How did we get here?
Mortgage fraud is not just creative financing, and its effects are far-reaching. Lenders’ increased reliance upon third-party brokers has created opportunities for organized fraud groups, particularly when real estate professionals are involved, says the FBI in its May 2005 Financial Crimes Report to the Public. “Combating significant fraud in this area is a priority, because mortgage lending and the housing market have a significant overall effect on the nation’s economy,” the report says.
The FBI investigates mortgage fraud in two distinct areas fraud for profit and fraud for housing. Fraud for profit is identified as industry-insider fraud, and the motive is to revolve equity, falsely inflate property values or issue loans based on properties that do not exist. The FBI reports that “80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.”
Fraud for housing, on the other hand, involves fraud committed by borrowers to acquire and maintain ownership of a home using false pretences. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a mortgage loan.
Prevention and protection
Consumers and the mortgage industry are fighting back. Mortgage investors like Freddie Mac are scouring loan applications, appraisals and other closing documents before a loan becomes delinquent, looking for patterns of fraud. Industry organizations are providing internet tools to lenders and the public to communicate and share information. Consumer groups such as the Georgia Real Estate Fraud Prevention & Awarenes Coalition (GREFPAC) have been formed to join homeowner victims in the fight. Georgia consumers, too, now have the protection of the “Georgia Residential Mortgage Fraud Act.” Enacted in May 2005 the act defines the crime of residential mortgage fraud as, when “a person knowingly makes any deliberate misstatement, misrepresentation or omission during the mortgage lending process with the intention that it be relied upon by a mortgage lender, borrower or any other party to the mortgage lending process.” The act provides penalties of up to 20 years imprisonment and fines of up to $100,000 in instances involving multiple loans. Georgia is the first state in the country to create a law criminalizing this conduct.
GREFPAC provides a few pointers to prevent borrowers from becoming unwilling participants in fraud schemes.
- Don’t accept payment for use of your name, credit or social security number.
- Don’t close a loan that you know is based upon false or misleading information, including inflated appraisals and false information regarding down payments.
- Don’t expect to be paid for purchasing a property. You should be bringing a certified check to the closing to purchase the property.
- Don’t include false information about employment, income, credit or bank accounts in the loan application. Don’t leave blanks in the loan application form that someone could complete without your knowledge.
- Do review the good-faith estimate of closing costs that is provided by your lender. Ask about any parties being paid or fees you do not understand.
- Do read and understand all the documents presented at the closing. Ask questions.
- Do be an informed consumer. Know the comparative values of properties similar to your purchase. Be wary of appraisals that seem out of line with similar properties.
The key to halting exposure to the public and private sectors is to stop fraud before it starts. The collective knowledge of the public, mortgage industry and law enforcement is the tool that will prevent these land sharks from taking a bite out of you!
Linda S. Finley is a partner at Gambrell & Stolz, LLP. Her practice focuses on real estate litigation, civil litigation, regulatory compliance for lenders, real estate foreclosure, mortgage servicing, mortgage fraud civil prosecution and defense. Reach her at firstname.lastname@example.org or (404) 577-6000.