QUESTION
We are reviewing our branch and home office procedures for identifying mortgage fraud. As the Compliance Officer, I receive all allegations of mortgage fraud for review. However, I can't be at all the branches all the time, and I want to be able to categorize some basic areas related to mortgage fraud.
Each branch has a Branch Manager who works with a senior underwriter to identify potential mortgage fraud. The senior underwriter conducts a second review, and the Branch Manager provides oversight. Even with the training we do, there is no standardization for a categorical approach. What I am looking for is a list of the most likely areas of mortgage fraud. We would like to distribute the list so that it can be used throughout the company. It will help us to set basic standards.
What are some of the basic categories of mortgage fraud?
COMPLIANCE SOLUTION
RESPONSE
Mortgage fraud prevention is an area in which we have extensive expertise. Indeed, we invented the Forensic Mortgage Audit®, which uses loan-level reviews to detect mortgage fraud. I've provided expert witness representation and given testimony in cases related to mortgage fraud. Our clients regularly discuss potential cases of it with us. We've written policies and procedures to prevent it. I've spoken about it at conferences and written extensively on the topic, for instance, here.
Here's my published article, with linked sections, entitled Mortgage Fraud Challenges: How to Catch a Crook.
And I can tell you, based on my experience, crooks continue to find new ways to commit mortgage fraud all the time. To identify the means and methods of these crooks requires staying one step ahead of them – and, even then, they devise new plans to scam, deceive, rip off, con, double-deal, cheat, and skunk their way toward new contrivances of chicanery.
For instance, request information about our Identity Theft Prevention Program – a program which, by the way, is a statutory requirement. Our policy provides an extensive list of the various nefarious methods by which thieves commit mortgage fraud.
If you are a subscriber to our newsletters, we will be happy to provide our checklist of Common Red Flags for Mortgage Fraud. Just request it here!
BASIC CATEGORIES
The basic features of mortgage fraud revolve around intentional deception or misrepresentation to obtain a mortgage loan or to profit from the lending process.
If you're looking for a basic set of mortgage fraud categories, it is possible to group them into a few areas, with the proviso that this construct is a very high-level outline. The outline should not be taken as comprehensive. But if you want to offer it to the affected personnel, it might help to streamline the review process.
I think you should still be notified that a mortgage fraud review is taking place, even if the second review clears it. Be aware of potential false positives!
In my opinion, mortgage fraud can be categorized into fraud for housing, fraud against homeowners, and fraud for profit. Unfortunately, industry professionals are often involved in mortgage fraud activities in pursuit of profits.
So, let's outline these categories.
Fraud for Housing
This illicit activity happens when a borrower provides false information to acquire or maintain ownership of a home. A borrower commits this type of fraud to obtain or maintain ownership of a home in an illegal manner. They may misrepresent their financial standing to qualify for a loan they would not otherwise be able to get.
Categories of Fraud For Housing
Income and Employment Fraud
Falsifying or inflating income, fabricating employment history, or creating forged documents like W-2s, tax returns, and bank statements to qualify for a larger loan or a better interest rate.
Occupancy Fraud
Misrepresenting the intent to use a property as a primary residence to get more favorable terms, such as a lower interest rate, when the borrower actually intends to use it as a rental property or investment.
Asset Fraud
Falsely inflating assets or concealing liabilities to make the applicant appear more financially stable. This scheme can also include "asset rental," where an applicant temporarily borrows assets to qualify for a loan.
FRAUD AGAINST HOMEOWNERS
This type of fraud happens when a borrower provides false information to acquire or maintain ownership of a home.
Categories of Fraud Against Homeowners
Foreclosure Rescue Scams
Scammers promise to help homeowners avoid foreclosure, often for a large upfront fee, but provide no real assistance. The homeowner is convinced to transfer the deed to the scammer, who then sells the property and disappears with the profit. This is a pernicious scam because fraudsters target struggling homeowners with false promises to save their home from foreclosure. As to those upfront fees, the fraudster pockets the money and, deed in hand, lets the foreclosure proceed.
Loan Modification Scams
Similar to foreclosure rescue scams, fraudsters promise to negotiate better loan terms with the lender in exchange for a fee. They may take the money and do nothing or negotiate unfavorable terms.
Predatory Lending
Lenders offer loans with high fees, abusive terms, and hidden charges to exploit borrowers.
Straw Buyers
The straw buyer scam applies to both the homeowner fraud category and the fraud for profit category. A person with good credit applies for a mortgage on behalf of another person whose credit is insufficient or otherwise disqualifying. After the loan closes, the straw buyer transfers the deed to the crook.
FRAUD FOR PROFIT
This type of fraud is committed by industry insiders who abuse their knowledge of the mortgage process for monetary gain. Generally, a complex scheme is typically carried out by industry insiders, such as appraisers, loan officers, or real estate agents, who exploit the mortgage process to steal cash and equity. These schemes often involve multiple fraudulent loans and multiple co-conspirators. Because professionals in the mortgage industry usually perpetrate these schemes, it is particularly contemptible.
Categories of Fraud For Profit
Appraisal Fraud
A corrupt appraiser, often licensed but sometimes unlicensed, intentionally inflates or deflates a property's value to manipulate the purchase price for the benefit of the conspirators. This tactic of misrepresenting a property's value is a key feature in many fraud-for-profit schemes, especially illegal flipping. The purpose of inflating the value is to secure a higher loan amount, or, by undervaluing the value, to obtain a lower sale price.
Illegal Property Flipping
This scam involves purchasing a property and quickly reselling it at an artificially inflated price. It often involves a fraudulent appraisal and may use straw buyers to execute the scheme. The value is artificially inflated by colluding parties, and often without any real improvements to the property.
Straw Buyer Schemes
A fraudster uses a person with good credit (a "straw buyer") to apply for a mortgage on their behalf. The real buyer's identity is concealed, and after closing, the deed is transferred to the fraudster. The straw buyer may be compensated, or they may be an unknowing victim.
Equity Skimming
An investor uses a straw buyer to acquire a property and obtains a mortgage with false information. They rent out the property, collect the income, and allow the property to go into foreclosure, stripping the equity.
Air Loans
A fraudulent scheme based on fictitious collateral. A broker invents fake borrowers and properties to secure mortgage loans for nonexistent collateral.
Common Fraud Indicators
Many schemes share characteristics, or red flags, that can alert lenders or borrowers to fraudulent activity. I will provide a few to include in your second review list.
· Inconsistent Information
Discrepancies within the loan file, such as different Social Security numbers, addresses, or signatures on various documents.
· Altered Documents
Loan documents that contain altered information, such as fake pay stubs, forged W-2s, or doctored bank statements.
· Suspicious Down Payment
The down payment comes from an unusual or unverified source, such as a third party not directly involved in the transaction.
· Non-Arm's Length Transactions
The buyer and seller have an undisclosed relationship, such as being family members, employer and employee, or parties to a business.
· Pressure to Sign
A party involved in the transaction pressures the borrower to sign documents immediately or without allowing time for review.
· Unrealistic Appraisals
The appraised value differs significantly from comparable properties in the area, without a clear explanation.
Thank you for your interest in our compliance newsletters!
Jonathan Foxx, PhD, MBA
Chairman & Managing Director
