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Lacey Phillips and Erin Hall are an unmarried couple who decided to purchase a home together in 2006. Their first application for a mortgage was rejected by Associated Bank. They next applied to Fremont Investment & Loan ("Fremont"), through a referral, Brian Bowling, one of Hall's clients. Unbeknownst to Phillips and Hall, Bowling was a "crook" (Judge Posner's words), "who brokered fraudulent loans."
Fremont accepted loan applications based on "stated income," that is, they didn't verify applicants' income. And you've probably heard the rest before: Hall and Phillips couldn't make loan payments, they defaulted and lost their home. What you've probably not heard before is this little twist: Bowling's testimony helped convict Hall and Phillips for mortgage fraud, in return for a smaller sentence.
The Seventh Circuit affirmed the district court's judgment in a 2-1 decision, but decided to rehear the case en banc. The full court reversed the previous decision of the three judge panel, and remanded for a new trial.
18 U.S.C. § 1014
The U.S. Code prohibits knowingly making any false statements to an entity that regulates financial services, including banks. The Seventh Circuit noted that the Supreme Court had held that materiality was not an element of a § 1014 violation.
Knowingly Making False Statements
At trial the district court judge did not allow certain testimony to be admitted that would have shown whether the false statements were made knowingly, and if so, whether they were made with the intent to influence the bank's decision in granting the loan application. Judge Posner found that this was error, and stated: "Had the jury believed either that the defendants lacked the intent to influence the bank or that they did not make any knowingly false statements, it would have acquitted them."
Whether Lacey and Hall made the right decision to try to obtain a loan, the Seventh Circuit came to the just conclusion. Could you imagine the repercussions if it came to the opposite conclusion? Families would not only have to deal with their homes foreclosing, but they'd have to worry about the specter of criminal convictions.