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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2014

Avoid Bridge-Lending Traps

Dodge loan scammers with awareness, due diligence and professional intuition

Avoid Bridge-Lending Traps

Scams tend to pop up in times of crisis or where confusion has been created. Loan scams in particular prey on desperate, uninformed or confused borrowers. A recent example of this was during the recent real estate meltdown, when many so-called loan-modification companies sprouted up overnight. Panicked borrowers who felt they were about to lose their homes or businesses were the perfect targets for loan scams disguised as legitimate loan modifications.

In today’s lending environment, where credit is still tight, loans scams remain a huge problem, particularly in the area of commercial bridge lending. To protect their clients’ and their own interests, commercial mortgage originators should understand the three primary types of bridge-lending scams and be able to avoid them by seeing the warning signs before it’s too late.

Because credit was easy to get in the years leading up to the financial crisis of 2008, bridge loans were rarely considered as a financing option. For this reason, bridge loans in general have been largely misunderstood, especially by borrowers. Since 2008, however, bridge loans have become more necessary and frequently utilized. Confusion caused by the differences between conventional financing and bridge lending has been a major contributor to the increase in loan scams in recent years.

Loan scams having existed since loans themselves, but bridge-loan scams have unique characteristics. In bridge and hard-money lending, the most common loan scams target desperate borrowers who are seeking fast loans with terms that seem too good to be true. The three most common types of bridge-loan scams are:

  • Upfront-fee loan scams
  • Bait-and-switch loan scams
  • Identity-theft loan scams

Upfront-fee scams

The upfront-fee loan scam is by far the most common of the three types. Because upfront fees are also charged by legitimate bridge lenders, it is challenging to determine which lenders are the real deal, not scammers.

Upfront-fee scams make loan offers in the form of a term sheet or a letter of intent. These loan offers are always accompanied by a request for an upfront fee that is paid to the lender before closing the loan. This upfront fee is explained as being necessary to pay for underwriting or legal fees, or it may even be disguised as a wire-transfer fee for covering the cost of the transfer of funds. Often, loan scammers of this type will offer to have you deposit the upfront fee with an attorney, which may fool borrowers into thinking it’s a safe, legitimate option.

A common giveaway in upfront-fee scams is e-mail correspondence with misspellings or improper grammar in the text. Also, this type of scammer may ask the borrower to purchase transaction insurance before the lender wires funds. The following excerpt from an actual e-mail sent by a scammer requesting payment of transaction insurance before making the loan demonstrates how text and grammar errors are clues about a likely scam:

“Before I transfer funds to client account, I always get my loan insured by an insurance company. I have an insurance company that I work with and I normally direct my client to the insurance company to get the loan insured, I used the insurance company for the safety of both parties.”

Another interesting upfront-fee scam entails an overseas entity that offers to provide financing in the form of private equity or a joint-venture partnership for U.S.-based real estate acquisitions or development projects. The entity may offer to partner with U.S.-based investors as its “overseas money partner.” With this type of scam, it’s not long before the entity will ask for an upfront fee in the form of a deposit, a wire-transfer fee or a transaction fee in exchange for wiring its funds into your U.S. bank account.

Bait-and-switch scams

Another loan scam in bridge lending involves legitimate-but-unscrupulous lenders taking advantage of prospective borrowers by switching the terms or conditions of the loan prior to closing.

With a bait-and-switch scenario, a lender may bait a borrower by presenting attractive terms in writing, or promise a fast closing requiring little documentation. But after a borrower accepts the terms of the loan, the lender may change the interest rate or require the borrower to bring more equity into the transaction. In some cases, a bait-and-switch lender may even demand to have an ownership stake in the property as a condition of making the loan.

Unfortunately, once a borrower has engaged a bridge lender in a loan request, it is costly in terms of time and money to disengage and move on. A bait-and-switch lender wants to entangle a borrower long enough that all other options for financing have been taken off the table. These lenders will then squeeze borrowers and loan terms to the breaking point to force them to make last-minute concessions or sign terms that were not part of the original loan proposal.

These bait-and-switch loan scams may be hard to avoid if you are working with a lender for the first time. To protect yourself, try to find someone who has closed a loan with the proposed lender to determine if there were any surprises or changes to the loan terms made after the lender’s original terms were presented. There are many online real estate and mortgage forums where you can post questions about specific lenders and receive responses from other members who have worked with them before.

