Redemption / Strawman / Bond Fraud

Proponents of this scheme claim that the U.S. government or the Treasury Department control bank accounts—often referred to as “U.S. Treasury Direct Accounts”—for all U.S. citizens that can be accessed by submitting paperwork with state and federal authorities. Individuals promoting this scam frequently cite various discredited legal theories and may refer to the scheme as “Redemption,” “Strawman,” or “Acceptance for Value.” Trainers and websites will often charge large fees for “kits” that teach individuals how to perpetrate this scheme. They will often imply that others have had great success in discharging debt and purchasing merchandise such as cars and homes. Failures to implement the scheme successfully are attributed to individuals not following instructions in a specific order or not filing paperwork at correct times.

This scheme predominately uses fraudulent financial documents that appear to be legitimate. These documents are frequently referred to as “bills of exchange,” “promissory bonds,” “indemnity bonds,” “offset bonds,” “sight drafts,” or “comptrollers warrants.” In addition, other official documents are used outside of their intended purpose, like IRS forms 1099, 1099-OID, and 8300. This scheme frequently intermingles legal and pseudo legal terminology in order to appear lawful. Notaries may be used in an attempt to make the fraud appear legitimate. Often, victims of the scheme are instructed to address their paperwork to the U.S. Secretary of the Treasury.

Tips for Avoiding Redemption/Strawman/Bond Fraud:

* Be wary of individuals or groups selling kits that they claim will inform you on to access secret bank accounts.
* Be wary of individuals or groups proclaiming that paying federal and/or state income tax is not necessary.
* Do not believe that the U.S. Treasury controls bank accounts for all citizens.
* Be skeptical of individuals advocating that speeding tickets, summons, bills, tax notifications, or similar documents can be resolved by writing “acceptance for value” on them.
* If you know of anyone advocating the use of property liens to coerce acceptance of this scheme, contact your local FBI office.

Advance Fee Schemes

An advance fee scheme occurs when the victim pays money to someone in anticipation of receiving something of greater value—such as a loan, contract, investment, or gift—and then receives little or nothing in return.

The variety of advance fee schemes is limited only by the imagination of the con artists who offer them. They may involve the sale of products or services, the offering of investments, lottery winnings, “found money,” or many other “opportunities.” Clever con artists will offer to find financing arrangements for their clients who pay a “finder’s fee” in advance. They require their clients to sign contracts in which they agree to pay the fee when they are introduced to the financing source. Victims often learn that they are ineligible for financing only after they have paid the “finder” according to the contract. Such agreements may be legal unless it can be shown that the “finder” never had the intention or the ability to provide financing for the victims.

Tips for Avoiding Advanced Fee Schemes:

If the offer of an “opportunity” appears too good to be true, it probably is. Follow common business practice. For example, legitimate business is rarely conducted in cash on a street corner.

* Know who you are dealing with. If you have not heard of a person or company that you intend to do business with, learn more about them. Depending on the amount of money that you plan on spending, you may want to visit the business location, check with the Better Business Bureau, or consult with your bank, an attorney, or the police.
* Make sure you fully understand any business agreement that you enter into. If the terms are complex, have them reviewed by a competent attorney.
* Be wary of businesses that operate out of post office boxes or mail drops and do not have a street address. Also be suspicious when dealing with persons who do not have a direct telephone line and who are never in when you call, but always return your call later.
* Be wary of business deals that require you to sign nondisclosure or non-circumvention agreements that are designed to prevent you from independently verifying the bona fides of the people with whom you intend to do business. Con artists often use non-circumvention agreements to threaten their victims with civil suit if they report their losses to law enforcement.

For more information:
- Work-at-Home Advance Fee Scheme
- Cancer Research Advance Fee Scheme

Identity Theft

Identity theft occurs when someone assumes your identity to perform a fraud or other criminal act. Criminals can get the information they need to assume your identity from a variety of sources, including by stealing your wallet, rifling through your trash, or by compromising your credit or bank information. They may approach you in person, by telephone, or on the Internet and ask you for the information.

The sources of information about you are so numerous that you cannot prevent the theft of your identity. But you can minimize your risk of loss by following a few simple hints.

Tips for Avoiding Identity Theft:

* Never throw away ATM receipts, credit statements, credit cards, or bank statements in a usable form.
* Never give your credit card number over the telephone unless you make the call.
* Reconcile your bank account monthly, and notify your bank of discrepancies immediately.
* Keep a list of telephone numbers to call to report the loss or theft of your wallet, credit cards, etc.
* Report unauthorized financial transactions to your bank, credit card company, and the police as soon as you detect them.
* Review a copy of your credit report at least once each year. Notify the credit bureau in writing of any questionable entries and follow through until they are explained or removed.
* If your identity has been assumed, ask the credit bureau to print a statement to that effect in your credit report.
* If you know of anyone who receives mail from credit card companies or banks in the names of others, report it to local or federal law enforcement authorities.

Investment-Related Scams

Letter of Credit Fraud

Legitimate letters of credit are never sold or offered as investments. They are issued by banks to ensure payment for goods shipped in connection with international trade. Payment on a letter of credit generally requires that the paying bank receive documentation certifying that the goods ordered have been shipped and are en route to their intended destination. Letters of credit frauds are often attempted against banks by providing false documentation to show that goods were shipped when, in fact, no goods or inferior goods were shipped.

Other letter of credit frauds occur when con artists offer a “letter of credit” or “bank guarantee” as an investment wherein the investor is promised huge interest rates on the order of 100 to 300 percent annually. Such investment “opportunities” simply do not exist. (See Prime Bank Notes for additional information.)

Tips for Avoiding Letter of Credit Fraud:

* If an “opportunity” appears too good to be true, it probably is.
* Do not invest in anything unless you understand the deal. Con artists rely on complex transactions and faulty logic to “explain” fraudulent investment schemes.
* Do not invest or attempt to “purchase” a “letter of credit.” Such investments simply do not exist.
* Be wary of any investment that offers the promise of extremely high yields.
* Independently verify the terms of any investment that you intend to make, including the parties involved and the nature of the investment.

