Loan Officer Training - 11/21/2024 - Understanding and Preventing Mortgage Fraud - Loan Officer Training with The Mortgage Calculator

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Restream recording Nov 21, (00:00):
This is a great topic, uh, very
important to, uh, understand,uh, to avoid any issues you may
have because, uh, Fraudulentloans, um, if they get caught in
a, in a post closing audit, is aloan that is going to have to be
repurchased, usually, by the,um, company, by the lender, and

(00:25):
any commissions, uh, earned,returned.
And that's assuming that the MLOdidn't have anything to do with
the fraud because if there wasany collusion by the MLO and the
fraudsters, then besides givingyour money back, you're looking
at additional legalramifications.

(00:46):
So it's very important in ourbusiness that we be proactive.
Uh, when we are, um, discussingwith customers, uh, prospective
deals, uh, processing loanapplications, reviewing
documents, uh, at submission,reviewing documents provided for
conditions.

(01:06):
All of that is, uh, important inlight of not just, um, closing
the deal, but closing the dealthat should be closed and
staying out of trouble.
So let's get right into it here,because it's, like I said, Very
important, especially in momentslike now when interest rates are

(01:30):
higher, it's harder to qualify.
Uh, people still need housing.
People still want to make moneyand, uh, you know, close loans,
whether it's a realtor wantingto close a transaction, a sale,
a loan officer wanting to closea loan, a borrower wanting to
get into the properties.
When we get into these types ofsituations where the market's a
little soft in transactions orthe costs are higher on the

(01:54):
borrowers.
We're at the extremes.
That's when things can occur.
So what do we mean by mortgagefraud?
Mortgage fraud is afalsification of any information
that is given in order toreceive a mortgage on real

(02:17):
estate property.
It's going to involve usually amaterial misstatement.
Misrepresentation or omission,right?
Omitting information, you'rejust as guilty of fraud as
giving bad information.
So material misrepresentation,misstatement, or omission in

(02:39):
relation to a mortgage loan,which is then, this information
is then relied upon by thelender to issue a decision.
So, you know, just imagine if,All the documents are fraudulent
and the lenders approving itbased on fraudulent info, that's

(02:59):
going to be a big problem.
Now, most of you, uh, whenyou're doing your loan
applications in Encompass and orin your approvals, you're going
to see FraudGuard or therequirement for a clean
FraudGuard.
Uh, that's an industry tool.
It is applied in every loan andit searches for incorrect info

(03:23):
related to the borrower.
What are the things that we'relooking at here?
Well, some of the things we'regoing to cover in this
Presentation here, right?
Um, straw purchases where theborrower may not be the real,
not going to be the realoccupant of the property, just,
um, letting their credit beused, um, flipping, uh, or

(03:47):
selling a property to somebodyand then buying it back from
that same person.
That's another, uh, scheme thatfraud guard catches, uh, or if
you've had foreclosures in thepast that may be not disclosed,
or if you have properties.
That you haven't disclosed onthe application.
Maybe property is held in apersonal name, not disclosed.

(04:08):
Maybe property is held in anLLC, not disclosed in the
application, which is obviouslygoing to result in additional
liabilities, potentially for theborrower, right?
Minimum additional tax liabilityon the property can have also
additional liability from theinsurance.
And then if there's any loan onthat property, because it may
not be in their personal name,maybe in the LLC.

(04:31):
And they're doing the closingthe loan in that particular LLC.
That's definitely something thatwe have to consider.
So, uh, fraud guard.
Great tool tries to, you know,find all of the issues that may
be going on, or at leastidentifies issues you're going
to have mainly the ones thatwe're asked to address are the

(04:53):
critical risk issues that are infront of guard.
So, what is the impact ofmortgage fraud?
Well, you know, there's a lot,but we're looking at damages and
communities because if there's alot of fraud that goes on.
In a particular community.
All right, those could beproperties that end up going

(05:13):
into foreclosure and then sellat a reduced price.
So they, they, they did thefraud.
Maybe it was a collusion to anon arms and limbs transactions
where they inflated the price,no intention of paying for it.
And then they let their propertygo into default and then it

(05:33):
sells at a reduced price.
And you end up then withdeclining values in that
community.
It can lead to riskier lending.
It is usually affiliated withmoney laundering and criminal
behavior.
And it creates greater lossesdue to higher defaults.

