The Pinocchio Papers : Lying on Loan Forms Is Increasing Even Though the Punishment Is Severe

Throwing caution to the wind, borrowers nationwide are increasingly lying about their earnings or savings to secure mortgages or other types of loans, bankers say.

Unfortunately, these lenders say, perpetrators of such loan application fraud seem to know little about how easily they can be caught--and how severe the resulting penalties can be.

Where fraudulent loan applications were once an immeasurably tiny portion of total loans, they now account for between 4% and 10% of all applications taken nationwide, says Greg Benson, a retail banking expert at Savings and Community Bankers of America, a Washington trade association.

The problem is particularly pronounced in California, where the FBI says it is getting roughly 1,200 loan fraud referrals each month, compared to about 600 or 700 per month a year ago. Florida and Chicago are also loan fraud hot spots, experts say.

Nationwide, the FBI has roughly 10,000 open loan fraud cases today, compared to 6,000 a year ago, says Tony Adamski, assistant special agent in charge of the FBI’s financial crimes division in Los Angeles. Only a fraction of the referrals are pursued.

“Never in my 26 years with the FBI have I seen so many blatantly fraudulent loan applications as I have in the past year,” he says.

Fraudulent applications have been found in all types of loans, from mortgages to personal loans to auto loans. No one knows exactly why this fraud is growing, but economic hard times appear to be a culprit.

Lenders believe some borrowers have found themselves in a Catch-22. They’re trying to refinance to get a more affordable payment, but have lost income, which makes it harder for them to qualify. Or their home has declined in value, leaving them with less equity and less ability to get a new loan.

What’s shocking to bankers, however, is that borrowers apparently don’t understand the dire consequences that can result from a falsified application.

“People seem to think this is the thing to do,” says Joan Little, director of strategic planning at First Federal Savings Bank in Santa Monica, where loan fraud has grown dramatically. “They don’t understand how serious this is.”

Federal law now requires banks and thrifts to report all fraudulent loan applications to regulators, law enforcement officials and, in some instances, the Internal Revenue Service.

If the borrower has a professional license, the appropriate licensing board is also notified.

It doesn’t matter whether the false information caused a loss to the lender. If the borrower--or the borrower’s loan broker or real estate agent--purposely provided false information, he or she can be prosecuted. The borrower’s and loan agent’s property can be seized and their professional licenses revoked, and they can be thrown in jail.

Even if bankers don’t want to report the digression, they have to, Little notes. If they don’t, they’re breaking banking regulations, and the bank could be sanctioned by regulators.

All loan fraud cases in Los Angeles are now prosecuted as felonies, Adamski says. That means, according to federal sentencing guidelines, that anyone convicted must serve at least one year in jail.

Some people plea-bargain before the cases go to court, however, and those sentences are a bit more lenient.

One banker says a longtime customer was recently sentenced to five months in jail, five months in a halfway house, $2,400 in fines and three years of probation. And the bank didn’t suffer a loss on the loan.

In another case, an accountant sent a fake tax return with his loan application, indicating that he earned substantially more than was true.

The FBI confiscated the accountant’s property, and his accounting license was taken away.

Sentences are even more severe--up to 20 years in prison--for loan brokers and real estate agents who have established a pattern of padding financial statistics to get their clients loans, Adamski says. If the bank has suffered a loss--or is even “exposed” to a potential loss--the borrower or agent may also be held liable for financial restitution.

Borrowers can be punished even if they were turned down for the loan, experts add. The U.S. attorney’s office frequently settles these cases by fining the borrower an amount equal to 20% of the loan they falsely applied for, officials say.

To top it all off, if the bank has suffered a loss because of a false loan application, the bank can also sue for civil penalties.

“The consequences are quite serious, and I don’t think the average borrower realizes that,” says Linda Mueller, a spokeswoman for Great Western Bank.

“People need to know that if they enhance their loan documentation, they’re setting themselves up.”

It is relatively easy to determine when a loan application has been falsified because borrowers typically sign forms allowing verification of employment, tax returns and other financial information when they apply for their loans. Some bankers don’t verify all that information, but an increasing number do, says Benson. The bank simply sends out half a dozen verification forms to get positive proof when the borrower has been deceitful.

Banking experts say it is somewhat easier to detect fraud with mortgage loans because lenders typically require more documentation for mortgages and they check these loans more carefully.

The ease of catching loan fraud is also one of the reasons the FBI has been so quick and aggressive in pursuing these cases, Adamski notes.

Unlike many other types of financial crimes, loan fraud investigations may take only a matter of hours. A number of those confronted by investigators confess and opt to settle cases before going to court, he adds.

“I don’t think you have much of a choice. We usually have these things cold,” Adamski says. “When it’s as simple as that, you’re pretty much dead meat.”

Loan Fraud

What it is: Providing a lender with false information in order to secure a loan.

How it’s done: Borrowers often lie about how much they have in savings or investments, lenders say. Sometimes borrowers claim they have a cash down payment when they’re actually borrowing that money too.

How lenders catch it: Standard loan documents include releases for banks, brokerages, employers and the Internal Revenue Service. The releases open the mouths and records of these otherwise circumspect operations, who let lenders know if borrowers have padded salary or savings account information.

If you’re caught: Your property can be seized and your professional licenses revoked, and you can be jailed.