Prime Bank Note Fraud

International fraud artists have invented an investment scheme that supposedly offers extremely high yields in a relatively short period of time. In this scheme, they claim to have access to “bank guarantees” that they can buy at a discount and sell at a premium. By reselling the “bank guarantees” several times, they claim to be able to produce exceptional returns on investment. For example, if $10 million worth of “bank guarantees” can be sold at a two percent profit on 10 separate occasions—or “traunches”—the seller would receive a 20 percent profit. Such a scheme is often referred to as a “roll program.”

To make their schemes more enticing, con artists often refer to the “guarantees” as being issued by the world’s “prime banks,” hence the term “prime bank guarantees.” Other official sounding terms are also used, such as “prime bank notes” and “prime bank debentures.” Legal documents associated with such schemes often require the victim to enter into non-disclosure and non-circumvention agreements, offer returns on investment in “a year and a day”, and claim to use forms required by the International Chamber of Commerce (ICC). In fact, the ICC has issued a warning to all potential investors that no such investments exist.

The purpose of these frauds is generally to encourage the victim to send money to a foreign bank, where it is eventually transferred to an off-shore account in the control of the con artist. From there, the victim’s money is used for the perpetrator’s personal expenses or is laundered in an effort to make it disappear.

While foreign banks use instruments called “bank guarantees” in the same manner that U.S. banks use letters of credit to insure payment for goods in international trade, such bank guarantees are never traded or sold on any kind of market.

Tips for Avoiding Prime Bank Note Fraud:

* Think before you invest in anything. Be wary of an investment in any scheme, referred to as a “roll program,” that offers unusually high yields by buying and selling anything issued by “prime banks.”
* As with any investment, perform due diligence. Independently verify the identity of the people involved, the veracity of the deal, and the existence of the security in which you plan to invest.
* Be wary of business deals that require non-disclosure or non-circumvention agreements that are designed to prevent you from independently verifying information about the investment.

“Ponzi’ Schemes

“Ponzi” schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artist pays “dividends” to initial investors using the funds of subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”

This type of fraud is named after its creator—Charles Ponzi of Boston, Massachusetts. In the early 1900s, Ponzi launched a scheme that guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial backers, the scheme dissolved when he was unable to pay later investors.

Tips for Avoiding Ponzi Schemes:

* Be careful of any investment opportunity that makes exaggerated earnings claims.
* Exercise due diligence in selecting investments and the people with whom you invest—in other words, do your homework.
* Consult an unbiased third party—like an unconnected broker or licensed financial advisor—before investing.

For more information:
- Bernie Madoff Case
- Stanford Case
- Wholesale Grocery Distribution Ponzi Scheme
- ATM Ponzi Scheme
- Victims Turn Tables with Ponzi Scheme

Pyramid Schemes

As in Ponzi schemes, the money collected from newer victims of the fraud is paid to earlier victims to provide a veneer of legitimacy. In pyramid schemes, however, the victims themselves are induced to recruit further victims through the payment of recruitment commissions.

More specifically, pyramid schemes—also referred to as franchise fraud or chain referral schemes—are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. At the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out.

Tips for Avoiding Pyramid Schemes:

* Be wary of “opportunities” to invest your money in franchises or investments that require you to bring in subsequent investors to increase your profit or recoup your initial investment.
* Independently verify the legitimacy of any franchise or investment before you invest.

Market Manipulation or “Pump and Dump” Fraud

This scheme—commonly referred to as a “pump and dump”—creates artificial buying pressure for a targeted security, generally a low-trading volume issuer in the over-the-counter securities market largely controlled by the fraud perpetrators. This artificially increased trading volume has the effect of artificially increasing the price of the targeted security (i.e., the “pump”), which is rapidly sold off into the inflated market for the security by the fraud perpetrators (i.e., the “dump”); resulting in illicit gains to the perpetrators and losses to innocent third party investors. Typically, the increased trading volume is generated by inducing unwitting investors to purchase shares of the targeted security through false or deceptive sales practices and/or public information releases.

A modern variation on this scheme involves largely foreign-based computer criminals gaining unauthorized access to the online brokerage accounts of unsuspecting victims in the United States. These victim accounts are then utilized to engage in coordinated online purchases of the targeted security to affect the pump portion of a manipulation, while the fraud perpetrators sell their pre-existing holdings in the targeted security into the inflated market to complete the dump.

Tips for Avoiding Market Manipulation Fraud:

* Don’t believe the hype.
* Find out where the stock trades.
* Independently verify claims.
* Research the opportunity.
* Beware of high-pressure pitches.
* Always be skeptical.

For more information:
- Operation Shore Shells investigation

Telemarketing Fraud

When you send money to people you do not know personally or give personal or financial information to unknown callers, you increase your chances of becoming a victim of telemarketing fraud.

Here are some warning signs of telemarketing fraud—what a caller may tell you:

* “You must act ‘now’ or the offer won’t be good.”
* “You’ve won a ‘free’ gift, vacation, or prize.” But you have to pay for “postage and handling” or other charges.
* “You must send money, give a credit card or bank account number, or have a check picked up by courier.” You may hear this before you have had a chance to consider the offer carefully.
* “You don’t need to check out the company with anyone.” The callers say you do not need to speak to anyone including your family, lawyer, accountant, local Better Business Bureau, or consumer protection agency.
* “You don’t need any written information about their company or their references.”
* “You can’t afford to miss this ‘high-profit, no-risk’ offer.”

If you hear these or similar “lines” from a telephone salesperson, just say “no thank you” and hang up the telephone.

Tips for Avoiding Telemarketing Fraud:

It’s very difficult to get your money back if you’ve been cheated over the telephone. Before you buy anything by telephone, remember:

