The Financial Crimes Enforcement Network (FinCEN) periodically releases mortgage fraud report, Mortgage Loan Fraud SAR Filings. This report provides information on reporting activities, geographic locations, and other filing trends. The most recent third quarter of 2010, mortgage fraud report, shows possible mortgage loan fraud (MLF) characterized by filers increased 2 percent up from MLF SARs in the 2009 third quarter. In 2010 Q3, California and Florida were the highest ranked states based on total numbers of subjects, followed by New York and Illinois. Within metropolitan areas, New York ranked highest in the number of MLF subjects with activity dates after January 1, 2008, and Miami ranked highest based on activity dates before January 1, 2008.
Following are some potential areas of mortgage loan fraud reported in mortgage fraud report.
- Debt elimination scam
- Misrepresentation of income or employment
- SSN fraud or theft
- Loan modification fraud
- Foreclosure rescue fraud
- Fraud against federal housing recovery programs
- Straw buyer
- Appraisal fraud
- Property flip
- Occupancy fraud
Awareness with the above mentioned areas of fraud in mortgage loans will help bankers and financial institutions to review substance over the form, in case by case basis.
One of the areas of fraud is advance fee scams for debt elimination in which third party perpetrators fraudulently promised to obtain mortgage loan forgiveness from financial institutions for borrowers. There are many such schemes going on all across the country. The financial institutions should be very careful when analyzing the documentation to see if a third party (most likely a separate business entity) is sending all the documentation on behalf of the client.
Another factor as discussed above is misrepresentation of income or employment. The financial statements given to the bankers differ significantly from the annual tax returns of the clients, which might be an indicator of potential mortgage fraud. The bankers however should consider the differences between generally accepted accounting principles and tax provisions to eliminate the true differences first and then to compare the financial statements with the tax returns. An example of such a difference is the depreciation expense. There are many depreciation incentives provided by the Federal Government for businesses these days, which can cause greater disparities between the financial statements and tax returns. Also all the bank accounts on which the clients has signing authority (accounts opened with parents, minors etc) should be analyzed while analyzing the financial situation of a client.
Fraudulent use of social security number (SSN) is also one of the potential areas of mortgage loan fraud these days. The parties involved in the transaction might use a SSN which do not belong to them to obtain loans. If no proper SSN verification is done by the lenders at the time to extending loans then later on title related issues can rise.
Frivolous legal challenges to terms and conditions of the mortgage loans can possibly reflect the mortgage loan modification. Some of the documents which might be used to defraud are advance fee scams for debt elimination in which third party perpetrators fraudulently promised to obtain mortgage loan forgiveness from financial institutions for borrowers. Some other factors are fraudulent payment methods such as fictitious “bonded promissory notes,” fraudulent cashiers’ checks, or other worthless monetary instruments.
Many different kinds of foreclosure rescue schemes are out there. One of the schemes is where a financial institution might receive an initial request for short sale from a third party hired by a client. After getting the fees from the clients and telling them that short sale process has been started with the bank, the third party disappears.
Related party transactions such as using a friend of relative in the short sale process still implies that original property owner will still not be able to make the house mortgage payments and eventually will end up in a foreclosure. Often such properties are flipped again which might result in the foreclosure down the road when the price of the property will be dropped even more. Straw buyers are often used to structure such kind of transactions.
Shehla Begum, has a Masters in Business Administration for the University of Central Oklahoma. She currently works as an Indian Tribal Government Specialist with the Internal Revenue Service. She has been a field agent and completed IRS training for Bank Secrecy Act.