(05:54):
This last one is particularlydamaging as well because that
increases the operating costs.
To the companies, and then theyhave to increase the interest
rates to cover the additionalexpenses.
So again, borrowers are beingdamaged by that.
What are the types of mortgagefraud, right?

(06:18):
Um, the two types of mortgagefraud, the two categories, the
first one is fraud for profit.
That is where there is financialgain from the fraud and it
involves multiplemisrepresentations, right?
So, um, and it could alsoinvolve multiple Participants

(06:41):
like a borrower, an MLOappraiser, real estate agent,
and it could also involvemultiple loans and properties
resulting in a significantsignificant amount of money
being involved.
You know, fraud for profit islike usually a professional
fraud.
Let's call it that right.
Where everybody's colluding todo the fraud like, um, prior,

(07:07):
you know, that's why theyenacted.
The Dodd Frank Act and a lot ofthe, um, the, the rules in the
Dodd Frank Act.
One of the main one has to dowith the appraiser, right?
The, you cannot communicatedirectly with the appraiser when
putting in the order and, uh, orwhen having any issues with the
valuation, they don't want theappraisers being, um, I guess,

(07:32):
intimidated.
To say the least to do anythingor coerced or enticed right by
offering them money, they wantto keep the appraiser totally
separate.
So that's fraud for profit againis going to be for financial
gain.
Now fraud for housing.

(07:53):
You know, is the primarymotivation there is home
ownership, whether it's aprimary home or an investment
property.
The borrower is committing sometype of fraud because they want
the property, right?
They either need somewhere tolive or they want that
investment property to createincome.

(08:15):
Now in fraud for housing, theborrower does intend to occupy
the home if it's a primary anddoes intend to pay or does
intend to pay, make payments ifit's an investment property.
But they need, they want to getthe property and they probably
wouldn't qualify if they didn'tdo some type of fraud like alter

(08:36):
their pay stubs, alter theirbank statements or whatever else
altering the borrower, uh,misrepresents.
To own property or occupancy,right?
Um, they may state that it's in,that they're going to buy it as
an investment property when it'sreally going to be a primary,

(08:57):
right?
Or buying it, you know, becausethey need the extra income from
the investment, or buying it asa primary because they wanted to
hire LTV.
And the lower rate, but it'sactually going to be an
investment and fraud for housingusually is only going to involve
that one particular loan thatthe borrower has applied for.

(09:25):
So what are, um, now some of themore specific fraud actions.
Well, uh, we have straw buyer.
Now, a straw buyer, that's whereyou allow someone else to use
your credit.
To buy the home like you're,you're listed as the buyer,
you're listed as a borrower, butyou're really not going to live

(09:48):
there as a primary, somebodyelse is going to live there.
They have bad credit.
They don't have verifiableincome.
Maybe they have lots of money toput to the deal, but they don't
have anything else.
So they, um, get a straw buyerto help them out.
Now, straw buyer can be used infraud for housing or a straw

(10:08):
buyer can also be used in fraudfor profit, depending what's the
transaction you're trying to do.
And the straw buyer may be paidfor their involvement, whether
it's for helping out thatprimary buyer or somebody wanted
to buy an investment property.
They have money, they want to,they want investments, but
again, their credit is not good,their income is not good,

(10:29):
whatever may be the issues.
They get the straw buyer, theypay him, you know, five, eight,
10, 000 to use your credit sothey can get the home.
And so be it.
Now, what are some of the redflags here that you want to look
for to try to identify a strawbuyer transaction?
Well, for example, you couldhave a first time home buyer
with a substantial increase intheir housing expense, right?

