Credit Fraud

While many of my colleagues and I earn our bread by picking apart and analyzing the laws that govern motor vehicle dealers and finance companies, a good chunk of our firm’s practice deals with the laws and regulations that govern mortgage lending. We (more or less) affectionately refer to the mortgage crowd as “dirt lawyers,” and they call us “motor heads.” And, even though I’ve got motor oil running through my veins, I know better than to turn a blind eye to the goings-on in the dirt law world. A recent AG claim against a mortgage broker caught my attention. 

In early March, the office of the Massachusetts Attorney General Martha Coakley sued a mortgage broker, alleging that it “fraudulently procured mortgage loans by submitting to lenders asset and income information for loan applicants that was fabricated or inflated.” The complaint asserted that the broker violated the Massachusetts Consumer Protection Act by, among other things, submitting loan applications to lenders that the broker knew or should have known contained false or inflated asset and income information. The complaint argued that the broker falsified information to secure loans for consumers who would not otherwise have qualified and, as a result, received fees from lenders it otherwise would not have received had it submitted accurate information.

It’s not clear what, if any, penalties the mortgage broker will ultimately have to pay. The AG’s office is seeking civil penalties and reimbursement of legal fees from the broker and also wants to forbid the broker from “brokering” loans in the future.

A press release quoted the AG as saying that, “[i]rresponsible behavior by mortgage brokers has directly contributed to the foreclosure crisis that has devastated communities across the state. Our office will continue to hold businesses accountable for their role in fraudulent mortgage lending.”

Mortgage loans? Foreclosures? What does any of this have to do with the car business?

For starters, its easy to see how the misdeeds that got the AG’s office up in arms could just as easily occur in a dealership—particularly a dealership that deals heavily in special finance. It’s also interesting to note how the AG connected the dots between brokers overstating income and asset information and the “foreclosure crisis.” In doing so, the AG is suggesting that an increase in foreclosures in the state is due, at least in part, to lenders who loan money to folks who simply don’t qualify based on the false information provided by brokers.

So, what lessons should your dealership take from this AG claim? Here are some thoughts.

While employees may be tempted to fudge income or asset information a tad here and a smidge there to help customers get approved, misleading the assignee of your contract is serious business.

Remember that dealer agreement you signed with your finance companies? It probably contained a bunch of reps and warranties that you make to the finance company when you assign a contract to them. Some of those reps and warranties probably include a promise that all information provided to the assignee is accurate. Misleading your finance sources is, at a minimum, a violation of your dealer agreement, but is more likely flat-out fraud (as in, jail-time fraud). If the outfit that buys your contracts is federally chartered or federally insured (categories that include nearly all banks), that flat-out fraud is a federal felony.

Also, it’s important to note how the AG complaint focused on how overstating income information could lead to foreclosures. Occasionally, we’ll see a similar claim on the car side—a claim that a customer would not have had his or her car repossessed and credit ruined, but for the fact that the dealership put the customer in a payment that the customer couldn’t afford. Allegations of falsified income make these sorts of claims even more dangerous. 

So, how do you reduce these risks at your dealership?

First, train your employees that monkeying with credit application information is a crime and a violation of your dealer agreements. Then, train them some more.

Next, consider periodically auditing your deal files to make sure the income and asset information is consistent with any stips provided. Track down any inconsistencies with the responsible employee. Develop a “zero tolerance” policy for falsifying credit application information.

There are also some procedures you could implement to reduce claims that employees are falsifying income information. For example, consider requiring customers to complete all credit applications in the customer’s own handwriting. If this isn’t practical in your dealership, consider asking customers to initial income and asset information provided in the credit application. Any changes to this information should also be initialed by the customer.

I, for one, am happy to take this little lesson from the dirt lawyers of the world.

*Emily Marlow Beck is a partner in the Maryland office of Hudson Cook, LLP. Prior to starting her legal career, she spent years working in a family-owned dealership. Emily is an editor and one of the authors of the CARLAW® F&I Legal Desk Book, available at www.counselorlibrary.com. She can be reached at 410-865-5438 or by e-mail at ebeck@hudco.com. Copyright CounselorLibrary.com 2008, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to Special Finance Insider. HC# 4848-7624-9858 (3/08).