Is a Reckless Lender a Victim Owed Restitution? Not Always, Court Says

A lender that recklessly makes bad loans may not be a "victim" owed restitution, which is money a court orders you to pay back to the victims of your crime. In United States v. Litos, 847 F.3d 906 (7th Cir. 2017), the Seventh Circuit threw out an order requiring three defendants to pay Bank of America $893,015.

What happened

The defendants were convicted of wire fraud and conspiracy tied to fake mortgage applications for homes in Gary, Indiana. The loans were made around the time of the 2007-2008 housing crash. The buyers were fronts: the defendants gave them the down payments, kept the loan money, and left the buyers to default.

The district court ordered the defendants to pay Bank of America $893,015 in restitution, despite the bank's reckless conduct in making the loans. The Seventh Circuit reversed that order.

Why the bank was not a "victim"

The Mandatory Victims Restitution Act (MVRA), 18 U.S.C. § 3663A, requires restitution for fraud victims. (Read more about the MVRA.)

But the court, in an opinion by Judge Posner, pointed to the bank's own role in the loss. It made the loans without checking whether the borrowers could pay, even when one person applied for six mortgages in ten days. In the court's words:

"We are mindful that the federal criminal code requires 'mandatory restitution to victims of certain crimes,' 18 U.S.C. 3663A (the Mandatory Victim Restitution Act of 1996, usually referred to as the MVRA), including fraud, see 3663A(c)(1)(A)(ii), but only for 'an offense resulting in damage to or loss or destruction of property of a victim of the offense.' 3663A(b)(1). That doesn't seem to describe the loss suffered by Bank of America as a result of its improvident loans, especially when we consider its complicity in the loss—its reckless decision to make the loans without verifying the solvency of the would-be borrowers, despite the palpable risk involved in, for example, providing mortgage loans to a person who applies for six mortgages in ten days."

The court went on:

"Had the bank done any investigating at all, rather than accept at face value obviously questionable claims that the mortgagors were solvent, it would have discovered that none of them could make the required down payments, let alone pay back the mortgages. These people were just fronts for the defendants, who made the down payments required by the bank, pocketed the mortgage loans (which were of course much larger than the down payments) that the bank made, and left it to the nominal mortgagors to default since they hadn't the resources to repay the bank. All this was transparent."

So the court held that Bank of America was not a "victim" for restitution purposes.

What happened next

The court sent the case back for resentencing. It suggested the district court consider a fine equal to the restitution amount instead. That way the defendants would not keep their profits, but the bank would not be rewarded for its carelessness.

The practical lesson is that restitution is not automatic just because a company lost money. Who counts as a victim, and how much they actually lost, are questions the defense can and should test before the judge signs the restitution order.

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