Thursday, October 23, 2008

Linda Pence is Right; My Experience With The Failure of the Attorney General's Office to Fight Mortgage Fraud

This morning's Indianapolis Star features an article written by Jon Murray in which he discusses the battle between Republican Greg Zoeller and Democrat Linda Pence over the scope of the Attorney General's job. Pence says she wants to raise the profile of the office. Zoeller says his focus will be on the criminal appeals function of the office and suggests Pence is claiming the AG should take over criminal prosecutions, a suggestion Pence denies.

Pence is right. The Indiana Code provides plenty of power to the Attorney General short of conducting an actual prosecution. It is a power that has not been exercised by the Attorney General's Office. But that fact that the AG has chosen not to act is not the same thing as the AG not having the authority to act. As an example, I previously commented on the Attorney General's claim he had no power to investigate Lake County voter registration fraud.

One thing that is not captured in any article I've seen thus far is a sense of frustration that many elected and appointed officials, including some prominent Republicans, have had with the Attorney General's Office. It's not just Pence urging that the office take a more aggressive role. Many Republicans also wanted a much more aggressive, active Attorney General...they just wanted that person to be a Republican who shared their values.

A good example of where the Attorney General's Office can do a much better job is in the area of real estate regulation and mortgage fraud. Up until a little more than a year ago, I headed up the Title Insurance Division at the Department of Insurance. In that role, our office worked with regulators from the Secretary of State's Office, the Department of Financial Institutions, the Attorney General's Office and others. Because all of these entities regulate different real estate players in even the same transaction, it is imperative to cooperate and share information. DFI and the Secretary of State's Office were great to work with. The weak link in the real estate regulatory chain was always the Attorney General's Office.

The Attorney General's Office's responsibility was regulating real estate agents and appraisers. Our office would provide the Secretary of State's Office with mortgage brokers who were involved in mortgage fraud. The Secretary of State's people would investigate and take action if they thought it appropriate. But when we would provide the AG's Office with the names of appraisers involved in mortgage fraud, the AG's office would not even bother to investigate.

Without question the AG's office has the authority to fine and even yank the licenses of appraisers who are involved in mortgage fraud. In addition to licensing enforcement, the AG can take the lead and work with prosecutors in providing the investigatory information and expertise needed to prosecute mortgage fraud. It is always going to be the county prosecutor's choice as to whether to prosecute. That doesn't mean though the AG can't investigate and turn over the information to the prosecutor to prosecute if he or she so chooses.

Our office often found county prosecutors simply did not have the knowledge of how complex real estate transactions work. You can't prosecute something you don't understand. That again is where the Attorney General's Office can provide expertise to a county prosecutor. There is nothing stopping the Attorney General's Office from offering to county prosecutors a Deputy Attorney General, who specializes in mortgage fraud and can also be deputized by the county prosecutor to prosecute that crime in their counties.

I can't leave this topic without discussing another real estate matter - the issue of unfair competition. We regulated title insurance agents at the Title Insurance Division. In the real estate industry, real estate agents, mortgage brokers, builders and others often tell title insurance agents that they will not steer business to their agency unless they get something in return, a kickback. The trouble is paying for and accepting anything of value for a title insurance referral is illegal under both Indiana law and the Real Estate Settlement Procedures Act (RESPA) It is illegal for both the giver and the recipient of the kickback.

We had no problem enforcing the law against title insurance agents receiving kickbacks. Enforcement of the unfair competition laws was in fact the very reason the Title Insurance Division was created. The problem was the recipient of the kickback, the real estate agents, were continuing to solicit the title insurance agents, without any fear of getting in trouble for doing so.

We brought it to the attention of the Attorney General's Office, in particular the Homeowner's Protection Unit, that solicitation of things of value by the real estate agents was a violation of RESPA. We explained the numerous schemes involved to avoid a straight handing over of cash in return for business. We asked them to enforce the law. We were met with disinterest and told that they weren't sure the Attorney General had the authority to enforce RESPA. But as I pointed out, it says right in RESPA that the Attorneys General of the states (along with the state Insurance Commissioners) have the authority to enforce RESPA. The Indiana General Assembly thought so to and in 2007 passed a law requiring the AG's office to report on its enforcement of RESPA. Still the AG's office took the position that it was not clear the office had the authority to enforce RESPA.

We need an Attorney General who will be more active and aggressive than it has been in the past. The status quo is not good enough.

See also:

Consolidating Real Estate Regulation in Indiana - Where do the Governor and Attorney General Candidates Stand on the Issue? (10/5/2008)

Real Estate Reform - Why Indiana Needs It (9/16/2008)


Diane Cipa said...

I'm in PA and I share your frustration over enforcement in real estate transactions. Our insurance department took a bit longer than most to start acting but they have been pursuing bad actors now for the last year. They can do nothing about the real estate brokers and it seems like no one is willing to step into that role in PA either.

The public is unaware that this corruption is the base on which the entire credit crisis was built. I think it's because the real estate lobby is so very powerful.

I've been an insider in real estate for over 30 years. The dynamics unleashed in the 80s when HUD caved and decided to allow controlled business, coupling real estate brokers, mortgage lending and title insurance created a money making monster and the conflicts inherent in decision making tossed all guidelines and sanity out the window. It was get on board or get cut out. It's been a hard ride of reverse peer pressure for those who tried to stay clean.

I was there. I know how it started. Unless and until regulators and law enforcement restore natural boundaries in lending, the corruption - the schemes will reinvent themselves.

Paul K. Ogden said...

Thanks, Diana. As I have said before in these pages, not all regulation is bad. Regulation can play an important role in helping preserve competition. As you know, a problem is created when real estate players are allowed to wear more than one hat. Mortgage brokers, for example, are naturally prone to push the envelope on loans. When the mortgage broker also owns the title company, that independent party which might otherwise prevent wrongdoing at a closing, is no longer there to protect the consumer.

Anonymous said...

There is so much obvious fraud going on; I have noticed things which signal fraud is going on behind the scenes with just the application of common sense. It stuns me how no one else (with the power to do something about it) seems to notice until the real estate scheme collapses and all the money disappears into a black hole.