Assessing the case against Lisa Cook

Criminal investigations do not usually start with tweets. They very rarely start with tweets by government officials asserting someone’s guilt before a charge has even been laid. That, however, is how the case against Lisa Cook, a governor of the Federal Reserve, began on August 20th, when Bill Pulte, head of the Federal Housing Finance Agency, published a letter alleging that Ms Cook had “falsified bank documents and property records to acquire more favourable loan terms, potentially committing mortgage fraud”. Mr Pulte then tweeted a screenshot showing her signature on two documents. It is on the basis of this evidence that President Donald Trump sought to sack Ms Cook on August 25th. She has refused to resign; the courts will consider what is required to remove a Fed governor “for cause”.

Mr Pulte’s precise allegation is that Ms Cook took out two mortgages a fortnight apart—one for a house in Michigan and another for a flat in Atlanta—and claimed that both would be her main residence. Lenders tend to charge much lower interest rates for first homes than for second homes or investment properties, since people are less likely to default on a loan if doing so would make them homeless. Intentionally misleading a bank could, in theory, constitute fraud. Given that Ms Cook is a financial regulator, it would be hard for her to stay in her post if the allegations were more substantiated, even if she were not convicted and regardless of the motivations of those making the accusations. She says that she is gathering evidence to prove her innocence.

The problem, for Mr Pulte, is that substantiating his charge is fiendishly difficult. According to a study in 2023 by the Fed’s Philadelphia branch, “owner-occupancy fraud” is common. Perhaps a third of investment-property owners have mortgages on residential terms, and their default rates are indeed higher. In a housing crash, this could prove costly for lenders.

Yet the paper is an economic study, not a legal one. Kathleen Engel, an expert on mortgage regulation at Suffolk University, says giving wrong information to a bank does not in itself constitute criminal fraud in the way that, say, doing so on a tax return would. To be fraud, the deception must have been deliberate, typically the bank must have lost money as a result and it must be able to show it would not have lent had it known the truth. Just 38 people were convicted of any type of mortgage fraud last year, in large part owing to the difficulty of such prosecutions.

There are circumstances in which claiming two primary residences would make sense. It can happen as a result of moving home, and is sometimes explicitly allowed by banks—as, for example, when a married couple work in different cities and both homes are genuinely lived in by the applicants. Ms Cook is also accused of briefly listing her flat in Atlanta for rent. Yet on her financial disclosures she did not report any rental income. To prove criminal fraud, prosecutors would have to show not only that any deception was intentional, which is hard as mistakes are common, but also that it carried a cost for the lender. Mr Pulte has not shown she misled the bank, whether on purpose or by accident.

Alongside Mr Pulte, the other instigator of the accusations is Ed Martin, an official at the Department of Justice who, from January to May, served as the interim US Attorney for the District of Columbia. Mr Martin, who in that job liked to send strange letters to Democratic politicians accusing them of crimes, failed to be confirmed by the Republican Senate. He has also made the same accusation of fraud against Letitia James, the attorney-general of New York, who prosecuted Mr Trump last year, and Adam Schiff, a Democratic senator from California. No indictments have emerged in either case. ■