Whether To Deduct Value of Collateral From Loan Amount, and Whether to Use Actual or Intended Loss Calculation, Depends on Specific Facts of Case
It's loss-amount time again. This time, the question is how to determine the loss amount in a mortgage-fraud scheme. The answer: it depends.
Here's the ripped-from-the-headlines conduct:
From about 1999 to 2002, Goss, a mortgage lender, conspired with others to commit mail and wire fraud by preparing and submitting false documents to induce lenders to make loans totaling over $2 million to 35 borrowers who may not have been qualified for them otherwise. Goss and his co-conspirators created false verifications of deposit and rent, IRS W-2 forms, and Social Security benefit letters and provided them to lenders to obtain the mortgages.
Additionally, they conspired to launder money by converting some of the mortgage-loan proceeds for their own use and benefit. An unindicted coconspirator issued checks to fictitious creditors for some of the fraudulently obtained loans and forwarded them to Goss. Goss also received mortgage-broker fees for each fraudulently obtained loan.
Goss wound up pleading guily to a variety of mail and wire fraud and money laundering counts. At sentencing, the district court determined that the §2B1.1 loss amount should be calculated on the basis of the intended loss, and that "the entire amount of the fraudulent loans was the appropriate amount of intended loss," without any offset for the value of the collateral.
And that was the basis for Goss's appeal. He argued that "the district court erred by not deducting the collateral value in its intended-loss calculation, resulting in an inflated loss amount . . . , and thus an inflated offense level[,]" for all the charges. The court agreed, but declined to adopt a bright-line rule, instead going for a case-by-case approach in an effort to harmonize a specific application note with broader considerations involved in loss-amount determinations.
One the one hand, Application Note 3(E)(ii) to §2B1.1 provides that, “In a case involving collateral pledged or otherwise provided by the defendant, [loss shall be reduced by] the amount the victim has recovered at the time of sentencing from disposition of the collateral, or if the collateral has not been disposed of by that time, [loss shall be reduced by] the fair market value of the collateral at the time of sentencing.” (alterations in Goss). One secondary authority* reads the application note to mean "that 'immovable collateral such as real estate properly pledged to the victim will virtually always be credited against loss . . . .'"
Then again, the Fifth Circuit "has recognized . . . that there are situations where the deduction of collateral may not provide the most fair loss assessment. For example, . . . if a defendant’s intent to avoid repaying a loan is sufficiently clear, and recovery of the collateral is problematic, these factors might preclude deduction of the collateral involved." In one such case, "the collateral consisted of movable, highly depreciable property (mobile homes); and the underlying facts made the defendants’ lack of control over the collateral an item of concern." In another, the court found it unlikely that the defendant intended for his clients to repay vehicle and mortgage loans that he helped them obtain with false social security numbers.
Thus, the court held that "in the light of the direction provided by the advisory guidelines, it becomes apparent that whether to deduct collateral—whether to employ an actual or an intended loss calculation—will depend upon the specific facts at hand." That means that "it is necessary to examine each loan individually in order to determine the fair market value of the loan’s collateral and whether it should be deducted." This inquiry "should be shaped by weighing the appropriate factors in determining, at the time of sentencing, what, in the event of a default, would be the fair market value of any recovered collateral." A non-exhaustive list of such factors includes whether "the collateral is immovable; whether third parties exercise control over the collateral; whether, in the event of default, the collateral is, or might be, damaged before recovery; whether the collateral’s value was appraised or assessed at the time of sentencing; and whether there are financial or practical risks inherently associated with the collateral." And as always, the district court may estimate the loss amount.
All that said, the court strongly implies that, in cases involving immovable, real property---as in mortgage fraud---calculating the actual loss, including an offset for the value of the collateral, will almost always be the correct approach. And so it was in Goss's case, hence a remand for resentencing.
Which leads to another question, with another it-depends answer. On remand, should "the district court’s loss calculation should be based on the fair market value of the collateral at the time of the original sentencing or, rather, at the time of resentencing[?]" The court declined to adopt a "blanket rule," instead concluding, "only for this appeal and based on the facts at hand, that focusing on the value at the time of the initial sentencing best comports with the guidelines’ plain language." (Why just for this case? Probably because the parties didn't address the issue in their briefing. This way, the district court has guidance, but the court of appeals avoids resolving the issue---and binding future panels---without full briefing and argument.)
*That source was the Federal Sentencing Guidelines Handbook: Text and Analysis, by Roger W. Haines, Jr. et al. (You may recognize it as the one with the light grey cover and greenish-blue stripes.) As a footnote explains, although the tome is no more than secondary authority, the Fifth Circuit and other courts tend to view it as persuasive. For that reason alone, you should consult it. But don't rely solely on Haines. Federal Sentencing Law and Practice, by Thomas Hutchinson et al. (electric blue with gold lettering), also has very good commentary.