SPRINGFIELD, MO—Beth Phillips, United States Attorney for the Western District of Missouri, announced today that the owner of Guaranty Title, formerly headquartered in Nixa, Mo., pleaded guilty in federal court today to his role in a $2.7 million wire fraud conspiracy and money laundering.

Richard G. “Rick” Burton, 59, of Nixa, pleaded guilty before U.S. Magistrate Judge James C. England this morning to conspiracy to commit wire fraud and conspiracy to commit money laundering. Burton was charged in a Nov. 17, 2009, federal indictment.

Burton admitted that he participated in a scheme to defraud financial institutions of more than $2.7 million through a series of illegal financial transfers related to stolen escrow payments. Burton attempted to conceal his criminal activities through a substantial check-kiting scheme.

Burton was the president and majority owner of Guaranty Title Company of Southwest Missouri, Guaranty Title Company d/b/a Guaranty Title and Closing Company, and Guaranty Properties, Inc. The companies, referred to collectively as Guaranty, provided real estate title and closing services. Guaranty’s main office was located in Nixa, with at least 10 branch offices located in Aurora, Branson, Mount Vernon, Ozark, Springfield, and Republic, Mo.

Conspiracy to Commit Wire Fraud

Burton admitted that, from May 12, 2005, to June 18, 2007, he defrauded mortgage companies and individual customers of escrow money which had been wired to Guaranty to pay real estate closing costs.

When real estate buyers and sellers hired Guaranty to facilitate the closing of real estate contracts, Guaranty agreed to hold buyers’ money for closing costs in an escrow funds account separate from funds that Guaranty owned. Guaranty was prohibited from commingling that escrow money with the firm’s business operations money, because it did not own the escrow money it received.

Burton admitted that he took a portion of the escrow money that had been transferred into these escrow accounts. In violation of Guaranty’s promise not to do so, Burton caused $2,040,937 of stolen escrow funds to be diverted into the firm’s business operations account and used the money for the day to day business operations of Guaranty.

Burton instructed Guaranty’s in-house bookkeeper to record deposits of stolen escrow money into Guaranty’s business operations account as loans, including loans from a fictitious company called “K & S Investments,” which was created to help conceal the source of the deposits.

By April 2007, deposits into Guaranty’s main escrow account no longer covered shortages caused by the theft of escrow funds. Burton assisted in concealing this shortage by causing checks to be written and deposited between various accounts held by Guaranty at Great Southern Bank and Ozark Mountain Bank that did not contain sufficient funds to cover the checks. This check-kiting scheme continued until June 18, 2007, when Old Missouri Bank discovered the fraud and closed the bank account. As a result of this check kiting, Burton caused Ozark Mountain Bank to lose approximately $682,954.

Conspiracy to Commit Money Laundering

Burton admitted that he participated in a conspiracy to commit money laundering from May 12, 2005, to June 18, 2007. Burton conducted financial transactions that involved the proceeds of the wire fraud and bank fraud conspiracies, in order to promote that criminal activity and to conceal the source of the proceeds of the unlawful activity.

Under federal statutes, Burton is subject to a sentence of up to 40 years in federal prison without parole, plus a fine up to $1,250,000 and an order of restitution. A sentencing hearing will be scheduled after the completion of a presentence investigation by the United States Probation Office.

This case is being prosecuted by Assistant U.S. Attorney Randall D. Eggert. It was investigated by the Federal Bureau of Investigation, IRS-Criminal Investigation, and the Missouri Department of Insurance, Financial Institutions and Professional Registration.

Recently, an investigative reporter for Seattle, Washington’s King 5 News broke a story that illustrates a concept and a phrase that may be unfamiliar to many, Affinity Fraud. Affinity Fraud refers to a situation where a trusted member of a shared group or organization preys upon a victim. In the recently reported story, reporter Susannah Frame found that a mortgage broker affiliated with a Filipino Christian congregation devised a fraudulent scheme to procure home loans for church members with damaged credit. The mortgage broker deceived homebuyers and lenders by substituting the identities and credit histories of past customers who were also church members. These unsuspecting and misdirected individuals thought they were purchasing homes when, in fact, ownership was vested in the names of others. It should come as no surprise that forged documents can be traced to a single title company and a number of its employees who are notaries. The mortgage broker took the scheme to new depths by collecting monthly payments from borrowers and allowing the loans to default.

