One element of mortgage fraud is known as abusive lending. Here are ten Red Flags that might indicate something dishonest has occurred.
A lending representative encourages you to include false information on a loan application.
The lending representative has you leave certain line items blank, and enters the requested information for you after you have signed all of the forms.
Are there missing disclosures? (Good faith estimate, HUD-1 Settlement statement, Truth in Lending information or Special Information Booklet)
Unexpected settlement costs at the end of the process.
Is the amount of the loan higher than the true value of the home?
Have you refinanced several times, each time encountering higher and higher fees and an increased payment? Is it ever represented as a "brand new loan product?"
Has the monthly payment come in higher than what you were told?
Is there special language covering late payments that requires you to pay a "daily interest rate?"
If you were sold a balloon loan, was your ability to handle the lump sum payment taken into consideration, or were you just led to believe that getting you another loan to cover that lump sum will be a piece of cake?
Did the lender require high priced "credit insurance" as a condition of the loan?
Here's what the FBI had to say about Mortgage Fraud in 2005:
MORTGAGE FRAUD
I. General Overview
The increased reliance by both financial institutions and
non-financial institution lenders on third-party brokers has created
opportunities for organized fraud groups, particularly where
mortgage industry professionals are involved.
Combating significant fraud in this area is a priority, because
mortgage lending and the housing market have a significant overall
effect on the nation's economy. All mortgage fraud programs were
recently consolidated within the Financial Institution Fraud Unit,
even where the targeted lender is not a financial institution. This
consolidation provides a more effective and efficient management
over mortgage fraud investigations, the ability to identify and
respond more rapidly to emerging mortgage fraud problems, and a
better picture of the overall mortgage fraud problem.
Each mortgage fraud scheme contains some type of "material
misstatement, misrepresentation, or omission relied upon by an
underwriter or lender to fund, purchase or insure a loan." The
Mortgage Bankers Association projects $2.5 trillion in mortgage
loans will be made during 2005. The FBI compiles data on mortgage
fraud through Suspicious Activity Reports (SARs) filed by
federally-insured financial institutions, and Department of Housing
and Urban Development Office of Inspector General (HUD-OIG) reports.
The FBI also receives complaints from the mortgage industry at
large.
A significant portion of the mortgage industry is void of any
mandatory fraud reporting. In addition, mortgage fraud in the
secondary market is often under reported. Therefore, the true level
of mortgage fraud is largely unknown. The mortgage industry itself
does not provide estimates on total industry fraud. Based on various
industry reports and FBI analysis, mortgage fraud is pervasive and
growing.
The FBI investigates mortgage fraud in two distinct areas: Fraud for
Profit and Fraud for Housing. Fraud for Profit is sometimes referred
to as "Industry Insider Fraud" and the motive is to revolve equity,
falsely inflate the value of the property, or issue loans based on
fictitious properties. Based on existing investigations and mortgage
fraud reporting, 80 percent of all reported fraud losses involve
collaboration or collusion by industry insiders. Fraud for Housing
represents illegal actions perpetrated solely by the borrower. The
simple motive behind this fraud is to acquire and maintain ownership
of a house under false pretenses. This type of fraud is typified by
a borrower who makes misrepresentations regarding his income or
employment history to qualify for a loan.
The defrauding of mortgage lenders should not be compared to
predatory lending practices which primarily affect borrowers.
Predatory lending typically effects senior citizens, lower income
and challenged credit borrowers. Predatory lending forces borrowers
to pay exorbitant loan origination/settlement fees, sub-prime or
higher interest rates, and in some cases, unreasonable service fees.
These practices often result in the borrower defaulting on his
mortgage payment and undergoing foreclosure or forced refinancing.
Although there are many mortgage fraud schemes, the FBI is focusing
its efforts on those perpetrated by industry insiders. The FBI is
engaged with the mortgage industry in identifying fraud trends and
educating the public. Some of the current rising mortgage fraud
trends include: equity skimming, property flipping, and mortgage
related identity theft. Equity skimming is a tried and true method
of committing mortgage fraud. Today's common equity skimming schemes
involve the use of corporate shell companies, corporate identity
theft, and the use or threat of bankruptcy/foreclosure to dupe
homeowners and investors. Property flipping is nothing new; however,
once again law enforcement is faced with an educated criminal
element that is using identity theft, straw borrowers and shell
companies, along with industry insiders to conceal their methods and
override lender controls.
