State senators are preparing to give final approval this week to new laws designed to imprison bankers, loan officers and even home buyers who engage in mortgage fraud.
The legislation would make it a crime to deliberately make misstatements on a mortgage application that is relied on by any party in agreeing to the loan. And those who knowingly use the lies of others would be equally culpable.
Violators could be sent away for up to 2½ years — and twice that long if they are engaged in a “pattern of residential mortgage fraud.”
The legislation cleared the House on Thursday on a 51-5 vote. But not everyone is convinced a new law is needed.
Rep. Eddie Farnsworth, R-Gilbert, said it already is illegal to commit fraud. And he said the record shows that people are being charged and convicted under those laws.
And Farnsworth, a lawyer, said creating special fraud statutes “creates a foundation and a basis for attorneys to be involved in litigation” and would lead to more civil suits.
The measure is largely aimed at the “cash-back’’ schemes that some sellers have used to move their homes as the residential real estate market has cooled. That involves selling the home at a specified price and then rebating part of that price to the buyer.
There is nothing specifically illegal about cash-back sales.
What creates the problem is when banks and mortgage companies are not told about the scheme, and lend money based on what they believe is the perceived value of the property, according to Felecia Rotellini, director of the state Department of Financial Institutions.
Sen. Jay Tibshraeny, R-Chandler, who is sponsoring the legislation, said that could lead to a rash of bad loans and foreclosures. And that, he said, could hurt the entire state.
“It could be like the savings and loan scandal of the late ’80s,” he said. “It could really put your economy into a major recession.”
Farnsworth said none of that justifies a new law.
“As I’ve done the research and talked to prosecutors, there is nothing in this bill that is going to add to fraud statutes,” he said.