Relates to unauthorized entities, unregistered mortgage brokers and mortgage fraud

Summary

Section 78-a is added to the Banking Law to provide that the Criminal Investigations Bureau of the Department of Financial Services shall refer any instances of a person, partnership, association, corporation or other entity which is operating without being chartered, licensed or registered as required under this chapter to the Attorney General and to any other federal, state or local agency or entity for appropriate enforcement action. At least every six months, the Attorney General shall provide the Bureau with a written update of the status of any enforcement actions it has taken against such persons or entities.

Paragraph (e) is added to Section 590(5) of the Banking Law to prohibit a mortgage banker, mortgage broker or exempt organization from conduct- ing 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 Department of Financial Services if it becomes aware of any such unlicensed or unreg- istered operations.

Section 598(5) of the Banking Law is amended to increase the maximum amount of civil penalties assessable against an unlicensed or unregis- tered person engaged illegally in mortgage banking or brokering activ- ities. 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 amend- ment 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 the Department of Financial Services, the maximum amount of liability shall be up to ten times the amount paid.

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 fox ensuring the protection of consumers.

There continue to be some problems with persons undertaking financial activities without the required approval of the Department of Financial Services. 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 home- owners 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 coordi- nation between the Department of Financial Services 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 Department of Financial Services to inform the Attorney General and other appropriate agencies if it learns of any such unau- thorized 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 mort- gage 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 institu- tion 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 2007-06 Passed Senate both years Bill S.4871 of 2009-10 Referred to Banks Bill S.3781 of 2012 Passed Senate

Fiscal impact

None.

Effective date

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