Magazine article American Banker

Using Racketeering Law to Recoup Fraud Losses

Magazine article American Banker

Using Racketeering Law to Recoup Fraud Losses

Article excerpt

Byline: Kate Berry

A federal case brought by ING Bank against an alleged mortgage fraud ring in Seattle shows the lengths to which lenders will now go to recoup losses.

The Wilmington, Del., thrift, a unit of ING Group NV, is suing 10 people and more than a dozen companies under the Racketeer Influenced and Corrupt Organizations Act. Though it is not unheard-of for a lender to bring a civil suit under this law, legal experts said such cases are hard to win, because they require a higher burden of proof to show a pattern of conduct.

Of the 866 federal mortgage fraud cases that Navigant Consulting Inc. tracked in 2007 and 2008, only 16 cited violations of the anti-racketeering law.

"You really have to plead a pattern of practice that goes back a certain amount of time and involves recurrences of federal crimes," said Rachel Dollar, a partner at Smith Dollar PC in Santa Rosa, Calif. Courts are "very reluctant" to extend racketeering charges to "garden-variety" fraud cases.

Usually lenders will file their cases in state court to go after alleged fraudsters. But the potential payoff is bigger from using the anti-racketeering law, which provides for triple damages. ING stands to collect up to $18 million for the $6 million of loans it says it was defrauded.

Lawyers say the law, created in 1970 to combat organized crime, is increasingly cited in civil cases alleging various types of fraud. As a result, according to lawyers, more lenders may try the strategy ING is using to recover losses on mortgage fraud, which was rampant during the housing boom.

Jeff Nielsen, managing director at Navigant, said bankers would be more likely to pursue a civil RICO case for mortgage fraud if there were significant losses involved and the case included professionals such as appraisers and brokers. More often, he said, there are few deep pockets to recover losses.

"It may be that a bank wants to send a message," Nielsen said. "There is a deterrent effect in knowing a bank has zero tolerance for this type of fraud."

The $82.4 billion-asset ING Bank filed its suit in January in the U.S. District Court for the Western District of Washington. The defendants include a mortgage broker, an escrow company that ING said was unlicensed, title insurers, accountants, appraisers and an auto shop accused of creating "false verifications of employment" for loan applicants.

The suit claims "a pattern of deception that goes far beyond ordinary fraud."

The defendants prepared falsified loan applications, overvalued properties, submitted false documents, engaged in identity fraud, falsely claimed to hold valid state licenses and used fraudulent closing letters in the guise of a licensed escrow company, according to the suit.

ING called the defendants "a complex network of conspirators who organized and orchestrated a massive mortgage loan falsification scheme that induced ING to provide millions of dollars in loans, to pay over $100,000 in fees and to suffer other losses."

The borrowers allegedly misrepresented their assets, income and employment on at least nine loans originated between November 2007 and June 2008. …

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