Vulnerabilities Identified

Filings on Mortgage Brokers

A growing number of SARs report that mortgage brokers initiated the fraudulent loan applications. Filers are increasingly listing mortgage brokers as subjects in these SARs.

Figure 1 depicts a three year growth trend for total mortgage fraud comparing SAR filings and those reporting mortgage brokers as subjects. SARs reporting mortgage brokers as subjects comprise over one quarter of the total mortgage loan fraud SARs filed for the period between April 1, 2006 and March 31, 2007.



Appraisal Fraud

Reports of fraudulent appraisals continue to increase in SARs reporting mortgage loan fraud. Filers of nearly 13% of the narratives sampled for this report suspected appraisers as participants in the reported fraud. This represents an increase of two percentage points from the 11% reported in the 2006 FinCEN Mortgage Loan Fraud report. All fraudulent flipping6 and nearly all other organized fraud schemes that were reviewed relied on fraudulent appraisals. A small number of sampled narratives reported the fraud was conducted through the theft of licensed appraisers? identity and license information. The increase in reporting of appraisal fraud and theft of licensed appraiser information underscores the value of independent verification of appraisal documentation.

Vulnerabilities in Specified Mortgage Products

Although many SAR narratives did not identify the mortgage product involved in suspected mortgage loan fraud activities, some associated trends and vulnerabilities were deduced from those narratives that did specify the mortgage product. A small number of narratives specified that loans were subprime.7

• Trend for Suspected Fraud in Cash-Out Refinance Loans
  Filers identified ?cash-out refinance loans?8 in 3.35% of the SARs reporting suspected mortgage loan fraud filed between April 1, 2006 and March 31, 2007. Over the past six years, the study revealed a significant growth in the number of depository institution SARs reporting suspected fraud in these loan products. There was a nearly 53% increase in suspected fraud in these loans between 2005 and 2006.
  Figure 2 depicts this trend and projects the number for 2007.9
  
  
  
  
• Trend for Suspected Fraud in Stated Income/ Low or No Document Loans
  Filers specified that the mortgage product was a stated income, low or no document loan in 1.55% (633) of all SARs filed for suspected mortgage loan fraud between April 1, 2006 and March 31, 2007.10 This represented nearly a 69% increase in loans thus specified from the previous one year period (375).
  
  In the smaller sample reviewed, sixty-nine (3.9%) narratives specified the mortgage product was a stated income or a low or no document loan. Filers reported the suspected fraud was detected prior to loan financing on 18.84% of the reports for these mortgage products. In comparison to other loans identified in the sample, filers reported that they detected the suspected fraud prior to loan funding in 33.52% of full document purchase loans.
  
  
  1. For the purpose of this report, identity fraud was defined as the unauthorized use of a social security number issued to another individual or use of an invented social security number for the purpose of obtaining credit. Because the perpetrator used his/her true personal identifiers (i.e., name, address, and date of birth), there was no apparent attempt to steal another person?s identity. Identity theft involved an attempt to obtain credit using another person?s identity. The distinction made between identity fraud and identity theft is intended solely for the purpose of this report, and is not intended to establish legal definitions of these terms.
  2. Mortgage loan fraud can be divided into two broad categories: fraud for housing and fraud for profit. Fraud for housing generally involves material misrepresentation or omission of information with the intent to deceive or mislead a lender into extending credit that would likely not be offered if the true facts were known. Fraud for housing is generally committed by home buyers attempting to purchase homes for their personal use. In contrast, the motivation behind fraud for profit is money. Fraud for profit involves the same misuse of information with the intent to deceive or mislead the lender into extending credit that the lender would likely not have offered if the true facts were known, but the perpetrators of the fraud abscond with the proceeds of the loan, with little or no intention to purchase or actually occupy the house. Suspicious activity reporting confirms that fraud for profit is often committed with the complicity of industry insiders such as mortgage brokers, real estate agents, property appraisers, and settlement agents (attorneys and title examiners).

  
  
  
  
  

• Home Equity Lines of Credit
  Filers identified suspected fraud in home equity lines of credit on 1,492 (3.66%) of the SARs reporting mortgage loan fraud that were filed between April 1, 2006 and March 31, 2007. Over 61% of the suspected fraudulent home equity loans identified in the sampled narratives were > 6 Property Flips: Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve fraudulent appraisals, doctored loan documents, and inflation of the buyer?s income.
  
  7 For the period April 1, 2006 through March 31, 2007, 79 SAR narratives (0.19% of total filings) specified suspected fraudulent loans were subprime. Other SAR narratives do not provide sufficient details to make this determination.
  
  8 A cash-out refinance loan is a refinanced loan granted for an amount greater than what the borrower owes on the prior loan. The additional amount of the refinance is funded by existing equity.
  
  9 Projection is based on increases observed in comparisons of 1st quarters 2006 and 2007.
  
  10 ?A ?No Doc? loan is one in which extensive documentation of income, credit history, deposits, etc., is not required because of the size of the downpayment, usually 25% or more. Theoretically, the value of the collateral will protect the lender.? FDIC, Risk Management Manual of Examination Policies, Section 9.1 - Bank Fraud and Insider Abuse, http://www.fdic.gov/regulations/safety/manual/section9-1.html.
  
  Excerpted from Mortgage Loan Fraud SAR Assessment -April 2008, page 8