Penalties for Equity Skimming
By David M. Tkacik, Esq.
The term “equity skimming” has various definitions but invariably involves an investor purchasing a home from a homeowner in foreclosure subject to the existing mortgage with the false promise of rescuing the homeowner from foreclosure. The investor then collects rent from an unsuspecting tenant while the foreclosure process works its way through the court system, but the investor never intends to bring the mortgage current. This activity is not only unethical to the homeowner in default, the lender, and tenant, but it is also illegal and can carry a fine of up to $250,000 or the possibility of imprisonment of up to five years, or both. The federal law dealing with equity skimming, 12 U.S. Code Section 1709-2, states as follows:
Whoever, with intent to defraud, willfully engages in a pattern or practice of—
(1) purchasing one- to four-family dwellings (including condominiums and cooperatives) which are subject to a loan in default at time of purchase or in default within one year subsequent to the purchase and the loan is secured by a mortgage or deed of trust insured or held by the Secretary of Housing and Urban Development or guaranteed by the Department of Veterans Affairs, or the loan is made by the Department of Veterans Affairs,
(2) failing to make payments under the mortgage or deed of trust as the payments become due, regardless of whether the purchaser is obligated on the loan, and
(3) applying or authorizing the application of rents from such dwellings for his own use,
shall be fined not more than $250,000 or imprisoned not more than 5 years, or both. This section shall apply to a purchaser of such a dwelling, or a beneficial owner under any business organization or trust purchasing such dwelling, or to an officer, director, or agent of any such purchaser. Nothing in this section shall apply to the purchaser of only one such dwelling.
At the state level, the Pennsylvania Attorney General may also have causes of action against the investor under existing consumer protection statutes. Investors marketing to homeowners in foreclosure should pay particular attention to these laws and avoid equity skimming schemes at all costs.
David M. Tkacik, Esq. is the managing attorney for Tkacik Law Office, a landlord and real estate broker. He can be reached at 412-414-9644 or DTkacik@TkacikLawOffice.com.