Property flipping is best described as purchasing properties and
artificially inflating their value through false appraisals. The
artificially valued properties are then repurchased several times
for a higher price by associates of the "flipper." After three or
four sham sales, the properties are foreclosed on by victim lenders.
Often flipped properties are ultimately repurchased for 50 - 100
percent of their original value.
Since 1999, the FBI has been working to actively investigate
mortgage fraud in various cities across the United States. The FBI
also focuses on fostering relationships and partnerships with the
mortgage industry to promote mortgage fraud awareness. To raise
awareness of this issue and provide easy accessibility to
investigative personnel, the FBI has provided points-of-contacts to
relevant groups including the Mortgage Bankers Association (MBA),
the Mortgage Asset Research Institute, the Mortgage Insurance
Companies of America, Fannie Mae, Freddie Mac, and others.
The FBI has also been working to establish broader SAR reporting
requirements for mortgage lenders who do have adequate protection
under the current safe harbor provisions. The FBI is collaborating
with the mortgage industry and Financial Crimes Enforcement Network
to create a more productive reporting requirement for mortgage
fraud. The FBI has also been working with the mortgage industry
through the MBA to promote a more efficient and effective method of
identifying and reporting fraudulent mortgage activity, otherwise
known as, the Suspicious Mortgage Activity Report (SMARt Form)
concept.
The FBI works closely with individual lenders, as well as national
associations such as the MBA, the Appraisal Institute, the National
Association of Mortgage Brokers, and the National Notary
Association, to define and combat the mortgage fraud problem. In
addition, on a case-by-case basis, the FBI receives close
cooperation from lenders. An example of this is the usage of Real
Estate Owned properties from lender inventories to facilitate
mortgage fraud undercover operations (UCO). In December 2003, the
FBI initiated an UCO to address the massive amount of mortgage fraud
in the Jacksonville area. On September 16, 2004, as a result of this
investigation, seven search warrants were executed and two arrests
were made. Mortgage broker J.R. Parker and closing attorney Dale
Beardsley, were arrested via complaint, charging them with bank
fraud for their role in this alleged scheme. This UCO was made
possible by the close cooperation of a local financial institution.
This type of cooperation happens around the country and is a key
component in the FBI's approach to this growing crime problem.
A recent analysis of mortgage industry fraud surveys identified 26
different states as having significant mortgage fraud problems.
Although every survey identified Georgia and Florida as having
significant mortgage fraud related investigations, the survey also
identified nine other states in the South and Southwest, seven
states in the West and five states in the Midwest as having mortgage
fraud problems.
MORTGAGE FRAUD
INDICATORS
Inflated Appraisals
Exclusive use of one appraiser
Increased Commissions/Bonuses - Brokers and Appraisers
Bonuses paid (outside or at settlement) for fee-based services
Higher than customary fees
Falsifications on Loan Applications
Buyers told/explained how to falsify the mortgage application
Requested to sign blank application
Fake Supporting Loan Documentation
Requested to sign blank employee or bank forms
Requested to sign other types of blank forms
Purchase Loans Disguised as Refinance
Purchase loans that are disguised as refinances requires less documentation/lender scrutiny
Investors-Short Term Investments with Guaranteed Re-Purchase
Investors used to flip property prices for fixed percentage
Multiple "Holding Companies" utilized to increase property values
COMMON MORTGAGE FRAUD
SCHEMES
Property Flipping - Property is purchased, falsely appraised at a
higher value, and then quickly sold. What makes property illegal is
that the appraisal information is fraudulent. The schemes typically
involve one or more of the following: fraudulent appraisals,
doctored loan documentation, inflating buyer income, etc. Kickbacks
to buyers, investors, property/loan brokers, appraisers, title
company employees are common in this scheme. A home worth $20,000
may be appraised for $80,000 or higher in this type of scheme.