* Don’t buy from an unfamiliar company. Legitimate businesses understand that you want more information about their company and are happy to comply.
* Always ask for and wait until you receive written material about any offer or charity. If you get brochures about costly investments, ask someone whose financial advice you trust to review them. But, unfortunately, beware—not everything written down is true.
* Always check out unfamiliar companies with your local consumer protection agency, Better Business Bureau, state attorney general, the National Fraud Information Center, or other watchdog groups. Unfortunately, not all bad businesses can be identified through these organizations.
* Obtain a salesperson’s name, business identity, telephone number, street address, mailing address, and business license number before you transact business. Some con artists give out false names, telephone numbers, addresses, and business license numbers. Verify the accuracy of these items.
* Before you give money to a charity or make an investment, find out what percentage of the money is paid in commissions and what percentage actually goes to the charity or investment.
* Before you send money, ask yourself a simple question. “What guarantee do I really have that this solicitor will use my money in the manner we agreed upon?”
* Don’t pay in advance for services. Pay services only after they are delivered.
* Be wary of companies that want to send a messenger to your home to pick up money, claiming it is part of their service to you. In reality, they are taking your money without leaving any trace of who they are or where they can be reached.
* Always take your time making a decision. Legitimate companies won’t pressure you to make a snap decision.
* Don’t pay for a “free prize.” If a caller tells you the payment is for taxes, he or she is violating federal law.
* Before you receive your next sales pitch, decide what your limits are—the kinds of financial information you will and won’t give out on the telephone.
* Be sure to talk over big investments offered by telephone salespeople with a trusted friend, family member, or financial advisor. It’s never rude to wait and think about an offer.
* Never respond to an offer you don’t understand thoroughly.
* Never send money or give out personal information such as credit card numbers and expiration dates, bank account numbers, dates of birth, or social security numbers to unfamiliar companies or unknown persons.
* Be aware that your personal information is often brokered to telemarketers through third parties.
* If you have been victimized once, be wary of persons who call offering to help you recover your losses for a fee paid in advance.
* If you have information about a fraud, report it to state, local, or federal law enforcement agencies.

For More information:
- Telemarketing Fraud Targeting Seniors

Nigerian Letter or “419” Fraud

Nigerian letter frauds combine the threat of impersonation fraud with a variation of an advance fee scheme in which a letter mailed from Nigeria offers the recipient the “opportunity” to share in a percentage of millions of dollars that the author—a self-proclaimed government official—is trying to transfer illegally out of Nigeria. The recipient is encouraged to send information to the author, such as blank letterhead stationery, bank name and account numbers, and other identifying information using a fax number provided in the letter. Some of these letters have also been received via e-mail through the Internet. The scheme relies on convincing a willing victim, who has demonstrated a “propensity for larceny” by responding to the invitation, to send money to the author of the letter in Nigeria in several installments of increasing amounts for a variety of reasons.

Payment of taxes, bribes to government officials, and legal fees are often described in great detail with the promise that all expenses will be reimbursed as soon as the funds are spirited out of Nigeria. In actuality, the millions of dollars do not exist, and the victim eventually ends up with nothing but loss. Once the victim stops sending money, the perpetrators have been known to use the personal information and checks that they received to impersonate the victim, draining bank accounts and credit card balances. While such an invitation impresses most law-abiding citizens as a laughable hoax, millions of dollars in losses are caused by these schemes annually. Some victims have been lured to Nigeria, where they have been imprisoned against their will along with losing large sums of money. The Nigerian government is not sympathetic to victims of these schemes, since the victim actually conspires to remove funds from Nigeria in a manner that is contrary to Nigerian law. The schemes themselves violate section 419 of the Nigerian criminal code, hence the label “419 fraud.”

Tips for Avoiding Nigerian Letter or “419″ Fraud:

* If you receive a letter from Nigeria asking you to send personal or banking information, do not reply in any manner. Send the letter to the U.S. Secret Service, your local FBI office, or the U.S. Postal Inspection Service. You can also register a complaint with the Federal Trade Commission’s Complaint Assistant.
* If you know someone who is corresponding in one of these schemes, encourage that person to contact the FBI or the U.S. Secret Service as soon as possible.
* Be skeptical of individuals representing themselves as Nigerian or foreign government officials asking for your help in placing large sums of money in overseas bank accounts.
* Do not believe the promise of large sums of money for your cooperation.
* Guard your account information carefully.

For More information:
- Related Online Rental Ads Scheme
- Related Spanish Lottery Scam

Health Care Fraud or Health Insurance Fraud

Medical Equipment Fraud:

Equipment manufacturers offer “free” products to individuals. Insurers are then charged for products that were not needed and/or may not have been delivered.

“Rolling Lab” Schemes:

Unnecessary and sometimes fake tests are given to individuals at health clubs, retirement homes, or shopping malls and billed to insurance companies or Medicare.

Services Not Performed:

Customers or providers bill insurers for services never rendered by changing bills or submitting fake ones.

Medicare Fraud:

Medicare fraud can take the form of any of the health insurance frauds described above. Senior citizens are frequent targets of Medicare schemes, especially by medical equipment manufacturers who offer seniors free medical products in exchange for their Medicare numbers. Because a physician has to sign a form certifying that equipment or testing is needed before Medicare pays for it, con artists fake signatures or bribe corrupt doctors to sign the forms. Once a signature is in place, the manufacturers bill Medicare for merchandise or service that was not needed or was not ordered.

Tips for Avoiding Health Care Fraud or Health Insurance Fraud:

* Never sign blank insurance claim forms.
* Never give blanket authorization to a medical provider to bill for services rendered.
* Ask your medical providers what they will charge and what you will be expected to pay out-of-pocket.
* Carefully review your insurer’s explanation of the benefits statement. Call your insurer and provider if you have questions.
* Do not do business with door-to-door or telephone salespeople who tell you that services of medical equipment are free.
* Give your insurance/Medicare identification only to those who have provided you with medical services.
* Keep accurate records of all health care appointments.
* Know if your physician ordered equipment for you.

For more information:
- Heath Care Fraud webpage

* Analysis of available law enforcement and industry resources indicates that the top ten mortgage fraud areas are California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, and Utah. Other areas significantly affected by mortgage fraud include Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina, Tennessee, and Virginia.
* There is a strong correlation between mortgage fraud and loans which result in default and foreclosure.

Emerging Schemes

* Recent statistics suggest that escalating foreclosures provide criminals with the opportunity to exploit and defraud vulnerable homeowners seeking financial guidance.
* Perpetrators are exploiting the home equity line of credit (HELOC) application process to conduct mortgage fraud, check fraud, and potentially money laundering-related activity.

FBI and Industry Respond to Escalating Mortgage Fraud

* The FBI is proactively working with the mortgage industry in an effort to curb mortgage fraud crimes. The FBI signed a memorandum of agreement with the MBA to promote the FBI’s Mortgage Fraud Warning Notice.

Introduction

The Prieston Group, a risk management solutions provider that administers an insurance product covering losses due to fraud and misrepresentation, calculated that losses attributed to mortgage fraud will most likely reach $4.2 billion for 2006. This figure does not take into account another estimated $1.2 billion spent on fraud prevention tools. – The Prieston Group, 2006 Data, 16 February 2007,and 2 April 2007.

