The idea of predatory lending has garnered a lot of national attention in recent years. Most people think of it as involving large institutions such as banks and sub prime lenders who exploit the vulnerabilities of struggling home buyers and homeowners in distressed neighborhoods.
But in California, federal state and local prosecutors have targeted small lenders, real estate brokers, mortgage brokers, appraisers and other individuals for crimes that relate to predatory lending.
We're a law firm of former police investigators and former deputy district attorneys. We have decades of experience prosecuting real estate fraud cases. Now we defend people who get accused. We understand that public outcries (and the resulting political pressure) cause the overzealous prosecution of truly innocent people. You may be one of them. We can help.
In this article, our California mortgage and real estate fraud defense attorneys1 explain the California crime of predatory lending by addressing the following:
If, after reading this article, you would like more information, we invite you to contact us at Shouse Law Group.
You may also find helpful information in our related articles on California's Fraud Laws; California Real Estate and Mortgage Fraud; Penal Code 487 PC Grand Theft; Penal Code 470 Forgery; Straw Buyer Schemes; California Legal Defenses; Civil Code 2945.4 California's "Foreclosure Fraud" Law; Civil Code 890 California's "Rent Skimming" Law; Phantom Help Scams; and Illegal Property Flipping.
According to the Federal Deposit Insurance Corporation (FDIC), illegal "predatory lending" typically involves
- imposing unfair and abusive loan terms on borrowers, often through aggressive sales tactics,
- taking advantage of a borrower's lack of understanding of complicated transactions, and
- outright deception."2
Simply put, predatory lending becomes a crime in California when the lender manages the loan transaction to extract the maximum value for itself without regard for the borrower's ability to repay the loan.
Generally speaking, there are two features that are common to most illegal predatory lending schemes. These include
- target marketing to households based on illegal, discriminatory practices such as race, ethnicity, age, and/or gender that are unrelated to creditworthiness, and
- unjustifiable and unreasonable loan terms that maximize the lender's potential earning capacity at the expense of the borrower.
Let's take a closer look at these features to gain a better understanding of their roles in predatory lending schemes.
The fact is that there are a wide variety of ways to violate California's fraud laws that pertain to predatory lending. But as with most crimes, certain schemes are more common than others.
The following sections outline some of the more common predatory lending schemes.
Predatory lenders have a variety of public information at their disposal to identify potential customers. They typically prey on uneducated, unsophisticated individuals who lack the ability to scrutinize the paperwork and terms of the loan. Households that have limited incomes but significant equity...such as homes owned by the elderly...are particularly at risk.
Many of these lenders will engage in telephone and door-to-door solicitation, direct mailings and TV commercials to contact their potential clients. In and of themselves, there is nothing wrong with these practices...in fact, these are valuable marketing strategies that are used in a wide variety of industries.
These activities become illegal when aggressive lenders engage in fraudulent behavior by directing these techniques to vulnerable homeowners in an effort to make money rather than to meet the needs of their customers.
Failing to explain the terms of the loan, such as omitting reference to a balloon payment, or discouraging the borrower from exploring a lower-cost option are a couple of the tactics used that can turn an otherwise legal transaction into an illegal California predatory lending scheme.
Predatory loans are generally characterized by excessively high interest rates and/or fees. The lender usually also fills these loans with unnecessary terms that do not benefit the borrower. These include (but are not limited to):
- unnecessary balloon payments (balloon payments are final loan payments that are significantly higher than the preceding payments),
- large prepayment penalties,
- deceptive promises about low interest rates that, in reality, are actually higher than promised, and
- loan approvals that ignore the borrower's ability to repay the loan.
The lender profits from these types of excessive loans by
- collecting excessive upfront fees, and
- almost ensuring that the borrower will default so that the lender can repossess or foreclose on the property. Unfortunately, a pending foreclosure additionally places the borrower in a position where he/she is more susceptible to schemes involving violation of California foreclosure fraud laws.
Mortgage brokers aren't the only ones who engage in predatory lending. Home improvement contractors also contribute to this illegal activity. Unscrupulous home contractors most frequently target
- inner-city neighborhoods where houses are older, often in need of renovation, and where owners have accumulated significant equity in their properties, and
- homes owned by the elderly that are often in need of repair and whose owners are much less likely to attempt the repairs themselves than younger homeowners...which can also lead to violations of California elder abuse laws (Penal Code 368).
The contractor convinces the homeowners that they should refinance their home loan in order to pay for home improvements that will increase the value of the property. The contractor steers the owner to a predatory lender and collects a referral fee...oftentimes without ever ultimately performing the work.
Fortunately there are a variety of legal defenses that a California real estate fraud defense lawyer could present on your behalf. Which ones will be more appropriate will, of course, depend on the specific facts of your case.
