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National Mortgage Professional
Nov 09, 2006

What the hay is a straw buyer?Julie Woodleyfraud, scam What is a straw buyer, anyway? Is it someone made of straw, like the Scarecrow in "The Wizard of Oz" who needed a brain? Does it involve a house made of straw, as in the story of "The Three Little Pigs?" Or does it refer to someone who is buying straws? Each of these definitions is not far off, but actually, the term "straw buyer" refers to an individual who is used as a cover for a questionable transaction. Sometimes he is solicited (in person or via an advertisement) and paid for his services (procuring a mortgage loan for another person in his name). Straw buyers can be anyone from any walk of life. They can range from a person on the street to an assistant unknowingly signing mortgage documents for his boss. He can be an individual applying for investors, a parent applying for a child who does not qualify on his own or a person applying in order to help an illegal alien. Often, the straw buyer is unaware of the liability or consequences of his actions and does not entirely understand what part in the scam he plays. He may be approached by someone he knows or by a total stranger offering him a quick buck in exchange for using his identity or signature. The straw buyer knows that he is not putting any money into this transaction, so what is the harm in helping someone or being paid to sign a couple of pieces of paper? Often, the straw buyer feels no responsibility, as he knows he does not plan on occupying the residence or has been told he is not going to be obligated to pay for the mortgage. The initiator of the scam has promised the straw buyer that he will take care of everything, if he could just borrow the straw buyer's personal information. On the fraudulent transaction's documentation, the personal information (e.g., the Social Security number, employment history, phone numbers, etc.) may or may not be real or related to the straw buyer. He may be signing documents using someone else's name, thus making him feel even more removed from any liability in the transaction. The ultimate goal in this popular scam is to hide the identity of the actual buyer. Oftentimes, this scam is combined with other scams in the same transaction (e.g., a bogus appraisal, a builder bailout scam, property flipping, etc.) So, what is a lender to do? To start with, it is very important to arm your company against the perpetrators of these scams. The first step to combating these types of illegal transactions is knowledge. Knowing what to look for and having a great technology tool in place to help you find it is a must! Automated fraud detection systems can help you combat these scams. Following are some tricks the straw buyer will use and the red flags you should be looking for: - The application contains an invalid Social Security number. - The application contains an inconsistent address for your borrower. Check addresses in your file against each other (e.g., the credit report against the 1003, the 1003 and credit report against the appraisal, etc.). - The signatures appear inconsistent. Put your documents side-by-side or overlap the signatures while holding them up to a bright light. Look at the way the letters slant. Look at the size of each signature. Is one neat and concise and others loopy or sloppy? - Does the signature of the employer on the Verification of Employment document appear to be made in the same handwriting as the borrower's signature on the 1003? - Look at your borrower's credit history. Does he have a high FICO score and stable employment, but no assets and little or no cash in this transaction? - If approved for the mortgage, will there a questionable commute for this borrower given where the property is and where he states he works? Does the borrower claim he will be transferring jobs, but you have no evidence of that from the employer? - Does he appear to be downsizing his property or perhaps doubling its size? How many people will be occupying the home? If the borrower states he has five children, would he really be interested in buying a $500,000, two-bedroom condominium? - Is there any indication that the current seller or builder is in default? In addition, are there unexplained or undocumented disbursements on your estimated closing statement? - When you call to verify employment for your borrower, who answers the phone? Does that person state the company name? Does an answering machine or voicemail system answer? Does it state the company name? Is the income documented on the 1003 or W-2s congruent with the type of job the borrower works and the length of time he has spent in that position? - Where or whom are the funds to close coming from? At the end of the day, you should be able to answer the question, "Does this loan make sense?" A good automated fraud detection system can answer this question and much more. It will save you time and stress when trying to determine or investigate these types of issues. No automated system is going to entirely replace the manual review of documents, but automation surely can save you time and money by alerting you to potential issues prior to you even underwriting the loan. Julie Woodley is the vice president of risk management for Glen Allen, Va.-based real estate investment trust Saxon Capital Inc. She may be reached at (800) 538-8202.
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