- Mortgage Fraud Defined
According to the FBI, “each mortgage fraud scheme contains some type of material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.” The origination of this misleading information can be from a variety of sources.
• Exclusive use of one appraiser
Increased Commissions/Bonuses to Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees
• Higher than customary fees
Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application
Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms
Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances requires less documentation/lender scrutiny
Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple “Holding Companies” utilized to increase property values
- Mortgage Fraud Schemes
Mortgage Fraud is Constantly Changing
The nature of fraud means that as soon as someone figures out one scheme, another will pop up. Mortgage fraud takes many shapes…
Examples of Mortgage Fraud
Property Flipping – Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.
Silent Second – The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.
Nominee Loans/Straw Buyers – The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.
Fictitious/Stolen Identity – A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant’s name, personal identifying information and credit history are used without the true person’s knowledge.
Inflated Appraisals – An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.
Foreclosure Schemes – The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by re-mortgaging the property or pocketing fees paid by the homeowner.
Equity Skimming – An investor may use a straw buyer, false income documents, and false credit reports, to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
Air Loans – This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.
Source: U.S. Department of Justice, Federal Bureau of Investigation
- Predatory Lending
The office of inspector general of the FDIC broadly defines predatory lending as “imposing unfair and abusive loan terms on borrowers.” Predatory mortgage lending describes unfair, deceptive, or fraudulent practices of a lender during the loan origination process.
HUD outlines the different type of predatory mortgage loan practices:
· Encouraging borrowers to lie about their income, expenses, or cash available for down payments in order to get a loan.
· Knowingly lending more money than a borrower can afford to repay.
· Charging high interest rates to borrowers based on their race or national origin and not on their credit history.
· Charging fees for unnecessary or nonexistent products and services.
· Pressuring borrowers to accept higher-risk loans such as balloon loans, interest only payments, and steep pre-payment penalties.
· Targeting vulnerable borrowers to cash-out refinance offers when they know borrowers are in need of cash due to medical, unemployment or debt problems.
· “Striping” homeowners’ equity from their homes by convincing them to refinance again and again when there is no benefit to the borrower.
· Selling properties for much more than they are worth using false appraisals.
· Using high pressure sales tactics to sell home improvements and then finance them at high interest rates.
The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. The purposes of RESPA are
to help consumers become better shoppers for settlement services and
to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
Details about RESPA
Corresponding with the above purposes:
1. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.
2. RESPA also prohibits certain practices that increase the cost of settlement services.Section 8 of RESPA prohibits a person from giving or accepting anything of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular
At the time of loan application
When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers:
a Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only) and
a Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. Depending on the type of charge and service provider selected, the difference between the estimated costs (GFE) and actual costs at settlement (HUD-1 settlement statement) may be subject to tolerance levels. If tolerance requirements are exceeded, then the borrower may be due a refund from the lender. When a loan originator permits a borrower to shop for third-party settlement services, the loan originator must provide the borrower with a written list of settlement service providers at the time of the GFE.
a Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender.
If the borrowers don’t get these documents at the time of application, the lender must mail them within three business days of receiving the loan application.
If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents.
The RESPA statute does not provide an explicit penalty for the failure to provide the Special Information Booklet, Good Faith Estimate or Mortgage Servicing Statement. However, bank regulators may choose to impose penalties on lenders who fail to comply with federal law. Please read the section on RESPA enforcement for more information.
Disclosures before settlement/closing occurs
The terms “settlement” and “closing” can be and are used interchangeably.
An Affiliated Business Arrangement (AfBA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest.
The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider’s charges.
Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender’s interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.
The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. The HUD-1 includes a comparison chart to help borrowers compare the charges disclosed on the GFE and the actual charges listed on the HUD-1. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
Disclosures at settlement
The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and the seller both attend the settlement, the HUD-1 should be mailed or delivered as soon as practicable after settlement.
The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to be paid from the Escrow Account during the first twelve months of the loan. It lists the Escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.
Disclosures after settlement
Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual Escrow account statement summarizes all escrow account deposits and payments during the servicer’s twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.
A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower’s loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.
Violations in the Truth in Lending Act
Creditors are liable for violation of the disclosure requirements, regardless of whether the consumer was harmed by the nondisclosure, UNLESS:
The creditor corrects the error within 60 days of discovery and prior to written suit or written notice from the consumer, or
The error is the result of bona fide error. The creditor bears the burden of proving by a preponderance of the evidence that:
If the violation was unintentional, the error occurred notwithstanding compliance with procedures reasonably adapted to avoid such error. (Error of legal judgment with respect to creditor’s TILA obligations not a bona fide error.)
Civil remedies for failure to comply with TILA requirements:
Action may be brought in any U.S. district court or in any other competent court within one year from the date on which the violation occurred. This limitation does not apply when TILA violations are asserted as a defense, set-off, or counterclaim, except as otherwise provided by state law.
Private remedies – (applicable to violations of provisions regarding credit transactions, credit billing, and consumer leases.)
Actual damages in all cases.
Attorneys’ fees and court costs for successful enforcement and rescission actions.
For individual actions, double the correctly calculated finance charge but not less than $200 or more than $2,000 for individual actions.
For class actions, an amount allowed by the court with no required minimum recovery per class member to a maximum of $500,000 or 1% of the creditor’s net worth, whichever is less.
Damages can be imposed on creditors who fail to comply with specified TILA disclosure requirements, with the right of rescission, with the provisions concerning credit cards, or with the fair credit billing requirements