unit 8 ethics, mortgage fraud, and predatory lending...

Unit 8 Ethics, Mortgage Fraud, and Predatory Lending Issues

Introduction Every decade has seen financial tumult. Greed (the selfish desire to have more of something) combined with fraud (the intentional act meant to deceive in order to get someone to part with something of value.) is a recipe for disaster. Greed and fraud in the financial markets are often a predecessor to such financial turmoil. In the 20s, the stock market crashed. In the 30s, there was the Great Depression. Fast forward to the Savings and Loan Crisis in the 80s when half of the federally insured savings and loans failed and/or closed. In this decade, the subprime market imploded leading to the Financial Crisis of 2007-2010.

Although other factors are involved in the subprime market meltdown or implosion, fraudulent mortgages contributed to the massive losses lenders reported. Large lenders and mortgage companies collapsed. JPMorgan Chase & Co. purchased Washington Mutual Bank and Bear Stearns, Bank of America now owns Countrywide Financial and Merrill Lynch, and Wells Fargo bought troubled Wachovia Corporation.

This Unit and the following Unit will examine the concept of ethics, mortgage fraud, and predatory lending practices. Ethics frequently is defined as a system of moral principles or standards that govern the conduct of members of a group. The FBI defines mortgage fraud as "any material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." Predatory lending is the abusive practice of extending credit with the intent to deceive and take advantage of the borrower.

The cases presented in Units 6 and 7 are actual cases that resulted from lengthy investigations by the Federal Bureau of Investigation, the IRS-Criminal Investigations Division, and other federal and/or state agencies. They were prosecuted by Assistant United States Attorneys of the U.S. Department of Justice. The cases are taken from public records that are on file in the courts within the judicial district where the cases were prosecuted. The FBI website has press peleases regarding the court cases and the IRS puts examples of the mortgage fraud cases on its website.

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Because the cases are public record and the perpetrators have been convicted and sentenced, their names have not been changed.

Learning Objectives After completing this Unit, you should be able to:

• recall the “Ethic of Reciprocity” and its applicability to business and professional interactions.

• differentiate between mortgage fraud and predatory lending.

• recognize how mortgage and bank fraud are procecuted.

• identify “red flags” and how MLOs can protect themselves.

What is Ethics? Law and ethics overlap, but are not the same. The law tell us what we cannot do (i.e., prohibitions) and, sometimes what we must do (i.e., mandates); it does not answer the bigger question, which is what we should do. Ethics is much more extensive and carries on after the law ends. The word “ethics” is from the Greek word ethos meaning moral custom, use, and character. Aristotle first used the term ethos to name a field of study developed by his predecessors Socrates and Plato. Philosophical ethics is the attempt to offer a rational response to the question of how humans should best live.

Ethics is a set of principles or values by which an individual guides his or her behavior and judges that of others. Principles are fundamental truths. Principles are permanent, moral guideposts. Values are mutable, which means they can change over time. Values may be immoral or illegal and, as such, can contradict principles. This presents an ethical dilemma. Do we stay true to our principles?

Ethics frequently is defined as a system of moral principles or standards that govern the conduct of members of a group, such as the NAMB Code of Ethics that members of the Association of Mortgage Professionals must follow. Ethics refers to our business and social conduct and our attitudes toward others.

The basis of ethics is the Golden Rule often expressed as do unto others as you would have them do unto you. This is also known as the Ethic of Reciprocity, which describes a reciprocal, or two-way, relationship between one's self and others that involves both sides equally, and in a mutual fashion.

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A number of ancient cultures, religions, and ethical thinkers also put forward some version of the Golden Rule.

“Now this is the command: Do to the doer to cause that he do thus to you.” The Egyptian story of The Eloquent Peasant, 109-110 translated by R.B. Parkinson. The original dates to circa 1800 BCE and may be the earliest version of the Epic of Reciprocity ever written.

