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C.
Robert Simpson of The Wolf Firm
(The White Paper, Topical Issues on White Collar Crime, Vol. 12 No.5)
I. INTRODUCTION.
Mortgage Loan Quality Control departments across the country are increasingly calling upon Certified Fraud Examiners, lawyers, and other professionals to help recover losses due to loan fraud. This article will suggest ways to increase the amount recovered and to speed up the collection process through proper organization and analysis of the fraudulent loan file prior to contacting your attorney.
II. HOT FRAUDS
The list of popular frauds is growing, but the following are a few of the most popular.
a. The Land Flip: In this scheme, the perpetrators purchase a single family residence for $100,000.00. They then sell the property to a straw buyer (defined as a person who either does not know about the deal, or one who knows but has no intention of making the payments) for $400,000.00. Mr. Straw, as we will call him, borrows $300,000.00 and those proceeds are used to pay off the existing first with the balance going to the perpetrators. Mr. Straw then defaults on the payments and the lender is left to foreclose on a property that is worth considerably less than the loan amount.
This fraud implicates the buyer, loan officer or mortgage brokerage, the appraiser, and often the escrow. This type of fraud is one of the most costly for lenders because the loss is always large.
b. The Builder Bailout: This fraud involves a builder/developer that has sold the majority of homes in a tract, but is left with a couple of homes to unload. The developer does not want to be bothered with the last remaining properties and so the Builder Bailout fraud is implemented to sell these last remaining units.
The Builder offers the homes to Mr. Buyer with no down payment. A property worth $100,000.00 is sold to Buyer for $120,000.00, but with no down payment required. This allows Buyer to borrow $100,000.00 (the entire value of the house), and the Builder forgives the down payment. The net effect is that the builder gets what he wants for the property (about $100,000.00), the Buyer pays what the property is worth (about $100,000.00), Buyer gets to finance the whole transaction (about $100,000.00), and the lender is stuck with a loan of 100% of the value of the property. This, the lender had no intention of doing. When the home goes to foreclosure, there is no equity to protect the lender, and the resulting losses are disproportionately large.
c. Fraud For Housing: These are the garden variety types of fraud in which legitimate homebuyers falsify documentation in order to qualify for a mortgage. Tax returns are falsified, employment is misrepresented, obligations are understated, and down payments are falsified. The areas of potential misrepresentation are as varied as lender's requirements themselves.
These frauds may seem harmless until investors like Fannie Mae or Freddie Mac discover the frauds and demand that the originating wholesale lender repurchase the loan. At that time, a simple misrepresentation can have large consequences.
Uncovering the perpetrators requires knowledge of the lending process and the documents which are required to fund mortgage loans.
III. THE FIVE CRUCIAL DOCUMENTS.
The five most crucial documents in the analysis of any loan fraud file are: (1) the HUD-1; (2) the loan application (1003); (3) the loan submission form (1008); (4) the escrow instructions; and (5) the preliminary title report. These few documents often serve as a blueprint of the fraud, showing the trail of money and the identity of the people who stood to gain. Properly analyzing and highlighting these documents will assist your attorney in more effectively representing you, and in developing a plan of attack. The effectiveness of your attorney increases exponentially if he or she can litigate your case, i.e., examine witnesses, conduct depositions, etc., having a complete knowledge of the motivations and involvement of each of the parties. The following, then, is a discussion of what should be culled from each of the five documents.
A. HUD-1.
The HUD-1 is the closing statement generated by the attorney or escrow officer upon the close of the loan, and the most important document for two reasons. First, it shows the flow of money, outlining in detail the disbursements from escrow. Second, the HUD-1's are remarkably truthful. Apparently most crooks feel that they have beaten the system when the loan closes, and they don't spend much time thinking about what would happen if someone were to investigate after the fact. HUD-1's should be carefully reviewed by asking the following questions:
(1) What liens were paid off at the close of escrow? Examine closely who received disbursements at the close of escrow. They are the ones who gained at the funding, and their intentions may be suspect.
(2) What were the mortgage broker's fees according to the Section 800 line items? Charges that are too high can reflect a consciousness of guilt; too low, and there might be a relationship between the loan broker and the borrower which your attorney should know about.