Silent Second - The buyer of a property borrows the down payment
from the seller through the issuance of a non-disclosed second
mortgage. The primary lender believes the borrower has invested his
own money in the down payment, when in fact, it is borrowed. The
second mortgage may not be recorded to further conceal its status
from the primary lender.
Nominee Loans/Straw Buyers - The identity of the borrower is
concealed through the use of a nominee who allows the borrower to
use the nominee's name and credit history to apply for a loan.
Fictitious/Stolen Identity - A fictitious/stolen identity may be
used on the loan application. The applicant may be involved in an
identity theft scheme: the applicant's name, personal identifying
information and credit history are used without the true person's
knowledge.
Inflated Appraisals - An appraiser acts in collusion with a borrower
and provides a misleading appraisal report to the lender. The report
inaccurately states an inflated property value.
Foreclosure Schemes - The perpetrator identifies homeowners who are
at risk of defaulting on loans or whose houses are already in
foreclosure. Perpetrators mislead the homeowners into believing that
they can save their homes in exchange for a transfer of the deed and
up-front fees. The perpetrator profits from these schemes by
remortgaging the property or pocketing fees paid by the homeowner.
Equity Skimming - An investor may use a straw buyer, false income
documents, and false credit reports, to obtain a mortgage loan in
the straw buyer's name. Subsequent to closing, the straw buyer signs
the property over to the investor in a quit claim deed which
relinquishes all rights to the property and provides no guaranty to
title. The investor does not make any mortgage payments and rents
the property until foreclosure takes place several months later.
Air Loans - This is a non-existent property loan where there is
usually no collateral. An example of an air loan would be where a
broker invents borrowers and properties, establishes accounts for
payments, and maintains custodial accounts for escrows. They may set
up an office with a bank of telephones, each one used as the
employer, appraiser, credit agency, etc., for verification purposes.
Mortgage Fraud Prevention Measures
General Fraud Tips
Mortgage Fraud is a growing problem throughout the United States.
People want to believe their homes are worth more than they are, and
with housing booms going on throughout the U.S., there are people
who try to capitalize on the situation and make an easy profit.
Tips to protect you from becoming a victim of Mortgage Fraud
Get referral for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies.
If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem.
Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques.
Look at written information to include recent comparable sales in the area, and other documents such as tax assessments to verify the value of the property.
Understand what you are signing and agreeing to--If you do not understand, re-read the documents, or seek assistance from an attorney.
Make sure the name on your application matches the name on your identification.
Review the title history to determine if the property has been sold multiple times within a short period--It could mean that this property has been "flipped" and the value falsely inflated.
Know and understand the terms of your mortgage--Check your information against the information in the loan documents to ensure they are accurate and complete.
Never sign any loan documents that contain blanks--This leaves you vulnerable to fraud.
Check out the tips on the Mortgage Bankers Association's (MBA) website at http://www.StopMortgageFraud.com for additional advice on avoiding mortgage fraud.
Mortgage Debt Elimination Schemes
Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.
There is no magic cure-all to relieve you of debts you incurred.
Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.
Foreclosure Fraud Schemes
Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed, and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner without preventing the foreclosure. The victim suffers the loss of the property as well as the up-front fees.
Be aware of offers to "save" homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure.
Seek a qualified Credit Counselor or attorney to assist.
Predatory Lending Schemes
Before purchasing a home, research information about prices of homes in the neighborhood.
Shop for a lender and compare costs. Beware of lenders who tell you that they are your only chance of getting a loan or owning your own home.
Beware of "No Money Down" loans--This is a gimmick used to entice consumers to purchase property that they likely cannot afford or are not qualified to purchase. Be wary of mortgage professional who falsely alter information to qualify the consumer for the loan.
Do not let anyone convince you to borrow more money than you can afford to repay.
Do not let anyone persuade you into making a false statement such as overstating your income, the source of your down payment, or the nature and length of your employment.
Never sign a blank document or a document containing blanks.
Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness and omissions.
Be aware of cost or loan terms at closing that
are not what you have agreed to.
Do not sign anything you do not understand.
Be suspicious if the cost of a home
improvement goes up if you accept the contractor's financing.
If it sounds too good to be true--it probably is!
For the complete version go to: http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1