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The overlooked problem of closing fraud in the mortgage industry

National Mortgage Professional
Mar 24, 2014

The overlooked problem of closing fraud in the mortgage industryAndrew Liput Esq.due diligence, fraud, sub-prime, identity theft, fake settlement agents

While the mortgage industry has awakened to the serious threat of bad loan origination and the resulting chaos it creates with repurchases, there is still very little being done to focus on fraud taking place at the closing table. The failure to look at the back end of the mortgage loan process is occurring to the overall detriment of lenders and threatens to derail the many advances made in fraud detection and prevention to date.

It is clear to everybody now that fraud in loan origination has been a serious problem for a long time. Its genesis occurred during the housing boom, when profits were pursued while ignoring the risk that large volumes of originations by untrained loan officers would attract those opportunists who see a booming market as a license to commit criminal acts in the pursuit of greed.

Even before the recent sub-prime collapse, tools existed to uncover fraud at the origination stage. As the result of self-policing, increased training and automated fraud detection software from companies like Interthinx and CoreLogic, the flood of fraud in originations could at least be stemmed. Without these tools, the current problems with repurchases and bad loans would be a lot worse.

Yet despite the advances in identifying fraud in origination, closing table fraud remains a glaring problem that has yet to be seriously addressed. Now, while we are all looking to address the weaknesses in our industry, is the time to take a closer look at this phenomenon as well.

Typical closing fraud schemes can involve closing table identity theft, theft of closing funds, fake settlement agents, unauthorized disbursements of closing funds, undisclosed contract flips, improper use of powers of attorney and even the failure to record a mortgage instrument to allow additional intervening liens to be filed.

For example, one recent case in New York involved a group of criminals who conspired to create a fake law firm, complete with a trust account into which unsuspecting lenders wired more than $27 million dollars.

In Pennsylvania, a lawyer and his paralegal were sued for forging their clients' names on loan documents at the closing and keeping the loan proceeds, then making mortgage payments to cover their deed.

A real estate agent in Nebraska used strawbuyers to purchase homes she owned in the names of various entities, forging downpayment checks and diverting closing proceeds to herself and others.

In Michigan and Florida, real estate agents, closing agents and sellers conspired together so that borrowers got cash back at closing for phony repair credits and other concessions, some of which never ended up on the HUD-1 and were designed solely to boost the lien amount and cash-out. Mortgage payments were never made.

Closing table fraud involves many of the same elements as mortgage fraud at the origination stage, except that those who conspire tend to be absent from a lender's radar screen. Real estate agents, sellers (including builders) and closing agents have little contact in loan origination, since they do not participate in the loan application process. However, they play an enormous role in real estate transactions that are the basis for purchase money mortgage loan transactions. Improper and illegal collaboration among borrowers, sellers, real estate agents and closing agents creates as equally a dangerous and costly scenario as any other fraud scheme. But does a lender actually know enough about the seller, the real estate agent and, most incredibly, the closing agent?

Every day, lenders around the country are wiring hundreds of millions of dollars into the accounts of men, women and settlement companies about whom they know very little. While lenders wait anxiously for their signed closing packages to return, their money lies exposed on the street, without guarantees of security. Why lenders (and title underwriters, for that matter) place universal confidence in the existing loan closing process is a mystery, and a recipe for disaster.

Who are these closing agents? Are they experienced? Licensed? Insured? Do we care? Should we care? Of course we should! Lenders who rely solely on closing protection letters, in those states where they are issued, ignore the common practice for agents of title underwriters to issue them without any criteria and for closing agents to recycle them on their own. It is not unheard of for closing agents to simply white-out the specific transaction details on a protection letter and use them over and over again.

While there is no foolproof method of preventing fraud, since the fraudsters tend to change their tactics and methods, and since anyone who is determined to defraud a lender and has the cooperation of enough of the parties to a transaction usually can accomplish it, lenders can arm themselves with more data about the closing process and demand that closing agents meet certain minimum levels of experience, insurance and overall reliability. Shining a light on the closing process--and those who work it--can go a long way toward weeding out the bad operators and defining a better process for the honest and orderly distribution of mortgage loan funds.

Furthermore, having access to real-time data about the parties at the closing table, immediate access to key closing documents and the ability to access detailed reports about a closing when audits or loss mitigation efforts are required are all highly desirable in today's fraud-infested environment.

If and when a post-closing problems occurs, whether through fraud or due to some other closing error such as an unsigned document, a lender needs immediate access to the key information about the closing that will allow loss mitigation or post-closing follow-up to be completed in a matter of days, rather than in weeks or even months.

Lenders need to work with land title agents, the real estate bar and the national notary associations to establish standards for their members that will ensure the men and women who act on behalf of lenders at the closing table are ethical, experienced and trustworthy. Without standards, and without due diligence beyond the loan approval stage into the closing room, lenders will continue to be victimized by closing fraud.

Andrew Liput Esq. is senior managing attorney and president of Repurchase Resolution Specialists Inc. He may be reached at (888) 424-3728 or e-mail [email protected].

Mar 24, 2014