Tuesday, November 18, 2008

Mortgage Fraud: A Growing Problem

Mortgage Fraud is a growing problem in the United States and according MortgageDaily.com, reported cases of fraudulent mortgage loans amounted to more than $4 billion in 2007, up from $1.6 billion in 2006. According to many sources including the FBI and Freddie Mac, mortgage fraud is committee for two main reasons: fraud for property and fraud for money.

Fraud for property also known as fraud for housing, generally occurs when a borrower wants to purchase a property they know they cannot afford. Borrowers are often aided by dishonest mortgage industry professionals who submit or encourage the submission of false information about the borrowers employment, income or assets in order to qualify for a loan. Borrowers are often tempted to engage in this type of fraud by a strong desire for home ownership and the belief that no one will check the information. However, lenders detect fraud for housing schemes by thoroughly reviewing and validating documents and keeping diligent records. It is a federal crime to lie in connection with the loan application and these individuals may be at risk of criminal prosecution.

Fraud for profit schemes often involve a group of people who defraud a prospective home buyer or mortgage lender. For example, a dishonest mortgage broker may partner with a loan processor to create a fictitious credit profile, and with an appraiser to inflate the property value. Additionally, "straw borrowers," who falsely represent themselves, may be enticed to participate through the promise of financial gain. Fraud for profit schemes are also attractive to criminal enterprises lured by the opportunity for greater profits, fewer dangers than those commonly associated with violent crime, and reduced sentencing or jail time. Illegal property flipping is the fraud scheme commonly employed.

Common Mortgage Fraud Schemes

From the FBI Financial Crime Report Property Flipping

Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.

Silent Second - The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

Nominee Loans/Straw Buyers - The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan.

Fictitious/Stolen Identity - A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant's name, personal identifying information and credit history are used without the true person's knowledge.

Inflated Appraisals - An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Foreclosure Schemes - The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by re-mortgaging the property or pocketing fees paid by the homeowner.

Equity Skimming - An investor may use a straw buyer, false income documents, and false credit reports, to obtain a mortgage loan in the straw buyer's name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.

Air Loans - This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.

Mortgage Fraud Prevention Measures

From the FBI Financial Crime Report

Tips to protect you from becoming a victim of Mortgage Fraud:

Get a referral for real estate and mortgage professionals.

Check the licenses of the industry professionals with state, county, or city regulatory agencies. If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem. Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques.

Look at written information to include recent comparable sales in the area, and other documents such as tax assessments to verify the value of the property. Understand what you are signing and agreeing to--If you do not understand, re-read the documents, or seek assistance from an attorney. Make sure the name on your application matches the name on your identification. Review the title history to determine if the property has been sold multiple times within a short period--It could mean that this property has been "flipped" and the value falsely inflated.

Know and understand the terms of your mortgage--Check your information against the information in the loan documents to ensure they are accurate and complete. Never sign any loan documents that contain blanks--This leaves you vulnerable to fraud.

Mortgage Debt Elimination Schemes
Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport. There is no magic cure-all to relieve you of debts you incurred. Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.

Foreclosure Fraud Schemes
Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed, and up-front fees. The perpetrator profits from these schemes by re-mortgaging the property or pocketing fees paid by the homeowner without preventing the foreclosure. The victim suffers the loss of the property as well as the up-front fees. Be aware of offers to "save" homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Seek a qualified Credit Counselor or attorney to assist.

Predatory Lending Schemes
Before purchasing a home, research information about prices of homes in the neighborhood. Shop for a lender and compare costs. Beware of lenders who tell you that they are your only chance of getting a loan or owning your own home. Beware of "No Money Down" loans--This is a gimmick used to entice consumers to purchase property that they likely cannot afford or are not qualified to purchase. Be wary of mortgage professional who falsely alter information to qualify the consumer for the loan. Do not let anyone convince you to borrow more money than you can afford to repay. Do not let anyone persuade you into making a false statement such as overstating your income, the source of your down payment, or the nature and length of your employment. Never sign a blank document or a document containing blanks. Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness and omissions. Be aware of cost or loan terms at closing that are not what you have agreed to. Do not sign anything you do not understand. Be suspicious if the cost of a home improvement goes up if you accept the contractor's financing. If it sounds too good to be true--it probably is!

Nonprofit Screening Practices

From the National Survey of Nonprofit Volunteer Screening Practices

There are a number of people engaged in the nonprofit sector including nonprofits' board of directors, executives, staff members and volunteers. Yet, few are thoroughly screened before taking their positions. This significantly increases the risk of corporate fraud, criminal acts of abuse, neglect and exploitation against the populations they serve and other less serious infractions. A recent National Survey of Nonprofit Volunteer Screening Practices conducted by the National Center for Victims of Crimes explores this issue of background screening on volunteers. Through other research and anecdotal information, the information gathered in this survey is also indicative of the background screening practices for both nonprofit employees. The National Survey of Nonprofit Volunteer Screening Practices found that "the vast majority of organizations that participated in the survey indicated that they conduct some form of screening on incoming volunteers, but not all organizations that screen do so thoroughly and 12 percent of organizations reported not screening volunteers at all." The majority of organizations represented in the survey at minimum conduct an interview of volunteers while fewer organizations check references and fewer still engage in full background checks.

While many organizations said they engage in some form of volunteer background checks, 1 in 4 organizations working with vulnerable clients do not conduct reference or criminal background checks. This leaves millions of children, seniors, individuals with disabilities, and others vulnerable to potential victimization each year.

