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National Mortgage Professional
Mar 26, 2007

Closing in on closingAnn Fulmer and Jim Ronan mortgage fraud, avoid mortgage fraud Mortgage fraud is a crime that is best explained as bank robbery with a pen. Like any crime, the motive is money, but in mortgage fraud, the robbery takes place through the loan closing process. Industry experts estimate that 80 percent of mortgage fraud involves an industry professional who knows the lending or closing process. These insiders are able to identify weak controls and procedures in order to perpetrate the crime. Lenders become vulnerable to fraud because of internal communication policies that delay or prevent the escalation of loan application issues and because of their reliance on external partners whose trustworthiness is not confirmed. Perpetrators are also able to exploit confusion on the part of closing and settlement agents with regard to the party that they represent, since many feel that their ethical duties are owed primarily to the buyer or seller. This confusion was apparent at a recent conference, where some closing agents stated that they felt they did not have a duty to bring misrepresented transactions to the lender's attention because their clients were either the buyers or sellers, and they did not have the expertise to identify fraud. In fact, these agents also have a duty to represent the interests of the lender and title company. In order to counter these misperceptions, lenders must communicate their expectations to settlement agents. Closing instructions must clearly identify the agent's responsibilities and provide a channel by which potential fraud can be communicated to the lender. Without specific contact information for the lender's investigation or fraud unit, most agents will refer their concerns to the broker, loan officer, underwriter or closer, since those are the people the agent is most familiar with, thereby inadvertently seeking approval or clarification from the perpetrators. Fraud comes in many forms, but the last line of defense is the closing or settlement agent. Therefore, it is critical to make sure that these agents are trained in what to look for. Analysis of current fraud patterns shows that agents should be on the lookout for the following. Silent seconds Silent seconds are used to obtain a mortgage for an otherwise unqualified borrower. Signs of this scam may be identified through down-payment misrepresentations, misrepresented assets, altered sale contracts or illegitimate loan valuations. While automated fraud tools can alert the lender to potential valuation problems, silent second frauds may only be apparent when the parties appear at the closing with documents that the lender has not reviewed, such as certified checks from a third party or a financial institution that the borrower does not have an account with. It is important that the settlement/closing agent be instructed to call the fraud or investigation unit if there are any last-minute variations from what was submitted in the loan package. Seller seconds Seller seconds are frequently used by motivated sellers who are having difficulty obtaining the asking price and borrowers who are seeking (but do not qualify for) 100 percent financing. In order to make the sale, the owner may agree to an inflated sales price, with the excess being accounted for as a seller second that is part of the loan package. However, the parties do not reveal that the second mortgage will be discharged after closing. Lenders in this situation are exposed to the possibility that the collateral value has been inflated and that the borrower is not qualified at the actual loan-to-value ratio. Automated valuation tools, which can, for example, identify past sales for the subject property and neighborhood sales and verify the comparables used in the appraisal, can identify valuation issues. If these tools identify potential misrepresentations, lenders should obtain a copy of the second mortgage and a listing history for the subject property. If the listing history shows a price that is lower than the sales price, the loan should be escalated for additional review. If the closing/settlement agent hears something at the closing that may indicate the second will be discharged, the loan should be referred for investigation. Liens and invoices Liens and invoices are a very lucrative way for fraudsters to exploit lenders' reliance on the borrower's credit scores and collateral value alone when making the lending decision. Lenders traditionally do not examine disbursements from seller proceeds, leaving them vulnerable to this type of fraud. Underwriting staff should be instructed to investigate any liens disclosed in the loan packages in order to determine whether the corporation actually exists and whether the owners/officers or the individual named on an invoice have some relation to the transaction. Supporting documentation, such as a cancelled check, contracts, invoices and receipts for materials, should be requested from the borrower. Furthermore, because many fraudulent liens and invoices are not disclosed in the application process, settlement/closing agents should be instructed to contact the investigation or fraud unit if they are presented with liens that have not been recorded or were recorded shortly before or on the day of closing, or invoices that were not shown on the approved settlement statement. Assignment fees Assignment fees allow perpetrators to illegally obtain mortgage proceeds that do not appear in the loan documentation, because such fees are not a fiscal obligation that must be disclosed by a seller. In order to effectuate this scam, the perpetrator enters into an assignable contract with the seller, at an inflated price. The perpetrator then locates a second buyer who may be a co-conspirator or naïve investor. The second buyer enters into a contract with the seller to purchase the property at the inflated price. The perpetrator does not submit a loan application. The second buyer's application usually contains misrepresentations, to ensure loan approval and an inflated appraisal. The original seller closes with the buyer obtained by the perpetrator, and the difference between the actual sales price and the contract sales price is shown on the settlement statement as an assignment fee (lines 1303-1308) or commission (line 703), which is then distributed to the perpetrator or a company (shell or legitimate) controlled by the perpetrator. Closing is the last line of defense in the fight against mortgage fraud. Underwriters should be trained to look for assignment fees or unusually high real estate commissions and to investigate if they are found. Using automated tools and a good communication process will help identify and prevent the robbery and resulting loss before it happens. Interthinx, an ISO business, is a provider of comprehensive fraud prevention, compliance and decision support tools for the mortgage industry. For more information, visit www.interthinx.com, call (800) 333-4510, or e-mail afulmer@interthinx.com or jronan@interthinx.com.
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