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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2010

Fraud Report Opens Door to Client Education

By warning clients about common scams, brokers can educate and aid

This past May, the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) published its Mortgage Fraud Report ( sctsm.in/FinCenM), noting trends related to loan-modification and foreclosure-rescue scams.

Mortgage brokers can use the report information to educate homeowners needing loan-modification services. By outlining concerns and making consumers aware of fraud attempts and trends, brokers can gain credibility. They also can leverage the report by sending direct mailings and newsletters to prospects and by posting relevant information about the findings on their Web site. Those who do also should consider noting if the states in which they operate require a license to act as a loan-modification negotiator.

If applicable, brokers also can discuss states' fee limits with their clients and explain their policies for abiding by these limits. In many ways, brokers are in the best position to educate consumers, many of whom might not realize that under no circumstances should a negotiator require the signing of a deed whereby property is transferred.

Brokers can act as negotiators, too, by approaching lenders with modification plans that offer advantages to all parties involved.

To educate their clients, brokers should be aware of some common fraud patterns and typical fraud attempts.

Fraud patterns emerge

By collecting and analyzing data -- and by providing guidance, regulatory information and training to financial institutions and criminal investigators -- FinCEN helps in the fight against mortgage fraud. The organization often relies on the filing and analysis of suspicious-activity reports (SARs) for insights and data points.

In April 2009, FinCEN issued an advisory report requesting information that would help identify and address loan-modification and foreclosure-avoidance fraud. In this advisory, it provided guidance on the preparation of SARs and identified potential red flags.

In response to the advisory, the number of SARs by entities required to produce them increased to more than 3,000 in 2009 from 28 in 2004.

This past May's report, which includes statistics from '04 to '09, reflected that increase and identified distinct patterns in the perpetration of fraud. More specifically, it outlined two typical scenarios that dominated loan-modification and foreclosure-rescue scams:

  1. Use of straw borrowers, equity-skimming, property theft or a combination of them
  2. Advance-fee scams

Although the bulk of SARs came in 2009, many scams remained undetected for years after the suspicious activity occurred. According to the FinCEN report, not only was there fraud in the loan-modification industry, but it also was multilayered and thriving -- and had been for some time. A CoreLogic report released this past July, meanwhile, revealed that mortgage fraud has declined since 2007. 

According to reports, fraud contributed to the subprime (aka, nonprime) mortgage collapse. Here's a closer look at two typical loan-modification and foreclosure-rescue fraud attempts.

Straw borrowers

In almost all loan-modification and foreclosure-rescue scams, the scam artist purported to be a qualified specialist and preyed upon financially troubled homeowners who typically were older. In many scenarios, the scammers not only defrauded the homeowner but also deceived a new lender.

The popularity of straw-borrower scams increased during the height of subprime lending, when credit and lending guidelines were loose and no-income-verification programs were popular. The scams generally involved a "specialist" who required borrowers to deed their home to another individual in a sale transaction, after which the original homeowners would rent to own until their credit or financial position improved. At that time, the specialist would help the borrowers repurchase their home under favorable loan terms. Alternatively, the specialist would agree to sell the property and take part of the proceeds, a process known as equity-skimming.

Often, the original homeowners remained in the house and paid rent to an individual who didn't make the requisite mortgage payments. This left the original homeowners facing foreclosure and eviction. In some cases, the so-called specialist would be the purchaser in the new transaction.

After the sale closed and the deed was recorded, the scammer would resell the house for a higher price in the inflated market. In other cases, a group would flip the property several times at inflated prices. 

In other instances, the scammer would enlist a straw buyer to purchase the home. The scammers would then take out a loan on the property, extracting all the remaining equity, another equity-skimming operation. Ultimately, the original homeowner would be left homeless, and the new brokers or lenders often received a repurchase request or an increased default ratio on their portfolios.

These types of scams often involved multiple players, including:

  • Buyers who gave lenders false information, such as misrepresented income, employment and occupancy;
  • Appraisers who supplied inflated values or failed to report comparable sales; and
  • Settlement agents who assisted with flips or diverted funds.

Advance fees

These scams increased as credit and lending guidelines tightened. For example, almost as soon as the Hope Now Alliance -- a collaboration between the federal government and various lenders, investors and counselors to assist homeowners with loan modifications and foreclosure avoidance -- came to be in '07, companies popped up with the words "hope now" in their name. Many of these groups targeted borrowers with financial woes and offered them false guarantees of avoiding foreclosure.

In one common scenario, fake specialists required borrowers to pay a hefty advance fee -- often thousands of dollars -- for loan-modification-negotiation services. The fraudsters often provided false evidence of their expertise or relationships with lenders and admonished borrowers against reporting the relationship with the specialist or that any fee was paid, saying it could jeopardize the negotiation and cause the borrowers to lose their home.

In some instances, monthly charges or milestone charges were included, in addition to the upfront fee. In many instances, fraudsters did little to help bring about a loan modification. Often, they didn't contact the lender as the loan continued toward foreclosure.

Many of the borrowers caught up in these scams failed to realize that Hope Now provides free counseling and assistance to consumers seeking loan workouts, which can include loan modifications that create manageable mortgage terms or modified repayment plans.

Another advance-fee scam has involved a fake specialist providing baseless theories to borrowers about debt elimination in exchange for payment. The specialist would often advise borrowers that two theories govern securitization of property and negate the requirement of repayment.

  • Redemptionist theory, which argues the federal government assumes responsibility for the debt.
  • "Freeman in Nature" theory, which argues that a mortgage loan is illegal and borrowers have no duty to repay

Helping borrowers

This past May's FinCEN report calls out scammers and their schemes, both of which deteriorate the mortgage industry's reputation. Although the federal government thus far has determined that loan-modification negotiators don't fall within the "mortgage loan originator" definition for purposes of the Secure and Fair Enforcement for Mortgage Licensing Act, many states have enacted laws requiring licensure as an originator to offer loan-modification services. Accordingly, many unlicensed individuals who provide such services could be, by definition, acting illegally.

On the Web

  • Q&A with U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) director James H. Freis Jr. (February 2010 Scotsman Guide): sctsm.in/3955
  • FinCEN Mortgage Fraud Report, May 2010: sctsm.in/FinCenM
  • FinCEN Suspicious Activity Report form: sctsm.in/SARSform

In many cases, mortgage brokers are the best individuals to provide assistance. Although free loan-modification assistance exists, many troubled borrowers complain that such assistance is minimal or that the process is overwhelming.

Although some states have capped the fee that can be charged for offering loan-modification services, brokers can provide it as an ongoing service to clients and strengthen their reputation. Providing such assistance could lead to referrals and marketing potential. In addition, when clients are ready to buy or refinance later, they'll be more likely to come back to the broker who helped them.

Brokers also can help by filing SARs voluntarily. Although only certain institutions are required to file SARs -- mortgage brokers and originators weren't on the list, as of press time -- brokers can do so of their own volition. In many cases, brokers can assess and identify emerging fraud trends before regulators can.

By understanding fraud trends and helping put a stop to them -- and by educating borrowers and leading them to successful loan modifications and foreclosure avoidance -- brokers can work for good, promote their services, and position themselves and the industry for long-term success.


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