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FRAUD IN MORTGAGE LENDING
Fraud is the intentional deception of a person (or organization) for the purpose of depriving him of property (possessions or money) or causing him injury in other ways. Fraud in mortgage lending has been a problem for decades and is one of the leading causes of financial losses that exists in America today. As in most types of fraud, there are perpetrators on both sides of the equation, fraud created by lenders, and fraud created against lenders. Combined these two types of fraud account for billions of dollars in losses each year for lenders and homeowners. A pervasive problem in America is the degree to which lenders have cooperated with borrowers to commit fraud against institutional mortgage investors. Any dishonest act committed for the purpose of assisting a person to qualify for a mortgage they cannot afford is an act of fraud. This is probably where the most common acts occur. It may seem an innocent thing to place information on an application for a mortgage loan that exaggerates the length of time the applicant has been employed in his current job or the amount of money he will have after the consummation of the mortgage transaction. In telling these 'white lies' which are not white at all, the applicant is committing fraud against the lender. It can very well be true that the lender or mortgage broker plays a part in the dishonesty. But who wins by qualifying a borrower for a loan that the underwriting tables say he cannot afford? First of all, the dishonesty precipitates a dangerous situation wherein the borrower is at risk of not being able to meet his mortgage obligations and lose the home through a loan default. The ramifications of this for the borrower are far reaching and may include not only a foreclosure, but also the loss of credit rating and possibly even prosecution. A foreclosure on a borrower's record is the surest way to keep him from qualifying for a mortgage for a long time into the future. Secondly, the lender also stands to lose. The cost of managing a default, including collections, inspections and legal expense can be quite high. A defaulted loan will nearly always cause catastrophic losses for a lender. And that is not nearly the worst of it. That describes only a small single act of dishonesty that resulted in a loss of property for the owner and a default that had to be managed by the lender. Fraud in mortgage lending can become much worse than that. Frauds perpetrated against lenders by borrowers can be organized and purposeful and can cost lenders millions. Consider the wholesale lender from New Jersey who purchased loans from a broker from another state. The loans in question were the product of a scheme of real estate flipping, meaning the properties were sold over and over again to insiders who, on each transaction, inflated the price of the properties more and more. By the time the scheme was uncovered the lender had invested over $23,000,000 in loans on properties whose value was probably less than half that amount. The good news was that the mortgage broker who originated and sold the loans went to jail along with the borrowers in the transactions. The bad news was that the lender was declared insolvent and had to be taken over by its regulators. Millions of dollars and hundreds of jobs were lost due to this customer fraud against the lender. The other type of mortgage fraud is that which is perpetrated by the lender or an employee of the lender. This kind of dishonesty is rampant and happens every day. It might be as simple as the example above where the mortgage broker assisted the borrower to qualify by exaggerating his qualifying capabilities. Or it may be much worse where the lender or mortgage broker has intentionally created a scheme to rip off applicants, another lender or investor. This has happened in every way conceivable, including everything from lying to customers to induce them to sign for loan terms not previously agreed upon, to selling the same mortgage to several different lenders at the same time and skipping town with the proceeds. In property flipping schemes, in addition to the use of unscrupulous borrowers, Realtors and appraisers, there is usually a lender who is willingly taking part in the fraud. The testimony of a young mortgage processor from Louisiana, in an article written for one of the trade journals, shows the human side of the consequences of routinely misstating the qualifications of her loan officer's clients. This processor writes that she worked for an aggressive loan officer who was able to build up a healthy clientele of Realtors and builders by always getting his deals closed. Nearly all the buyers they would send to this loan officer would qualify even when the brokers on the transactions believed this would be impossible to do. The loan officer made this happen by overstating the income or assets, or understating the liabilities of his applicants to a level where they would appear to meet the minimum qualifying criteria. Never would there be gross exaggerations of qualifying criteria, just enough to get by. Perhaps an applicant who earned $3,000 per month but needed $3,400 per month to qualify, or one who had $2,200 per month in continuing obligations would be made to look like his obligations