## Facts

- Lacey Phillips (hairdresser) and Erin Hall (barber) sought to buy a first home in 2006 for slightly under $250,000 and were financially unsophisticated.
- Their initial mortgage application to Associated Bank was denied due to Hall’s recent bankruptcy and their insufficient joint monthly income.
- Hall contacted mortgage broker Brian Bowling, whom the couple trusted; there was no evidence they knew he engaged in fraudulent lending practices.
- Bowling directed them to Fremont Investment & Loan, a federally insured institution that commonly made “stated income” loans without verifying income.
- Following Bowling’s guidance, the loan application submitted to Fremont substantially overstated income.
- The government prosecuted on the theory that signing and submitting the application constituted knowingly making a false statement for the purpose of influencing a federally insured bank, in violation of 18 U.S.C. § 1014.

## Issues

1. Under 18 U.S.C. § 1014, must the government prove not only that a defendant knew a statement was false, but also that the defendant made it with the purpose of influencing the bank’s action—meaning an intent that the statement matter to the lending decision?
2. In a “stated income” lending environment involving a broker’s preparation of forms, what evidence suffices to show an unsophisticated borrower’s knowledge of falsity and purpose to influence the bank?

## Decision

- The Seventh Circuit, sitting en banc in an opinion by Judge Posner, reversed the § 1014 convictions and the related conspiracy convictions.
- The court held that § 1014 contains two distinct mens rea components: knowledge that the statement is false and a purpose to influence the bank’s action.
- On this record, the government failed to prove the required mens rea as applied to Phillips and Hall, given their lack of sophistication and their reliance on the broker in a stated-income loan setting.

## Legal Principles

- 18 U.S.C. § 1014 requires proof that the defendant (1) knowingly made a false statement and (2) did so for the purpose of influencing the action of a covered financial institution.
- The “purpose of influencing” element requires more than the mere act of submitting a form containing an inaccuracy; it requires intent that the falsehood affect the institution’s decision-making.
- In evaluating mens rea under § 1014, the factfinder must focus on the defendant’s subjective knowledge and purpose, not merely on the presence of a false statement in loan paperwork prepared through intermediaries.
- In mortgage cases involving “stated income” lending and broker involvement, evidence of borrower reliance and limited financial understanding can negate an inference that the borrower intended the statement to influence the lender in a meaningful way.

## Conclusion

The en banc court reversed the convictions because § 1014 is not a near–strict-liability statute for inaccurate loan applications; it requires proof that the defendants knew the statement was false and made it with the purpose of influencing the bank’s action, which the evidence did not establish for these borrowers.


United States v. Phillips, 731 F.3d 649 (7th Cir. 2013) (en banc)