A novel lawsuit brought in federal court in Seattle by Wilmington, Del. based ING Bank alleges that over 20 individuals and companies violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") by running a complex mortgage fraud scheme that resulted in the origination of over $6 million of mortgages. The defendants named in the federal Civil RICO lawsuit include a mortgage broker, an escrow company, title insurers, accountants, appraisers and an auto shop that allegedly created false employment verification documents.
If successful, ING Bank stands to collect up to $18 million in damages under the treble damages provision included in RICO.
ING's complaint recites a sordid tale of deception in the mortgage application process, including falsified loan applications, overvalued properties, false income and employment documentation, and identity fraud. In one deal cited in the complaint, ING loaned a borrower $935,000 to buy a Tacoma house for $1.35 million — a house that, according to the real-estate Web site Zillow, is valued higher than 99 percent of homes in its ZIP code. Nationwide Home Lending, one of the defendants named in the suit, was paid nearly $30,000 in fees for the loan. According to an article in the Seattle Times , an attorney for the borrowers involved in the alleged scheme claims that the borrowers were preyed upon by the mortgage broker and escrow company, but were not part of any fraud.
Many experts have noted the novelty of ING's strategy to use the Civil RICO statute against alleged fraudsters. This may be the first civil suit of its kind.
The RICO law was was passed in 1970, and originally intended to help the government prosecute cases against the Mafia and other organized-crime rings. More recently, individuals have used RICO to combat corporate abuses and malfeasance. However, corporations rarely, if ever, use the RICO law as a sword against individual customers and their agents, as ING did in this case.
ING, the country's second largest thrift institution and an arm of the Netherlands-based ING Group , is taking an aggressive but justified approach to combat mortgage fraud. The thrift reported $1.1 billion in loses at the end of 2008, and is saddled with a growing book of foreclosures. Faced with growing pressure, filing claims against alleged fraudsters made good sense for ING. The lawsuit sent a clear message to regulators, investors, and potential fraudsters that ING takes these issues seriously, and will take all necessary steps to protect its capital.
And it is a serious issue: just days after ING's lawsuit, the U.S. Attorneys Office in Seattle announced that a grand jury had indicted seven people, including owners of two Bellevue mortgage loan companies and an escrow company, in a 40-count indictment alleging conspiracy to commit mortgage, bank and wire fraud totaling more than $47 million. According to a post on the RICO Law Blog, certain of the defendants allegedly pocketed loan proceeds from escrow accounts to purchase, among other things, two 2004 Lamborghini Gallardo sports cars.
The question remains whether ING's approach to combating mortgage fraud will have any significant impact. Mortgage fraud is billion dollar problem. Citing an F.B.I. report, a recent New York Times story noted that mortgage fraud costs American $4 billion to $6 billion annually. It remains to be seen whether the ING approach is a blip on the screen or the start of a new trend.