“By self-control and by making dharma (right conduct) your main focus, treat others as you treat yourself.” Mahabharata, 5:1517, the ancient Sanskrit epic of India

“...thou shalt love thy neighbor as thyself.” Leviticus 19:18

“Do not do to your neighbor what you would take ill from him.” Pittacus (c. 640 – 568 BC)

“Never impose on others what you would not choose for yourself.” Confucius Analects 15:23

“None of you [truly] believes until he wishes for his brother what he wishes for himself.” Number 13 of Imam Al-Nawawi's Forty Hadiths

“Therefore, whatever you want men to do to you, do also to them.” Matthew, 7:12

"The good which a virtuous person aims at for himself he will also desire for the rest of mankind." Ethics, (pt. 4, prop. 37) by Spinoza

If the Golden Rule is found in almost all religions, ethical systems, and philosophies, why is the concept cloudy for so many people?

Kohlberg’s Six Stages of Moral Reasoning How can we define the ethical situations in which we find ourselves? Lawrence Kohlberg postulated that each human belongs to one of six stages of moral reasoning. Kohlberg devised a series of tests to determine the stage in which an individual is currently. The six stages of moral reasoning are set forth in the following table.

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http://www.religioustolerance.org/bce.htm

Stage Description One Might makes Right

Obedience to Authority Two Looking out for Number One

Be nice to others IF they will be nice to you

Three Good Girl, Nice Guy Approval is more important than specific rewards

Four Law and Order Obey the laws created by the powers that be

Five Social Contract If the rules of society are destructive, the contract with society is over

Six Universal Ethical Principles Universals determine right versus wrong and might contradict legal authority

There is no right or wrong answer to Kohlberg’s moral dilemmas. Indeed, two individuals can arrive at the same judgment but operate at different stages.

WHAT LEVEL ARE YOU? Stage One generally is representative of younger subjects who are afraid of parental confrontations. If you acquiesce to gain approval, (“Go with the flow. Everyone is doing it.”), perhaps you are at Stage Three. Stage Four occurs later in life and represents a respect for civil authority. If you are convinced the system is broken, then perhaps you are at Stage Five and are rising above the law to feed your family and avoid bankruptcy and divorce. Does the stage level affect the sentence the prosecutor demands? Does Stage Five reasoning carry mitigating circumstances in the eyes of the law?

Categorizing your actions according to Kohlberg’s six stages of moral reasoning can be a useful way to analyze your actions. There are no correct answers. There are only your actions and the responses of the law.

Business Ethics Keeping ethics at the forefront of everyday practices is an ongoing process. It is much easier to talk about ethics than it is to consistently follow ethical principles. Competitiveness, ambition, and innovation will always be important to success but they must be regulated by ethical

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principles. Ethical principles provide a guide to making decisions and also establish the criteria by which your decisions will be judged by others. In business, how people judge your character is critical to sustainable success because it is the basis of trust and credibility. Both of these essential assets can be destroyed by actions that are, or are perceived to be unethical. Consequently, successful business people must be concerned with both their character and their reputations.

Ethical Business Principles 1. Obey the law. Ethical business people abide by laws, rules, and

regulations relating to their business activities.

2. Be honest in all communications and actions. Ethical business people are truthful, honest, and trustworthy. Ethical business people do not deliberately mislead or deceive others by misrepresentations, overstatements, partial truths, or selective omission of facts.

3. Maintain personal integrity. Integrity literally means having “wholeness” of character. It is demonstrated by consistency between thoughts, words, and actions. Maintaining personal integrity often requires moral courage, which is the courage to take action for moral reasons despite the risk of adverse consequences. Ethical business people do not sacrifice principles or expediency.

4. Keep promises and fulfill commitments. Ethical business people make every reasonable effort to keep their promises and they do not create justifications for escaping their commitments.

5. Be loyal. Ethical business people avoid conflicts of interest and they do not use or disclose information learned in confidence for personal advantage.

6. Be accountable and transparent. Ethical business people accept personal accountability for their decisions and omissions. They make decisions openly and with full disclosure. This allows anyone affected by the decisions to understand the basis for them.

