Fraudulent Activities and Red Flags
Overview of Fraudulent Activities
A sample of 1,769 depository institution SAR narratives was reviewed to identify additional trends and patterns reported in those narratives. The sampled SARs were reviewed to determine the types of activity and participants reported in the narratives.
Figure 4 provides the types of suspected fraudulent activities identified in the narratives.11
Figure 5 provides a comparison of activity type by fraud type,the narratives.12 i.e. fraud for profit or fraud for housing.13
Figure 6 provides a comparison of the reported activities and participants reviewed in the sample.14
Commonly Reported Variations of Mortgage Fraud
Activities identified through a narrative analysis of the sampled SARs follow.
- Misrepresentation of income/assets/debts (43.02%).
Material misrepresentation of income, assets, or debts was seen in both reports of fraud for housing (68.20%) and fraud for profit (31.41%). The suspected fraudulent loans were identified during post loan audits (56.37%); pre-funding reviews (24.44%); and upon loan defaults (15.90%). The reported activity involved fraudulent misrepresentation of employment and income and/or failure to disclose all debts or assets, such as additional real properties owned. These suspected misrepresentations resulted in higher debt to income ratios than considered acceptable, and would likely have precluded the loan issuance if reported accurately. Early payment defaults were reported in 5.12% of these narratives. Mortgage brokers initiated the loans on 64.13% of these reports. Forged/fraudulent documents (15.64%) and occupancy fraud (13.53%) were the most commonly reported activities in conjunction with misrepresentation of income, assets, or debts.
- Forged/fraudulent documents (28.04%).
Filers reported submission of fraudulent W-2s, tax returns, verifications of deposit; verifications of rent; credit reports; and forged signatures on loan documents submitted to support income and assets. This activity was seen in fraud for housing (79.64%) and fraud for profit (19.56%). Mortgage brokers initiated the loans on 68.15% of the reports describing this activity. The suspected fraudulent activity was detected during pre-loan fund reviews (52.42%); post loan audits (31.05%); loan defaults (9.88%); and victims reporting forged signatures (3.83%)
- Occupancy fraud (14.41%).
SARs reporting misrepresentation of the borrower?s intent to occupy the property as a primary residence most frequently were associated with fraud for profit (94.51%). Generally, this misrepresentation was perpetrated in order to obtain a more favorable finance rate. Real estate investors participated in occupancy fraud for profit in 20% of these reports. A small percentage of the reports involving occupancy fraud (5.49%) described individuals acting as straw buyers for family members in order to help them obtain property. Mortgage brokers originated the loans involving suspected occupancy fraud on 61.96% of these reports.
- Appraisal Fraud (13.11%).
Narratives indicating appraisal fraud described suspected fraud for profit in 60.34% and fraud for housing in 33.19% of filings. Generally the suspected fraud was committed through the use of inappropriate comparable properties to inflate property evaluations; inaccurate descriptions of the subject properties (failure to cite deficiencies or needed repairs); theft of a licensed appraiser?s license number, or forgery of licensed appraiser?s signature. In addition to appraisers, participants in loans where reviewed SARs indicated suspected appraisal fraud included: borrowers/investors (48.71%); mortgage brokers (48.71%); sellers (11.21%); loan settlement providers (including attorneys, and notaries) (2.59%); insider loan officers (2.59%); and correspondent lenders (1.72%).
- ID Fraud (10.18%).
Identity fraud, the unauthorized and illegal use of another person?s Social Security Number or a fraudulent (invented) Social Security Number not yet issued by the Social Security Administration, was nearly always >15 after obtaining a loan with a Social Security Number were identified on 17.22% of these reports. Filers identified the use of an ITIN prior to loan funding on 67.74% of the reports.
- Straw buyers (5.65%).
Straw buyers were used in both fraud for profit (83%) and fraud for housing (15%) schemes. In the cases of fraud for housing, filers described individuals acting as straw buyers to help family and friends obtain property. Filers noted that mortgage brokers initiated the loans on 66% of narratives describing straw buyers. Many of the reports described individuals acting as straw buyers who failed to disclose all of their assets and liabilities, such as additional properties and mortgages they held.
