Mortgage Broker Escapes Sentencing Enhancement for Fraudulent Loan Conviction: Seventh Circuit Refuses to Find Abuse-Of-Trust between Broker and Lenders

Mortgage Broker Escapes Sentencing Enhancement for Fraudulent Loan Conviction: Seventh Circuit Refuses to Find Abuse-Of-Trust between Broker and Lenders

Yesterday, the Seventh Circuit rejected Fifth and Eighth Circuit precedent by holding that 18 USCS Appx § 3B1.3's abuse-of-trust sentencing enhancement was not applicable per se to a relationship between lenders and a mortgage broker who had falsified loan applications and provided phony documentation.

Mitchel Fuchs brokered subprime mortgages, and in doing so, doctored the loan applications with inflated incomes and phony employers and often altered credit reports or fabricated W-2s. Generally, the lenders relied on the information without verification.

Fuchs was convicted of mail and wire fraud, and after applying a number of sentencing guidelines adjustments, including § 3B1.3's two-level increase for abuse of a position of trust, the district court calculated Fuchs's imprisonment range at 100 to 125 months. The district court held that Fuchs's position as a broker had facilitated the fraudulent scheme and allowed its concealment and that the lenders had relied on Fuchs to provide them with accurate information.

In United States v. Fuchs, 2011 U.S. App. LEXIS 5298 (7th Cir. 2011) [enhanced version available to subscribers / unenhanced version available from lexisONE Free Case Law], the sole issue on appeal1 was whether the § 3B1.3 enhancement for abuse of a position of trust was properly applied. Fuchs argued that he did not occupy a position of trust with respect to the lenders, and thus, it was error to assess the two-level increase.

The government and the district court relied on opinions from the Fifth and Eighth Circuits upholding the application of § 3B1.3 to mortgage brokers who had defrauded their lenders. United States v. Septon, 557 F.3d 934 (8th Cir. Minn. 2009) [enhanced version / unenhanced version]; United States v. Wright, 496 F.3d 371 (5th Cir. Tex. 2007) [enhanced version / unenhanced version]. In refusing to follow these cases, the Seventh Circuit held that:

Neither Wright nor Septon identifies any factor apart from the general "structure" of the commercial relationship between mortgage broker and lender to justify applying § 3B1.3. The workings of the mortgage industry may cultivate a heightened degree of trust between mortgage brokers and lenders in a particular case, e.g., where the same broker deals repeatedly with the same lenders, but neither Wright nor Septon discusses whether the defendants in those cases actually enjoyed this special trust. The Fifth Circuit recognized that the question was a "close call" but in the end appears to have fashioned a per se rule that mortgage brokers always occupy a position of trust with lenders based on reliance flowing "from the structure of the mortgage industry itself." To the extent that the Fifth Circuit adopted a per se approach (and the Eighth Circuit followed suit), we respectfully disagree.

(citations omitted)

The Seventh Circuit held that the government did not establish anything more than an ordinary, commercial relationship, which wasn't enough to warrant an upward adjustment under § 3B1.3. In so holding, the court rejected Fuchs's assertion that as a matter of law, he could not have been in a position of trust because he did not have the authority to access or control the lenders' assets.

The court explained that § 3B1.3 encourages trust by making trust less risky to the trusting and that trust is an efficient substitute for continuous surveillance. This does not equate to lax supervision or the victim's abdication of his own duties. There is an element of misplaced trust inherent in every fraud, and so what is required is a showing that the victim placed more than the ordinary degree of reliance on the defendant's integrity and honesty. The court held that:

... we have cautioned against drawing bright lines defining where a position of trust begins or ends, and we've repeatedly emphasized that the § 3B1.3 inquiry is case-specific and that a job title cannot answer whether the defendant is in a position of trust. This is not to say that a mortgage broker can never occupy a position of trust with respect to his lenders. But whether a mortgage broker actually does occupy a position of trust ultimately depends on the particular facts of the case.


... the government did not establish that the lenders in this case had a relationship of trust with Fuchs in particular. That is, the government introduced no evidence explaining the nature of the relationship between Fuchs or his employers and the victim lenders. In fact, the government did not even disclose the actual written agreements the lenders had with these brokers. What the evidence does tell us is that the victim lenders sometimes verified Fuchs's work but more often than not they didn't. On this record, an inference that the lenders operated this way based on their trust in Fuchs is no stronger than the inference that they simply failed to do their own due diligence. All we can do is speculate because aside from the general evidence of the industry of which Fuchs was a part--in which there is a statutory agency relationship between Fuchs and the borrowers-there is nothing pointing to a special relationship of trust outside of the ordinary arm's--length, commercial relationship between him and the lenders.

(citations omitted)


[1] As a fiduciary, Fuchs occupied a position of trust with respect to legitimate borrowers. However, the borrowers either had actual knowledge of the fraud-which would make them coconspirators, not victims-or at least should have known of the fraud. The government thus took the position that only the mortgage companies were the victims and suffered the financial losses.


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  • 04-11-2011

Surely, you don't want to mess yourself in such situation. Living in jail for about 120 months, boy, its hard to imagine.