7. Strive to be fair and just in all dealings. Ethical business people are committed to justice, the equal treatment of individuals, and the tolerance for and acceptance of diversity.

8. Commit to excellence. Ethical business people are committed to excellence when performing their duties.

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9. Treat everyone with respect. Ethical business people are

courteous and treat all people with equal respect and dignity regardless of sex, race, or national origin. They follow the Golden Rule, striving to treat others the way they would like to be treated.

10. Demonstrate concern for the well-being of others. Ethical business people seek to accomplish their business objectives in a manner that causes the least harm and the greatest positive good.

The country has experienced first hand the results of greedy business executives without conscience or character in the failures of Lehman Brothers, AIG, Washington Mutual, Countrywide Funding, and others during the financial crisis of 2007-2010.

Professional Ethics and Conduct Professional ethics has become more important over the years. What do we mean by professional ethics? Professional ethics define standards of conduct or practice that help a professional choose what to do when faced with a problem at work that raises a moral issue.

The residential mortgage lending business involves interactions with borrowers and lenders and other real estate professionals. Therefore, professional consideration should go beyond simply what is required by law. To build and maintain a successful career, mortgage loan originators (MLOs) should adhere to applicable laws and follow professional ethical standards.

Because ethics frequently impose a higher level of professionalism than the law, professional, ethical standards are the foundation for a successful career. It is good business sense to be honest, treat everyone equally, provide full disclosure, and not take advantage of consumers. Mortgage loan originators must use reasonable care when originating real estate loans.

Reasonable care, also known as due care or diligence, refers to the amount of care that an average, rational person would take under the same or similar circumstances. Professionals and specialists are held to a higher standard of care than the public when dealing with situations related to their field of specialization. Consumers use mortgage loan originators to provide skilled and knowledgeable service and advice about financing real estate. The courts use a standard of care to decide whether a mortgage loan originator has used reasonable skill and care in a disputed transaction. The judge or jury must determine if, under similar circumstances, a reasonably prudent MLO would use the same amount of care to protect the best interests of the borrower. If the answer is yes, then the MLO has acted appropriately.

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A good rule of thumb to follow is, “Don't do anything that you wouldn't want plastered across the front page of the local newspaper.”

One group of professionals—attorneys—are supposed to observe all rules of law and conduct themselves in a professional manner. However, as the following case study shows, attorneys and other professionals sometimes perpetrate mortgage fraud as well.

CASE STUDY: Tennessee Attorney and Developer Convicted for Mortgage Fraud & Money Laundering - $6 Million Loss

Jeffrey Whaley, of Sevierville, Tennessee and Jerry Kerley of Kodak, Tennessee were convicted on charges of conspiracy to commit wire fraud affecting a financial institution, wire fraud affecting a financial institution relating to the purchase of real property, bank fraud in submitting a false HUD-1 statements relating to the purchase of real property, false statements to a bank relating to the purchase of real property, and money laundering relating to the purchase of real property. The Scam According to court documents, Jeffrey Whaley (developer) recruited "straw borrowers" to obtain mortgage loans in their names based on promises that they would not have to make a down payment or mortgage payments for the property and that they would receive cash at closing. The property they acquired was to be rented and all the mortgage payments and maintenance would be covered by the rental revenue. The straw borrowers were promised that the real property would be resold within one year that they would receive a share in the profit following a resale of the property. Some of the properties purchased by the straw borrowers were actually flips because they were sold by “straw sellers”. Jerry Kerley, a Tennessee licensed attorney, was the owner of Guaranty Land Title Company where the fraudulent loans were closed. Whaley and Kerley concealed eight real estate transactions from the banks where the borrowers did not provide the money identified as the "cash from borrower" on the HUD-1 Settlement Statement. In those eight transactions, the banks wired more than $6 million in loan proceeds to Kerley’s title company. Kerley and Whaley committed money laundering offenses through financial transactions that involved proceeds from the mortgage fraud scheme. The Penalty On July 1, 2013, Jeffrey Whaley was sentenced to 60 months in prison for his role in a mortgage fraud scheme. On June 6, 2013, Jerry Kerley was sentenced 48 months in prison.