- ID Theft (3.45%).
Identity theft involved the actual theft of another person?s true identity with the intention of obtaining a loan. All of the SARs reporting identity theft were >
- Flipping (2.71%).
All narratives describing flipping were >
Elaborate Mortgage Fraud Schemes
Although the numbers of SAR narratives describing elaborate mortgage fraud schemes did not constitute a particularly significant percentage of the entire sample, some of these narratives described apparent fraud for profit schemes that were notably elaborate and organized. These schemes are described below.
- Mortgage rescue schemes.
Seven of the sampled narratives described fraudulent mortgage rescue schemes. Fraud perpetrators preyed on individuals threatened with foreclosure of their homes. Typically, the home owner was told that if they signed a quit claim deed for the benefit of the rescuer, the mortgage would be paid and the homeowner could continue living in the house with the promise that the property would be deeded back when the homeowner was able to obtain refinancing. The rescuer recorded the quit claim deed and then sold the property. Whereas in these instances, the borrower was the victim of the fraud, another type of mortgage rescue scheme defrauded the lender. In these cases, borrowers participated as straw buyers to purchase property and then quit claim the property back to the seller. This was considered a type of mortgage rescue scheme since typically the sellers were in default when the transfers occurred.
- ?Freeman in nature? schemes.
Four reports described attempted fraudulent payoffs with ?Freeman in nature? arguments.16 These arguments claimed that no money exchanged hands (i.e., the loan was merely a paper transaction), therefore there was no duty to repay the mortgage. Suspected Freeman schemes made up less than 1% of the sampled narratives, but they represent a danger to both lenders and homeowners. The reviewed Freeman schemes frequently resulted in the filing of fraudulent lien releases in county land records endangering the lender?s loan security. Ultimately, homeowners who participate in these schemes lose their homes.
- Asset rental.
Ten of the sampled narratives described suspected fraudulent attempts to temporarily inflate borrowers? assets in order to qualify them for loans. Typically, the borrower?s name was added to an existing account. After the institution holding the account verified the assets in that account, the borrower?s name was removed. Eight (80%) of these reports were submitted by the institutions that were requested to prepare verifications of deposit. The filers noticed that the funds were withdrawn or the names were removed shortly after a verification of deposit request was completed. These proactive reports demonstrated an awareness of this type of fraud and provided examples of successful industry efforts to identify them.
- Fraudulent investment schemes.
Borrowers obtained loans for multiple properties within a short period of time. Frequently the subject properties were located in states outside the borrower?s home state. The fraudulent activities generally included appraisal fraud, occupancy fraud, fraudulent property flipping, forged or fraudulent documents, and misrepresentation of assets and debts. These schemes also included borrowers participating in fraudulent real estate investment schemes by agreeing to have their personal credit used to acquire mortgages in return for a fee plus the promise of additional commissions when the property was resold. Investors were told the properties would be renovated and sold in approximately one year, and that mortgage payments would be made with rental income. The fraudulent activities generally included appraisal fraud, asset rental fraud, occupancy fraud, straw buyer, and misrepresentation of assets and debts. Ultimately the borrowers were left owing mortgages that exceeded the property value.
- Creating false down payments for properties.
Activities included depositing advances from credit cards into bank accounts then using those funds to obtain official checks payable to a title company. The funds were later returned from the title company to the bank account. In reality, the property was obtained for no money down, while creating a false appearance to the lender that the borrower had made a down payment. Another variation reported was the disguising of purchase loans as refinance loans with no money down and possibly cash back at the time of settlement. In reality the property is transferred to the borrower at the time the ?refinance? loan is closed. This type of activity increases the likelihood the borrower will default on the loan since the borrower has no financial vested interest, since their earnest money was funded by a loan.
Lenders may find it helpful to review the HUD-1 settlement statement for disbursements to unknown individuals or entities. These disbursements may represent payments to the sellers.
- Short payoff.