(10:51):
They're paying 500 a month rentand all of a sudden they're
going to pay 2, 800 a month, youknow, that has to make sense.
I mean, we're not saying that'snot true, but it just has to
make sense.
Another red flag for the strawbuyer is gift funds are used for
the cash to close.
Again, no money being used oftheir own.

(11:12):
Who's that donor?
That donor really a relative?
Is it really a parent?
Is it really a close personalfriend?
Or is it, uh, the person whothey are in collusion with so
that to commit the fraud?
And another red flag for a strawbuyer transaction is that no
real estate agent is involved.

(11:35):
Another specific type of fraudis affinity fraud.
That is where you rely in acommon bond to exploit the trust
and friendship.
For example, you belong to thesame church, you work at the
same employer, um, you know,you, whatever may be, uh, that

(11:57):
binds you together, you know,common group, or you go to the
same church, right?
Those are three common, uh,areas where we would be bound.
You know, together in a commonbond.
But again, something, this isanother, uh, type of fraud
because it can't, the red flagsto look for are, for example,

(12:21):
common surnames, uh, formultiple parties in the
transaction, right?
I mean, a little less.
Um, glaring.
If it's for example, uh, you'rein South Florida and the name is
Gonzalez like mine.
Got a lot of people withGonzalez.
You would want to investigate tomake sure.
Is that a relative or is thatjust a coincidence?

(12:41):
Is it because if it's a relativeor is it a non, you know, some
type of non arms linkstransaction, right?
Somebody that that, you know,maybe your employer, whatever it
may be that hasn't beenidentified in the transaction.
Um, another, um, red flag foraffinity fraud is excessive
assets do not align with theprofession of the borrower.

(13:04):
You got 200, 000 in the bank andyou work in a job making 25, 000
a year, you know, that, that mayraise a red flag and a big red
flag would be that the downpayment is a large gift from the
group members, you know, to makesure that this is not something

(13:26):
where it's being bought.
as a group investment, but it'snot being disclosed that way.
And the last one that I wantedto cover here is reverse
occupancy.
This is a really big one.
Reverse occupancy could be, Itouched on it previously, it,

(13:47):
this is where someone buys thehome as an investment property,
but uses it as a primary.
Or conversely, buys it as aprimary but uses it as an
investment property.
Um, obviously they do thatbecause if they're using, if

(14:11):
they're putting it as aninvestment property, they're
gonna be able to get extraincome from that rental income
that is going to be used toqualify but is not actually
going to be received.
So that's a, that's a big issuefor the bank there.
Total misrepresentation there ofoccupancy.
Or just as bad, they state thatit's going to be a primary, but

(14:34):
they use it as an investment.
And obviously the reason they dothat there is because they're
going to get a lower rate as aprimary, and they're going to
get a higher loan to value.
And the red flags to look forhere also is it's a first time
home buyer.
Uh, if it's an investmentproperty, no current housing

(14:59):
obligation, they're living rentfree.
That's a real big red flag forthe investment property.
Are they going to stay livingrent free, right?
Are they going to move into theinvestment property and make it
a primary?
And, um, last red flag here isthey provide evidence of
insurance for an owner occupiedproperty, but the property is

(15:21):
actually an investment property.
So, that, that would probably bemore, uh, occurring more when
it's a, uh, refinance as opposedto a purchase, but if they're
dumb enough to request, uh,owner occupied insurance,
evidence of insurance on apurchase that's going to be an
investment property, then, uh,you know.

(15:42):
Be on the lookout.
So are there any questionsregarding fraud?
Really important stuff here,especially when you're taking
those loan applications.
I'll give it a moment.
See if anyone pops a question inthere, but I do not see any
questions.
So, all right, everybody, thankyou for joining us, uh, for

(16:05):
today's training, and I will seeyou all again on Tuesday and
have a great day.

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Loan Officer Training - 11/21/2024 - Understanding and Preventing Mortgage Fraud

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