. "Defendants usually don't get prison. They get county jail time unless there are multiple counts or they are a repeat offender."

If the bill reaches the governor's desk by Friday as expected, he will have 12 days to make a decision.

Other states that have recently adopted dedicated felony mortgage fraud statutes with similar wording include Georgia, Arizona, Nevada, North Carolina and Florida.

In one of the larger mortgage broker scams prosecuted by the Santa Clara County District Attorney's Office, a San Jose couple received hefty prison sentences in May for running a scheme that involved lying to five banks about borrowers' ability to repay $8 million in subprime loans and lying to borrowers about the terms of the loans.

Prosecutors accused Esperanza Valverde and Herman Covarrubias, who operated Summit Mortgage One of Milpitas, of obtaining loans for 22 clients by supplying lenders with false tax returns, W-2 statements, pay stubs and employment verification letters. They both received prison sentences of about 20 years.

"Mortgage fraud is one of the linchpins in the demise of the California real estate market and the related crises in the financial sectors," Santa Clara County District Attorney Dolores Carr said in a statement. "It is critical that something is done to assist law enforcement in handling the flood of mortgage fraud offenses that we continue to receive."

In typical cases of mortgage fraud, crooked brokers falsify loan documents by inflating a client's income by as much as 250 percent, manufacture bogus bank statements that show tens of thousands of dollars for deposits, and falsify employer information, Fitzsimmons said.

"Frequently we come across cases in which mortgage brokers have borrowers sign blank applications and fill them in later as they see fit in order to grease the skids and facilitate getting their commissions and fees," Fitzsimmons said. "It's only a year or two when mortgages adjust and everything hits the fan when a borrower comes to us."

Contact Mark Gomez at 408-920-5869.