(3) When there is a reason to doubt the borrower's ability to raise the required down payment, does the HUD-1 show a proper down payment being received? Misrepresentations here can implicate escrow officers, which can lead to insurance or bond claims.
(4) Were there mysterious transfers to other escrows which are unexplained? Cash transfers to other escrows are commonly employed to discreetly slough off cash, and are good indicators that the escrow agent and others are involved in the conspiracy.
B. Loan Application (1003).
The loan application (the 1003) is also of great significance to the lawyer when analyzing your loan fraud. The 1003 contains the borrower's signature and may have false information supplied by the borrower regarding employment, cash, assets, credit, owner occupancy, or other material misrepresentations. Because the 1003 bears the signature of the borrower, it is powerful evidence. The handwritten 1003 will also tell much about the nature of the fraud and who conspired with the borrower. The 1003 should be examined for the following:
(1) Is the final loan amount smaller than the amount initially applied for? Knowing when the amount of the loan was settled can help to determine who was involved in any discussions related to appraised value.
(2) Is the handwriting and the signature that of the borrower or the loan officer? The identity of the person who actually completed the 1003 tells much about the involvement with and the relationship between the borrower and the loan officer.
(3) Does the borrower show assets or real estate owned? The assets of the borrower are of special interest to a lawyer looking to collect a judgment.
(4) How much credit card debt shows on the final, typed 1003? Large amounts of credit card debt are reliable indicators of whether the borrower has or is likely to file bankruptcy, and can alert your attorney to check for bankruptcy filings.
C. Escrow Instructions.
Escrow instructions show the progression of the transaction from start to finish. Escrow amendments show the addition or deletion of co-borrowers, changes in the loan amount or purchase price, as well as the names and identities of the real estate agents involved. All of this is crucial information for your attorney. Escrow instructions should be reviewed for the following:
(1) Has the purchase price or loan amount changed during the course of the escrow? These changes are almost always significant and can serve to implicate realtors, loan officers, appraisers, and other professionals.
(2) Have purchasers/borrowers been added or taken off? If an escrow is originally opened with a borrower and a co-borrower, and the co-borrower is later removed, this may help the lender to understand why the borrower submitted false tax returns in order the qualify for the mortgage.
(3) Are there real estate agents involved? Often, fraud requires the help or knowledge of real estate agents, and finding their identities on the escrow instructions is the easiest and most efficient way to locate them.
D. Title Report.
The original preliminary title report in the origination file contains valuable information and should be carefully evaluated. Possible areas for evaluation include:
(1) Who holds liens on the subject property and how old are the liens? Fraudulent junior liens, just weeks or months old, can be employed to siphon cash from properties through the loan proceeds.
(2) Are there pay offs on the HUD-1 which are not consistent with those being shown on the preliminary title report? Pay offs to new lienholders are suspect and can lead to additional defendants, as well as provide a tracing of funds for purposes of collecting on a judgment.
E. Loan Submission Form (1008).
The 1008 is important to the legal analysis of the file because it tells what the parties' expectations were at the time the loan application was submitted from the loan broker to the mortgage wholesaler. For example, changes in the loan amount can indicate appraisal or underwriting problems which were subsequently remedied by fraudulent representations of appraisers, brokers, or borrowers.
Of course, any other documents which would enlighten your attorney as to the nature and extent of the fraud should be highlighted and forwarded. Fraudulent tax returns, W-2's, and pay-stubs can all be marked for your attorney's convenience, and do not hesitate to speculate with your attorney about underwriters, processors, or others you suspect of being involved. These hunches can often lead to the discovery of admissible evidence and additional defendants.
IV. CONCLUSION.
In order to increase recovery and speed up the collection process when prosecuting loan fraud cases, organize and highlight your file for easy review by your attorney. Not many lawyers are as skilled in the arcane subject of mortgages as quality control personnel. Take time to analyze and highlight for your attorney at least these five documents so that the nature and extent of the fraud is clear. Proceeding diligently and in an organized fashion will assist your attorney in recovering your loss.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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