Mortgage Fraud is defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan. Although no central repository collects all mortgage fraud complaints, statistics from multiple sources indicate that mortgage fraud is on the rise. Some industry explanations for this increase point to recent high mortgage loan origination volumes that strained quality control efforts, the persistent desire of mortgage lenders to hasten the mortgage loan process, the escalation of home prices in recent years, and the introduction of non-traditional loans which contain fewer quality control restraints such as low documentation and no documentation loans1.

Mortgage loan fraud is divided into two categories: fraud for property and fraud for profit. Fraud for property/housing entails minor misrepresentations by the applicant solely for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. It is this second category that is of most concern to law enforcement and the mortgage industry. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation. Recent events likely resulted in an increase in mortgage fraud as higher housing prices tempted borrowers to commit fraud for property in order to qualify for a mortgage loan. Also, mortgage fraud perpetrators likely seized the opportunity to take advantage of the relaxed lending practices to commit fraud for profit.

The most common form of mortgage fraud is illegal property flipping which entails false appraisals and other fraudulent loan documents (see figure 1). Combating mortgage fraud effectively requires the cooperation of law enforcement and industry entities. No single regulatory agency is charged with monitoring this crime. The FBI, Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), Internal Revenue Service, Postal Inspection Service, and state and local agencies are among those investigating mortgage fraud.

Mortgage fraud is a relatively low-risk, high-yield criminal activity that tempts many. However, according a May 2006 Financial Crimes Enforcement Network (FinCEN) report, finance-related occupations, including accountants, mortgage brokers, and lenders, were the most common suspect occupations associated with reported mortgage fraud2. Perpetrators in these occupations are familiar with the mortgage loan process and therefore know how to exploit vulnerabilities in the system.

Victims of mortgage fraud may include borrowers, mortgage industry entities, and those living in the neighborhoods affected by mortgage fraud. Lenders are plagued with high foreclosure costs, broker commissions, reappraisals, attorney fees, rehabilitation costs, and other related expenses when a mortgage fraud is committed3. As properties affected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When property values increase, property taxes increase as well. Legitimate homeowners also find it difficult to sell their homes as surrounding properties affected by fraud deteriorate.

During boom periods, high mortgage loan volume impacts expedited quality control efforts which often focus on production. Therefore, perpetrators may submit loans based on fraudulent information anticipating that the bogus information will be overlooked. On the other hand, loan officers, brokers, and others in the industry are paid by commission and may be tempted to approve questionable loans when the housing market is down to maintain current levels of income.

Analysis of mortgage originations indicates a decrease in demand. As a result of the declining housing market, mortgage fraud perpetrators may take advantage of eager loan originators attempting to generate loans for commission. Mortgage loan originations, including purchases and refinances declined during 2006 across the United States. The Mortgage Bankers Association (MBA) estimates that mortgage loan originations will reach $2.28 trillion during 2007 (see figure 2)4. According to an MBA December 2006 report, total home sales during 2006 decreased by approximately 10 percent from 2005 sales. New home sales declined by 17 percent and existing home sales dipped by 8 percent. In response to a decrease in demand for housing, builders reduced single-family starts (through November 2006) which were 14 percent lower than during the same time period in 2005. The MBA estimates that the oversupply of housing will continue to affect new home construction, home sales, and home prices until mid-20075.

Top Areas for Mortgage Fraud

Data was compiled and analyzed from law enforcement and industry sources to determine those areas of the country most affected by mortgage fraud during 2006. Information from the FBI, HUD-OIG, FinCEN, Mortgage Asset Research Institute (MARI), Federal National Mortgage Association (Fannie Mae), RealtyTrac Inc. (foreclosure statistics), and Radian Guaranty Inc., indicate that the top ten mortgage fraud areas for 2006 were California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, and Utah. Other areas significantly affected by mortgage fraud include Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina, Tennessee, and Virginia (see figure 3).

Analysis of available information indicates that mortgage fraud is most concentrated in the north central region of the United States. The north central region is followed by the southeast and west regions.

Regional analysis of FBI pending mortgage fraud-related investigations as of FY 2006 reveals that the north central region of the United States led the nation with the most pending investigations. The north central region was followed by the southeast, west, south central, and northeast, respectively (see figure 4).

The aggregate amount of ARM loans containing fraudulent misrepresentations is unknown. However, since mortgage fraud perpetrators hope to inflate the value of their properties and quickly sell them, they would likely gravitate towards mortgage loans that offered low and short-term interest rates such as those offered by ARMs.

Delinquency, Default, and Foreclosure: Potential Fraud Indicators

Mortgage loans based on fraudulent information usually result in delinquency, default, or foreclosure in a bear market. According to the MBA, both delinquency and foreclosures rates increased during 2006 and were largely concentrated in adjustable rate mortgage (ARM) loans, especially sub-prime ARMs. This is partly attributable to the recent rise in interest rates, placing a strain on ARMs borrowers6.

BasePoint Analytics, a fraud analytics company, analyzed more than 3 million loans and found that between 30 and 70 percent of early payment defaults (EPDs) are linked to significant misrepresentations in the original loan applications7. Radian Guaranty, Inc. is a leading provider of mortgage insurance which protects lenders against loan default. Of the top ten states Radian Guaranty Inc. ranked highest for mortgage fraud, seven of them also ranked in the company’s top ten for EPDs. This suggests that EPDs are a good mortgage fraud indicator.

During 2006 there were more than 1.2 million foreclosure filings nationally, which represents a 42 percent increase from 2005 figures. The foreclosure rate for 2006 was one foreclosure filing for every 92 households8. Foreclosures for 2006 surpassed foreclosures for 2005 during every month of the year9.

Foreclosure Fraud

Recent statistics suggest that escalating foreclosures provide criminals with the opportunity to exploit and defraud vulnerable homeowners seeking financial guidance. The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This “foreclosure rescue” often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal enrichment.

While foreclosure scams vary, they may be used in combination with other fraudulent schemes. For instance, perpetrators may view foreclosure-rescue scams as a new method for fraudulently acquiring properties to facilitate illegal property-flipping and equity-skimming.

