What we collectively refer to as mortgage fraud includes various illegal schemes involving some type of misrepresentation or misstatement on mortgage documents. For example, a home buyer, mortgage broker and/or other real estate professional who submits fake W-2 forms or procures an inflated property appraisal has engaged in mortgage fraud.
In general, fraud involves two parties: the party providing false information and the party that relies on that information to complete a transaction. Such crimes commonly are prosecuted as wire fraud, bank fraud and conspiracy (federal statutes do not directly reference "mortgage fraud").
The Fraud Enforcement and Recovery Act (FERA) enacted in 2009 expanded the reach of federal law enforcement officials in enforcing mortgage fraud laws. Sentences under FERA can include $1 million fines and 30-year prison sentences. Some states also have laws that address crimes related to mortgage fraud.
An investigation may also lead to additional charges of bankruptcy fraud or tax fraud. Although unscrupulous mortgage brokers, appraisers, real estate attorneys and other real estate professionals tend to be the ones targeted by investigations, home buyers are sometimes arrested for providing inaccurate information.
Law enforcement officials recognize two main categories of mortgage fraud:
1. Fraud for Housing: A situation where a borrower submits false, incomplete or inaccurate information in order to qualify for a loan or to obtain more favorable terms when buying home.
1. Fraud for Housing: A situation where a borrower submits false, incomplete or inaccurate information in order to qualify for a loan or to obtain more favorable terms when buying home.
2. Fraud for Profit: A situation where a real estate professional (appraiser, mortgage broker, etc.) commits fraud in order to extract money from a property or transaction.
Common Types of Mortgage Fraud
Mortgage transactions, which involve multiple parties and large sums of money, provide ample opportunities for fraud. Some such schemes are extremely sophisticated and unique, but the following types of mortgage fraud are the most common:
•Fraudulent Supporting Loan Documentation: Loan applicant submits forged or altered paycheck stubs, or otherwise fraudulent documentation.
•Property Flipping: A piece of real estate is purchased, promptly appraised at a falsely inflated value, and then quickly resold. The fraudulent appraisal is what makes this practice illegal, as "flipping" during a housing boom is not necessarily illegal.
•Straw Buyers: Borrower's identity is hidden through the use of a nominee, in whose name and credit history the loan application is made.
•Silent Second: Buyer takes out a second mortgage to cover the down payment on the initial loan. It is illegal because the second, smaller loan is taken out without the initial lender's knowledge.
•Stolen Identity: Mortgage loan applicant uses a fictitious or stolen identity. If stolen, the true person's name, personal information and credit history is used without their knowledge.
•Equity Skimming: An investor uses a straw buyer, false credit reports and false income documents to obtain a mortgage in the straw buyer's name. Straw buyer signs property over to investor after closing, relinquishing all property rights. Investor makes no payments but rents the property until it is foreclosed.
•Inflated Appraisal: Appraiser, colluding with the mortgage broker and/or loan officer, provides unrealistically high appraisal value in order to match the buyer's offer and complete the deal.
Mortgage transactions, which involve multiple parties and large sums of money, provide ample opportunities for fraud. Some such schemes are extremely sophisticated and unique, but the following types of mortgage fraud are the most common:
•Fraudulent Supporting Loan Documentation: Loan applicant submits forged or altered paycheck stubs, or otherwise fraudulent documentation.
•Property Flipping: A piece of real estate is purchased, promptly appraised at a falsely inflated value, and then quickly resold. The fraudulent appraisal is what makes this practice illegal, as "flipping" during a housing boom is not necessarily illegal.
•Straw Buyers: Borrower's identity is hidden through the use of a nominee, in whose name and credit history the loan application is made.
•Silent Second: Buyer takes out a second mortgage to cover the down payment on the initial loan. It is illegal because the second, smaller loan is taken out without the initial lender's knowledge.
•Stolen Identity: Mortgage loan applicant uses a fictitious or stolen identity. If stolen, the true person's name, personal information and credit history is used without their knowledge.
