Federal loan fraud occurs when a person or business knowingly makes a false, material statement to a federally insured financial institution or federal agency in order to obtain a loan. A conviction for federal loan fraud can carry serious penalties, including federal prison time and fines that can reach six figures.
Many federal agencies and institutions administer loans. This article will cover some of the federal crimes involved with making false statements to obtain a loan guaranteed by the Small Business Administration (SBA). Depending on the conduct involved, other federal charges could be relevant (such as racketeering, conspiracy, or money laundering). It's also possible that state criminal charges could come into play.
The SBA provides business counseling, loans, loan guarantees, and other assistance to small businesses. The federal agency was created in 1953 in response to concerns for the survival of small businesses post-Great Depression and World War II. The current SBA has grown to include federal contract procurement aid, specialized outreach for women, minorities, and veterans business owners, and disaster assistance.
The SBA works with banks and lending partners to make it easier for small businesses to get loans. For the most part, the SBA doesn't lend the money directly. Instead, it guarantees or backs loans to reduce the risk for lenders and makes it easier for them to access capital. In the event of a natural disaster or pandemic, the SBA provides some direct funding through disaster loans and grants to small businesses.
Loan fraud occurs when a person or business knowingly makes a false, material statement to a financial institution or federal agency in order to mislead the lender into making a loan.
In all criminal prosecutions, the prosecutor needs to prove all the elements of the crime "beyond a reasonable doubt." Beyond a reasonable doubt is the highest legal standard and requires a jury to be convinced that the defendant's guilt is the only reasonable conclusion (some put it at 99% certainty).
Depending on the conduct involved, one or more of the federal crimes listed in the next section could apply. While each statute contains different language, here are some important terms to be aware of.
Knowingly or willfully. For most criminal prosecutions, a person's acts must be knowing, intentional, or willful. Generally speaking, this means the person must be aware of certain facts or desire a certain result. An innocent mistake will not usually result in criminal liability.
Material. Something "material" goes to the heart of the matter. A material statement in a loan application is one that affects the lender's decision-making process. For example, providing false information on payroll figures or inflating the value of security or collateral would be material statements in the loan application process.
Deceitful or misleading. Importantly, the federal government or bank doesn't need to lose any money or even rely on the false information for a crime to be committed. It's generally enough that the person made the false statements to influence the bank or agency's decision on whether to make the loan.
Several federal criminal statutes apply to acts involving loan fraud. The specific crime charged will depend on the conduct and organizations involved. For fraudulent acts relating to SBA and SBA-backed loan applications, prosecutors could seek criminal penalties for:
It's a crime to knowingly make a false, material statement aimed at deceiving or misleading a matter under the jurisdiction of the federal government or a federal agency. Material statements are those that would tend to influence a decision-making process, like a loan application. A conviction carries a maximum penalty of five years' incarceration and a $250,000 fine. (18 U.S.C. §§ 1001, 3571 (2020).)
A person who knowingly makes a false statement or overvalues security or collateral in order to obtain an SBA loan or influence the SBA to make a loan commits a two-year felony subject to a fine of up to $5,000. (15 U.S.C. §§ 636e(1); 645(a) (2020).)
It's also a federal crime to knowingly provide a false statement to certain federally insured financial institutions (such as a local bank or credit union) in an effort to influence loan application decisions. Loan application fraud carries penalties up to 30 years' incarceration and a fine up to $1,000,000. (18 U.S.C. § 1014 (2020).)
Bank fraud involves a scheme or ploy used to knowingly defraud a bank or obtain any money or funds controlled by the bank through the use of false pretenses, representations, or promises. This section covers a broad range of criminal activities, from forging bank checks to providing false information on mortgage or loan applications. A conviction carries up to a 30-year sentence and $1,000,000 in fines. (18 U.S.C. § 1344 (2020).)
Additional charges for wire fraud or mail fraud can be filed, if the prosecution can show a person used:
to engage in a plan to defraud another of money or property. As with the other fraud charges, a crime is committed regardless of whether any money was obtained.
While wire and mail fraud charges tend to be "catchall" federal charges, the consequence of a conviction is significant. Penalties for mail and wire fraud carry 20 to 30 years in federal prison and fines can reach $1,000,000. (18 U.S.C. §§ 1341, 1343 (2020).)
Being charged with federal loan fraud is a serious matter. If you face charges for a federal crime or learn you are being investigated, speak with a criminal defense attorney immediately. Just having a record of criminal charges for borrower fraud could prohibit you from qualifying for a future SBA loan. Find a criminal defense attorney who has experience defending cases in federal court (versus just state court). Your attorney will be able to protect your rights during the criminal justice process as well as advise you on what legal options you have.