Argued May 30, 2012
Reargued En Banc April 16, 2013
Appeals from the United States District Court for the Western District of Wisconsin. No. 11 CR 00012 — Barbara B. Crabb, Judge.
Before Easterbrook, Chief Judge, and Bauer, Posner, Flaum, Kanne, Rovner, Wood, Williams, Sykes, Tinder, and Hamilton, Circuit Judges.
Posner, Circuit Judge.
The defendants were convicted of violating, and conspiring to violate, 18 U.S.C. § 1014, which criminalizes "knowingly mak[ing] any false statement … for the purpose of influencing in any way the action of" any specified private and public entity that provides, or regulates the provision of, financial services; among the entities are federally insured banks. The defendants were each sentenced to two months' imprisonment plus three years of supervised release and they were ordered to pay (along with Brian Bowling, of whom more shortly) nearly $90, 000 in restitution to successors in interest to the bank they were convicted of having made false statements to. A panel of this court affirmed the judgment, 688 F.3d 802 (7th Cir. 2012), over the dissent of one of the panel members. The full court granted rehearing en banc to clarify the elements of the crime and their application to charges of mortgage fraud, which have mushroomed in the wake of the collapse of the housing and credit bubbles in the period 2006 to 2008. We try in this opinion to clarify the meaning of "knowingly" making a false statement "for the purpose of influencing in any way" the action of the bank or other covered entity in response to the false statement.
Lacey Phillips and Erin Hall are a couple. Phillips is a hairdresser, Hall a barber. In the spring of 2006, just as— unbeknownst to them—the housing bubble was deflating, they found a house they wanted to buy priced slightly below $250, 000. Like countless American couples during the housing bubble they mistakenly believed they could afford the house they wanted. They had never owned a house, had only a high-school education (Hall had some college but no degree), and were financially unsophisticated.
They applied to Associated Bank for a mortgage. The bank turned down their application because Hall had a re- cent bankruptcy and because the bank deemed the couple's joint monthly income of $3, 800 too meager to justify the loan of more than $200, 000 that they needed. After this rebuff Hall turned to a mortgage broker named Brian Bowling whom he knew and admired (Hall had been Bowling's barber) for help in obtaining a mortgage loan. Bowling—a crook who brokered fraudulent loans (but there is no indication that either Phillips or Hall knew or suspected that he was a crook)—steered the couple to a federally insured bank of dubious ethics named Fremont Investment & Loan. Had Fremont been the bank that had turned the defendants down the first time, this might have shown that they realized they didn't meet the bank's criteria for a loan and so would be able to obtain a loan only by lying. But it was of course a different bank that had previously turned them down.
Associated Bank was a reputable bank. Fremont was not. See Commonwealth v. Fremont Investment & Loan, 897 N.E.2d 548, 551–55 (Mass. 2008); In re Fremont Investment & Loan, Docket No. FDIC-07-035b (FDIC Order to Cease and Desist, Mar. 7, 2007), www.fdic.gov/bank/individual/enforcement/ 2007-03-00.pdf; "U.S. Regulators Order Fremont Investment & Loan to Tighten Its Loan Policies and Operations, " New York Times, Mar. 8, 2007, www.nytimes.com/2007/03/08/ business/worldbusiness/08iht-mortgage.4840813.html (both websites were visited on September 3, 2013). Fremont's specialty was making "stated income" loans—known to the knowing as "liars' loans" because in a stated-income loan the lender accepts the borrower's statement of his income without trying to verify it. Such loans, which played a significant role in the financial collapse of September 2008—the doleful consequences of which continue to plague the U.S. and world economies—were profitable despite the high risk of default because lenders sold them as soon as they'd made them. Many of the loans were repackaged by the buyers into ill-fated mortgage-backed securities whose holders lost their shirts. This was musical-chairs financing.
Fremont went broke when the music stopped in June 2008. Its collapse was a harbinger of the worldwide financial collapse that occurred three months later when Lehman Brothers suddenly declared bankruptcy. "[The] very terms [of Fremont's loans]—short-term interest rates followed by payment shock, plus high loan-to-value and high debt-to- income ratios—were likely to lead to default and foreclosure." Megan Woolhouse, "Lender Settles with State for $10m, " Boston Globe, Business, p. 7, June 10, 2009, www.boston.com/business/articles/2009/06/10/subprime_ lender_settles_suit_with_mass_for_10m/ (visited Sept. 3, 2013) (quoting Attorney General of Massachusetts).
The defendants soon lost their home, being unable— despite valiant efforts to keep up their mortgage payments by working second jobs—to make the monthly payments of principal and interest required by the terms of the mortgage. The interest rate was adjustable; it reset automatically after two years, doubtless at a higher rate. "A large majority of Fremont's subprime loans [the loan to the defendants was subprime] were adjustable rate mortgage (ARM) loans, which bore a fixed interest rate for the first two or three years, and then adjusted every six months to a considerably higher variable rate for the remaining period of what was generally a thirty-year loan." Commonwealth v. Fremont In- vestment & Loan, supra, 897 N.E.2d at 552. Though hapless victims of Bowling, the defendants were convicted in part on the basis of his testimony; for he turned state's evidence and was rewarded for helping to convict his victims by being given a big slice off his sentence.
At the government's urging, the trial judge excluded, as irrelevant, evidence that might have persuaded the jury that the defendants either had not made statements they knew to be false or, though knowing the statements to be false, hadn't made them for the purpose of influencing the bank's action on their mortgage application. The district judge ruled erroneously that if mortgage applicants "sign something and they send it in, they're attempting to influence the bank … . They didn't sign these papers just to put them up on their wall. They signed these papers with the idea they would go in to whoever and they would get a mortgage … . [If defendant Phillips, who signed the mortgage application to Fremont] just took the papers and went home, we would not have a crime. But by sending them in to the mortgage company, she's met the requirements of [section] 1014."
The implication of the passage we just quoted is that making a statement that is false and influences a bank is a crime. It isn't. The statement must be knowingly false. The judge excluded evidence that if believed might have convinced a jury that any false statements the defendants made were not made knowingly—that is, not known by them to be false. The evidence if believed might also have rebutted an inference of intent to influence the bank. Not that the jury was erroneously instructed. But the judge may have been led by a misunderstanding of section 1014 to exclude evidence that if admitted might have exonerated the defendants.
We take up the issue of influencing first, and then the is- sue of knowing falsehoods. Suppose you're an actress and you habitually subtract three years from your true age be- cause you're worried about movie producers' discriminating against aging actresses. You're 40 but pretend to be 37. You know the bank doesn't care whether you're 40 or 37—you're wealthy and the bank is eager to have you as a customer— but you don't like your true age to appear on any document; a bank employee might read it and discover the lie and post his discovery on Facebook or Twitter, and within hours the whole world would be privy to your secret. You would have made a knowingly false statement on your bank application by listing your age as 37, and rather than just pinning the application to your wall you had submitted it to the bank. Under the district judge's ...