Inflated appraisals were used to obtain the subject loans. Borrowers defaulted on the loans and claimed a fraudulent hardship, such as loss of employment or illness. The borrowers further claimed they were victims of appraisal fraud and requested that the lenders accept short payoffs. The proposed payoffs were based on legitimate appraisals that were significantly less (40 to 60 percent less) than the appraisals used to obtain the loans.
- Fraudulent credit reports.
Employees of a credit bureau changed credit reports to fraudulently improve credit profiles by removing legitimate negative information and adding positive information.
These reports suggest that some lenders may reduce the likelihood of fraud by obtaining credit information from all three major credit bureaus.
- Property Theft.
- Property was sold with the promise of granting a life estate to the seller. The deed was altered to remove the life estate provision prior to recording. The property was then resold without the life estate provision in a true arms-length transaction, and a mortgage was placed against the property. The original homeowner, the purchaser, and the subsequent mortgage holder were left to sort out the legal and financial consequences of this fraud. Sampled narratives frequently specified that victims of this type of fraud were elderly.
- Loan applications were made in the name of deceased owners. The fraud perpetrator needs to work quickly before heirs can file wills or estate executor documents with the courts. This type of fraud is aided by rapid loan processing.
- Individuals stole the identities of property owners to allow them to sell the property to another individual who assumed the identity of another true person. In this scheme, the existing mortgage on the property was paid off with a new mortgage. The perpetrators received the difference between the sales price and the loan payoff. Therefore, this fraud scheme is more profitable when perpetrated against homeowners with a large amount of equity, i.e., where market value exceeds the outstanding debt on the home. The legitimate homeowners discover the fraud when they are informed that their mortgage has been paid in full.
- ID theft of the true homeowner?s identity to apply for home equity lines of credit or cash-out refinancing. ?Shotgunning? is frequently a part of this fraud. In this scheme, the borrower applies for multiple loans from multiple lenders on the same property in a short period of time. This allows the identity thief to take advantage of lag time in recording the mortgages. Consequently, lenders are unable to identify the existence of the other loans. By the time the lender is aware of the other mortgages, the loan payment has already been provided. Successful applications usually result in first payment defaults.
11 In this chart, percentages may exceed 100 percent, as many SAR narratives include descriptions of multiple fraudulent activities.
12 Not all SAR narratives provide sufficient details to determine if the activity appears to be fraud for housing or fraud for profit. Consequently, totals in Figure 5 are sometimes lower than totals in Figure 4.
13 For a fuller discussion of fraud for profit and fraud for housing, see page 37. Most of these SARs include multiple subjects; totals do not reflect SAR volume (see Table 4 for SAR totals).
14 Most of these SARs include multiple subjects; totals do not reflect SAR volume (see Table 4 for SAR totals).
15 The IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those who do not have, nor are eligible for SSNs.
16 ?Freeman in nature? arguments refer to specious arguments that avow that the funds were never loaned and therefore the borrower has no duty to repay the mortgage. These arguments rely on an unreasonable interpretation of Section 1-207 of the Uniform Commercial Code that has never been affirmed or supported by any court or governmental authority.
Excerpted from Mortgage Loan Fraud SAR Assessment -April 2008, page 18
Institutions receiving verification of deposit (VOD) requests are well positioned to detect and prevent some asset rental schemes. It may be a red flag when an account holder repeatedly adds new names to an account, then drops them shortly after the bank responds to a VOD. In these cases, the account holder may have added the loan applicant?s name to the account to boost the latter?s (apparent) available assets. Recurring incidents of this type of asset rental suggest that the asset renter likely has a direct connection to the loan processor, either a broker or a bank insider that routinely arranges for loans. Banks tracking suspicious activity that includes VOD requests can note on their SAR the party that requests the VOD in either the subject field or the narrative, as is appropriate.
Other instances of asset rental were detected when filers noted that funds were temporarily deposited into the loan applicant?s bank account for the time required to qualify for a loan. The funds came from friends or family, or even from mortgage brokers attempting to qualify an ineligible borrower. The temporary funds were withdrawn from the bank account after the loans were approved. Since these transactions only occur once, they are more difficult to detect than using the method above. However, the asset renter faces greater risk of losing his or her borrowed funds.
First published on 04/01/2008