Mortgage Fraud in Colorado – Laws, Penalties & Defenses

Under Colorado law, mortgage fraud is a type of theft involving

• mortgage loans,
• titles, and
• property transactions.

The penalties for mortgage fraud depend on the amount of fraud involved. In Colorado, it can be

• a petty offense,
• a misdemeanor, or
• a felony.

In this article, our Denver Colorado criminal defense lawyers will address:

• 1. What is mortgage fraud?
• 2. What are the penalties?
• 3. What are common mortgage fraud schemes?
• 4. How can I defend against a criminal charge?
• 5. Are there related crimes?

1. What is mortgage fraud?

Mortgage fraud in Colorado involves theft by deception, where the “underlying factual basis of the case involves the mortgage lending process. Any type of fraud or deception in the mortgage lending process can result in criminal mortgage fraud charges.”¹

The “mortgage lending process” is “the process through which a person seeks or obtains a residential mortgage loan.” This may include:

• Solicitation, application, or origination of the mortgage loan;
• Negotiation of loan terms;
• Third-party provider services;
• Underwriting the loan;
• Signing and closing;
• Funding of the loan; and
• Perfecting and releasing the mortgage.²

The “mortgage loan” is “a loan or agreement to extend credit” that is “secured by a mortgage or lien.” Colorado’s mortgage fraud statute includes “the refinancing or renewal of a loan secured” by the real estate.³

Who can be implicated?

Mortgages are complex transactions that involve multiple individuals, businesses, and institutions. This includes the property owner, the potential buyer, the land, and the lender or lenders. Participants in possible mortgage fraud may include anyone involved in the lending or purchasing process, including:

• The buyer. This is the party interested in purchasing the property or refinancing.
• The borrower. This is the party that initially receives the money from the mortgage loan. The borrower is generally the same as the buyer, but in some cases of mortgage fraud, it is not.
• The seller. This is the party seeking to sell a piece of property. The seller is generally the owner of the property. However, in many cases of mortgage fraud, though, the alleged seller does not own the property.
• The owner. This is the party that owns the property. In mortgage fraud cases, the owner may be either the party committing the fraud or the party defrauded.
• The appraiser. This is the party that assesses the property for sale and estimates its value.
• The lender. This is usually a bank or financial institution that funds the mortgage loan and disburses the funds to the borrower. Sometimes, the lender is a so-called “warehouse lender.” Warehouse lenders provide funds for the mortgage loan to the borrower and then sell the loan’s rights to other investors.
• The loan officer. This individual works with the lender. He or she is the point of contact for anyone trying to get a loan from the lender that is related to the sale of real estate or mortgage.
• The underwriter. This individual works with the lender. He or she decides whether to approve the borrower’s mortgage loan application. In making this decision, the underwriter considers factors such as the borrower’s income, age, employment, credit score, the property’s appraised value, and foreclosure risk.
• The mortgage broker. Not to be confused with a loan officer, this is the person who connects borrowers with banks or other institutions that provide mortgages. The mortgage broker makes a commission by connecting the two.
• The real estate agent. This person seeks a buyer for the property for sale. The agent earns a commission for completing the transaction. In some cases of mortgage fraud, the agent is not following the real estate company’s instructions.
• The title company. This company verifies that the seller owns the property. They examine the property title and its ownership records. They also note any liens on the property that might hurt its value.

Documents used in mortgage fraud schemes

Several key documents are involved in mortgage fraud schemes. These include:

• The title. This document is proof of ownership of a piece of property.
• The title opinion. This document typically comes from a title company. The title opinion details the title company’s investigation into the ownership of the property.
• The mortgage deed. This document gives the lender a lien, or security interest, on the property purchased with the mortgage loan. If the mortgage deed is a warranty deed, it comes with a guarantee that the grantor of the deed – often the seller – has title to the property. If the deed is a quitclaim deed, then no such guarantee is given.
• The loan application. This collection of documents is sent by the borrower to the mortgage broker, or directly to the lender or the lender’s agents. The loan application includes key information about the borrower’s ability to repay the mortgage.
• A verification of deposit. This document serves as proof that the borrower has sufficient funds to make a down payment on the property. It is often used as part of the borrower’s mortgage application to the lender.
• A verification of employment. The document the lender uses to request confirmation of the borrower’s employment and income from the borrower’s employer.
• Form 4506. This document authorizes the Internal Revenue Service (IRS) to provide lenders with access to the borrower’s past tax returns. This helps lenders verify a borrower’s income.

2. What are the penalties?

The penalties for a conviction for mortgage fraud depend on the value of the fraud, the accused’s criminal record, and the extent of the fraud. A white-collar crime, mortgage fraud can be a petty offense, a misdemeanor or a felony offense in Colorado.