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CASE STUDY: Utah Real Estate Expert Offers Fraudulent Investment Seminars - $1.9 Million Loss

Keith Nelson Cook, of Emmett, Idaho, was convicted of mail fraud, wire fraud, and money laundering in connection with a scheme to defraud students and mortgage lenders. The Scam According to court documents, Cook, or individuals working under his direction, recruited students willing to pay a fee to be coached in the art of investing in real estate at a profit. Cook hired people to mass market the real estate program opportunity by phone. During the calls, individuals acting at Cook’s direction made one or more fraudulent statements, including telling students that he was a nationally recognized real estate expert and guaranteeing that participation in his program would result in either doubling the student’s income or a gain of $50,000 during the first year of participation. Cook solicited payments of between $15,000 and $30,000 from prospective students, and also received the students’ financial and credit information. In total, he solicited $427,500 from students. Cook refused to provide the promised coaching and diverted the $15,000 to $30,000 application fees for his own unauthorized business or personal use. In addition, Cook induced certain students to become straw buyers of residences in Salt Lake County. He represented to the straw buyers that they would not have to make a down payment or invest any money of their own to buy the home; that the straw buyer would have no financial risk from the transaction, and would have no obligation to make loan payments. At first, Cook’s entities made payments on the properties to give the mortgage lenders the false impression that the loans were performing appropriately. However, at some point he stopped making payments on the loans, leaving the straw buyers with mortgages they did not have the ability to repay and mortgage lenders with significant losses on the non-performing loans. The total loss amount incurred by the straw buyers and the mortgage lenders in the scheme was $1,905,651. The Penalty On August 5, 2013, Keith Nelson Cook was sentenced to 36 months in prison, three years of supervised release, and ordered to pay $1,905,651 in restitution to victims of his fraud scheme.

Professional standards may have many gray areas, so determining the proper course of action is not always easy. Many MLOs allow the need to make a living to get in the way of what is right. Therefore, it may be need rather than greed. What they do not understand is that MLOs can make as much money with as without ethics. In fact, many think you can make

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more money being ethical. This is not a “get rich quick” business—you need to be in it for the long haul. By following the Golden Rule when dealing with potential clients and customers, you get a reputation for operating at a high standard. This leads to referrals and repeat business. If every MLO followed the Golden Rule, the public and the mortgage industry would be better served.

Professional Organizations The mortgage lending industry is highly regulated and its practitioners must follow a stringent set of rules. However, you cannot assume that any mortgage loan originator (MLO) who follows the “letter of the law” when dealing with clients and customers in a real estate transaction is acting ethically. This is not necessarily true. However, every mortgage loan originator knows that without the trust created by consistent ethical behavior, business will dry up.

Many MLOs belong to national mortgage associations (e.g., the National Association of Mortgage Brokers or the National Reverse Mortgage Lenders Association). Each of these associations has a Code of Ethics that members must follow in an attempt to prevent exploitation of consumers and to preserve the integrity of the profession. This benefits consumers as well as those belonging to the profession by maintaining the public’s trust in the profession and encouraging the public to continue seeking their services.

Does that mean that every member acts in an ethical manner? Unfortunately, no, but members (and even non-members) are advised to follow the ethical precepts as well as the laws to make the right decisions.

When comparing the various associations’ codes of ethics, a similar theme is apparent. They all state that members must follow applicable federal and state laws, rules, and regulations pertaining to the mortgage industry. Then, members must follow the professional association’s code of ethics and must conduct business in a professional manner with honesty and integrity. In addition to the code of ethics, many organizations provide their members with standards of professional practice.