Home Equity Lines of Credit

According to a DOJ press release, Mi Su Yi and her husband, Paul Amorello, were sentenced in California in July 2006 for operating a $3 million bust-out scheme involving business lines of credit and HELOCs. The couple accessed lines of credit that had been obtained by others and paid the balances with worthless checks. They subsequently withdrew cash from the lines of credit before the checks were returned for insufficient funds. The couple laundered their proceeds through bank accounts opened under three false identities. In an attempt to avoid detection, the couple deposited cash amounts of less than $10,000 into these accounts. -US DOJ, “New Jersey Residents Sentenced to Prison for Running a $3 Million ‘Bust-Out’ Scheme,” Press Release, 25 July 2006, available at http://www.usdoj.gov

Individuals and criminal groups are exploiting the home equity line of credit (HELOC) application process to conduct multiple-funding mortgage fraud schemes, check fraud schemes, and potentially money laundering-related activity. HELOCs differ from standard home equity loans because the homeowner may borrow against the line of credit over a period of time using a checkbook or credit card. HELOCs are aggressively marketed by lenders as an easy, fast, and inexpensive means to obtain funds. HELOC funds are normally withdrawn on an as-needed basis to conduct home repairs or to pay bills, but fraud perpetrators may withdraw the entire amount within a short time period. Lenders typically focus on property equity prior to funding HELOCs. As such, many lenders do not demand a full property appraisal or a full property title search.

Perpetrators apply for multiple HELOCs to different lending institutions for a single property within a short time period. Prior to providing the funding, lenders conduct searches to determine if the property is encumbered by a lien. However, liens on a property may not be recorded for several days or months and thus cannot be immediately verified. Consequently, lenders do not discover that they hold a third, fourth, or fifth lien on a property (rather than the expected second lien) until later. The money obtained from the multiple HELOCs totals more than the original property purchase price, exceeding the out-of-pocket expenses incurred to secure the property.

Perpetrators conducting check fraud schemes may manipulate HELOC accounts and cause lenders to incur losses. For example, a perpetrator secures a HELOC and withdraws the entire allotted amount. A fraudulent check is then used to pay the balance owed on the HELOC. However, the perpetrator quickly withdraws the check amount from the HELOC before the bank realizes the check is worthless. When the check is returned for insufficient funds, the line of credit surpasses its maximum limit and the lender experiences a loss. HELOC accounts have also been used in common check frauds where perpetrators stole HELOC checks, fraudulently completed them, and deposited the funds into their own personal accounts.

HELOCs may also be used as a means of depositing and withdrawing laundered proceeds to further conceal the original funding source. As long as withdrawals from the HELOC do not exceed the line of credit limit, payments deposited into the account may be withdrawn later.

FBI and Industry Respond to Escalating Mortgage Fraud

The FBI is proactively working with the mortgage industry in an effort to curb mortgage fraud crimes. On March 8, 2007, the FBI signed a memorandum of agreement with the MBA to promote the FBI’s Mortgage Fraud Warning Notice. The Notice states that it is illegal to make any false statement regarding income, assets, debt or matters of identification, or to willfully inflate property value to influence the action of a financial institution. Under the agreement, the MBA and the FBI will make the notice available to mortgage lenders to use voluntarily as a means of educating consumers and mortgage professionals of the penalties and consequences of mortgage fraud.10

The unfolding foreclosure fraud crisis isn’t easy to understand, but here it is boiled down. Banks need proper documentation to repossess a home from a family. They need documents about everything from the family’s financial situation to its history of missed payments to its assets. And they need to verify that the information in those documents is correct. But they didn’t. They hired individuals to sign thousands of mortgage papers — legal affidavits, swearing to a judge that they had personal knowledge of the information within — without checking a thing.

Only 23 states require a judge to sign off on a foreclosure, but some banks are now stopping foreclosures in all 50 states. Moreover, they are halting the sale of foreclosed properties to new homeowners.

So who stands to gain? And who stands to lose? Let’s go through the possible impacts on major players and markets, one by one.

The winners:

* Homeowners undergoing foreclosure. Borrowers undergoing foreclosure might benefit from the various state moratoriums: The process is stalled for now, meaning some might have a few more months in their homes, and they know they will not be evicted without due process. States and federal agencies might also work with banks to provide principal write-downs and right-to-rent to ameliorate the foreclosure crisis in the meantime.

The losers:

* Recent purchasers of foreclosed homes. A nightmare scenario: Banks probably foreclosed on and evicted families without proper mortgage documentation. It is unclear whether or how courts might overturn those foreclosures. (One expert I spoke with said it would be more likely that the bank would have to offer some sort of restitution to the evicted family, but nobody really knows.) What if you recently bought one of those houses? There’s a whole lot of uncertainty for you, right now.
* The housing market. The fraud crisis looks certain to prolong the foreclosure crisis — dragging out how long families undergoing foreclosure will remain in limbo, and preventing banks from clearing properties off of their books. It seems possible that the foreclosure fraud crisis will weaken an already-weak housing market.
* The banks and investors. This could be a complete catastrophe. For a detailed but clear explanation of the various liabilities, see Mike Konczal’s description of who owns what and who stands to lose — and an explanation of why this might create a new too-big-to-fail scenario. Rep. Brad Miller (D-N.C.) also provided a clear explanation to The Washington Post yesterday:

There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

A little of each:

* Communities with concentrations of homes in foreclosure. Good news and bad news. On the one hand, families should be able to stay in their homes until the banks and Washington work out the foreclosure fraud crisis. That will benefit communities with lots of families undergoing foreclosure. On the other hand, neighborhoods with high concentrations of bank-owned properties for sale will see a lot of homes remain vacant, pulled off of the market.
* The courts. State attorney generals — Beau Biden in Delaware, Richard Cordray in Ohio, Tom Miller in Iowa and many others — are going hard after the banks. This looks to be just the first wave of what might be thousands of cases for judges to handle. Many housing advocates argue that judges should have had a more prominent role in foreclosure decisions before, anyway — and this might give new life to cramdown legislation in Washington. But the scandal certainly has the potential to swamp courts and cost billions in legal fees. In that sense, lawyers might be the clearest winner from the whole thing thus far.

By Annie Lowrey

The U.S. Attorney’s Office for the Northern District of Alabama is currently prosecuting two mortgage fraud rings that have affected 125 properties in the Birmingham Metro Area and caused nearly $4 million in losses to banks and lending institutions, U.S. Attorney Joyce White Vance announced.