Susannah Frame was correct to question the practices of the title company identified in her report; notary abuse is just one visible symptom of a greater disregard for accepted practices. Real estate fraud requires a great deal of planning and coordination among numerous insiders; it takes a team. The fraudster has no choice but to enlist the cooperation of a title agent who is uniquely positioned as the “last line of defense” in any transaction. The transparency of this particular scheme and the brazenness of the fraudsters should shock everyone. Clearly, they felt they would not be caught, or that nothing would happen to them if they did. Boy, were they were sorely misinformed! The number of real estate-related crimes reported each year has become a primary focus of federal investigators and prosecutors. State and local authorities are equally as concerned and only slightly less so prepared to take a serious stance (budgets permitting). Still, a title community comprised of properly trained professionals should have proven a formidable barrier to the criminal aspirations of the mortgage broker described in the King 5 News report. So, what exactly is the problem?

The title industry faces an enormously complex set of challenges as it evolves from something that it was in the past to something that it’s expected to be in the present. I often ask audiences of title agents to define their work product in 10 words or less. The answer is not quite as simple as it seems. The traditional sources of business for the title industry now have an affinity of their own for sharing profits in return for directed title orders. The title industry once possessed a moral high ground that has eroded in the face of anti-competitive forces. Today’s title agent lacks the ability to confront partners in joint ventures or to replace lost sources of business. Is the title company in the King 5 News report guilty of greed in a traditional sense, or is it guilty of a newly spawned category of real estate fraud, “complacency on demand?” Only a thorough investigation by authorities will reveal the real motive… both are criminal offenses.

It is my opinion that the land title industry exists for the following reasons:

1. To expertly examine titles and provide curative remedies for title issues
2. To disclose all material facts (in writing) to interested parties
3. To actively promote fraud prevention in real estate transactions

Many title agents lack the professional skills needed to fulfill the legal duty to act in the best interest of consumers and lenders. Licensing standards are determined by individual states, as are continuing education requirements. For the most part, it requires very little experience or practical knowledge to become a title agent. Continuing education is geared towards the novice and has little to offer seasoned practitioners. Additionally, title insurers are far too zealous in their efforts to expand market share by signing new agencies. The overall effect has been disastrous for the public as evidenced by current fraud statistics and the endless barrage of news reports illuminating the activities of fraudsters.

Back to King 5 News reporter Susannah Frame…she has a blog that adds valuable insight into the human side of Seattle’s real estate-related affinity fraud. Honest and well-intended members of Seattle’s real estate community are properly concerned that the reputation of their industry has been tarnished by the unscrupulous behavior of one single mortgage broker and a single title company. Members of Christian groups worry as well that the public will be unforgiving in its assessment of their religious beliefs. The actions of real estate professionals profoundly influence the lives of many.

At the end of the day, after contemplating the motives of a title company that lacks the courage to say “no” and the actions of a dishonest woman hiding behind a veil of religious values, one question remains: What has happened to human decency?

Recently, Forbes Magazine ran an article which could only be taken as a negative indictment of the title industry. Referring at different times to research, interviews and the findings of an 18-month investigation conducted by the state of Washington’s insurance commissioner, the article’s author, Scott Woolley, contends that the title industry has enriched itself for decades and “bilked home buyers out of billions of dollars.” Additionally, Woolley asserts that automated land records will eliminate the need for title insurance and the title profession. (If you haven’t read “Inside America’s Richest Insurance Racket,” do so before reading any further. The article itself is followed by several pages of spirited, sometimes heated, comments, including a rebuttal by the American Land Title Association.)

While I do not agree with everything in the article, it is clear that the title industry needs a major overhaul. It’s no coincidence that Woolley’s article is just one of many that have surfaced as the media, legislators, investigators and consumers question the practices of a decidedly misunderstood industry. The title industry is being attacked nationally for employing illegal tactics to generate orders from realtors and lenders. Just as disturbing is a dramatic increase in the incidence of class action lawsuits alleging anti-competitive practices (pricing) and failure to disclose material facts to consumers. Only a handful of title insurers now dominate this very important and lucrative market following an aggressive stream of acquisitions. The public understands little about the scope of a title policy and the role of the title agent because the industry has chosen to conduct its day to day business “in silence.”

The concept of “bundled services” has added an entirely new dimension to the evolution of the title industry by giving many of it’s participants an “identity crises” that may be difficult to overcome. It’s now common practice for title professionals to join forces with realtors and lenders by sharing the ownership of a new company that enjoys the benefits of captive title orders. The joint venture, assuming that its RESPA compliant, must conform to federally mandated guidelines that control its initial capitalization, its “core title” practices and the way dividends are paid. In theory, the joint venture benefits from “economies of scale” and accordingly rewards the consumer with a reduced fee structure. Additionally, we’re told that the interests of the consumer are best served by the convenience of a “one stop” shop. One by-product of the joint venture when paired with technology is the ability to process regional, or national, title orders (and loan applications) from a single location.

