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.