Working as part of Operation Stolen Dreams, the national mortgage fraud crackdown announced today by Attorney General Eric Holder, Vance said 12 defendants in the two Jefferson County mortgage fraud rings have been charged, sentenced or pleaded guilty since March 1 when the national sweep began.

Operation Stolen Dreams was organized by President Obama’s interagency Financial Fraud Enforcement Task Force, which was established to lead an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. Nationwide, since the sweep began it has involved 1,215 criminal defendants, including 485 arrests, who are allegedly responsible for more than $2.3 billion in losses. Additionally, the operation has, to date, resulted in 191 civil enforcement actions which have resulted in the recovery of more than $147 million.

“Mortgage fraud not only damages our banks and credit unions, this crime can affect the very core of our neighborhoods and communities,” Vance said. “We have seen first-hand that as a property goes into foreclosure, surrounding homes are harmed by lowered property values. Many times the foreclosed properties become abandoned, and these vacant houses then become the source of new criminal offenses such as vandalism, or drug-related activities. We are determined to aggressively seek out these frauds and prosecute their perpetrators,” she said.

The mortgage fraud rings currently being prosecuted in Birmingham involve various schemes of deception. Some schemes involve false statements of income and assets on loan applications. In other schemes, the seller makes an up-front payment to the buyer of rental property and promises to supply tenants eligible for government rent subsidies. Then, when the properties can’t be rented, buyers are stuck with depressed properties they can’t afford.

Of the 12 defendants involved in the two rings, 8face pending charges, two have been convicted and sentenced, and two have pleaded guilty and are awaiting sentencing.

The FBI, the Department of Housing and Urban Development’s Office of Inspector General and the Social Security Administration’s Office of Inspector General investigated these mortgage fraud rings and worked with Assistant U.S. Attorney Patrick Carney to bring them to prosecution, Vance said.

“Those who perpetrate mortgage fraud not only damage lending institutions, real estate professionals and the financial health of our communities – they also victimize a significant number of homeowners in the U.S. every year,” said FBI Special Agent in Charge Patrick J. Maley. “As these cases highlight, the FBI, along with our local, state and federal partners, are addressing this crime on a local level to protect the financial health of our country as well as individual citizens,” Maley said.

“The last number of years have seen enormous and damaging developments in the mortgage and housing markets, with an urgent reliance on the government to bolster unstable marketplaces and devastated communities,” said Kenneth M. Donohue, inspector general of the Department of Housing and Urban Development. “The HUD OIG, in partnership with other federal agencies, is deeply committed to ensuring that scarce resources are not diverted to those who seek to enrich themselves at the expense of those who so desperately need assistance today.”

The local mortgage fraud ring led by TIMOTHY JOHNSON hit lenders the hardest, causing $2.5 million in failed mortgages on about 45 properties in Fairfield, East Lake, inner-city Birmingham and Bessemer. Loans have been foreclosed on about 75 percent of those homes. Johnson and nine other individuals have been charged in connection with this mortgage fraud ring.

Johnson, 45, of Bessemer, is charged with two counts of making false statements on a loan application, two counts of mail fraud against a financial institution and one count of false statements to federal agents. The nine other defendants connected to the case all face charges that they supplied false information or documents, including letters claiming Social Security disability payments, in their mortgage loan applications.

Johnson, as the center of the fraud, would approach people attempting to sell their homes and discover what price they wanted. He would do minimal work on the homes, have them appraised and then attach a “mechanics lien” against the property for the difference between the appraised value and what the owner wanted for the house. Johnson would then proceed to find buyers, spreading the word that he could help individuals improve their credit or get approved for a mortgage loan.

His means of helping people secure loans often involved the creation of fraudulent letters purporting to show that the loan applicant received monthly disability payments from the Social Security Administration. Once loans were issued, based on the false claims of disability income or false credit claims, Johnson would realize his profit from the scheme. He would be paid the amount of the liens he placed on the properties.

Among the nine other defendants charged in connection to Johnson’s fraud scheme was a Social Security Administration employee, Pamela Terrell. Terrell was charged with aiding and abetting the fraud. She provided Johnson with several disability award letters that fraudulently purported to be from the Social Security Administration, and which were used to obtain loans for otherwise ineligible loan applicants.

A second ring being prosecuted in this office was led by AL CARSON ROCKETT, 33, of Birmingham, who pleaded guilty in February to mail fraud. Those charges were connected to a mortgage fraud scheme that involved about 80 properties and totaled $1,090,046. Rockett was sentenced June 3 to 15 months in prison.

Rocketts’ frauds took various forms as he adapted to changing banking and funding rules associated with mortgage loans. His initial scheme involved altering documents to make it appear that the home buyer already owned the home and was seeking to refinance the mortgage. He was assisted in this scheme by JERRY EUGENE PARKER, who owned Central Alabama Title Company. Parker, 59, of Hoover, was charged in April with two counts of aiding and abetting mail fraud.

Rockett resold houses he bought at foreclosure auctions. He made minimal improvements on the houses, then obtained artificially high appraisals. He recruited buyers with assurances that the houses could be investments, promising to find tenants through the government’s subsidized rent program and claiming the rent would cover the mortgage and provide some profit. Tenants rarely were found.

Once Rockett had buyers, Parker would change the title of the property into the buyer’s name before the sale was made. This allowed the new buyer to appear as the current owner of the property seeking a refinance, rather than a new mortgage loan. The loan requested would be 20 percent less than the appraised value, giving the appearance that the owner had at least 20 percent equity in the home, and making the loan more likely to be approved.

Rockett made his illicit profit in the difference between the inflated loan amount and his original purchase price. This refinance scheme also allowed him to avoid down-payment or other costs associated with an original mortgage loan.

The President’s Financial Fraud Enforcement Task Force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information on the task force, visit StopFraud.gov.

Suspects may find themselves behind bars living rent free thanks to nationwide mortgage fraud arrests.

Members of the Financial Fraud Enforcement Task Force released the results of a nationwide dragnet, “Operation Stolen Dreams,” which targeted mortgage fraudsters throughout the country and is the largest collective enforcement effort ever brought to bear in confronting mortgage fraud. The White Collar Crime Committee of the National Association of Chiefs of Police obtained relevant documents describing this enormous operation.

The sweep was organized by President Barack Obama’s interagency Financial Fraud Enforcement Task Force, which was established “to lead an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes.”

