CH 15-3: Mortgage Fraud & Predatory Lending

The creation of a secret agreement or cooperation among people, especially for deceitful or fraudulent purposes.

Collusion

A deliberate act with the intent to deceive or with reckless indifference to the truth for the purpose of financial or personal gain.

Fraud

A scheme to purchase property, make cosmetic changes that may disguise hidden defects, and resell it at an artificially inflated price.

Illegal flipping

A charge that a loan originator assesses to a borrower that serves little if any function and that is likely to be hidden in the mortgage documents. These fees may or may not pay for actual services to the borrower, and they are typically not known to the borrower prior to signing.

Junk fee || Garbage fee || Processing fee

Any scheme, whether for profit or for property, involving misrepresentation, concealment, or omission that is used in an attempt to obtain financing to purchase real property.

Mortgage fraud

The use of loan tactics that take advantage of ill-informed consumers and that involve excessively high fees, misrepresented loan terms, or frequent refinancing that does not benefit the borrower.

Predatory lending

A person who receives payment from a conspirator for the use of that person’s name and credit history to apply for a loan, generally as part of a mortgage fraud scheme.

Straw buyer

A loan that involves more risks than allowed in the conforming market.

Subprime loan || B/C loan || B/C credit

TRUE or FALSE: Jana enters into a contract to buy a property for $200,000. After the contract signing, an accomplice of Jana’s signs a contract to purchase the property from her for $300,000. They convince the appraiser to value the property for the contract amount. Once the second sale closes, Jana splits her $100,000 profit with her accomplice, who fails to make any payments on the mortgage and leaves town. Jana’s actions constitute mortgage fraud.

TRUE: The fraud occurs in the second transaction because it involves a straw buyer and a false appraisal. Jana and her accomplice have committed felony theft and conspiracy to defraud, which could result in criminal charges and imprisonment.

TRUE or FALSE: If you were not the agent for any of the parties who bought and sold the property in Jana’s scheme, you would not be affected by their fraud.

FALSE: Mortgage fraud affects everyone. Even if you were not directly involved, using that property as a comparable in a market analysis could distort prices and harm clients relying on your expertise.

TRUE or FALSE: When a borrower schemes with a real estate licensee or appraiser to commit mortgage fraud, the motive is most likely financial gain.

FALSE: Industry insiders are more likely than borrowers to commit mortgage fraud for profit. Borrowers typically commit fraud to gain property ownership, not to make a profit.

TRUE or FALSE: Failing to disclose required information on a loan application is unethical but is not considered fraud.

FALSE: Failing to disclose required information on a loan application can be considered fraud by omission and is punishable under federal lending laws.

TRUE or FALSE: Property flipping is considered fraud when an investor remodels a property and quickly sells it for profit.

FALSE: If an investor buys a property below market value and remodels it to bring it up to true market value, this is legal and benefits the community.

TRUE or FALSE: An inflated appraisal is required to perpetrate an illegal flipping scheme.

TRUE: Illegal flipping schemes rely on inflated appraisals that artificially increase property values to justify fraudulent profits.

TRUE or FALSE: Valeria applies for a loan with XYZ Mortgage Company. The loan originator tells her that because she is a single woman, she can be approved for the loan only if she pays for a credit insurance policy to cover the mortgage in the event of her death. The insurance policy requires a significant one-time fee that will be rolled into the loan amount. This could be an example of predatory lending.

TRUE: This could be predatory lending because XYZ Mortgage Company bundled an unnecessary insurance fee into the loan, increasing Valeria’s costs and allowing the lender to charge more in origination fees.

What are the 2 ways mortgage fraud is generally categorized into?

fraud for profit && fraud for property

What type of mortgage fraud did Nina commit: Nina wants to buy an investment home but doesn’t have a large enough down payment to qualify for a non-owner-occupied loan. She lies on her mortgage application and says she’ll be living in the home as her principal residence. After she closes on the loan, she rents out the home.

Material misstatement

A type of mortgage fraud that involves stating the intent to occupy a home as a principal residence to qualify for better financing terms when the house is actually intended to be used as a rental

Material misstatement

A type of mortgage fraud that involves altering paycheck stubs, tax returns, or bank statements to qualify.

Material misrepresentation

A type of mortgage fraud that involves failing to mention that the borrower is taking early retirement in six weeks, and their income will be substantially reduced

Omisson

To combat illegal flipping, the Federal Housing Administration (FHA) requires sellers to own a property for at least _____ months before the property can be sold again using FHA-insured financing.

3

A scheme in which a buyer borrows a down payment from a seller with an undisclosed second mortgage. The buyer may have every intention of repaying the seller, but this unrecorded second mortgage is a type of mortgage fraud that could be quite a risk for the seller.

Silent Second

A scam that involves loans made on nonexistent properties. For example, a broker enlists or creates a straw buyer, identifies fictional properties, opens accounts for payments, and maintains custodial accounts for escrow payments.

Air Loan

This scam involves a borrower signing multiple copies of the same documents and the loan originator submits each set of the loan papers to a different lender. When the loan is approved by more than one lender, the loan originator forges a duplicate set of closing documents, delivers them to a second lender, and keeps the proceeds.

Double Sold Loan

This scame involves a perpetrator forging a seller's signature on a deed - so the real homeowner is not aware the proeprty is being fraudulently transferred - and records the deed. The thief mortgages the property with cash-out refinancing, pockets the money, and walks away without making a payment. The owner has no idea title has been transferred. This scheme most commonly targets properties that are paid in full or vacant.

Deed Scam

A foreclosure rescue scam that involves stripping a homeowner’s equity through fraud. For example, a schemer might tell a desperate homeowner they can remain in the home as a renter if they surrender the title and promise that they can buy back the house in a few years. In the next part of the scheme, a different borrower—who is, for all intents and purposes, a straw buyer—with better credit refinances to prevent foreclosure. The terms of such a deal are usually so burdensome that it becomes impossible for the original owner to buy back the home.

Equity Skimming

Involves refinancing over and over again, usually with no benefit to the borrower in terms of lowering the interest rate or saving fees. The lender, which profits every time a loan is made, promises the borrower benefits that never materialize. Often, refinancing raises the interest rate—and the monthly payment—for the borrower.

Loan Flipping