In addition to criminal penalties, anyone convicted of mortgage fraud will face a minimum fine of the amount of financial harm suffered in the fraud. For example, if someone is accused of defrauding a homeowner of $50,000, the minimum penalty would be $50,000.⁴

The court will not accept a guilty plea to another offense from someone charged with mortgage fraud unless the plea includes an agreement to pay restitution to the victims for any cost caused by the offense.⁵

Aside from minimum fines and restitution, the penalties for mortgage fraud are generally the same as the penalties for theft in Colorado. The penalties depend on the value of fraud, as follows: ⁶

Amount of Fraud	Crime Class	Jail Time	Fines
Up to $300	Petty Offense	Up to 10 days	Up to $300
$300 to less than $1,000	Class 2 Misdemeanor	Up to 120 days	Up to $750
$1,000 to less than $2,000	Class 1 Misdemeanor	Up to 364 days	Up to $1,000
$2,000 or more but less than $5,000	Class 6 Felony	12 to 18 months	Up to $10,000
$5,000 or more but less than $20,000	Class 5 Felony	1 to 3 years	Up to $100,000
$20,000 or more but less than $100,000	Class 4 Felony	2 to 6 years	Up to $500,000
$100,000 or more but less than $1 million	Class 3 Felony	4 to 12 years	Up to $750,000
$1 million or more	Class 2 Felony	8 to 24 years	Up to $1,000,000

Additionally, the defendant may face enhanced sentencing if the victim is considered an “at-risk” individual under Colorado law. At-risk individuals include people with a disability and elders who are age 70 or older. Mortgage fraud involving an at-risk victim is a felony.⁷

3. What are common mortgage fraud schemes?

Mortgage fraud can happen anywhere during the mortgage lending process. A mortgage can involve small pieces of property or multi-million dollar deals. Common mortgage schemes include:

• Property Flipping
• Double Selling
• Equity Skimming
• Chunking
• Fake Loan Schemes
• False Down Payment
• Silent Seconds
• Schemes Targeting Distressed Homeowners

Property Flipping

Flipping property can be a legitimate thing to do. Many people buy houses that are damaged or undervalued. They then “flip” the property by fixing it up to increase its value and sell it at a higher price. This is perfectly legal.

Illegal property flipping can be fraudulent if no real value is added to the property. Instead, a buyer can purchase a property and have an appraiser inflate its value by making a false appraisal. The original buyer then resells the property to another, unsuspecting buyer. The original buyer and the appraiser then pocket the profit.

Double Selling

This mortgage fraud scheme is committed by the mortgage broker. The mortgage broker identifies a legitimate real estate transaction but connects the buyer with multiple lenders. The broker gets an innocent buyer to fill out mortgage applications for each lender, often by having them sign several “copies” of the application.

The broker then sends the applications to each lender as originals. When multiple lenders provide the loan, the broker pockets all but one, which goes to the buyer.

Equity Skimming

An equity-skimming scheme involves purchasing real estate using a fictitious buyer.

This scam usually involves stealing someone’s identity and forging documents to create a mortgage application sufficient to get a loan. Once the mortgage loan is obtained, the real buyer – using the fake buyer’s identity – closes on the property. The real buyer then sells the property to himself, with the fake buyer’s identity acting as the seller, using a quitclaim deed.

Once this sham sale is completed, the real buyer rents the property and pockets the rent payments. The fake buyer disappears as the real buyer discards the identity. The lender then has no one to pursue and must foreclose on the property.

Chunking

This scheme is carried out by the seller, who, after buying numerous low-value properties, offers them to an investor. The seller says investors can expect to get rich quickly as people rent the properties. The seller often convinces the investor that the properties are worth far more than their true value and that the seller will find tenants who provide the investor with steady cash flow. This usually involves a fraudulent appraisal.

The seller then “chunks” the properties and sells them to the investor at well above their appraisal value. The seller then disappears without finding tenants for the properties, leaving the investor with a worthless and vacant property.

The Fake Loan Scheme

This mortgage fraud scheme is done by a mortgage broker. The broker invents a property buyer who needs a mortgage loan. This involves forging a loan application. If a lender approves the loan, the mortgage broker pockets the loan proceeds.

In other cases, the broker invents a piece of property rather than a fictitious buyer. The broker convinces an unsuspecting buyer that the fake property is a good investment. The unsuspecting buyer applies to the lender for a mortgage loan. If the loan is approved, the broker pockets the commission.

Finally, the broker can hire an appraiser to make a false appraisal of a piece of property. This significantly overvalues the property. A conspirator then acts as a buyer, and the broker submits the buyer’s loan application to the lender. If the lender approves the loan, everyone involved in the fraud takes a cut.

False Down Payment

This mortgage fraud scheme is carried out by a buyer and another party. The other party is usually the mortgage broker, though it can also be the seller or even the real estate agent.

The buyer and their conspirator create documents that make it look like a down payment has been made on the property. This makes it look like a mortgage loan is a safer investment than it really is. When the buyer then applies for a mortgage, they are more likely to get one on better terms.

Silent Seconds

Most mortgage loans require a down payment before funds are disbursed. In this fraud scheme, the buyer takes out a second mortgage without notifying the lender – a “silent” second mortgage on the property. This second mortgage is then used to satisfy the down payment on the first one. This leaves the original lender in a riskier position than they expect to be in.

