There’s Penalty for Lying on a Loan Application

Shahram overstated his income on three loan applications to different federally insured lenders. He defaulted on all three loans. Two of the lenders sustained foreclosure losses: One incurred a $137,500 loss; the other lost $66,347.

The borrower was sentenced to 18 months in federal prison for making the false loan applications. Shahram appealed, arguing that the interest he paid should be subtracted from the lenders’ losses so his sentence could be reduced.

If you were the judge, would you rule that the mortgage interest paid by the borrower should be subtracted from the lender’s loan losses?

The judge said no.

“Banks extend loans for the sole purpose of earning interest income,” the judge said. When a borrower’s fraudulent loan application results in a loss to the lender, the unpaid interest increases the lender’s loss, he said. Allowing the borrower to subtract his interest payments from the loan principal the bank lost would treat the mortgage as an interest-free loan, the judge said.

“In fact, unpaid interest in fraudulent loan cases is considered an actual loss to the victims,” he said.

Therefore, Shahram’s 18-month sentence is correct, the judge ruled.

Based on the 1999 U.S. Court of Appeals decision in U.S. vs. Davoudi.