Starting on March 1 through June 17, Operation Stolen Dreams has involved 1,215 criminal defendants nationwide, including 485 arrests, who are allegedly responsible for more than $2.3 billion in losses. Additionally, to date the operation has resulted in 191 civil enforcement actions, which have resulted in the recovery of more than $147 million, according to the Federal Bureau of Investigation.

“From home buyers to lenders, mortgage fraud has had a resounding impact on the nation’s economy,” said FBI Director Robert S. Mueller, III. “Those who prey on the housing market should know that hundreds of FBI agents on task forces and their law enforcement partners are tracking down your schemes and you will be brought to justice.”

Unlike previous mortgage fraud sweeps, Operation Stolen Dreams focused not only on federal criminal cases, but also on civil enforcement, recovering money for victims and increasing cooperation with state and local partners.

The operation was conducted in conjunction with the Department of Justice — including the FBI, U.S. Attorneys Offices, the U.S. Trustee Program, and other components — as well as the Department of Housing and Urban Development, the Department of the Treasury, the Federal Trade Commission, the Internal Revenue Service, the U.S. Postal Inspection Service, the U.S. Secret Service, the National Association of Attorneys General, and the National District Attorneys Association.

The President’s Financial Fraud Enforcement Task Force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources, according to officials.

MORTGAGE FRAUD REPORT

According to the Federal Bureau of Investigation’s 2009 Mortgage Fraud Report, released today, mortgage fraud suspicious activity reports referred to law enforcement increased 5 percent to 67,190 during fiscal year 2009.

It’s estimated that $14 billion in fraudulent loans originated in 2009. The total dollar loss attributed to mortgage fraud is unknown.

Other key findings presented in the report include:

There are more than 2.8 million properties with foreclosure filings, a 120 percent increase from 2007 to 2009. The Las Vegas area reported the most significant rate of foreclosures, with more than 12 percent of housing units there receiving a foreclosure notice.

The top 10 states ranked by the number of foreclosure filings per housing unit were California, Florida, Arizona, Michigan, Nevada, Georgia, Ohio, Texas, and New Jersey. In April 2010, one in every 386 housing units received a foreclosure filing.

Prevalent mortgage fraud schemes in fiscal year 2009 include loan origination, foreclosure rescue, builder bailout, equity skimming, short sale, illegal property flipping, reverse mortgage fraud and loan modifications. Emerging trends include fraud involving economic stimulus plans/programs, property theft/fraudulent leasing of foreclosed properties and tax-related fraud.

Predatory lenders employ many of the same illegal tactics found in other write-ups here on Flipping Frenzy. Loan officers, for example, may obtain inflated appraisals to get the homeowner a higher loan or will falsify income information to qualify the borrower for a mortgage.

Rather than doing those things to help the borrower, predatory lenders are simply out for themselves. Their actions rarely have any tangible benefits for borrowers and often saddle homeowners with loans they cannot afford. Loan officers—as you’re about to read—sometimes simply use borrowers to engage in a type of fraud I like to refer to as fraud for commissions.

Recently, one Flipping Frenzy reader came forward to share her experience with predatory lending and fraud for commission.

My name is Kim Sikorski, and in 2000 I was living in a one-bedroom apartment in New Baltimore, Michigan, when a local builder began construction on the Aspen Glen Condominiums right outside my front door. I remember thinking to myself how nice they looked and wished that someday I could own a home like that. Fast forward three years and I did.

To be honest, I wasn’t sure I could buy anything. I made ok money for a single person but I wasn’t sure it’d be enough to actually buy a home. To get the process started, I went to talk to a man named Dave P at Lira Financial in Clinton Township., MI (Dave P Inc. dba Lira Financial; 16600 18 Mile Rd.; Clinton Township., Michigan 48038). He was a friend of my boss, Ralph Bianchi, so I thought that I would be able to trust him.

I told Mr. P where I was looking to live and gave him the information he needed to check my credit report and get things started. A few weeks later I received a call from Stephen Tyree, the Lira Financial loan officer assigned to my application. Mr. Tyree called to tell me that my credit was good and I qualified to purchase one of the Aspen Glen condos with a mortgage at 6 ¼% (which for me translated into a monthly of $912.00). Before long, I went ahead and signed the purchase agreement and then started picking out carpet, countertops, tile color, etc. From my perspective, I was in the process of living the American dream of home ownership; I was buying my own home and I couldn’t be happier.

On August 27, 2003, I closed on my condo at the Mt. Clemens MI, office of Greco Title Co. To my surprise, neither Stephen Tyree or Dave P were present. It was there–at the closing–that I first found out that I was placed into an adjustable rate mortgage (ARM) that was only fixed for two years.

At the time, I only had a few days left to move out of my apartment, so I went ahead and signed all the documents and looked forward to moving into my new home. For me, the closing was a exciting day in my life. My mom and sister were even there by my side, taking pictures along the way.

The next day I talked to Dave P at Lira Financial and asked about the adjustable rate mortgage without escrow. Mr. P told me not to worry because in two years we would refinance and be able to set up escrow for my property taxes (which, by the way, were not included the first time). Eventually, I started having trouble keeping up with the taxes, and once again talked to Dave P about the situation. As he did before, Mr. P told me not to worry, that the taxing authority couldn’t do anything about it until I was four tax bills behind, and that by then we will have refinanced and paid off the back taxes, and set up escrow before that happens.

Based on Dave P’s recommendation, I went ahead as planned. About a week or so before I was supposed to close, my mortgage company at the time, Homecomings Financial, paid the back taxes (to protect their interest) and put me into forced placed escrow, which added to my principle and interest payment. My monthly payment went from $912 to $1,280 overnight.

When I called Dave P at Lira Financial, to tell him what happened, he told me this wasn’t a problem because we would just add it to the new mortgage. Just before closing I went to Mr. Dave P’s office where I learned for the first time that he had placed me into a interest-only mortgage. I was told that my new mortgage was at 8%, 30-year fixed interest. I immediately told the staff in Mr. P’s Lira Financial office to stop all paperwork and please have Dave P call me himself as I was not aware of the interest-only loan (just like I was not aware that I was placed in an adjustable rate mortgage the first time around).

Long story short, I never heard from Dave P until he called about six months later to tell me that I owed him $350.00 for the appraisal done on my condo. I told him I was not paying him for the appraisal because I did not close with him, and we have not spoken since.

