Brokers, beware: Overstating income on stated-income loans is fraudulent

C. Robert Simpson, CEO and senior legal counsel, Investors Mortgage Asset Recovery Co. LLC

As published in Scotsman Guide's Residential Edition, January 2007.

Some months ago, I attended a loan-originator luncheon, where a speaker from the FBI gave a presentation about the latest mortgage frauds and prosecutions. The agent said that if a stated-income loan shows an income of $10,000 per month and the borrower's actual income is much less than that -- say, $5,000 per month -- then it is fraud, and the FBI would prosecute it as such.

The loan originators were incredulous. One broker stood up to say, "But lenders created stated loans so we could state whatever income would get the borrowers the loan."

If I read his facial expression correctly, the FBI agent couldn't believe what he had just heard. There ensued a lively give-and-take between the agent and the loan originators regarding the intent of stated loans.

Essentially, stated-income loans allow a simple representation of income on the 1003 loan application to be the basis of the underwriting decision. These loans were designed for borrowers who have enough income and acceptable credit but who don't meet full-doc standards, such as self-employed borrowers and people with commission-based income.

Proponents claim that these loans make qualifying easier; opponents argue that misrepresentation of salaries is pervasive.

A case study of fraud

In a world where borrowers can state their income on a mortgage application, do investors and originators have the same view of what constitutes fraud?

While I was pondering this, the story of Casey Serin crossed my desk. Serin is a mid-20s real estate investor from Sacramento, Calif. After attending various seminars offered by "no-down-payment" gurus, he jumped into real estate investment.

Within eight months, Serin purchased eight properties with the help of multiple loan brokers, and he owed $2.2 million. He was unemployed during most of this period and admits to lying about his income on his stated-loan applications.

On six of the properties, he received cash back at closing. The largest check he received was for $50,000. The cash was paid to a bogus company, controlled by a third party. It was then funneled back to Serin. In all other escrows, cash was paid to the seller, then back to Serin after closing.

Let's look at this situation from a legal perspective. If a loan officer knows a borrower's true income and purposely misstates it, is it fraud? Simply put, the answer is yes.

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