Why don't nonprofits screen? Nonprofit leaders cite a variety of reasons for not performing extensive background screening including; not thinking screening is useful, thinking it costs too much, not wishing to offend potential volunteers and others felt the wait time for results were too long. While nonprofit leaders think they do not have time or money to invest in background screening, the reality is not investing in this process could be far more costly in the long term-both to vulnerable clients and to the organization itself.

Non Profit Fiscal Fraud

One recent study* estimates that some 13 percent of the roughly $300 billion given to charity in year 2006 was lost to corporate fraud and embezzlement. Broken down that's about $40 billion a year wasted that would have otherwise supported much needed public services. From this same report and others like it, accountability in nonprofit organizations is coming to the forefront like never before. This report found that "typical theft from a charity was committed by a female employee with no criminal record who earned less than $50,000 a year and had worked for the nonprofit at least three years. The amount she stole was less than $40,000." The report goes on to cite that the most costly cases involved male executives earning $100,000 to $149,000 a year.

As taken directly from the cited report, fraud is defined by Occupational fraud, e.g., a nonprofit employee overcharges his or her employer for travel expenses or steals cash from the bank account

Consumer fraud, e.g., an attendee at a fund raising auction replaces the price tag on an item with the goal of purchasing it at a lower price.

Insurance fraud, e.g., a nonprofit policy holder falsely claims its van or car has been stolen with the goal of collecting the value of the "stolen" vehicle in cash.

Medicare fraud, e.g., a nonprofit healthcare worker "codes" services rendered with the goal of increasing Medicare reimbursement to the organization

A study by J. T. Wells (2005) reports three major types of occupational frauds. The first is misappropriation of assets and occurs when organization's assets are stolen or misused. The second is referred to as corruption and occurs when influence is inappropriately used in an economic transaction. Third, financial statement fraud is the deliberate falsification of an entity's financial statements. Asset misappropriations comprise more than 97 percent of all reported frauds. It was by far the most common among the nonprofit organizations. Prior studies have found that fraud may be easier to commit in a nonprofit organization. It is argued that an atmosphere of trust is assumed particularly in human service organizations. Many nonprofits have difficulty in verifying certain revenue streams, possess weaker internal controls than for-profits and overall there is a lack of business and financial expertise. The reliance on volunteer and often inexperienced boards is one main contributory factor. Some nonprofits in New York State recognize the need for stronger boards of directors and separate auditing committees. A local nonprofit CEO explained,"Boards are looking for more accountability because they know they are fiduciaries and are at risk."

* An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents Accepted for Publication in Nonprofit and Voluntary Sector Quarterly (NVSQ) By Janet Greenlee, Mary Fischer, Teresa Gordon, and Elizabeth Keating

Non Profit Background Checks

From the National Survey of Nonprofit Volunteer Screening Practices Criminal History

To determine whether a prospective Board member, volunteer or employee has a criminal record, the candidate's name and/or fingerprints are submitted to local, state, or national law enforcement, or to a state or national repository of criminal history record information (either government entities at the state level or private companies that collect and store information nationally).

Criminal records may include data on arrests or convictions. In general, name-based checks are faster and more convenient, but fingerprint-based checks are the most reliable, as they eliminate name mix-ups and the possibility of candidates using aliases to avoid detection of their criminal past.

Sex Offender Registry: All states currently have lists of registered sex offenders, many of which are available online. Organizations can search online sex offender registries, contact state or local law enforcement agencies or connect with private companies to learn whether a candidate is a registered sex offender in a given state.

Child Protective Services and Adult Protective Services: All states have designated entities responsible for the protection of children and vulnerable adults, and these entities (whose official names vary by state) keep records of reports of abuse, investigations, and the outcomes of investigations (i.e., whether the allegation was substantiated by evidence). Candidates' names can be submitted to these state authorities to search for founded allegations of abuse. (Allegations that were not substantiated by evidence might not be revealed.) No national repository of this information currently exists; it must be checked state by state.

Credit History: With verification of a legitimate purpose, organizations can set up an account either directly with a credit bureau or with an intermediary entity to submit candidates' names and Social Security numbers for a report of their credit history. This type of check requires the candidate's consent and is typically conducted only when a someone will be handling significant sums of money.

Non Profit Fraud Prevention

Some recommendations from the Independent Sector's Panel on the Nonprofit Sector (2005)

Start Accountability at the Board Level: Improving the quality of the board could improve accountability and lessen fraud. Essential tasks may be undertaken by individuals with little financial expertise and no training in the design of appropriate controls against errors or fraud. Without financial expertise at the board level and little, or limited, supervisory capabilities at the operation level, a steady flow of cash donations become a magnet for fraud. Require independent directors to serve on the Board and make sure that someone other than the treasurer reviews financial statements. Do not let the nonprofit's account serve as a member of the Board.

Create an audit committee on the Board to deter or detect financial mismanagement and other fraud within the organization.

Don't just assume an atmosphere or trust--develop strong policies and procedures for fiscal management.

Prohibit personal loans to board members and nonprofit executives.

Management should take a strong response to alleged or suspected fraud.

Conduct extensive background investigations on the Board of Directors, executives, staff and volunteers.

Add accountability by providing orientation to volunteers about thefts and increasing training efforts.

Develop authorization procedures for purchase orders, invoicing, and payments.

Separate the duties of authorizing, purchasing, receiving, shipping, and accounting.