When Santa Clara City Council candidate Larry McColloch bought a home in Santa Rosa nearly two decades ago, he promised the lender he would live in it for at least a year — potentially earning him a low interest rate.
But just three months later McColloch sold the home. He never lived in it. He pocketed a $40,000 profit from the sale.
Now as McColloch looks to unseat an incumbent councilmember — who is a political opponent of Mayor Lisa Gillmor — that transaction is raising questions.
“That sounds like mortgage fraud, but can you really see a local district attorney prosecuting a crime like that?” Dana Sack, an Oakland attorney who specializes in real estate law, told San José Spotlight. “The seller got paid, the lender got paid, who was hurt? Where’s the crime?”
While the move may not be illegal — or hard to prove as a case of mortgage fraud — it could raise questions about McColloch’s character and ethics.
McColloch, a relative newcomer to politics, is in the spotlight after he filed to run for the District 2 council seat held by Councilmember Raj Chahal. After his election in 2018, Chahal became the first minority councilmember in Santa Clara in recent history and helped wrangle power away from Gillmor. The mayor subsequently lost her majority on the council in 2020.
If McColloch ousts Chahal, that could change — as the mayor and McColloch appear to be politically aligned.
McColloch said he had a good reason to sell the home just months after the purchase.
“I did buy a house in Sonoma but never moved in,” McColloch said in an email to San José Spotlight. “I had a change in my employment situation that disrupted the move before it occurred and we put the house back on the market.”
McColloch did not respond to follow-up requests asking for documentation of his employment change.
Deliberately misrepresenting one’s intentions during the mortgage lending process can qualify as fraud, according to state law. But there is a high bar for proving McColloch’s sale was criminal, attorneys say.
McColloch breached his contract, Soquel real estate attorney Pamela Simmons said, but that isn’t illegal. Proving fraud would require showing the city council candidate intended to violate the agreement at the time of sale, of which there is currently no evidence.
Potential legal trouble
According to documents obtained by San José Spotlight, McColloch and his wife bought the home for $790,000 in March 2004, aided by a $632,000 loan from LoanCity.com — a now-defunct lender — with an adjustable interest rate of 3.87%. This was a “really good” interest rate in 2004, Simmons said, and likely the result of McColloch agreeing to live in the home for one year.
They sold the house in June 2004 for $830,000.
McColloch’s voter registration history shows he voted in Santa Clara County 21 days before he purchased the home in March 2004, and again in the November general election, five months after he sold it.
Buyers who promise to live in their newly-bought property can get smaller down payments and receive lower interest rates on their mortgage. By claiming they will live in their new home, borrowers can save tens of thousands of dollars in a matter of months. But when homeowners falsely claim they will live in a home on mortgage applications, they commit what is known as occupancy fraud.
A 2016 study by the FDIC found that mortgage fraud was “pervasive” nationwide, and may have been a factor in causing the 2008 recession.
While this money-saving tactic may be tempting, it comes with significant risk. If the lender discovers the buyer’s deceit, the buyer can be found in immediate default on their loan. Fraudulent application statements can also land mortgage holders in legal trouble, including fines, prosecution and prison time.
In a related case, former U.S. Congressman Terrance John Cox of Fresno was indicted on multiple counts, including occupancy fraud, after he made false statements to a lender that he intended to live in a property he purchased, then rented it to someone else instead.
“To lie about it is a federal crime,” Sack said. “I wouldn’t make a habit of it.”