National Association of Mortgage Brokers The National Association of Mortgage Brokers (NAMB) was founded in 1973 and is affiliated with all 50 state associations and the District of Columbia, such as the California Association of Mortgage Professionals (CAMP), the Arizona Association of Mortgage Professionals (AzAMP), or the Louisiana Mortgage Lenders Association (LMLA). Members must follow the NAMB Code of Ethics.

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NATIONAL ASSOCIATION OF MORTGAGE BROKERS CODE OF ETHICS

The members of the NAMB – The Association of Mortgage Professionals, believing that the interests of the public and private sector are best served through the voluntary observance of ethical standards of practice, hereby subscribe to the following Code of Ethics.

HONESTY & INTEGRITY NAMB members shall conduct business in a manner reflecting honesty, honor, and integrity.

PROFESSIONAL CONDUCT NAMB members shall conduct their business activities in a professional manner. Members shall not pressure any provider of services, goods or facilities to circumvent industry professional standards. Equally, Members shall not respond to any such pressure placed upon them.

HONESTY IN ADVERTISING NAMB members shall provide accurate information in all advertisements and solicitations.

CONFIDENTIALITY NAMB members shall not disclose unauthorized confidential information.

COMPLIANCE WITH LAW NAMB members shall conduct their business in compliance with all applicable laws and regulations.

DISCLOSURE OF FINANCIAL INTERESTS NAMB members shall disclose any equity or financial interest they may have in the collateral being offered to secure a loan.

NAMB © 2014

Reprinted with permission from NAMB

National Reverse Mortgage Lenders Association The National Reverse Mortgage Lenders Association (NRMLA) was established in 1997 to enhance the professionalism of the reverse mortgage business. NRMLA’s Standards and Ethics Committee published the Code of Ethics & Professional Responsibility, a copy of which every member must sign when joining or renewing membership.

The NRMLA Code of Ethics is divided into two parts—Part I-Values and Part II-Rules. The Values convey the ethical and professional principles that NRMLA Members are expected to portray in all business and professional interactions. The Rules address the guidelines and standards of ethical and professional behavior applicable to NRMLA Members.

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CASE STUDY: California Mortgage Loan Originator Ignores Ethics & Laws- $6 Million Loss

Eric Ray Hernandez, of Bakersfield, was convicted of conspiracy to commit mail fraud, wire fraud, and bank fraud by submitting false loan applications and fraudulent documentation to lenders, causing them to fund mortgage loans based on the false and misleading information. The Scam According to court documents, between October 2005 and May 2007, Hernandez was employed by a mortgage brokerage in Bakersfield. He and other conspirators submitted loan applications that included material misstatements concerning the borrowers’ income, assets, employment, and the borrowers’ intent to reside in the properties as owners, among other false statements. The conspirators also fabricated false supporting documentation and submitted it to lenders in support of the loan applications. Hernandez and the other conspirators caused the defrauded lenders losses of approximately $6,037,541. The Penalty On September 16, 2013, Eric Ray Hernandez was sentenced to 130 months in prison and ordered to pay $6,087,541 in restitution to the victims of the crime.

Volunteer Tri-State Best Practices Lending Committee Predatory lending was such a problem in Evansville, Indiana that in 1999, the Tri-State Best Practices Lending Committee (a community committee made up of VOLUNTEERS from the real estate industry) drew up a code of ethics for mortgage lenders in an effort to fight predatory lending practices. It was published in the summer 2001 edition of Bridges by the Federal Reserve Bank of St. Louis.

The committee defined predatory lenders as those "who operate in unethical and, often, illegal ways, using high-pressure sales tactics to help people to obtain credit while charging extremely high costs and interest for their services."

A Code of Ethics for Lenders 1. Protect all they deal with against fraud, misrepresentation, or

unethical practices of any nature.

2. Adopt a policy that will enable them to avoid errors, exaggeration, misrepresentation or the concealment of any pertinent facts.

3. Steer clear of engaging in the practice of law and refrain from providing legal advice.

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A Code of Ethics for Lenders (continued) 4. Follow the spirit and letter of the law of Truth in Advertising.

