OCC Mortgage Lending Testing Program

OCC Mortgage Lending Testing Program Individuals who serve as “ testers” in a proposed Office o f the C om ptroller o f the Currency program designed to identify discrim inatory lending practices by national banks would not violate any fed­ eral crim inal laws if, as part o f the program , they provide false inform ation to targeted banks M arch 8, 1994 M EMORANDUM OPINION FOR THE COM PTROLLER OF THE CU RR EN C Y Our office has been asked to respond to your request to the Attorney General for the Justice D epartm ent’s view on whether individuals who serve as “testers” in a proposed Office of the Comptroller of the Currency (“OCC”) program designed to identify discriminatory lending practices by national banks would be subject to criminal liability if, as part of the testing program, they provide false information to targeted banks. Based on our understanding of the manner in which the testing program will be conducted,1 we do not believe that the testers would violate any federal criminal laws. The Criminal Division of the Justice Department has ad­ vised us that it agrees with our conclusion.2 I. BACKGROUND OCC is the primary regulator of national banks. In that role, OCC is responsi­ ble for ensuring that national banks comply with federal laws that prohibit racially discriminatory lending practices. Last year, OCC announced that it would under­ take a serious effort to ferret out such practices. The proposed testing program is part of those efforts.3 Posing as prospective borrowers, the testers will communicate with a targeted bank and inquire about available home mortgage programs. In the course of their discussions with bank personnel, testers may provide false information about their identities, employment, income, and credit history. Testers representing different racial groups will be given similar false background information to provide to the bank. Accordingly, when OCC evaluates the manner in which a targeted bank re­ sponds to the testers’ inquiries, the false information will serve as the constant factor, while the race of the tester providing the information will be the variable 1 O ur know ledge o f the program is based on inform ation that we have received from OCC personnel w ho are w orking on its design and im plem entation 2 O ur opinion is limited to federal law W e have not considered w hether false statem ents m ade by the testers would violate any state laws 3 Testing is a w ell-established m echanism for identifying discrim ination in the sale and rental o f housing See H a ven s R ea lty Corp. v- C olem an, 455 U.S. 363 (1982) W e have been told the use of testers to identify lending discrim ination is less developed at this point. 23 O pinions o f th e O ffice o f L eg a l Counsel factor. In this way, OCC will seek to determine whether the race of the testers in­ fluenced the bank’s conduct, and thus whether the bank may be in violation of the federal fair lending laws. The testing program will be restricted to what is known as the “pre-application” phase, which means that the testers will only engage in preliminary discussions with bank personnel about available loan programs. The testers will be instructed not to fill out any loan applications or any other document, even if the bank re­ quests that the testers do so. The testers will not be OCC employees, but rather, persons hired by organiza­ tions with which OCC will contract to adm inister the testing program. Those or­ ganizations will help OCC to design the testing program and to train the testers. OCC will, however, oversee and retain ultimate control of the program. N otice o f the testing program will be provided to other federal agencies that have som e regulatory authority over national banks.4 In addition, we believe that OCC should give notice about the testing program to the United States Attorney in the particular districts in which targeted banks are located; it is our understanding that O CC has no objection to providing such notice. II. DISCUSSION In considering w hether the OCC testers would be subject to criminal liability, we have analyzed four federal statutes that, in certain circumstances, reach false statements made to financial institutions. In order of their relevance to the OCC