Should the fox be guarding the henhouse?Charlie Elliott Jr., MAI, SRAfraud, mortgage fraud, H.R. 1295, Responsible Lending Act
In this era of pressure to meet goals and financial objectives,
it behooves each of us to step back and focus on any role that we
may have in the increasing mortgage fraud trend. It tears at the
very fabric of our profession and, to the extent that it exists,
our livelihood and perhaps our freedom is at risk. In some cases,
fraud has become so commonplace that its participants consider it
the standard rather than the exception. The bounds of ethics are
often being stretched to the point where variances that were once
considered blatant violations of the law, are now considered
What is mortgage fraud?
When we were taking business law in college, our textbook defined
fraud simply as "the misrepresentation of a material fact." Black's
Law Dictionary defines fraud as "an intentional perversion of truth
for the purpose of inducing another in reliance upon it to part
with some valuable thing belonging to him or to surrender a legal
right." While these two definitions differ somewhat and while
neither speaks directly to loan fraud, most of us with reasonable
intelligence will agree that fraud occurs in our business.
Is it a big problem?
Yes. The FBI reports that mortgage fraud complaints more than
doubled in 2004, reaching 17,127 as compared to 6,936 the previous
year. The mortgage fraud problem is so prevalent that the Mortgage
Bankers Association saw fit to devote a new Web site, www.stopmortgagefraud.com,
exclusively to this industry-wide problem. The FBI reports that
suspicious mortgage activities during 2004 involved $400 million in
How does mortgage fraud manifest itself?
Is fraud primarily blatant, as in the case where several people
conspire to take the entire proceeds of a loan without paying off
the previous loan? This type of fraud usually requires the
cooperation of participants, such as loan officers, attorneys, real
estate agents and appraisers. Or, is fraud primarily subtle and
untraceable, with very little concrete collaboration? For example,
an appraiser values a property for more than it is worth, so the
person ordering the appraisal can make a loan that would otherwise
be rejected, and collect a commission on the property. This may
happen with little or no direct discussion between the lender and
appraiser. It is likely based upon understandings from previous
transactions that could best be defined as "code." There are no
smoking guns here, only phrases like, "We need $200,000 on this one
to make it fly," and "Our previous appraiser just didn't understand
this market." While most appraisers would not cooperate with a
scheme like this, some will.
So, the answer to both questions is yes: Mortgage fraud is both
subtle and blatant, and it's occurring right before our eyes. Fraud
is becoming a bigger problem and, yes, we all have a responsibility
to do our part as professionals to prevent such activities when we
can. In the past, some of us may have found ourselves as unwitting
participants in fraud. This could have occurred when we had no idea
that it was going on. Or, we may have had questions, but figured it
best to let sleeping dogs lie. Others are willing participants in
fraudulent activity. Whatever the case, mortgage fraud is an
insidious cancer that affects our entire industry. This cancer is
not always easy to detect and its effects are not always
What is being done to prevent loan fraud?
On Oct. 27, 2003, the Office of Comptroller of the Currency along
with four other federal regulators sent a statement to all of the
12,000-plus regulated financial institutions, clarifying existing
regulations. The statement, titled "Independent Appraisal and
Evaluation Functions," provided that appraisers must be selected by
parties that do not have an interest in the loan transaction,
including borrowers. It made exceptions for small institutions and
did not cover mortgage brokers.
On March 15 of this year, H.R. 1295The Responsible Lending
Actwas introduced to the U .S. House of Representatives. This bill
requires (among other things) that the physical inspection by
appraisers of certain properties that lend themselves to flipping;
improves appraiser licensing standards; creates new standards to
abate appraiser intimidation; establishes minimum state licensing
standards for mortgage brokers; and provides for the establishment
of a national mortgage lender database.
What else must be done?
While some positive steps have been taken to address the problem
of mortgage fraud, more must be done. Many people feel that fraud
is a necessary evil in the mortgage industrysomething we all must
accept and that none of us can prevent. I beg to differ. Mortgage
fraud, for the most part, cannot exist without the knowledge and
permission of those mortgage loan professionals among us, including
appraisers, lenders, real estate agents and government regulators.
As a whole, we have an outstanding group of mortgage professionals
in all disciplines. There are a few rotten apples, and they cause
the entire basket to reek with a very foul smell. Fraud is an
insidious threat to our society, akin to violent gangs and illegal
Two things must happen in order to curb mortgage fraud. Mortgage
professionals must hold each other accountable in a supportive and
constructive way. While there may be some of us who go to prison as
punishment for their actions, the prisons are not large enough to
hold all of those who break the law when left unsupervised. We have
a responsibility to police our own industry in an effort to prevent
Our government regulators have a responsibility to develop a
better playing fieldone that does not lend itself to the temptation
to commit fraud. Our lawmakers and government agencies must develop
stronger policies that further separate the functions of appraiser
selection and communication, from those individuals obtaining sales
commissions from the successful closing of a mortgage transaction.
Foxes do not make good guards for the henhouse.
Charlie W. Elliott Jr., MAI, SRA is president of ELLIOTT
& Company Appraisers, a national real estate appraisal company.
He can be reached at (800) 854-5889, [email protected]
through the company's Web site at www.appraisalsanywhere.com.