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Saturday, November 13, 2010

William Black takes on Andrew Kahr on Sub-Prime Lending

In a two part series, Mr. Black takes on Andrew Kahr's assertions that mortgage applicants should be prosecuted.

Here's an excerpt from The Huffington Post:

Lender's Put the Lies in Liar's Loans
by William K. Black - The Huffington Post

I have noted before a family maximm -- one cannot compete with unintended self-parody. Andrew Kahr has recently written a column in the American Banker entitled "Spread the Word: Lying to Banks is Illegal." Mr. Kahr is one of the architects of subprime lending. He warns:
Federal law provides that anyone who knowingly makes a false statement to a[n] ... insured institution ... 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.

Mr. Kahr neglects to mention that "insured institution[s]" are required to file Suspicious Activity Reports (SARs) (criminal referrals). As the FDIC explains:

The U.S. Department of the Treasury's financial recordkeeping regulations (31 CFR 103.18) require federally supervised banking organizations to file a SAR when they detect a known or suspected violation of federal law meeting applicable reporting criteria.

Collectively, banks make massive numbers of SARS filings with regard to mortgage fraud, over 67,000 annually, but a mere 10 institutions file 72% of those referrals. The typical nonprime lender deliberately violates its legal requirement to file a criminal referral when it discovers mortgage fraud even though that practice would be irrational for an honest lender. The federal regulatory agencies have not taken any effective action against these pervasive violation of their rules despite an "epidemic" of mortgage fraud that drove the ongoing financial crises.

The remainder of this article can be read here
Part II of this article can be read here

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