The common rebuttal to accusations of bait-and-switch tactics by this type of bridge lender is that there was deception or withholding of the facts about the borrower’s background of finances by the broker or client. To invalidate this possible rebuttal by a bait-and-switch lender, be sure to provide all facts about the borrower’s finances and background upfront and document all correspondence via e-mail. Pose any possible issues or objections to the lender upfront and disclose everything.

Identity-theft scams

Identity-theft loan scams are perpetuated by an entity, often located overseas, that attempts to steal an individual’s personal-identification and financial information to use illegally. The scammer tries to get the information required to steal a borrower’s identity through the ruse of an irresistible loan offer. Some red flags include:

  • Loan terms that seem too good to be true, such as an interest rate that is lower than 5 percent or an offer of a loan term longer than 30 years.
  • An entity that represents itself to be from the United States, although it is located overseas.
  • An offer to make a loan quickly, without the supposed lender requesting the usual upfront information required to make a loan.
  • Requests early in the application process for sensitive or private information such as Social Security number, date of birth, or bank information for wiring funds.

These warning signs will help you recognize identity-theft scammers, thus protecting your clients from the potentially devastating effects of having their personal and financial information stolen and used for nefarious purposes without their knowledge.

Warning signs

How do you avoid becoming a victim of bridge-lending scams? There is no single foolproof solution other than to find and use legitimate lenders that you know and trust. But the task of picking out the trustworthy lenders from the scam artists is not easy, and is made even more challenging because there is no centralized medium for verifying the legitimacy of bridge or hard-money lenders. Many bridge and hard-money lender lists and directories are available online or in print, but their reliability is difficult to validate, and they may even lead brokers and borrowers directly to the loan scammers.

Do your own due diligence on all lenders to make sure they have a legitimate reputation for closing loans, and watch for the warning sign of loan terms that seem too good to be true, such as an offer that claims a 3 percent interest rate with a 60-year loan term, or one where the lender doesn’t require a downpayment from a borrower on a purchase transaction. Even in the realm of bridge financing, terms like this are simply too good to be true.

Other clues of loan scams are offers that promise immediate loan approval with little information requested that come from someone with an “American-sounding” name such as Bob or Jim but include an overseas phone number or overseas office, or that give monetary amounts in euros or other non-U.S. currency. In addition, remember that typos or grammar errors in e-mails or pre-approval letters may be a telling clue.

Beware of lenders that claim to lend on everything, everywhere. Examples of this are lenders that claim to make loans to every state, Canada, Latin America, Asia and Europe, or those that say they make every type of loan imaginable from, say, small-business loans to major construction loans in Singapore.

What about loan scams that are more insidious and harder to identify upfront? These are the types of loan offers you and your clients should watch out for because they are typically offered by well-organized, professional groups that make a lot of money collecting upfront fees. Always do your due diligence on a lender the way you would in any real estate or business transaction. Ask for the names of the companies or individuals the lender has closed deals with, and determine if they are first- or third-party references.

Perform a thorough online search about these types of lenders to verify that they have not been involved in any known loan frauds or scams. Search online real estate forums and other community websites for the prospective lender’s name to get feedback and personal experiences from members of those online communities. You may want to join some of these communities to follow up with community members about their experiences with particular lenders. You may discover some enlightening or even disturbing information this way.

Common-sense precautions

Because the victims of loan scams have no means to file formal complaints or take legal action against the perpetrators of the scams, upfront detection and avoidance of potential scams is especially important.

Remember a few common-sense guidelines to stay out of the traps loan scammers set:

  • Reality check. Any loan offer that seems too good to be true usually is.
  • Intuition. Always follow your gut when it comes to giving an unknown entity any kind of upfront fee.
  • Lender list. Build your own list of legitimate, verified bridge lenders that you trust. 
  • Relationships. Grow relationships with your chosen bridge lenders and get to know their processes and procedures.

Bridge and hard-money lending remain important financing options for mortgage professionals and their clients, especially with financing from banks and other conventional lenders often not being realistic options for borrowers. With an understanding of how to detect and steer clear of possible bridge-lending scams, you and your clients will avoid heading down the path toward a loan scam.  


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