The Many Faces of Loan Fraud
How to
Recognize Them and What You Should Do
By Janet B. Thoren, Deputy Legal Counsel
Loan fraud involves
making false representations to a lender in order to obtain a loan of a larger
amount or on more favorable terms than a borrower is otherwise qualified for
under the lender’s guidelines.Loan
fraud is a federal crime, punishable by up to 30 years in prison and $1 million
in fines.In the past, most loan frauds
consisted of a single transaction in which the purpose of the fraud was to get
a particular buyer into a particular property that the buyer could not
otherwise afford.Some examples of this
single-transaction type of loan fraud include the following:
•False Gift Letter. A false gift
letter is created so that it appears funds being provided to the borrower by
another party are a gift, when in fact the funds are being offered as a loan
and repayment is expected.
•Contract Kiting.Two contracts are created for the same
transaction.One contract contains the
actual terms of the agreement between the buyer and the seller.The second contract reflects a higher
purchase price and is given to the lender and the appraiser in order to obtain
a higher appraisal amount and permit the borrower to obtain a larger loan than
he would otherwise be qualified to receive in the transaction.
•False down payment.The contract shows a large down payment made
directly to the seller when in fact no down payment was made or the source of
funds was not the borrower.
•Secret Second Mortgage.The buyer is not qualified to borrow the full
amount needed so the seller consents to a “secret second” in which the seller
or real estate agent loans additional funds to the borrower and receives a second
mortgage on the property, which may or may not be recorded after closing but
which is not disclosed to the lender.
•Secret Concessions or
Undisclosed Rebates. The seller or broker offers concessions to the borrower
for repairs, closing costs, or other items but fails to disclose these concessions
to the lender or show them on the closing statement.
• False Statement of Owner Occupancy. The buyer represents to the lender
that the property will be the buyer’s primary residence, when in fact the
property is being purchased for rental or other investment purposes.
• False Qualifications of the Borrower. Information related to the buyer’s
credit-worthiness, such as income or sources of cash, is misrepresented to the
lender through false documentation or other means.
Within
the last three years, the FBI’s mortgage fraud caseload in
In
order for loan fraud to work on such a large scale, participants in the fraud
typically include appraisers and mortgage loan brokers, and occasionally real
estate agents and closing attorneys.The
newer types of scams have different variations, but basically work like this:
•The scam
organizer or promoter identifies himself or his company as a type of real
estate developer or investor.The
promoter selects a home, usually a new construction property, and negotiates a
purchase price with the seller/builder - let’s say $200,000.This price is usually at market value, or it
may be significantly lower if the home has been on the market for a while or if
the promoter arranges to purchase multiple properties from the same
seller/builder.Once the promoter has a
property lined up, he recruits a buyer.These buyers are usually homeowners with relatively good credit, but
typically don’t have enough income to purchase a second home in a legitimate
transaction.
• The promoter offers the buyer the property at a
greatly inflated price - for our scenario, let’s say $300,000.The written contract is usually between the
seller/builder and the buyer, but reflects the $300,000 purchase price.The promoter convinces the buyer that he can
purchase the home with no money down and, in most cases, even promises to give
the buyer anywhere from $1,000 to $5,000 in cash outside closing if the
transaction closes. The promoter promises the buyer that a tenant is ready to
move into the property, and that the rent the tenant pays will be used to pay
the mortgage payment.The promoter
promises the buyer that the house will be sold within a relatively short period
to the tenant for a huge profit, and that the promoter and buyer will then
split the profits from the sale.
•Once the
buyer is on board, the promoter directs the buyer to a particular mortgage
broker and sometimes a closing attorney.Appraisers are used who greatly inflate the value of the property in
order to substantiate the purchase price the buyer is to pay for the
property.A mortgage broker creates
false documents to show that the buyer intends to live in the property, to make
sure the buyer appears to be qualified for the loan and to make the property
appear to be worth more than the true market value.When the actual lender receives the
paperwork, everything appears to be in order and the loan is approved.
•At
closing, the promoterhas to make sure
that he gets the profits from the loan, not the seller/builder.The seller/builder’s existing loan is paid
off and he gets $200,000 for the property, less his closing costs.Closing costs may include a commission to a
real estate agent that is based on the amount the seller agreed to receive,
$200,000, rather than on the $300,000 purchase price shown on the HUD-1.The promoter receives the remaining funds
from the loan, usually shown on the closing statement as a false second
mortgage payoff or false assignment fee.Although the closing statement shows the buyer bringing funds to
closing, in fact the promoter uses the funds from the loan to pay the buyer’s
closing costs, and pay off the appraiser, mortgage broker, and buyer outside of
closing.In the end, the promoter walks
away with an average profit of $35,000 -$50,000 per transaction.
•The
tenant, if there is one, pays rent to the promoter, who in many cases is
running an unlicensed property management business.The promoter makes a few mortgage payments
and then quits.In many cases, no tenant
ever moves into the property and no mortgage payments are ever made.The buyer can’t afford to make two mortgage
payments, and the property soon goes into foreclosure.The lenders can’t come close to recovering
the full amount of their loans through foreclosure, and the buyer’s credit is
ruined.
Banks
and other lenders lose millions of dollars every year through mortgage loan
fraud.Losses are often passed on to
consumers through higher fees.Losses on
government-insured loans end up being paid for by taxpayers.Individual consumers who dreamed of a
business opportunity that seemed “too good to be true” learn the truth of the
old adage the hard way when their credit is ruined and in many cases they are
forced into bankruptcy.In addition,
because promoters have targeted certain subdivisions repeatedly, false
appraisals have caused property tax values in those subdivisions to soar,
leaving the few existing legitimate home purchasers in houses that are
overvalued for tax purposes and stigmatizing the neighborhoods with numerous
foreclosures.
The FBI and SBI have
been vigorously pursuing groups of promoters across the state.Some promoters, appraisers, and mortgage
brokers have already been charged and other investigations are ongoing.The U.S. Attorney’s office has made a
commitment to vigorously prosecute mortgage fraud at all levels, including
individuals holding professional licenses who are seen as key factors in
safeguarding the system.Such professionals
include real estate agents.In addition,
the Real Estate Commission has taken an active role in identifying real estate
agents involved in these types of transactions and taking disciplinary action
when appropriate, including the revocation of licenses and pursuing injunctive
relief against unlicensed participants.
Loan fraud can be
disguised in many ways.Whether it’s a
single transaction loan fraud or a sophisticated scam, the Real Estate
Commission expects its licensees to be the guardians of consumers and lenders
alike.As such, it is your
responsibility to further investigate any real estate transaction in which you
are involved if it appears to include possible elements of loan fraud.You are required by law to make full
disclosures to all parties, including the ultimate lender, if you suspect
fraudulent behavior.Failure to do so
may result in disciplinary action against your license, or criminal prosecution
by federal and state authorities.