That said, if you can demonstrate that you didn't have fraudulent intent and that you were simply engaged in a legitimate business practice...such as subprime lending...that is always a good defense to present.
Subprime lending, for example, exists for borrowers who have limited or blemished credit histories. These loans carry a higher interest rate than typical "prime" loans because they must compensate for their increased credit risk. These types of situations can create confusion between predatory lending and legal lending.
As Rancho Cucamonga criminal defense attorney Michael Scafiddi3 explains, "Even though a loan has 'predatory-type' characteristics, the loan is not necessarily predatory in nature. For example, depending on the specific loan, a prepayment penalty may be considered predatory in one case and reasonable and legitimate in another. This is one reason why it is crucial to consult with an experienced California real estate fraud defense attorney immediately upon being accused of predatory lending. This type of attorney knows the most effective ways to prove that your practices were fair and not fraudulent."
The penalties you face for the California crime of predatory lending will also depend on the exact facts of your case. Predatory lending can be prosecuted as a state crime and/or a federal crime.
There are a number of federal consumer protection laws that are designed to protect borrowers against illegal lending practices. Detailed explanations of these laws can be found on the Federal Deposit Insurance Corporation's website. Some of these include (but are not limited to):
- The Truth in Lending Act (which requires lenders to disclose credit and leasing terms in such a way that the borrower will be able to understand and compare the terms offered by competing lenders),
- The Home Ownership and Equity Protection Act (an amendment to the Truth in Lending Act (TILA)...and enacted in direct response to abusive mortgage lending practices rather than lending practices in general...it narrows the scope of TILA by requiring the lender to disclose additional terms that relate to high-interest and high-fee home equity loans), and
- The Real Estate Settlement Procedures Act (which requires lenders, brokers, and anyone else who services home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the transaction).
Violating these laws subjects you to federal prison time and substantial fines.
More frequently, California crimes alleging predatory lending are prosecuted as state crimes. Predatory lending isn't one of the enumerated crimes listed in the California Penal Code. Rather, it is a type of practice that is prohibited under a number of different laws, the most common of which are as follows:
- Penal Code 487 PC grand theft
You violate Penal Code 487 PC California's grand theft law anytime you permanently deprive another person or entity of money or property worth more than $950. This would most likely be the case if you charged excessive upfront fees as part of a loan package.
This offense is what's known as a wobbler. A "wobbler" is a crime that prosecutors can file as either a misdemeanor or a felony, depending on
- the facts of the case, and
- your criminal history.
If convicted of grand theft as a felony, you face 16 months, or two or three years in the state prison and a maximum $10,000 fine. If convicted of the misdemeanor, you face up to one year in a county jail and a maximum $1,000 fine.4
- Conspiracy to commit grand theft
If the prosecutor can prove that you and at least one other person acted together to try to fraudulently deprive a homeowner out of more than $950, you could additionally face charges for conspiracy to commit grand theft.
If convicted of conspiracy, you face the same penalties you face for a conviction of felony grand theft.5
- Penal Code 470 PC California's forgery law
Penal Code 470 PC California's forgery law prohibits knowingly altering, creating, or using a written document intending to commit a fraud. This means that if, for example, you falsify loan documents...perhaps altering the borrower's income and resulting ability to repay the loan...you face additional forgery charges.
This offense is also a wobbler, subjecting you to a maximum three years in the state prison and a maximum $10,000 fine.6
- False advertising
Stated in Business & Professions Code 17500 BPC, California's false advertising law prohibits making false or misleading statements during the course of advertising products or services. If you are accused of predatory lending based upon sales tactics that falsely lured the borrower into obtaining...or even seeking to obtain...a loan from you, you face prosecution for this law.
If convicted, you face a misdemeanor, punishable by up to six months in a county jail and a maximum $2,500 fine.7
- Miscellaneous charges
There are a variety of additional charges that...depending on the circumstances...you could face for the crime of predatory lending. If, for example, you entered a person's home with the intent of engaging in predatory lending, you could additionally be prosecuted for violating Penal Code 459 PC California's burglary law.
If you used threats or harassment to convince the borrower to obtain a loan from you or another person involved in predatory lending, you could face charges for
- Penal Code 422 PC criminal threats,
- Penal Code 240 PC assault, and/or
- Penal Code 646.9 PC stalking.
You can be convicted of any or all of the charges outlined under this section. If you get convicted of multiple crimes, the jail and/or prison time can quickly add up.
Some final thoughts
Predatory lending is a serious crime in California that can affect the lives of the lender as well as the borrower.
If you are accused of this offense, we know how to challenge the state's evidence to help demonstrate that you were engaged in legitimate business practices.