•Equity Skimming: An investor uses a straw buyer, false credit reports and false income documents to obtain a mortgage in the straw buyer's name. Straw buyer signs property over to investor after closing, relinquishing all property rights. Investor makes no payments but rents the property until it is foreclosed.
•Inflated Appraisal: Appraiser, colluding with the mortgage broker and/or loan officer, provides unrealistically high appraisal value in order to match the buyer's offer and complete the deal.
State Mortgage Fraud Laws
More than one-third of U.S. states, including California, Florida and New York, have laws prohibiting at least one form of mortgage fraud. The New York law (NY Penal Code, article 187), for example, defines "residential mortgage fraud" as an intentional act that involves statements that contain materially false information or that conceal information for purposes of misleading another party. The crime is prosecuted as a class A misdemeanor all the way up to a class B felony, depending on the severity of the offense.
More than one-third of U.S. states, including California, Florida and New York, have laws prohibiting at least one form of mortgage fraud. The New York law (NY Penal Code, article 187), for example, defines "residential mortgage fraud" as an intentional act that involves statements that contain materially false information or that conceal information for purposes of misleading another party. The crime is prosecuted as a class A misdemeanor all the way up to a class B felony, depending on the severity of the offense.
Federal sentences tend to be more severe than state sentences for equivalent mortgage fraud convictions. Talk to a local attorney to find out more details about the laws in your state.
Civil Liability for Mortgage Fraud
Those accused of committing mortgage fraud may also be held liable for monetary damages incurred by the lender. Civil claims may be based on contractual theories, misrepresentation and/or deceit, conspiracy to defraud the lender or breach of trust. Third parties involved in the fraudulent transaction, such as mortgage brokers or appraisers, may also be liable for damages.
Those accused of committing mortgage fraud may also be held liable for monetary damages incurred by the lender. Civil claims may be based on contractual theories, misrepresentation and/or deceit, conspiracy to defraud the lender or breach of trust. Third parties involved in the fraudulent transaction, such as mortgage brokers or appraisers, may also be liable for damages.
Source: FindLaw.com
Predatory Loan Practices
What Constitutes Predatory Loan Practices?
Predatory loan practices are when a lender commits abusive lending practices by not allowing consumers to access mortgage credit fairly. Consumers are given a loan for which they are paying more than they should and which could put their home at risk of foreclosure because they cannot afford their mortgage payments. If consumers were targeted for these type of loans based on any of the protected classes under the Elliott-Larsen Civil Rights Act or PWDCRA, they may be a victim of unlawful discrimination as well.
What Constitutes Predatory Loan Practices?
Predatory loan practices are when a lender commits abusive lending practices by not allowing consumers to access mortgage credit fairly. Consumers are given a loan for which they are paying more than they should and which could put their home at risk of foreclosure because they cannot afford their mortgage payments. If consumers were targeted for these type of loans based on any of the protected classes under the Elliott-Larsen Civil Rights Act or PWDCRA, they may be a victim of unlawful discrimination as well.
Identifying Predatory Mortgage Lending
Here are some signs to look for to identify predatory loan practices:
• Consumer directly approached by lender to take a home equity loan against the equity in their home.
• Lender encouraged Consumer to make home improvements. Predatory loans often involve a dishonest home improvement contractor who is working with the lender and/or there is outright fraud in the loan documents.
• Repeated refinancing of debt by charging multiple fees and costs to the Consumer which results in the Consumer draining all the equity out of their home.
• Asking the Consumer to refinance to consolidate credit card debt in their home loan.
• Adding credit insurance, life insurance, disability insurance or another form of insurance to the loan.
• A prepayment penalty is added to the loan without offering the consumer a benefit or discount in return or offering them other loan products without prepayment penalties.
• Balloon payments. A balloon payment is a large lump sum of money due at the end of the term of the loan. Lenders who add excessive balloon payments know that homeowners who cannot meet the balloon payment will lose their home to foreclosure unless they qualify to refinance the loan.