The marriage of title company with source of business should raise a number of concerns for anyone interested in fraud prevention. The removal of processing activities to distant points is the first of these concerns. In the past realtors, title agents and mortgage brokers conducted business in the same communities in which they lived. There was a relationship between the real estate professional and the consumer. There was a real-world familiarity with the condition and value of the homes being sold. The success of the realtor, title agent and mortgage broker was in large part decided by referrals from friends and neighbors. I realize that I’m oversimplifying this scenario and that real estate fraud has always existed, but we cannot ignore the fact that the fraudster benefits by doing business with a “voice on the phone.” Technology is a potent detector, and deterrent, of fraud. Still, many of the “tell-tale” signs of real estate fraud are extremely subtle and require direct observation. There is no substitute for the human element in matters of homeownership.

A second downside of the joint venture has to do with the reduced ability of the title professional to make independent decisions. A title agent has a very serious duty to act in the best interest of the source of funds. Keep in mind, the mortgage broker (loan officer) is not the source of funds. During a criminal investigation the title agent is held accountable for all of his professional decisions and is unable to make excuses by saying that he” didn’t know”, he “didn’t understand” or that he “can’t recall.” Consider an example where the title agent in a joint venture is asked by his business partner to “discretely” use seller proceeds to pay buyer closing costs. A title agent facing a situation such as this is in a real dilemma. The request itself is a solid indicator that falsified documentation was used to approve the loan. Also, the closing instructions would specifically prohibit the seller from contributing any amount without the actual knowledge of the source of funds. Yet, how does the title agent say “no” to his business partner and only source of business?

While I cannot quite agree with Mr. Woolley’s analysis that the title industry is no longer needed, I do have some advice for the title industry: Learn from prescription drug manufacturers and sell yourself and your services to the consumer. You’re being attacked, in part, because the public doesn’t know you!

In a story that just wont go away, the Wayne County, Michigan, Register of Deeds, Bernard Youngblood–whose office is facing a federal lawsuit seeking millions of dollars in damages and a receiver appointed to replace him–tells Paul Egan of The Detroit News that his office now has plans to compete with the same companies who are suing his ofice by selling its own title insurance. From this morning’s The Detroit News:

Youngblood said Thursday he would announce plans for a fast-track feasibility study of the county offering title insurance. … Title companies doing business in Wayne County claim poor record keeping by the register of deeds has forced them to insure transactions without knowing whether mortgages or other liens have recently been filed against the property being sold. They complain of a gap of up to six months between when a document is filed at the county office and when it is available to someone searching land records on a computer. … Youngblood said his plan to offer title insurance is not related to the recent lawsuit but to concerns over what he said are excessive profits by title insurers and national reports of kickbacks and other industry problems.

Youngblood also tells The Detroit News that the backlog of paperwork in his office is more like six weeks, not six months as the lawsuit claims, and that the very same title companies who are suing his office often wait an unreasonable amount of time before sending mortgages to his office, which he says plays a significant role in real estate fraud.

It’s a bold and somewhat unprecedented move (a municipality selling title insurance under these circumstances). It’ll be interesting, to say the least, to see how this one plays out!

A title company that claimed to maintain “physical, electronic and procedural safeguards” to protect its customers confidential financial information, but instead tossed home loan applications into an open dumpster, has agreed to settle Federal Trade Commission (FTC) charges that it violated federal laws. The settlement with Kansas City, Kansas-based Nations Holding Company, requires that the company establish and maintain a comprehensive information security program that includes administrative, technical, and physical safeguards. The settlement also requires the company to obtain–-every two years for the next 20 years–an audit from a qualified, independent, third-party professional that confirms that the company’s security program meets the standards of the order.

Nations Holding Company is privately held. It provides real estate services in 44 states, and its subsidiary, Nations Title Agency, provides a variety of services in connection with financing home purchases and refinancing existing home mortgages. As we all know, the careless handling of consumers’ sensitive financial information is an open invitation to identity thieves who regularly troll our trash for documents that are ultimately used in real estate fraud schemes.

The FTC charged that Nations Holding Company’s failure to provide reasonable and appropriate security to protect its customers information violates the FTC’s Safeguards Rule, which requires financial institutions to take appropriate measures to protect customer information. The complaint also alleged that the company’s privacy policy claims were deceptive because of these failures, which is in violation of the FTC’s Privacy Rule and the FTC Act. The Privacy Rule, among other things, requires financial institutions to disclose accurately the manner in which they safeguard customer information. The FTC Act prohibits unfair or deceptive practices.