So my interest rate went up and I paid the difference for a year, but with my rate to go up a point or so a year with a ceiling of 12 ½ %, I knew I could not keep it up, so I went to see Stephen Tyree (my original loan officer at Lira Financial) who was now with Keystone Mortgage in Shelby Township, Michigan (45679 Village Blvd, Shelby Township, Michigan 48315). While it’s true that I originally knew Stephen from my association with Dave P, Stephen had refinanced my girlfriend’s mortgage and she was very happy with the results. I told Stephen the situation I was in—which he was well aware of—and asked for his help. He said he would see what he could do and get back with me. In the meantime, he had me fill out a credit application and give him permission to check my credit report. He also had me sign lots of blank forms saying we had to see what we could do and fill those in later.

When Stephen Tyree called me back he told me it was going to be tough to help me but that he felt he could get it done. He asked me if I had any savings, which I did not, and told me that having a savings account with at least three to six months worth of mortgage payments would show reserves and help me get approved. Stephen Tyree asked me to ask someone with money in their own bank account to add my name to their account to make it look like I had some savings, so I did. I asked my father to do this for me, and despite feeling it was not a very good idea–but wanting to help and not see me lose my home–he did. Stephen also told me that getting my condo to apprise for what we needed was going to be difficult but he thought he knew an appraiser that could get it done. Obviously, looking back, these should have been red flags. I know I should have never signed those papers.

On October 16, 2006, I closed on the refinance with an 80-20 mortgage. The 1st for $112,320 with an interest rate of 7.5% and a payment of $1,047.99 and the 2nd for $28,660 with an interest rate of 9.75% and a payment of $252.44. The total of both is $1,300.43, which I could not afford but I did what I thought I should to save my home.

In about March or April of 2007 I started calling Indy Mac to make them aware of my situation and that I was falling further and further behind on my payments. I talked to several people but no one really had any suggestions for me. They did thank me for calling and making them aware but offered no help other than trying to refinance again with a lower interest rate.

Ultimately, I was told Indy Mac could not lower my interest rate due to the fact that they technically did not own my mortgage any longer. With a payment of $1300.43 plus association dues of $160.00 a month come October 2007, I could no longer afford to pay my mortgage. I had put my condo up for sale by owner in May of 2007 (I thought I would rather sell it then lose it). But nothing. I was advised from Indy Mac that I could sell it in a short sale but the property must be listed with a real estate agent for at least 90 days. I listed the property in October 2007 and did not have even one person look at it. My condominium complex is not completed (the builder has about four more buildings to construct), and prices for new units identical to my own have dropped to $99,000. Why would anyone look at mine for $145,000.00 when they can build a new one for $99,000?

In January 2008 I came home from work to find a letter on my door from Trott & Trott, the law firm representing IndyMac, stating that my property had gone into foreclosure, was going to a Sheriff’s sale at the end of February, and that I had six months from 2/29/08 to redeem my property or be out.

And so there you have it—that’s were I am as of today. Most of my conversations with both Dave P at Lira Financial and with Stephen Tyree formally at Lira and now with Keystone Mortgage, were based on trust. Like many new homeowners, I did not know anything about mortgages and put all my trust in the people who did. I thought they were working with my best interest at heart.

Expecting the worst, hoping for the best!

~ Kim Sikorski, Michigan

In reviewing Kim’s account of what happened, a number of items jump off the page as being sure signs of predatory lending and fraud for commissions. For example, after contacting Kim and reviewing her situation a little closer, I was able to determine the following:

• Kim’s loan officer had her “sign lots of blank forms” and told her that he had to first “see what we could do and fill those in later.” In real estate fraud forensics, we call this ‘backing into the documents.’ With signed forms (that contain blank fields) in hand, a loan officer is able to manipulate the borrower’s loan documents to fit his commission-related needs.
• Kim’s loan officer artificially inflated her income in order to help her qualify for her loan. This of course is against the law.
• As noted by Kim above, her loan officer worked with an appraiser to secure an inflated appraisal on Kim’s property, thus allowing her to qualify for a higher loan that translated into a higher commission for the loan officer. Here again, the loan officer and appraiser broke the law.
• As Kim already pointed, she was encouraged to borrow her father’s assets, which everyone should know by now is a highly improper way of determining one’s actual worth and ability to repay a loan. Any real estate industry professional that advises someone to borrow or rent assets is more likely than not up to no good.
• Her loan officer promised to refinance Kim into a fixed loan within two years. Legally, no one can make that type of promise to a homeowner.
• As you read in Kim’s account, when she arrived for the very first closing of her life, she learned that she had been placed into an adjustable rate mortgage that was only fixed for two years. When mortgage brokers and loan officers present the borrower with a product, specifying the terms, and then change the terms just prior to closing, that is called “bait and switch” and it makes the loan highly suspect and questionable.

While many federal and state laws are aimed at preventing predatory lending, it’s not always easy to spot it when it occurs. If after reading Kim’s story, you’re left wondering if you are a victim of predatory lending, review the following list of common predatory lending practices:

1. Refinancing a mortgage repeatedly within a short period of time and charging higher than normal loan origination fees each time.
2. Selling a high-cost, high-interest loan to a borrower who would qualify for the lower-cost, lower-interest loan that the same lender offers.
3. Being asked or instructed to sign an application or documents containing blanks that the loan officer says he will fill in later.
4. Convincing loan applicants to borrow more than they can reasonably afford to pay back.
5. Pressuring loan applicants into accepting high-risk loans such as interest-only mortgages and loans with unusually high prepayment penalties.
6. Providing “products” that are nonexistent or offer no benefits.
7. Selling high-interest loans to borrowers based on ethnicity or nationality rather than their credit history or financial situation.

Loan officers (and to be fair, Realtors also) are often paid on commission. The more loans the sell, the more they make. In many cases, loan officers can earn even higher commissions by selling high-cost loans and additional products and services. In other words, the motivation to make money sometimes eclipses a loan officer’s responsibility to follow the rules.

The rules that real estate industry professionals—including loan officers—are supposed to follow stipulate the parameters for approving and underwriting a home loan. Although the stipulations may seem overly restrictive to some, the rules are in place for a reason—to make sure that the homeowner/borrower can afford their monthly payments and continue to live the American Dream of Homeownership.