testing program , those statutes are 18 U.S.C. § 1014, which proscribes false state­ ments made with an intent to influence the actions of a financial institution with respect to loans and certain other transactions; 18 U.S.C. § 1344, which proscribes efforts to defraud a financial institution or obtain money from the institution; 18 U.S.C. § 1005, which proscribes the m aking of false entries in the records of a fi­ nancial institution with the intent to deceive officers of the institution; and 18 U.S.C. § 1001, the general federal false statements statute, which proscribes false statements made “in any matter w ithin the jurisdiction of any department or agency.” We do not believe that false statements made by OCC testers in the context of pre-application testing would violate any of the four statutes. The critical features o f the OCC testing program are that (i) it will be confined to the pre-application stage; (ii) the testers only will be seeking information from targeted banks; (iii) the testers will not fill out application form s or submit any other documents to the banks; and (iv) the testers will have no intention o f applying for a loan or obtaining any funds from the banks. In light o f these limitations, the testers will lack the req- 4 T h o se agencies include the Federal Deposit Insurance C orporation, the B oard o f G overnors o f the Fed­ eral R eserv e System , and, at least w ith respect to len d in g activities, the D epartm ent o f H ousing and U rban D evelo p m en t and the D ep artm en t o f Justice 24 O C C M ortgage Lending T esting P rogram uisite intent to violate §§ 1014, 1344, and 1005. As for § 1001, we do not believe that the testers’ false statements would come within the scope of that statute, be­ cause the statements would not be made in connection with a “matter within the jurisdiction of any department or agency.” Furthermore, we do not think that the testers false statements would satisfy the “m ateriality” requirement that most courts have read into § 1001. Our opinion is limited to false statements that may be made as part of the OCC pre-application testing program. In our view, persons acting outside the particular context of the OCC testing program who make false statements in connection with pre-application inquiries could violate the statutes in question here, particularly §§ 1014, 1344, and 1005. Simply put, such persons might well have the requisite in­ tent to violate those statutes, whereas the OCC testers will lack that intent.5 A. S ection 1014 18 U.S.C. § 1014 prohibits persons from making false statements, either written or oral, “for the purpose of influencing in any way the action of [financial institu­ tions] upon any application, advance, discount, purchase, purchase agreement, re­ purchase agreement, commitment, or loan.” One of the elements of a § 1014 violation is “intent to influence action by the financial institution concerning a loan o r one o f the oth er transactions listed in the sta tu te .” U nited States v. Erskine, 588 F.2d 721, 722 (9th Cir. 1978) (Kennedy, Cir. J.) (emphasis added). See U nited States v. Krown, 675 F.2d 46, 51 (2d Cir. 1982); U nited States v. P a vlick , 507 F. Supp. 359, 362 (M.D. Pa. 1980), a ff’d, 688 F.2d 826 (3d Cir. 1982). Be­ cause the OCC testing program will be limited to the pre-application setting in which testers only will be seeking information from targeted banks, and because 5 B ecause O C C will be directing the te sters' conduct, and because n o n c e of the testing program will be provided to o th er affected agencies, we also believe that the program should be regarded as a valid law en­ forcem ent tool designed to uncover violations o f the federal fair lending rules. In that sense, the testing program w ould be analogous to other federal “sting” o p eratio n s that have been held to be legal, even where the participants in the operations engage in co nduct that w o u ld be illegal outside the law enforcem ent con­ text S ee H a m p to n v. U nited S ta te s, 425 U S 484, 4 9 0 (1 976); id at 490-91 (Pow ell, J., concurring); United States v R u ssell, 411 U.S 423, 432 (1973), L ew is v U nited States, 385 U S . 