And if you are the victim of a predatory lending scheme, know that legal recourse is available. We can help you bring a civil suit to recover damages, including any payments you have made on your loan and any legal costs associated with the lawsuit.
Call us for help...
For questions about California predatory lending schemes, or to discuss your case confidentially with one of our California criminal defense attorneys, do not hesitate to contact us at Shouse Law Group.
We have local criminal law offices in and around Los Angeles, San Diego, Orange County, Riverside, San Bernardino, Ventura, San Jose, Oakland, the San Francisco Bay area, and several nearby cities.
Additionally, our Las Vegas Nevada criminal defense attorneys are available to answer any questions about Nevada's mortgage fraud laws. For more information, we invite you to contact our local attorneys at one of our Nevada law offices, located in Reno and Las Vegas.8
1Our California fraud defense attorneys have local Los Angeles law offices in Beverly Hills, Burbank, Glendale, Lancaster, Long Beach, Los Angeles, Pasadena, Pomona, Torrance, Van Nuys, West Covina, and Whittier. We have additional law offices conveniently located throughout the state in Orange County, San Diego, Riverside, San Bernardino, Ventura, San Jose, Oakland, the San Francisco Bay area, and several nearby cities.
3Rancho Cucamonga criminal defense attorney Michael Scafiddi uses his former experience as an Ontario Police Officer to represent clients throughout the Inland Empire including San Bernardino, Riverside, Rancho Cucamonga, Hemet, Banning, Fontana, Joshua Tree, Barstow, Palm Springs and Victorville.
4California Penal Code 489 PC -- Grand theft, punishment. ("Grand theft is punishable as follows: (a) When the grand theft involves the theft of a firearm, by imprisonment in the state prison for 16 months, 2, or 3 years. (b) In all other cases, by imprisonment in a county jail not exceeding one year or in the state prison.")
See also Penal Code 18 PC -- Punishment for felony not otherwise prescribed; alternate sentence to county jail. ("Except in cases where a different punishment is prescribed by any law of this state, every offense declared to be a felony, or to be punishable by imprisonment in a state prison, is punishable by imprisonment in any of the state prisons for 16 months, or two or three years; provided, however, every offense which is prescribed by any law of the state to be a felony punishable by imprisonment in any of the state prisons or by a fine, but without an alternate sentence to the county jail, may be punishable by imprisonment in the county jail not exceeding one year or by a fine, or by both.")
See also Penal Code 672 PC -- Offenses for which no fine prescribed; fine authorized in addition to imprisonment. ("Upon a conviction for any crime punishable by imprisonment in any jail or prison, in relation to which no fine is herein prescribed, the court may impose a fine on the offender not exceeding one thousand dollars ($1,000) in cases of misdemeanors or ten thousand dollars ($10,000) in cases of felonies, in addition to the imprisonment prescribed.")
5California Penal Code 182 PC -- Definition; punishment; venue; evidence necessary to support conviction. ("(a) If two or more persons conspire: (1) To commit any crime [including predatory lending]. (2) Falsely and maliciously to indict another for any crime, or to procure another to be charged or arrested for any crime. (3) Falsely to move or maintain any suit, action, or proceeding. (4) To cheat and defraud any person of any property, by any means which are in themselves criminal, or to obtain money or property by false pretenses or by false promises with fraudulent intent not to perform those promises. (5) To commit any act injurious to the public health, to public morals, or to pervert or obstruct justice, or the due administration of the laws. (6) To commit any crime against the person of the President or Vice President of the United States, the Governor of any state or territory, any United States justice or judge, or the secretary of any of the executive departments of the United States. They are punishable as follows: When they conspire to commit any crime against the person of any official specified in paragraph (6), they are guilty of a felony and are punishable by imprisonment in the state prison for five, seven, or nine years. When they conspire to commit any other felony, they shall be punishable in the same manner and to the same extent as is provided for the punishment of that felony. If the felony is one for which different punishments are prescribed for different degrees, the jury or court which finds the defendant guilty thereof shall determine the degree of the felony the defendant conspired to commit. If the degree is not so determined, the punishment for conspiracy to commit the felony shall be that prescribed for the lesser degree, except in the case of conspiracy to commit murder, in which case the punishment shall be that prescribed for murder in the first degree. If the felony is conspiracy to commit two or more felonies which have different punishments and the commission of those felonies constitute but one offense of conspiracy, the penalty shall be that prescribed for the felony which has the greater maximum term. When they conspire to do an act described in paragraph (4), they shall be punishable by imprisonment in the state prison, or by imprisonment in the county jail for not more than one year, or by a fine not exceeding ten thousand dollars ($10,000), or by both that imprisonment and fine. When they conspire to do any of the other acts described in this section, they shall be punishable by imprisonment in the county jail for not more than one year, or in the state prison, or by a fine not exceeding ten thousand dollars ($10,000), or by both that imprisonment and fine. When they receive a felony conviction for conspiring to commit identity theft, as defined in Section 530.5, the court may impose a fine of up to twenty-five thousand dollars ($25,000). All cases of conspiracy may be prosecuted and tried in the superior court of any county in which any overt act tending to effect the conspiracy shall be done. (b) Upon a trial for conspiracy, in a case where an overt act is necessary to constitute the offense, the defendant cannot be convicted unless one or more overt acts are expressly alleged in the indictment or information, nor unless one of the acts alleged is proved; but other overt acts not alleged may be given in evidence.")
