Potential Criminal Liability for Subprime Lending Practices

Larry Lender heads ABC Bank's loan department in Midcity, FL. Larry has lived in Midcity all of his life and knows the real-estate market well. In 2006, Larry began noticing loans coming through for his approval based on appraisals that he suspected, even in the context of a hot real-estate market, were unrealistically high. Larry also knew, however, that ABC Bank would hold these mortgages only for a few weeks before packaging them into mortgage-backed securities ('MBSs') and selling them on the financial markets through an investment bank. The investment bank often repackaged some of the MBS into collateralized debt obligations ('CDOs'), which are debt securities backed by portfolios of other debt securities. Larry therefore viewed the risks to ABC Bank as minimal and approved the loans. He had many discussions with the bank's loan department heads in other cities in Florida, and understood that they were doing the same thing, as was most of ABC Bank's competition. Larry received a bonus at the end of the year based largely upon his loan volume. Since 2006, Larry's annual bonuses have dwarfed his salary.

In 2008, Midcity's real-estate market began declining steeply, and Larry learned that an unexpectedly large percentage of the loans he had originated were in default. He also learned from his supervisors that ABC Bank was having trouble raising new funds to lend because it could no longer turn its existing mortgages into MBSs and sell them on the financial markets. Shortly thereafter, ABC Bank received a broad SEC subpoena and, subsequently, a grand jury subpoena concerning its lending practices.