206, 208 (1966), see also U nited S ta tes v. M o sley, 965 F.2d 906, 912 (10th Cir. 1992) (“ the g o v ern m en t can act as both su p p lier and buyer in sales o f illegal goods”); U nited States v M ilam , 817 F.2d 1113, 1116 (4th C ir. 1987) (governm ent agents may sell counterfeit currency to uncover schem e to d istribute su ch currency), Shaw v W inters, 796 F 2 d 1 124, 1125-26 (9th C ir 1986) (police departm ent m ay sell stolen food stam ps to uncover fencing op­ eration), cert, d enied, 481 U.S. 1015 (1987), U nited S ta tes v. M urphy, 768 F 2 d 1518, 1528-29 (7th Cir. 1985) (governm ent agents may offer bribes to public o fficials to uncover corruption), cert, denied, 4 75 U.S. 1 0 1 2 (1 9 8 6 ) W e do not express any opinion as to w hether, under the principles o f In re N eagle, 135 U S 1 (1890;, the te sters’ p articipation in a valid federal law enforcem ent operation w ould shield them from state prosecution if th eir co n d u ct v iolated state law s See B aucom v M artin, 677 F.2d 1346 (1 lth Cir. 1982) (a pplying princi­ ples o f In re N ea g le and holding that FBI agent was not su b ject to state prosecution for attem pting to bribe state official as part o f a federal law enforcem ent operation designed to uncover corruption in state govern­ m ent) As it relates to the O C C testing program , the issue w ould be w hether the principles o f In re N eagle apply to persons w ho are not them selves federal governm ent em ployees, but w ho are w orking at the direction o f federal officials. 25 Opinions o f th e Office o f L eg a l C ounsel they will have no intention of actually applying for a loan or entering into any of the other types o f transactions specified in the statute, their false statements will not come within the scope of § 1014. C onstruing § 1014 broadly, some courts have held that the statute covers any transaction that might subject a financial institution to risk of financial loss.6 But even under that reading of § 1014, the testers’ false statements would not violate the statute: again, because the testing program will be restricted to the pre­ application phase, and because the testers will have no intention of either applying for a loan or entering into any of the specified transactions, there is no risk of fi­ nancial loss to the targeted bank.7 B. Section 1344 18 U.S.C. § 1344, the federal bank fraud statute, makes it a crime to “knowingly execute[], or attempt[] to execute, a scheme or artifice to (1) defraud a financial institution or (2) to obtain any of the moneys, funds, credits, assets, securities or other property . . . o f a financial institution, by means o f false or fraudulent pre­ tenses, representations, or promises.” Under either prong of the statute, it is not necessary to show that the “scheme o r artifice” actually caused the institution a loss or that the defendant personally benefitted — it is enough that the institution is 6 S ee U n ited S ta te s v S to d d a rt, 574 F 2d 1050, 1053 (10th C ir. 1978); see also U nited States v Payne, 602 F.2d 1215, 1219 (5 th C ir 1979), ceri den ied , 4 4 5 U S. 903 (1980) C ourt decisions that look to risk of loss in d eterm in in g w h eth er a tran sactio n falls w ith in § 1014 d o not hold that intent to cause a risk o f loss is a necessary elem ent o f a § 1014 violation 7 A t O C C s request, w e have looked at the d e fin itio n o f application under the Federal Reserve B o ard 's regulation im p lem en tin g the Equal C redit O p p o rtu n ity Act, 15 U .S C § 1691 (“ E C O A ” ). Together, EC O A and the F e d ’s R eg u latio n , k n ow n as Regulation B , prohibit b an k s from discrim inating on the basis o f race against ' ‘a p p lic an ts” fo r cred it, and require banks to send a n otice to persons w hose applications are rejected, the notice m ust set forth the reasons for the b a n k ’s decision to deny the a p p lic an t's request for credit R egulation B d efin es “ ap p licatio n " as “an oral o r w ritten request for an extension o f credit that is m ade in accordan ce w ith p ro ced u res e sta b lish e d by a c r e d i t o r . . ” 12 C F.R. § 202 2(f) (1993). T he F ed's O fficial S ta ff In terp retatio n o f R eg u latio n B provides th a t, in the norm al course, inquiries o f the sort that the O C C testers w ill m ake do not c o n stitu te an “application.” F o r exam ple, the O fficial S taff