Schemes Targeting Distressed Homeowners

There are numerous mortgage fraud schemes that target struggling homeowners in Colorado.

A distressed homeowner is someone with a mortgage who is struggling to make the required payments. They are often unaware of their rights and do not know how to reduce their payments to a level they can afford.

One scheme is referred to as a “bailout.” Someone targets a distressed homeowner and offers to give them better interest rates on a refinanced property. Part of this deal involves the homeowner surrendering title to the property. Typically, the homeowner is led to believe that they will be renting the property, and will be able to buy it back at the end of the deal.

However, the conditions are deliberately impossible to meet. Ultimately, the distressed homeowner will be left without title to the property and will have lost any equity they have invested in it.

Another mortgage fraud scheme targets a struggling homeowner and offers “phantom help” for a steep fee. Once this fee is paid, the helping party makes the phone calls and files the paperwork the homeowner could have completed on their own. The distressed homeowner often spends thousands of dollars for mere minutes of work, regardless of whether the assistance worked.

4. How can I defend against a criminal charge?

If you are charged with criminal mortgage fraud charges, you may have a number of legal defenses available. The prosecutor is generally required to show that the accused had both the criminal intent AND the knowledge of criminal activity. Your Colorado criminal defense lawyer cans use a number of defenses to these charges, including:

• No criminal intent to deceive
• No knowledge of any criminal activity
• Entrapment
• Unlawful search or seizure
• No conspiracy

No Intent to Deceive

Mortgage fraud is a type of theft by deception. To deceive someone, you have to intend to lie or to falsely represent something. Deception cannot be done accidentally. It may be a defense to mortgage fraud charges if you did not mean to deceive anyone.

This can be an effective defense for people who have unknowingly passed on fraudulent documents during the real estate transaction. By claiming that you did not intend to deceive anyone, the prosecutors will have to prove that you were acting for the purpose of furthering the fraud.

Entrapment

Criminal investigators will sometimes create a situation to see if you will commit a crime. If they go too far, however, this can violate Colorado entrapment laws. Actions which would otherwise be illegal may not be a crime if:

• The accused engaged in the activity because he was induced to do so by a law enforcement official or other person acting under his direction, seeking to obtain evidence for the purpose of prosecution, and
• The methods used to obtain that evidence were such as to create a substantial risk that the acts would be committed by a person who, but for such inducement, would not have conceived of or engaged in conduct of the sort induced.⁸

Illegal Search

Mortgage fraud investigations implicate your Fourth Amendment rights against unlawful search and seizure. Therefore, if police conduct a search or a seizure that is deemed unreasonable, whatever evidence they find will be excluded from court.

Charges of Conspiracy

Mortgage fraud schemes often involve more than one person in the transaction. In these cases, anyone who knows the crime is occurring and helps further it may be guilty of conspiracy. A person conspires to commit a crime if:

• With the intent to promote or facilitate its commission, he or she agrees with another person or persons to engage in conduct that constitutes a crime or an attempt to commit a crime, or
• He or she agrees to aid the other person or persons in the planning or commission of a crime or of an attempt to commit such crime.⁹

Charges of conspiracy in mortgage fraud are common. Mortgage fraud schemes can be complex and multi-layered. There are often co-conspirators who may not even know all the individuals involved. However, Colorado law still considers them co-conspirators, even though they do not know who the other persons involved.¹⁰

5. Are there related crimes?

Committing mortgage fraud often involves committing other crimes, as well. Fraudulently obtaining a mortgage loan is rarely possible without also forging documents or making other misrepresentations. Prosecutors will often charge you for those infractions, in addition to charging you for mortgage fraud.

Here are some of the most common criminal charges you can face, in addition to a charge for mortgage fraud.

Identity Theft C.R.S. 18-5-902

Identity theft in Colorado happens when you knowingly make a payment using another person’s personal or financial information, including their check or credit card. Identity theft is a felony, and penalties include 2 to 6 years in prison and a fine of up to $500,000.

Appraisal Fraud

Many mortgage fraud schemes involve appraising the value of a property above its true amount. Overvaluing a property in this way amounts to appraisal fraud in Colorado, which can be punishable by disciplinary action from the appraisal board and losing an appraiser’s license, in addition to criminal charges.

Forgery C.R.S. 18-5-102

Forgery in Colorado involves falsely creating, altering, or presenting a written document with an intent to defraud someone Forgery is a class 5 felony in Colorado, with penalties including 1 to 3 years in prison, and a fine of up to $100,000.

Call us for help…

If you have been arrested for mortgage fraud, please contact us at Colorado Legal Defense Group. Our attorneys have many years of experience representing clients who have been charged with fraud in housing and loan transactions.

You may also wish to visit our articles on California real estate and mortgage fraud laws and Nevada mortgage fraud laws.

See also the Federal Bureau of Investigation (FBI.gov) Mortgage Fraud website. The U.S. Attorney General conducts criminal investigations and prosecutes mortgage fraud under 18 United States Code § 225 (Continuing Financial Crimes Enterprise). Penalties include several years in federal prison.

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Legal References