CCH Commends Passing of Fraud Enforcement and Recovery Act

Recently approved by Congress and expected to be signed into law by the president - The Fraud Enforcement and Recovery Act could start a new era of accountability in the financial services industry, especially the mortgage market.

"The Fraud Enforcement and Recovery Act is a major step toward holding accountable those who have caused so much damage to the U.S. economy," writes Jim Hamilton, principal securities law analyst at CCH, a subsidiary of Wolters Kluwer Law Business that provides tax and business law information and software services.

According to the author of CCH issued white paper, "Congress Passes Its First Financial Regulation Reforms of 2009: Expands Scope and Funding of Fraud Enforcement," the act would reinvigorate federal antifraud measures by expanding the scope of securities fraud provisions to include commodities and derivatives fraud and extends the prohibition against defrauding the federal government to the TARP program and the stimulus bill. It would also provide additional funds to the SEC and other agencies to fight fraud and would create a Financial Crisis Inquiry Commission to examine the causes of the financial crisis.

The white paper finds The Fraud Enforcement and Recovery Act makes a number of important improvements to antifraud and money-laundering statutes. Specifically, the legislation amends the federal securities fraud statute to cover fraudulent schemes involving commodities futures and options, including derivatives involving the mortgage-backed securities that caused such damage to the banking system. At the height of the subprime lending era, independent mortgage companies made nearly half of the higher-priced, first-lien mortgages. Current federal fraud statutes, such as the bank fraud and bank bribery statutes, did not generally cover the loans originated by these private mortgage companies.

The Fraud Enforcement and Recovery Act amends the definition of "financial institution" to extend federal fraud laws to mortgage lending businesses that are not directly regulated or insured by the federal government. These companies were responsible for nearly half the residential mortgage market before the economic collapse, Congress found, and yet they remain largely unregulated and outside the scope of traditional federal fraud statutes.

Mr. Hamilton writes that this change will apply the federal fraud laws to private mortgage businesses just as they apply to federally insured and regulated banks. Expanding the term "financial institution" to include mortgage lending businesses will also strengthen penalties for mortgage frauds and the civil forfeiture in mortgage fraud cases.

It will also extend the statute of limitations in investigations of mortgage fraud cases to be consistent with bank fraud investigations. According to Mr. Hamilton, "The new definition would also provide for enhanced penalties for mail and wire fraud affecting a financial institution, including a mortgage lending business."

Mr. Hamilton points out that the act authorizes additional appropriations for the SEC to fight financial fraud of $20 million for fiscal years 2010 and 2011. The legislation specifically states that the additional funds are to be used for investigations and enforcement proceedings involving financial institutions.

The act adds another $1 million a year for two years for the salaries and expenses of the SEC's inspector general.

The legislation includes improvements to federal fraud and money-laundering statutes to strengthen prosecutors' ability to confront fraud in mortgage lending practices, to protect TARP funds and to cover fraudulent schemes involving commodities futures, options and derivatives, as well as making sure the government can recover ill-gotten proceeds from crime.