Interpretation states that n o application has b een m ade w hen a consumer a s k s about (he b a n k 's term s for m ortgage loans and provides inform atio n about h e r in co m e, and in response, b a n k personnel explain the in stitu tio n 's lending policies 12 C .F R p t 202, Supp. I, A pp. D, at 4 8 -4 9 (1993). The O fficial S ta ff In terp retatio n does state th a t an inquiry becom es an application w hen bank personnel d eterm ine that the in d iv id u al m ak in g the inquiry w ould not q u alify for a loan, and that determ ination is c onveyed to the individual on the spot. It is o u r understanding that this is unlikely to occur in the O C C testing p ro g ram , giv en the lim ited nature of the in q u iries that the testers will m ake. H ow ever, it is c o n ce iv ­ able that a b an k co u ld tell a tester that he does not q u alify for a loan, and thereby treat the te ste r’s request for •nform ation as an ap p licatio n for p u rposes o f R eg u latio n B. T his w ould not m ean, how ever, that the request w ould also be an ap p licatio n for p u rposes of § 10 1 4 The focus o f R egulation B is different from that o f § 1014 R eg u lau o n B is c o n cern ed w ith the conduct o f the lender, w hile § 1014 is concerned w ith the conduct o f the b o rro w e r. A ccordingly, u n d er Regulation B , w hether an inquiry rises to the level o f an application depends on how the bank responds to the prospective borrow er, not on w hat the borrow er says. Indeed, that is what the F e d ’s O fficial S ta ff Interpretation states. Id. at 48. B y contrast, under § 1014, it is the statem ents and inten tio n o f the p ro sp e ctiv e b o rro w er that d e te rm in e w h eth er an inquiry am ounts to an application or o th e r tra n sac tio n sp ec ified in the statu te. 26 O C C M ortgage Lending T esting Program exposed to a potential loss.8 However, there must be an intention on the part o f the defendant to cause an actual or potential loss to the institution.9 The testers will have no such intention, since the purpose of the testing program is merely to obtain information from a targeted bank, rather than obtaining any funds from the bank. As a result, the testers’ false statements will not violate § 1344. C. S ection 1005 In pertinent part, 18 U.S.C. § 1005 imposes criminal penalties on “[w]hoever makes any false entry in any book, report, or statement of [a bank] with intent to injure or defraud [the bank] . . . or to deceive any officer [of the bank].” In light of the fact that the testers will only seek pre-application information, and will not fill out any applications or other documents, they will not make any entries in bank records. To be sure, if it is the policy of a targeted bank to record information ob­ tained in pre-application meetings with prospective borrowers, then it is conceiv­ able that the testers’ false statements could cause bank personnel to make false entries. In turn, it could be argued that this would lead the testers to violate § 1005, through the “aider and abetter” statute, 18 U.S.C. § 2. In our view, however, even if the testers’ statements do prompt the bank to make false entries, the testers would not have any intention of causing that result, and thus they would lack any intention to violate § 1005. See U nited States v. Barel, 939 F.2d 26, 42 (3rd Cir. 1991) (defendant’s action in causing bank employees to make false entries did not violate § 1005 because defendant had no intent to cause the bank to violate the statute); U nited States v. Rapp, 871 F.2d 957, 963-64 (11th Cir.) (defendant did not violate § 1005 because there was no evidence that he “knowingly or willfully directed or authorized” the making of false entries by bank personnel), cert, d e ­ nied, 493 U.S. 890 (1989).10 D. Section 1001 In pertinent part, 18 U.S.C. § 1001 bars the making of false statements “in any matter within the jurisdiction of any department or agency of the United States.” A false statement need not be made directly to a federal department or agency in or- 8 See, e g., U nited Stales v B riggs, 965 F 2d 10, 12 (5th C ir 1992), cert, denied, 506 U.S 1067 (1993); U nited States v Solom onson, 908 F.2d 358, 364 (8th C ir 1990), U nited S tates v G o ld h la tt, 813 F.2d 619, 624 (3rd C ir 1987) 9 See, e g , U nited State* v Jo n es, 10 F 3d 901, 908 (1st C ir. 1993). U nited States v S a k s , 964 F 2d 1514, 1518 (5th C ir. 1992); U nited S ta tes v. S tavroulakis, 952 F 2d 686, 694 (2d C ir ), cert denied, 504 U .S. 926 (1992). 