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
[email protected] or
[email protected].