• Negative amortization. The lender structures the loan so that the monthly payments do not cover the amount of interest due each month on the loan, and the principal balance increases each month. At the end of the loan term, the Consumer owes more than the original amount they borrowed (reverse mortgages).
• Making loans to senior homeowners based upon the equity in their homes, knowing that they cannot afford to repay the loans.
• Packing or other fraudulent non-disclosure of loan terms or adding additional fees and charges without the Consumer’s consent.
Here are some signs to look for to identify predatory loan practices:
• Consumer directly approached by lender to take a home equity loan against the equity in their home.
• Lender encouraged Consumer to make home improvements. Predatory loans often involve a dishonest home improvement contractor who is working with the lender and/or there is outright fraud in the loan documents.
• Repeated refinancing of debt by charging multiple fees and costs to the Consumer which results in the Consumer draining all the equity out of their home.
• Asking the Consumer to refinance to consolidate credit card debt in their home loan.
• Adding credit insurance, life insurance, disability insurance or another form of insurance to the loan.
• A prepayment penalty is added to the loan without offering the consumer a benefit or discount in return or offering them other loan products without prepayment penalties.
• Balloon payments. A balloon payment is a large lump sum of money due at the end of the term of the loan. Lenders who add excessive balloon payments know that homeowners who cannot meet the balloon payment will lose their home to foreclosure unless they qualify to refinance the loan.
• Negative amortization. The lender structures the loan so that the monthly payments do not cover the amount of interest due each month on the loan, and the principal balance increases each month. At the end of the loan term, the Consumer owes more than the original amount they borrowed (reverse mortgages).
• Making loans to senior homeowners based upon the equity in their homes, knowing that they cannot afford to repay the loans.
• Packing or other fraudulent non-disclosure of loan terms or adding additional fees and charges without the Consumer’s consent.
The above practices deny the Consumer from being offered suitable mortgage credit, the right to the lowest cost mortgage that the Consumer qualifies for and the right to know the true cost of a mortgage and are predatory loan practices.
Fannie Mae
Fannie Mae has established certain guidelines for lenders to follow to protect Consumers against practices such as steering, equity stripping, excessive fees, and prepayment penalties.
Fannie Mae has established certain guidelines for lenders to follow to protect Consumers against practices such as steering, equity stripping, excessive fees, and prepayment penalties.
Points and fees charged to a borrower should not exceed 5 percent.
Fannie Mae will not purchase "high-cost" mortgages.
Fannie Mae will not purchase or securitize any mortgages where a prepaid single premium of credit life insurance was sold to the borrower at the time of the origination of their mortgage.
Lenders must report on the status of any Fannie Mae loan that they are servicing each month to the credit agencies.
Fannie Mae will only consider allowing prepayment penalties under the terms of a negotiated contract, and where the lender adheres to the following criteria: a mortgage that has a prepayment penalty should offer some benefit to the borrower in the form of a rate or fee reduction for accepting the prepayment premium; the borrower is also offered the choice of another mortgage product that does not require a prepayment penalty; the prepayment penalty must be disclosed to the borrower; and the prepayment penalty should not be charged when the mortgage debt is accelerated as the result of the borrower’s default in not making the borrower’s monthly mortgage payments.
Fannie Mae generally requires servicers to maintain escrow deposit accounts for the monthly deposit of funds to pay taxes, ground rents, mortgage insurance premiums, etc., especially in the case of borrowers with poor credit records to protect them from default risks and foreclosure.
Steering
Steering is when the lender actually steers the borrower away from better loans or less expensive loan products for which they are qualified or when the lender allows the borrower to get a sub-prime loan when it is clear that they cannot afford the loan, especially when these products are higher costs to the Consumer.
Excessive Fees
Lenders should have their own guidelines and policies regarding fees that they can charge and must apply those policies to every loan.