10 In any event, we have not found any reported decision in which a court has applied § 1005 to persons who were not em ployees or officers o f a bank, agents o f a bank, or bank custom ers acting in conjunction with bank personnel S ee Barel, 939 F 2d at 39 (S ection 1005 only applies to bank insiders or their accom plices), U nited States v A u stin , 585 F 2 d 1271 (5th C ir 1978) (upholding § 1005 conviction o f cu sto m er w ho was acting in tandem w ith bank ex ecu tiv es to defraud the institution) 27 Opinions o f th e O ffice o f L eg a l C ounsel der to com e within the purview of § 1001; there are cases upholding convictions under the statute for false statements made to state or local governmental agencies and private com panies.11 In each o f those cases, however, there was a clear “nexus” between the entity to which the false statements were made and the func­ tion o f a federal departm ent or agency.12 As a general proposition, we do not be­ lieve that the necessary link will be present here so as to bring the testers’ false statem ents within the jurisdiction of a federal department or agency for purposes of § 1001. In a num ber of the § 1001 cases involving false statements to a nonfederal en­ tity, the required nexus took the form o f a funding relationship between that entity and the federal government. In particular, the false statement to the nonfederal entity triggered some statutory obligation of the federal entity to disburse funds.13 No such obligation is implicated by the testers’ false statements to targeted banks. In other cases, false statem ents to a nonfederal entity were made in connection with a specific statutory or regulatory arrangem ent between that entity and a federal agency. For exam ple, in United S tates v. Wright, 988 F.2d 1036 (10th Cir. 1993), false statem ents in a report submitted to a state environmental protection agency were reached by § 1001 where the reports were required to be filed with the state agency pursuant to regulations of the federal Environmental Protection Agency. Similarly, in U nited S tates v. Davis, 8 F.3d 923 (2d Cir. 1993), false statements made by a federal prisoner to state prison officials were found to be within the am­ bit o f § 1001 where the state officials were acting pursuant to a federal statute authorizing federal prison officials to delegate to state officials the responsibility for housing federal prisoners.14 Here, however, the testers’ false statements will not be tied to a particular program involving the targeted bank and federal agen­ cies. N or do we believe that the testers false statements will normally end up being subm itted to federal agencies pursuant to som e statutory or regulatory require­ m ent.15 That the OCC and other federal agencies exercise general supervisory 11 See, e.g.. U n ited S ta te s v. D avis, 8 F 3 d 9 2 3 (2d C ir 1993) (false statem ent to slate agency); U nited S ta te s v. P etu llo , 7 0 9 F.2d 1178 (7th Cir. 1983) (false statem en t to m unicipal agency); U nited S ta te s v Brack, 747 F.2d 1142 (7 th C ir 1984) (false statem e n t to p riv ate com pany), cert denied, 469 U S 1216 (1985). 12 See, e.g., U nited S ta tes v S t M ic h a e l’s C re d it Union, 880 F.2d 579, 591 (1st C ir 1989) (in order for § 1001 to apply to false statem en ts m ade to a no n fed eral agency, there m ust be a “nexus . betw een the d e­ ception o f the n o nfederal agency and the function o f a federal agency"). 15 See, e.g., U n ited S ta te s v Su g g s, 755 F 2d 1538 ( 1 1th C ir. 1985); U n ited Slates v. Richm ond, 7 00 F.2d 1183 (8 th Cir. 1983); U n ited S la tes v Petullo, 7 0 9 F 2d 1178 (7th C ir. 1983). In U nited States v W olf, 645 F.2d 23 (1 0 th C ir 1981), the d e fe n d an t made a false statem ent to a private corporation, w hich induced the co rp o ra tio n to d isb u rse m oney to the defendant Because the d isb ursem ent was m ade pursuant to a federal regulato ry schem e, the false statem en ts were h e ld to be a m atter w ithin the ju risd ictio n o f a federal d e p art­ m ent o r agency for p u rposes o f § 1001. 