Monday, March 30, 2015

Mortgage Fraud Schemes Are Common and Varied

In Ohio, as in many other states, mortgage fraud schemes are prevalent, especially in today’s world of distant lending and mortgage brokering practices.

Q:       What is mortgage fraud?
A:        Mortgage fraud can include many different schemes such as falsifying loan applications, using straw buyers (having an individual complete a transaction for someone who may not qualify for a loan or is barred from entering into the loan), making false or inflated appraisals, accepting kickbacks and using fictitious identities.
            One type of mortgage fraud is called “fraud for housing, or “fraud for property,” and is typically committed by borrowers. In this type of fraud scheme, a borrower may provide false information about employment, income or assets in order to qualify for a loan. For example, a borrower may fabricate income or falsify assets in mortgage application documents in order to qualify for a larger loan than he or she can afford.
            The second area of mortgage fraud is called “fraud for profit.” Sometimes known as industry insider fraud, this is the most common type of mortgage fraud. These schemes are often more intricate and involve a group of people, each of whom plays a different role. 

Q:       Who is typically involved in mortgage fraud schemes?
A:        According to, industry insiders are estimated to be involved in 80 percent of all reported mortgage fraud cases. Most “fraud for profit” is initiated by a seller, lender, real estate broker or closing agent (or all of them acting together). For example, mortgage brokers may partner with a loan processer or collude with an appraiser to inflate a property’s value. Appraisers may also play a part in fraud for profit, either by being gullible or bribable. Appraisers may expect to receive a kickback or even simply a steady stream of business. 
            Typically borrowers are unaware of “for profit” schemes, although they can be involved.  For example, a borrower may “flip” or help “flop” a piece of real estate or launder money. As long as the borrower is walking away with some sort of profit fraudulently obtained, the borrower may potentially be prosecuted for aiding and abetting a fraud.

Q:       How do incidents of mortgage fraud typically get investigated?
A:        Mortgage fraud investigations are generally conducted after government investigators become aware of mortgage fraud after analyzing Suspicious Activity Reports (SARs). SARs are filed by federally insured financial institutions, many of which are uncovered and reported during foreclosure proceedings.  Most mortgage fraud investigations (once triggered by the filed SARs) are investigated by both state and federal authorities who use shared efforts such as multi-jurisdictional task forces.

Q:       What happens if someone is convicted of mortgage fraud?
A:        Federally and in Ohio, mortgage fraud crimes are prosecuted under a variety of statutes (there is no specific mortgage fraud criminal statute per se). Federal prosecutors may look to bank fraud, money laundering, wire fraud or falsification statutes, while state prosecutors may look to various theft offenses.  The economic loss or damage is determined through the culmination of the loan transaction and can quickly climb into the millions of dollars. Determining sentencing for someone associated with mortgage fraud takes into account monetary loss as well as the wrongdoer’s criminal history.
            Fraud for housing is rarely prosecuted. Instead, a borrower who used fraudulent methods to obtain a loan is penalized by losing the home and becoming a subprime borrower for the next four to seven years.

Q:       If I believe I may have information regarding a mortgage fraud scheme, or have questions about a certain transaction, what should I do?
A:        Speak with an attorney who practices in this area. An attorney will likely investigate to learn the details of the transaction and determine the best way for you to proceed. If your participation was not intentional, your attorney will assist you in separating yourself and your actions from those responsible for the scheme. If you are a professional (for example, a real estate agent), then your lawyer may engage an expert to show that you acted within your profession’s standards.

This “Law You Can Use” consumer information column was provided by the Ohio State Bar Association. It was prepared by Columbus attorney Karl H. Schneider, a partner of Maguire & Schneider, LLP. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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