Prepaid Single Premium Credit Life Insurance Policies
Including a prepaid single premium credit life insurance in the origination of the mortgage is considered predatory lending practices by Fannie Mae guidelines.
Including a prepaid single premium credit life insurance in the origination of the mortgage is considered predatory lending practices by Fannie Mae guidelines.
Prepayment Penalties
Prepayment penalties must be included in the terms of a negotiated contract and must provide some benefit to the borrowers such as a rate or fee reduction for accepting the prepayment penalty premium or they are considered predatory loan practices. The borrower should be offered of choice of other mortgage products that do not require a prepayment penalty. Also Consumers should be aware of loans that call for the prepayment penalty to be accelerated as a result of the borrower’s default on their loan.
Prepayment penalties must be included in the terms of a negotiated contract and must provide some benefit to the borrowers such as a rate or fee reduction for accepting the prepayment penalty premium or they are considered predatory loan practices. The borrower should be offered of choice of other mortgage products that do not require a prepayment penalty. Also Consumers should be aware of loans that call for the prepayment penalty to be accelerated as a result of the borrower’s default on their loan.
Servicing Practices
The servicer should provide for escrow deposit accounts to be made available to borrowers with blemished credit records for monthly deposit of funds to pay taxes, ground rents, mortgage insurance premiums, etc. to avoid additional risk of default for the borrower.
Consumer Protection Against Predatory Practices
Because very few borrowers understand how mortgage prices are determined and affected by variables such as the borrower’s credit, the type of property, interest rate, fees, points, rebates (hidden fees), unscrupulous lenders or contractors conspire to take unfair advantage of borrowers and especially sub-prime borrowers.
The servicer should provide for escrow deposit accounts to be made available to borrowers with blemished credit records for monthly deposit of funds to pay taxes, ground rents, mortgage insurance premiums, etc. to avoid additional risk of default for the borrower.
Consumer Protection Against Predatory Practices
Because very few borrowers understand how mortgage prices are determined and affected by variables such as the borrower’s credit, the type of property, interest rate, fees, points, rebates (hidden fees), unscrupulous lenders or contractors conspire to take unfair advantage of borrowers and especially sub-prime borrowers.
HOEPA
The Home Owners Equity Protection Act (HOEPA) of 1994 was enacted to help prevent predatory lending practices. It imposes disclosure requirements and creates Consumer remedies in connection with high-cost mortgages that are 8 percent or more above prime. However, HOEPA only covers about 2 to 10 percent of sub-prime notes. Violations of HOEPA's disclosure provisions and inclusion of prohibited contract terms allows borrowers to collect for actual damages, statutory damages and attorney fees and costs. HOEPA violations are also subject to the Truth in Lending Act’s (TILA) extended right that Consumers may rescind the loan. Assignees of loans covered under HOEPA are also liable for all claims and defenses with respect to the assigned mortgage that the Consumer could assert against the originator of the loan, except for certain limitations on damages.
The Home Owners Equity Protection Act (HOEPA) of 1994 was enacted to help prevent predatory lending practices. It imposes disclosure requirements and creates Consumer remedies in connection with high-cost mortgages that are 8 percent or more above prime. However, HOEPA only covers about 2 to 10 percent of sub-prime notes. Violations of HOEPA's disclosure provisions and inclusion of prohibited contract terms allows borrowers to collect for actual damages, statutory damages and attorney fees and costs. HOEPA violations are also subject to the Truth in Lending Act’s (TILA) extended right that Consumers may rescind the loan. Assignees of loans covered under HOEPA are also liable for all claims and defenses with respect to the assigned mortgage that the Consumer could assert against the originator of the loan, except for certain limitations on damages.
