Bank Fraud · Loan Applications

When Does a Bad Loan Become Criminal Bank Fraud?

A missed payment is not, by itself, bank fraud. Nor is a breached loan covenant. The criminal question under 18 U.S.C. § 1344 is whether the government can prove the knowing scheme and the other requirements of the clause it charges.

By Heath Hyde · East Texas and statewide

Mr. Heath Enix ‘Heath’ Hyde
Eligible to Practice in Texas
Attorney at Law
Bar Card Number: 00796807
TX License Date: 11/01/1996

Primary Practice Location: Sulphur Springs, TX and Dallas, TX
214 Connally St Ste A
Sulphur Spgs, TX 75482-2612

Request a ConsultationCall 903-439-0000

Direct answer: A missed payment is not, by itself, bank fraud. Nor is a breached loan covenant. The criminal question under 18 U.S.C. § 1344 is whether the government can prove the knowing scheme and the other requirements of the clause it charges. In a federal bank fraud case, your lawyer will need the representations made to obtain the loan or draw, the evidence of what you knew then, and the connection to the bank or its property.

Put the application and closing documents at the front of the file. Then add each draw, amendment and disclosure in date order. Keep the later business setbacks and collection letters in their own part of the chronology. Counsel needs to see what information existed when the lender advanced the money.

A bakery lands a big customer order and borrows against it. Months later the customer cancels, and the bakery can’t make its payments. Put that next to a second application, this one backed by an order from a customer who never existed. Both businesses default. The records, though, ask very different questions about what was represented at the start. This is a hypothetical, not a description of a firm case.

A forecast that turned out wrong isn’t the same as a lie, even when it was way off. Save the signed orders and estimates, the customer messages, and every version of the spreadsheet. The bankruptcy that came later doesn’t tell anyone what the borrower believed when the representation was made.

What did the bank know? If you told the lender about a problem and it acknowledged it, or signed off on an adjustment, find that writing and its audit record. One caution. Knowing a business was risky isn’t the same as agreeing to fake invoices. Your financial crimes defense lawyer needs the papers that show what the lender was told and what it accepted.

Illustration: A company moves to new inventory software, and the first report after the switch counts one shipment twice, once from the old warehouse export and again from the new system. If nobody noticed, that’s a mistake. Claiming on purpose that the goods were in two warehouses so the company could borrow more is something else entirely. In this hypothetical the whole question is how the duplicate ended up in the certificate and who knew what.

For that hypothetical, collect:

• The warehouse scans for the shipment.
• The old and new inventory exports, with their dates.
• The software migration or change log.
• The calculation used for the borrowing-base certificate.
• Messages identifying who prepared, checked, and submitted the figures.

Preserve the originals. Do not correct a submitted certificate or overwrite a file while trying to reconstruct the calculation. Tell counsel about any error you find so the response can be considered with the surrounding records.

Advanced analysis: A lender may allege fraud in a civil lawsuit as well as breach of contract. The allegation does not establish a criminal offense. A prosecutor must prove the criminal charge under the applicable burden of proof in any federal bank fraud prosecution.

Keep the earlier versions of the calculation. Who entered the number, who checked it, and who sent the final document to the bank? Drafts and messages can help answer those questions and explain an error or a forecast that was honestly believed. If the lender agreed to an adjustment, include the agreement and the records showing what both sides did afterward.

Do not leave unfavorable documents out of the review. Repeated entries for nonexistent customers need an explanation of their own. Calling a company financially distressed does not make those entries an honest forecast. A bank fraud defense lawyer needs the complete record to assess the allegations and the available defenses.