Relates to unauthorized entities, unregistered mortgage brokers and mortgage fraud

Paragraph (f) is added to Section 590(5) of the Banking Law to prohibit a mortgage banker, mortgage broker or exempt organization from conducting business with any person, partnership, association, corporation or other entity which it knows or should have known is acting as a mortgage banker or a mortgage broker without being licensed or registered as required by the Banking Law. In addition, a mortgage banker, mortgage broker or exempt organization shall promptly notify the Banking Department if it becomes aware of any such unlicensed or unregistered operations.

Section 598(5) of the Banking Law is amended to increase the maximum amount of civil penalties assessable against an unlicensed or unregistered person engaged illegally in mortgage banking or brokering activities. Currently, such person may be liable for a sum of not less than the amount paid, nor more than four times the amount paid. This amendment would provide that, where a non-exempt unlicensed or unregistered person has continued to engage in such unauthorized activities after receiving a cease and desist notice from the Superintendent of Banks, the maximum amount of liability shall be up to ten times the amount paid.

Section 598-a is added to the Banking Law to establish the crime of Mortgage Fraud. A fraudulent mortgage act is committed by an officer, director, trustee, employee or agent of a mortgage broker, mortgage banker or exempt organization when such person, knowingly and with intent to defraud, forges a mortgage applicant's signature or presents (or prepares with the knowledge or belief that it will be presented) to a licensed mortgage banker or an exempt mortgage lending organization a form of identification, verification of deposit form, bank or securities statement, tax return, W-2 form, documentation regarding employment status, rental property lease or property appraisal which such person knows to contain false information concerning any fact material thereto.

A person is guilty of mortgage fraud in the second degree when he commits a fraudulent mortgage act. Mortgage fraud in the second degree is a class E felony. A person is guilty of mortgage fraud in the first degree when he commits a fraudulent mortgage act and thereby wrongfully defrauds or attempts to wrongfully defraud mortgage bankers or exempt organizations of more than ten million dollars. Mortgage fraud in the first degree is a class D felony.

Justification

New York State has established a comprehensive system for regulating, examining and overseeing the activities and operations of financial institutions. This regulatory system is important for the promotion and protection of the financial system, and for ensuring the protection of consumers.

There continue to be some problems with persons undertaking financial activities without the required approval of the Banking Department. Licensing and regulation are crucial for the protection of consumers. Because some entities are avoiding regulation and are not complying with the rules established for the protection of consumers, there is a much greater likelihood that consumers will be defrauded.

In particular, a number of people have operated without authorization as mortgage brokers, mortgage bankers and money transmitters. Several homeowners have been subjected to abusive lending practices as a result of the activities of unregulated persons.

Operating without the required authorization under the Banking Law is already a crime, and in some cases civil penalties may also apply. However, additional steps need to be taken to attack this problem. One concern raised in a State Comptroller's audit was the lack of coordination between the Banking Department and the Attorney General's Office in addressing the problem of unregistered mortgage brokers. These entities have often engaged in misleading, deceptive and fraudulent practices, harming many homeowners.

In order to encourage and promote better cooperation, this bill would require the Banking Department to inform the Attorney General and other appropriate agencies if it learns of any such unauthorized entities. The Attorney General is directed to provide the Department with regular updates on the status of any enforcement action being taken to prevent the continued operation of unauthorized entities. This should help ensure that the State remains focused on shutting down entities which flaunt the laws and harm consumers.

Given the number of problems with unauthorized mortgage brokers, the bill also establishes an affirmative obligation on licensed mortgage bankers and registered mortgage brokers to not conduct business with these unauthorized entities, and to notify the Banking Department if they become aware of such illegal operations.

The bill would also establish the specific crime of mortgage fraud in order to provide law enforcement officials with the improved ability to address this growing problem. Law enforcement officials and financial regulators have seen a disturbing number of incidents in which a mortgage broker (or a mortgage banker acting in the capacity of a broker) falsifies data and documents in order to secure approval of a loan, thereby enabling the banker or broker to close the loan and collect its fees. This type of fraudulent action may occur either with or without the knowledge of the applicant.

This type of fraud victimizes both the borrower and the lender. In these cases, the homeowner usually receives a loan they can't afford, which typically ruins them financially and ultimately results in the loss of the home. The lender is also victimized as it loses money on these bad loans.

Federal law already imposes strict penalties for knowingly making false statements in an attempt to influence the action of a banking institution on a loan application. However, that law only applies to fraudulent applications submitted to federally-insured banking institutions. This bill creates state level penalties that can be used for crimes affecting both insured banking institutions and other types of mortgage bankers who are not currently protected by the federal law. This new crime targets those brokers and bankers who actively engage in the forging of false supporting documents for a mortgage loan. By cracking down on this abusive practice, this legislation will help protect both the consumers and lenders who are victimized by this practice.

Legislative history

Bill S.2856 of 2005-06 Passed Senate both years Bill S.2746 of 2007-08 Passed Senate both years

Fiscal impact

None.

Effective date

This act shall take effect on the thirtieth day after it shall have become a law.