Today, we have what’s really Part 2 of Dan Broderick’s blog last week on materiality and bank fraud related prosecutions. This post is on the related offense of false statement in a loan application in violation of 18 U.S.C. § 1014.

BLOG BULLETS:

• Materiality isn’t an element of the 18 U.S.C. § 1014 offense of making a false statement in a loan application.
• But intent to influence the bank’s action, which is very close to materiality, is an element, so focus on that and what your client was told about what did and didn’t matter.
• This also makes evidence of mortgage banking practices at the time of the loan application relevant, so don’t let them hide that dirty laundry.

NOW THE BLOG:

In the last post, I talked about defending mortgage fraud cases based on the materiality element in the federal fraud statutes and challenging the Ninth Circuit model instruction on materiality. If your client is charged with false statements on a loan or credit application under 18 U.S.C. § 1014, materiality is not the critical question, however. In United States v. Wells, 519 U.S. 482, 489-90 (1997), the Supreme Court held that materiality of a falsehood is not an element of 18 U.S.C. § 1014. Instead, the statute requires a knowing false statement, made in a loan application, for the purpose of influencing the action of an FDIC insured bank. The defense focus in a prosecution based on this statute, therefore, must be on the subjective knowledge and intent of the defendant.

Here’s what the Court said in Wells:

The language makes a false statement to one of the enumerated financial institutions a crime only if the speaker knows the falsity of what he says and intends it to influence the institution. A statement made “for the purpose of influencing” a bank will not usually be about something a banker would regard as trivial, and “it will be relatively rare that the Government will be able to prove that” a false statement “was . . . made with the subjective intent” of influencing a decision unless it could first prove that the statement has “the natural tendency to influence the decision,” Kungys v. United States, 485 U.S. at 780-781. Hence the literal reading of the statute will not normally take the scope of § 1014 beyond the limit that a materiality requirement would impose.

United States v. Wells, 519 U.S. at 499.

The key part of this language is the suggestion that the government will usually be required to prove that the statement has the natural tendency to influence the decision. That’s pretty close to material. So you need to be sure to add this in as an element, along with the defendant’s subjective intent, in your proposed jury instructions in § 1014 cases.

The “natural tendency” requirement also can be the basis for presenting evidence about the state of mortgage banking at the time your client filed the loan application. If your client’s loan was a “liar’s loan” (i.e. stated income loan, where the lender did not verify the borrower’s income), what was your client told by the mortgage broker or lender representative? If your client was told it doesn’t matter what his or her income really was, then the false part of your client’s statement was not made to influence the bank.

Be prepared for the court to balk at the idea of letting the defense argue (or even produce evidence) on either materiality or the defendant’s subjective intent. The judges will see that this evidence makes the prosecution’s case much more difficult to show, particularly with respect to loans in the pre-financial meltdown days. To fight this, you need to emphasize that materiality is a question of fact for the jury in mail, wire, or bank fraud cases (United States v. Carpenter, 95 F.3d 773, 776 (9th Cir. 1996)), and the defendant’s subjective intent is an element of a § 1014 prosecution. Preventing the defense from introducing relevant evidence relating to a material fact is tantamount to a directed verdict and a violation of due process and the right to a fair trial.

That concern alone, though, may not cause some judges to permit this evidence, so be sure to have a written proffer prepared of what your evidence would show, what the Supreme Court has held are the elements of the prosecution’s case, and how the evidence is relevant to the issues in your case. File this as part of your ex parte trial memo, if those are allowed in your district, or at least raise it as a clear oral objection when the issue arises at trial. You need this argument in the record for appeal.