6California Penal Code 470: Forgery; Signatures or Seals; Corruption of Records. ("(a) Every person who, with the intent to defraud, knowing that he or she has no authority to do so, signs the name of another person or of a fictitious person to any of the items listed in subdivision (d) is guilty of forgery. (b) Every person who, with the intent to defraud, counterfeits or forges the seal or handwriting of another is guilty of forgery. (c) Every person who, with the intent to defraud, alters, corrupts, or falsifies any record of any will, codicil, conveyance, or other instrument, the record of which is by law evidence, or any record of any judgment of a court or the return of any officer to any process of any court, is guilty of forgery. (d) Every person who, with the intent to defraud, falsely makes, alters, forges, or counterfeits, utters, publishes, passes or attempts or offers to pass, as true and genuine, any of the following items, knowing the same to be false, altered, forged, or counterfeited, is guilty of forgery: any check, bond, bank bill, or note, cashier's check, traveler's check, money order, post note, draft, any controller's warrant for the payment of money at the treasury, county order or warrant, or request for the payment of money, receipt for money or goods, bill of exchange, promissory note, order, or any assignment of any bond, writing obligatory, or other contract for money or other property, contract, due bill for payment of money or property, receipt for money or property, passage ticket, lottery ticket or share purporting to be issued under the California State Lottery Act of 1984, trading stamp, power of attorney, certificate of ownership or other document evidencing ownership of a vehicle or undocumented vessel, or any certificate of any share, right, or interest in the stock of any corporation or association, or the delivery of goods or chattels of any kind, or for the delivery of any instrument of writing, or acquittance, release or discharge of any debt, account, suit, action, demand, or any other thing, real or personal, or any transfer or assurance of money, certificate of shares of stock, goods, chattels, or other property whatever, or any letter of attorney, or other power to receive money, or to receive or transfer certificates of shares of stock or annuities, or to let, lease, dispose of, alien, or convey any goods, chattels, lands, or tenements, or other estate, real or personal, or falsifies the acknowledgment of any notary public, or any notary public who issues an acknowledgment knowing it to be false; or any matter described in subdivision (b). (e) Upon a trial for forging any bill or note purporting to be the bill or note of an incorporated company or bank, or for passing, or attempting to pass, or having in possession with intent to pass, any forged bill or note, it is not necessary to prove the incorporation of the bank or company by the charter or act of incorporation, but it may be proved by general reputation; and persons of skill are competent witnesses to prove that the bill or note is forged or counterfeited.")
See also California Penal Code 473 PC -- Forgery; punishment. ("Forgery is punishable by imprisonment in the state prison, or by imprisonment in the county jail for not more than one year.")
See also Penal Code sections 18 and 672, endnote 4, above.
7California Business and Professions Code 17500 -- False or misleading statements; penalty. ("It is unlawful for any person, firm, corporation or association, or any employee thereof with intent directly or indirectly to dispose of real or personal property or to perform services, professional or otherwise, or anything of any nature whatsoever or to induce the public to enter into any obligation relating thereto, to make or disseminate or cause to be made or disseminated before the public in this state, or to make or disseminate or cause to be made or disseminated from this state before the public in any state, in any newspaper or other publication, or any advertising device, or by public outcry or proclamation, or in any other manner or means whatever, including over the Internet, any statement, concerning that real or personal property or those services, professional or otherwise, or concerning any circumstance or matter of fact connected with the proposed performance or disposition thereof, which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading, or for any person, firm, or corporation to so make or disseminate or cause to be so made or disseminated any such statement as part of a plan or scheme with the intent not to sell that personal property or those services, professional or otherwise, so advertised at the price stated therein, or as so advertised. Any violation of the provisions of this section is a misdemeanor punishable by imprisonment in the county jail not exceeding six months, or by a fine not exceeding two thousand five hundred dollars ($2,500), or by both that imprisonment and fine.")
8Please feel free to contact our Nevada criminal defense attorneys Michael Becker and Mike Castillo for any questions relating to Nevada's mortgage fraud laws. Our Nevada law offices are located in Reno and Las Vegas.