The Truth in Lending Act (TILA)
Under the Truth in Lending Act a homeowner has a right to rescind a non-purchase money loan which is secured by the homeowner’s primary residence. Home equity loans and home improvement loans, whether first or second mortgages, are also included so long as the proceeds of the loan were not used to purchase the home. The homeowner must be provided with a notice of the right to cancel. The homeowner has a right to rescind the loan for up to three business days after the transaction and an extended right to rescind the loan for up to three years if the homeowner was not given a notice of the right to cancel the loan when it was made, or the borrower failed to receive the notice and all the required disclosure disclosures. TILA also requires lenders to disclose the terms of loans in a manner that is understandable to the borrower.
Real Estate Settlement and Procedures Act (RESPA)
The Real Estate Settlement and Procedures Act (RESPA) prohibit the payments of unearned fees and kickbacks. A lender kickback to a mortgage broker for making a referral is forbidden. The remedy available to the borrower for violation of this provision is treble damages and attorney fees. At the time of the closing of the loan, the Borrower must be given a HUD-1 closing statement explaining the fees and the lender must disclose their fees in writing to the borrower prior to the borrower signing final loan documents.
Under the Truth in Lending Act a homeowner has a right to rescind a non-purchase money loan which is secured by the homeowner’s primary residence. Home equity loans and home improvement loans, whether first or second mortgages, are also included so long as the proceeds of the loan were not used to purchase the home. The homeowner must be provided with a notice of the right to cancel. The homeowner has a right to rescind the loan for up to three business days after the transaction and an extended right to rescind the loan for up to three years if the homeowner was not given a notice of the right to cancel the loan when it was made, or the borrower failed to receive the notice and all the required disclosure disclosures. TILA also requires lenders to disclose the terms of loans in a manner that is understandable to the borrower.
Real Estate Settlement and Procedures Act (RESPA)
The Real Estate Settlement and Procedures Act (RESPA) prohibit the payments of unearned fees and kickbacks. A lender kickback to a mortgage broker for making a referral is forbidden. The remedy available to the borrower for violation of this provision is treble damages and attorney fees. At the time of the closing of the loan, the Borrower must be given a HUD-1 closing statement explaining the fees and the lender must disclose their fees in writing to the borrower prior to the borrower signing final loan documents.
State Laws
Many of the abusive practices and loan terms found in predatory mortgage loans can be challenged by Consumers under their state unfair and deceptive acts and practices as long as the practices are covered under the state laws. This would include claims for practices such as repeated and unnecessary refinancing ("flipping") of loans, making unaffordable loans to Consumers to acquire the equity in the property, or misrepresenting the loan terms. Excessive fees and costs, and other terms that are clearly disadvantageous to the borrower may be also challenged as well.
Many of the abusive practices and loan terms found in predatory mortgage loans can be challenged by Consumers under their state unfair and deceptive acts and practices as long as the practices are covered under the state laws. This would include claims for practices such as repeated and unnecessary refinancing ("flipping") of loans, making unaffordable loans to Consumers to acquire the equity in the property, or misrepresenting the loan terms. Excessive fees and costs, and other terms that are clearly disadvantageous to the borrower may be also challenged as well.
At least 30 states have some sort of predatory lending law, with the strongest laws being in Arkansas, California, Georgia, Illinois, Massachusetts, New Jersey, New Mexico, New York, North Carolina, South Carolina, and West Virginia.
Additional Laws In addition, warranty law, usury, unconscionability, breach of fiduciary duty, fraud, and contract law all have remedies which apply in abusive loans and predatory practices. Other laws, including the Equal Credit Opportunity Act and the Fair Housing Act, may also been raised as a remedy for Consumers against these practices.
Also with the government’s current pressure on lenders and other consumer groups helping to curb predatory loan practices by making the Consumer more aware and prosecuting lenders that violate the rules and laws, victims do have a voice that is stronger now than ever.