were $1,800 per month. These are not big numbers, perhaps just a few hundred dollars per month one way or another. But these exaggerated figures over time led to many loan defaults. Often loan defaults result in a forensic type of underwriting where senior underwriters pick the loan apart piece by piece. In truth, under such a scenario, the loan review only has to come up with a single instance of complicity on the part of a loan officer, processor, underwriter or broker (Real Estate broker or Mortgage Broker) to have a chargeable offense. In her article the young processor from Louisiana admitted that she knew about some of the false statements that were made on her loan files but thought they were minor and unimportant. She thought this until she was arrested and actually spent eighteen months in jail, was left with a criminal record, and knows that she is marked for life as not hireable in the lending industry. In this particular instance she also admits to her shame and embarrassment and the public humiliation she has endured. It is very important to understand what are considered to be acts of fraud and how to identify them in order to avoid them. This information will serve to protect both homebuyers, in the instance of a purchase transaction, homeowners in the instance of a refinance transaction, and lenders in both types of transactions. Borrowers' rights include protections from predators in the lending community. The penalties for predatory lending on the part of lenders and Mortgage Brokers can be severe and can include closing down the mortgage operation, heavy fines, and possible criminal charges resulting in prison sentences. A good way to assist borrowers from becoming victims of lenders who may prey on them will be to quote The Borrower's Bill of Rights as published by the Mortgage Bankers Association of America:
1. A borrower has the right to clear and forthright explanations of the terms and conditions of a loan. 2. A borrower has the right to accurate disclosure of final annual percentage rate and amount of regular payments at the time of loan closing/settlement. 3. A borrower has the right not to be subject to deceptive marketing tactics. 4.A borrower has the right to timely and truthful disclosures regarding the rates and costs of the loan. 5.A borrower has the right to obtain credit counseling prior to closing on the loan. 6. A borrower has the right to have a lender consider a borrower's ability to repay the loans before such credit is extended. 7. A borrower should receive an identifiable benefit where charged a fee or a higher interest rate to refinance a loan. 8. A borrower has the right to not be subject to a requirement that he or she finance any portion of the points or fees. 9. A borrower has the right to decline credit insurance in connection with a loan. 10.A borrower has the right to a fair and equitable resolution to any disputes related to their loan. 11. A borrower has the right to have favorable information reported to credit bureaus on a timely basis.
Persons believed to have been victims of predatory lending should answer these questions for themselves: 1. Were you encouraged to include false information on your loan application? 2. Were you asked to leave signatures lines or any other important line item of any form blank? Did the lender or broker alter any information you entered on your loan application? 3. Are any of the following disclosures missing from your loan file? Good Faith Estimate Special Information Booklet Truth in Lending Disclosure HUD_1 Settlement Statement 4. Have you refinanced your loan several times, and in each instance increased either your monthly payment or the total amount you owe on your home? 5. Is the late payment penalty fee calculated as a "daily interest" rate? 6. Is the loan amount on your home higher than the value of your home 7. Were you surprised by unexpected costs at settlement that had not previously been explained to you? 8. After settlement were you surprised to find that the monthly payments on your mortgage were higher than you anticipated based on the initial disclosures? 9. If you have a balloon payment will you have to take out another loan to afford that payment? 10. Were you required to buy credit insurance; insurance that will repay the debt if you die or become disabled? Borrowers who believe that they may have been victims of fraud or predatory practices can find relief from any number of state and federal agencies. Most states have departments of professional regulation or anti-fraud units to investigate such abuses. The State Attorney General's offices in every state will also be interested in these types of complaints. At the Federal level such abuses can be reported to the U.S. Department of Housing and Urban Development which has offices in each state and is headquartered in Washington D.C. Abuses can also be reported through the web at www.stopmortgagefraud.com/report.htm. Advantage Financial Funding Corp. - The Commons at Lincoln Center - 124 John Robert Thomas Drive - Exton, PA 19341 Office Phone: (610) 594-8880 Fax: (610) 594-6884 Toll Free Phone: (800) 578-8400 Licensed and Regulated by: Pennsylvania Department of Banking Pennsylvania Department of Insurance Pennsylvania Real Estate Commission 
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