CRS § 18-5-802 prohibits equity skimming in Colorado. This is where you knowingly acquire a property with an overdue loan and then fail to use the rental income to pay off the loan and association fees before using it for other purposes.

Equity skimming is generally prosecuted as a class 5 felony. However,ut there are exemptions for bona fide lenders and purchasers who meet specific conditions.

The penalties include

• 1 to 3 years in prison,
• a fine of up to $100,000, and
• mandatory parole for 2 years.

In this article, our Denver Colorado criminal defense lawyers will address:

• 1. What is equity skimming?
• 2. What is equity skimming in real estate?
• 3. What is equity skimming of a vehicle?
• 4. What are the penalties for equity skimming?
• 5. What are defenses to equity skimming?
• 6. Related Offenses

1. What is equity skimming?

Equity skimming involves defrauding an owner out of the equity interest in their property. This usually involves a complex transaction by an agent, investor, or bank and a generally uninformed property owner who is unaware they are giving away the equity interest in their property.

Equity skimming is generally a type of foreclosure real estate fraud; however, equity skimming can also take place in other lending situations, such as those involving motor vehicle purchases.

2. What is equity skimming in real estate?

Equity skimming is most common in real estate. Equity skimming may also be referred to as a type of predatory lending. It often involves a homeowner who is at risk of foreclosure. An investor will use foreclosure notices in the newspaper to identify at-risk homeowners. An investor or agent will offer a last-minute rescue loan so the homeowner will not lose the house.

Many of the homeowners consider the transaction to be a type of foreclosure rescue that will allow them to stay in their homes. The investor will transfer the title from the homeowner, in some cases, against their knowledge, and agree to lease the property back to the homeowner who can stay in the home.

With additional and excessive fees and costs to the homeowner, the homeowner’s new rent or contract-for-deed payments may be higher than their previous mortgage. When the homeowner falls behind on their payments, they may be evicted from their home and lose the equity they had in their home before the equity skimming transaction.

Equity Skimming C.R.S. 18-5-802

Under C.R.S. 18-5-802, equity skimming of real estate is a criminal offense. A person commits the crime of equity skimming of real property if he or she knowingly:

• Acquires an interest in real property that is encumbered by a loan that is in arrears at the time the person acquires the interest or is placed in default within eighteen months; and
• Fails to apply rent derived from the person’s interest in the real property first toward outstanding payments due and second toward any fees due to any HOA or other common association before any remainder for any other purpose except for necessary repairs; or
• After a foreclosure in which title has vested, collects rent on behalf of any person other than the owner of the real property.¹

3. What is equity skimming of a vehicle?

Under C.R.S. 18-5-803, equity skimming of a vehicle is a criminal offense. A person commits equity skimming of a vehicle if he or she knows the vehicle is subject to a security interest, accepts possession over the vehicle in exchange for consideration and sells it to a third party without authorization.²

Equity skimming may also involve arranging a sale or lease of the vehicle to a third party without obtaining permission from the lienholder, or taking funds from payments without applying the money towards outstanding payments.

Equity skimming of a vehicle may be similar to equity skimming of real estate. An individual may have trouble making payments on a car and try to sell the vehicle subject to the security interest. An agent may contact the seller to offer to act as a broker to sell the vehicle for a fee. The agent may lease the vehicle to someone who does not have the credit to qualify for a loan. If payments aren’t made on the car, or the car gets into an accident, the original seller may remain responsible.

4. What are the penalties for equity skimming?

Equity skimming of real estate is a class 5 felony. The penalties for equity skimming involving real estate include 1 to 3 years in prison, a fine of up to $100,000, and mandatory parole for 2 years.³ The penalties for equity skimming of vehicles depend on the extent of the skimming.⁴

5. What are the defenses to equity skimming?

Some legitimate investors or agents engage in activity that is similar to illegal equity skimming. However, there are a number of affirmative defenses to bona fide purchasers of properties at risk of foreclosure.

It is generally an affirmative defense that all deficiencies in all underlying encumbrances have been fully satisfied and brought current, any regular payments on the underlying encumbrances during the following 9 months have been timely paid in full, and any HOA or association fees have been paid in full.⁵

Equity skimming provisions do not apply to a bona fide lender who accepts a deed in lieu of foreclosure or who forecloses on the property.⁶

Additionally, a bona fide purchaser may not be guilty of equity skimming if they acquire fee title to any real estate subject to encumbrances if they provide the seller a specific warning, in minimum size, bold-faced type, capital letters, and acknowledged by the seller’s signature.⁷

6. Related Offenses

Real Estate Fraud

In Colorado, real estate fraud involves engaging in wrongful acts using property for financial gain. Real estate fraud could include mortgage fraud, credit skimming, foreclosure fraud, credit fraud, deed forgery, and other forms of fraud. Real estate fraud charges in Colorado include misdemeanor and felony offenses, depending on the nature of the offense.

Identity Theft C.R.S. 18-5-902

In Colorado, it is a criminal offense to use another person’s personal or financial identifying information to obtain anything of value. This includes using another person’s identity in a real estate transaction to commit real estate fraud. Identity theft can be a felony or a misdemeanor depending on the case.

Insurance Fraud C.R.S. 18-5-211

Insurance fraud involves presenting a false insurance claim for a loss, claiming a loss for damage that occurred prior to coverage, intentionally damaging covered property, or presenting a false statement for an insurance claim. This includes title insurance, homeowners insurance, or other types of property insurance fraud. Insurance fraud can be a felony or a misdemeanor depending on the case.

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