Protect Yourself from Mortgage Loan Fraud
You hear a lot of mortgage broker fraud in the news these days. Especially since the sub-prime mortgage fiasco. Many borrowers were put into loans they simply could not afford based solely upon their credit history and undocumented income. When these adjustable rate mortgages reset to higher interest limits, the borrowers simply could not afford to make the payments at the new rate. For awhile, the sub-prime loans were not an issue because the real estate market was appreciating at such a fast pace that borrowers could either refinance to a lower interest rate or sell their home for a profit and pay off the existing mortgage. However the last two years, the market basically crashed with the bubble bursting in 2007, these homeowners had no equity in their property, and could not refinance or sell their homes. As a result, a record number of foreclosures and short sales started occurring between 2008 to current.
You hear a lot of mortgage broker fraud in the news these days. Especially since the sub-prime mortgage fiasco. Many borrowers were put into loans they simply could not afford based solely upon their credit history and undocumented income. When these adjustable rate mortgages reset to higher interest limits, the borrowers simply could not afford to make the payments at the new rate. For awhile, the sub-prime loans were not an issue because the real estate market was appreciating at such a fast pace that borrowers could either refinance to a lower interest rate or sell their home for a profit and pay off the existing mortgage. However the last two years, the market basically crashed with the bubble bursting in 2007, these homeowners had no equity in their property, and could not refinance or sell their homes. As a result, a record number of foreclosures and short sales started occurring between 2008 to current.
The government has been investigating mortgage loan broker fraud recently. The cause in many cases is simply greed. Although there are a large number of criminals and scam artists that make their living out of committing mortgage fraud against innocent homeowners as well.
There are ways to protect yourself so that you are not a victim of mortgage fraud or predatory loan practices.
Only Deal with a Reputable Lender or Mortgage Broker
You should only deal with a reputable lender or mortgage broker when obtaining a mortgage loan. Get a recommendation from a family member, friend or your Realtor. Using a trusted lender is the number one way to protect yourself against mortgage fraud.
Hire a Real Estate Attorney
Talking to securities fraud attorneys or a securities fraud law firm to review your loan documents before you sign them to avoid any fraudulent practices in the very beginning. It’s easier to correct a mistake before it happens. Or if you report mortgage broker fraud and your attorney suspects the claim is true, then you will need to deal with another lender.
Talking to securities fraud attorneys or a securities fraud law firm to review your loan documents before you sign them to avoid any fraudulent practices in the very beginning. It’s easier to correct a mistake before it happens. Or if you report mortgage broker fraud and your attorney suspects the claim is true, then you will need to deal with another lender.
Violations of Truth and Lending Act or RESPA
Your attorney will do a forensic loan audit and review. If your attorney finds that the lender has violated the truth and lending laws or RESPA (Real Estate Settlement Procedures Act) disclosure laws, then you do not need to go ahead with the loan. If you have already signed the papers you have three days to rescind, but the law can be enforced for up to three years after you signed the papers if there is a foreclosure action, and there were truth and lending violations found during your forensic loan audit.
Your attorney will do a forensic loan audit and review. If your attorney finds that the lender has violated the truth and lending laws or RESPA (Real Estate Settlement Procedures Act) disclosure laws, then you do not need to go ahead with the loan. If you have already signed the papers you have three days to rescind, but the law can be enforced for up to three years after you signed the papers if there is a foreclosure action, and there were truth and lending violations found during your forensic loan audit.
Don’t Buy a House Unless You Can Afford It
Figure out how much you can comfortably afford to pay for your mortgage payment, taxes and insurance without having to sacrifice your life style. Make a list of your income and your debts, and talk to a reputable mortgage broker who will pre-qualify you. If you have any doubts, then wait and try and save a larger down payment, or improve your credit score and trying again in 6 months or a year. A good rule of thumb is that your house payment should not exceed 31% of your debts.
Figure out how much you can comfortably afford to pay for your mortgage payment, taxes and insurance without having to sacrifice your life style. Make a list of your income and your debts, and talk to a reputable mortgage broker who will pre-qualify you. If you have any doubts, then wait and try and save a larger down payment, or improve your credit score and trying again in 6 months or a year. A good rule of thumb is that your house payment should not exceed 31% of your debts.
Source: LawFirms.com
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