• Fraud Enforcement Recovery Act of 2009 Closer to Becoming Law
  • June 17, 2009 | Author: Christine L. Ayotte-Brennan
  • Law Firm: Bingham McCutchen LLP - Boston Office
  • On May 6, 2009 the U.S. House of Representatives passed the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which makes only minor amendments to the similar Senate bill (S.386) approved by the Senate on April 28, 2009. The FERA, among other things, provides increased financial support and creates a new commission to aid in the investigation of the current economic and financial crisis in the United States.

    Expansion of Meaning of “Financial Institution” for Purposes of Federal Fraud Laws

    Many legislators believe that the current economic crisis was precipitated by lack of state and/or federal regulation of certain financial institutions who deal in mortgages, especially those used to create mortgage-backed securities. In response to this problem, the FERA seeks to broaden the definition of “financial institution” for purposes of the criminal code, including anti-fraud laws, to include a “mortgage lending business . . . or any person or entity that makes in whole or in part a federally related mortgage loan as defined in 23 U.S.C. 2602(1).” A “mortgage lending business” is defined as “an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affect interstate or foreign commerce.” The effect of these changes is to apply federal anti-fraud laws to currently unregulated institutions and private mortgage businesses such as Countrywide Home Loans and GMAC Mortgage, just as they currently apply to federally insured and regulated banks and broker-dealers.

    Increased Funding for Fraud Investigation and Enforcement

    One of the key spending provisions of the FERA would increase funding for government agencies to help to combat fraud committed against federal assistance programs (both mortgage and other programs) and fraud committed by and against financial institutions. Both the House and Senate versions of the FERA provide for increased funding in fiscal years 2010 and 2011 in excess of $200 million in the aggregate for the Department of Justice, the Federal Bureau of Investigation, the United States Attorneys, the U.S. Postal Inspection Service, and the Housing and Urban Development Department, to be used to investigate and prevent frauds in the financial sector. The House version of the FERA also includes an additional $20 million in funding for SEC investigations and enforcement proceedings for each of 2010 and 2011.

    Commission to Investigate the Current Financial Crisis

    In an attempt to fully understand the current financial landscape, the FERA also establishes a ten-member Financial Crisis Inquiry Commission (“FCIC”), with broad powers to investigate the causes of the current economic and financial crisis in the United States. The members of the FCIC would have subpoena power and would be made up of six members chosen by Democrats (three appointed by each of the Senate Majority Leader and the Speaker of the House of Representatives) and four members chosen by Republicans (two appointed by each of the Senate Minority Leader and the House Minority Leader). The FERA also provides that the Chairperson and Vice-Chairperson of the FCIC must be from different parties, with the Chairperson presumably being chosen by the Democrats and the Vice-Chairperson being chosen by the Republicans. The FERA provides for a $5 million budget to fund the FCIC for the duration of its existence, which is expected to cease in 2010 after the submission of its full report to the President.

    Role of the FCIC

    The two main functions of the FCIC would be:

    (1) to examine the causes of the financial crisis in the United States, including the role, if any, of, among other things: fraud and abuse in the financial sector, federal and state financial regulators and any lack of enforcement of regulatory or other requirements, monetary policy and the availability and terms of credit, accounting practices, tax treatment of financial products, capital requirements and leverage rules, credit rating agencies, lending and securitization practices, derivatives and unregulated financial products, short-selling and the quality of due diligence undertaken by financial institutions, and

    (2) to examine the specific causes of the collapse of each major financial institution that failed or was likely to have failed but for the receipt of governmental assistance during the period beginning in August 2007 through April 2009.

    Powers of the FCIC

    The FERA bestows broad subpoena power upon the FCIC and also gives the FCIC the power to hold hearings relating to its purpose. One of the most significant amendments in the House version of the FERA is to require agreement of the Chairperson and the Vice-Chairperson as well as an affirmative vote of a majority of the FCIC members to issue a subpoena. The Senate version of the FERA was silent on this point and, given the composition of the members of the FCIC, once the Chairman and Vice-Chairman of the FCIC agree to issue a subpoena, the House amendment, in practice, gives final power on the decision of issuing a subpoena to the members appointed by the Democrats.

    Reporting by the FCIC

    The FERA also calls for the FCIC to issue a report to the President and Congress on December 15, 2010, detailing the FCIC’s findings and conclusions on the causes of the current financial and economic crisis. The FERA authorizes, but does not require the Chairperson to include specific findings on any financial institution analyzed by the FCIC in accordance with its powers.

    Status of the FERA
    As of the date of this alert, the Senate has not yet accepted the House version of the FERA, nor has it elected to appoint a conference committee to work out the difference between the House and Senate versions of the legislation. However, given the White House’s clear and public support for this legislation, it is expected that the Senate will schedule the bill on its calendar in the near future.