14 S e e a lso U n ite d S ta te s v. M ilto n , 8 F 3 d 39. 4 6 (D C . C ir. 1993) (false statem ents to private com pany m ade pu rsu an t to E E O C d irective w ere within the ju risd ictio n o f a federal agency because there w as a “statutory b asis" for the E E O C directive), cert d en ied , 513 U .S 9 1 9 (1994) 15 T h e H om e M ortgage D isclosure Act (“H M D A ' ) and the relevant im plem enting regulations require a financial institu tio n to subm it to the federal b an k in g agencies certain inform ation regarding “com pleted ap p licatio n s” to the institu tio n for h o m e m ortgage loans S e e 12 U.S C. § 2803, 12 C .F .R . pt 203 (1993) 28 O C C M ortgage Lending Testing Program authority over the banks does not convert the testers’ false statements into a “matter within the jurisdiction” of those agencies. In addition to our view that the testers’ false statements probably will not meet the “jurisdictional” requirement of § 1001, we also believe that the statem ents will not satisfy the materiality requirement that nearly all courts have held to be a nec­ essary elem ent of the pertinent part of the statute.16 The most common formulation of the materiality test of § 1001 and other criminal statutes that proscribe m isrepre­ sentations is as follows: the false statement must have a natural tendency to influ­ ence, or be capable of influencing, a federal department or agency to take action that it otherwise would not take.17 If OCC notifies other relevant federal agencies about the testing program, then it would be difficult to see how the testers’ false statements could influence those agencies in such a fashion, and thus difficult to see how the statements would be m aterial.18 W ALTER DELLINGER A ssistan t A ttorn ey G eneral O ffice o f L egal Counsel H M D A defines “co m p leted application" as “an application in w hich the cred ito r has received the inform ation that is regularly o b tain ed in evaluating applications for the am ount and type o f credit requested.” 12 U S.C § 2802(3) It is conceivable that a targeted bank could treat a pre-application inquiry as a “co m p le ted appli­ c ation” for purposes o f H M D A , and subm it inform ation gleaned in the inquiry to the O C C . In su ch cases, the requisite § 1001 nexus betw een the bank and a federal agency m ight exist In the norm al co u rse, how ­ ever, it is very unlikely that a tester’s pre-application inquiry w ill rise to the level o f an application that trig­ gers the H M D A rep o rtin g requirem ents CJ supra note 7 (discussing m eaning o f “application’' for purposes o f R egulation B notification requirem ents and stating that pre-application inquiries will generally no t c o n ­ stitute a R egulation B application) Indeed, it is o u r understanding that O C C has decided to use pre- application testing precisely because inform ation about pre-application contacts betw een prospective b o r­ row ers and financial institutions is not a reportable event under HM D A If on the rem ote chance a te ster is told outright at the pre-application stage that he will not qualify for any loan, O C C could notify the bank im m ediately and instruct the institution not to treat the te ste r's inquiry as an application for H M D A p u r­ poses 16 T he Second C ircuit is the only court to hold otherw ise. S ee U nited S ta te s v. B ilzerian, 926 F 2d 1285, 1299 (2d C ir.) (citing previous Second Circuit cases rejecting m ateriality requirem ent), cert, d e n te d , 502 U.S 813 (1991) 17 See, e.g., K u n g vs v U nited Suites, 485 U S 7 5 9 ,7 7 0 (1 9 8 8 ), U nited S ta te s v M euh, 8 F 3d 1481, 1485 (10th C ir 1993), cert, denied, 5 11 U.S 1020 (1994); U nited S ta tes v. N otarantom o, 758 F 2d 111, 785 (1st Cir. 1985). 18 N otification o f U nited States A ttorneys w ould make it highly unlikely that testers ever w ould be sub­ jected to a federal prosecution W e believe that federal prosecutors w ould treat the O C C testing program as a valid law enforcem ent operation (see supra note 5) and decline to prosecute testers participating in the o p ­ eration, even if the te sters’ false statem ents were technically to violate any federal crim inal statutes (w hich, in our view , they will not). 29