5. Provide written disclosure of all financial terms of the transaction.

6. Charge for their services only such fees as are fair and reasonable and which are in accordance with ethical practice in similar transactions.

7. Never condone, engage in or be a party to questionable appraisal values, falsified selling prices, concealment of pertinent information and/or misrepresentation of facts, including the cash equity of the mortgagor in the subject property.

8. Not knowingly put customers in jeopardy of losing their home, nor consciously impair the equity in their property through fraudulent or unsound lending practices.

9. Avoid derogatory comments about their competitors but answer all questions in a professional manner.

10. Protect the consumer's right to confidentiality.

11. Disclose any equity or financial interest they may have in the collateral being offered to secure the loan.

12. Affirm commitment to the Fair Housing Act and the Equal Credit Opportunity Act.

The predatory lenders were targeting the elderly; those with low-to-moderate incomes; people desperate to consolidate debt; and those who recently had gone through a divorce, death of a spouse or a bankruptcy. The victims were found most often through telemarketing; TV, print and direct mail ads; and court or credit bureau information. The loans were designed to trap borrowers in excessive debt until they were forced to foreclose.

Overview of Mortgage Fraud & Predatory Lending

Fraud is an intentional act meant to deceive in order to get someone to part with something of value. Mortgage fraud harms the lender and occurs when a borrower perpetrates a fraud in order to purchase or keep ownership of a property. Mortgage fraud should not be confused with predatory mortgage lending. Predatory lending practices harm consumers, whereas mortgage fraud harms the lenders.

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Mortgage Fraud Mortgage fraud is a crime in which the intent is to materially misrepresent or omit information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained had the lender or borrower known the truth. Mortgage fraud involves complex schemes to defraud lending institutions, such as banks.

Mortgage Fraudsters and Fraud Rings Unfortunately, mortgage fraudsters and fraud rings are still a reality in today’s market because they are particularly resilient and adapt readily to economic changes and modifications in lending practices. A fraudster or swindler is someone who commits fraud. Individual buyers commit fraud if they falsify information on their credit applications or submit false or inaccurate documents.

Often, organized fraud rings are comprised of industry insiders—people in the real estate and mortgage business. In their greed to amass more money, they have perverted the Golden Rule to, "Whoever has the gold; makes the rules." The type of people involved in mortgage fraud include licensed and non-licensed mortgage brokers, mortgage loan originators, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, and trust account representatives.

These fraudsters use their experience in the banking, mortgage, and real estate-related industries to exploit vulnerabilities in the mortgage and banking sectors to conduct multifaceted mortgage fraud schemes. They have access to the financial documents, systems, mortgage origination software, notary seals, and professional licensure information necessary to commit mortgage fraud and have demonstrated their ability to adapt to changes in legislation and mortgage lending regulations to modify existing schemes or create new ones.

Lenders and mortgage loan originators commit mortgage fraud by using falsified credit applications, altered credit reports, and forged Verifications of Employment. Along with the loan originators, appraisers most often are caught up in fraud when mortgages are involved because mortgage fraud requires the help of an appraiser. There is a potential for appraisal fraud with every instance of mortgage fraud. Lenders have unknowingly granted many loans based on these fraudulent appraisals. Unfortunately, appraisal fraud is a part of most mortgage swindles.

Real estate agents may locate straw buyers, help falsify property documents, and work with appraisers in creating inflated appraisals. Accountants could falsify financial statements and tax returns. Attorneys might prepare and record bogus deeds, create inaccurate title reports, and

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when acting as a closing agent, falsify closing statements. Escrow and settlement companies may prepare false documentation. Title officers may prepare inaccurate title reports by omitting valid property liens from the report.

The types of mortgage fraud and case studies will be presented in the next Unit.

Predatory Lending Predatory lending is a term commonly used to describe mortgage practices that are deceptive, unfair, or even blatantly fraudulent. Some mortgage loan originators, processors, and executives of mortgage companies have been involved in predatory lending. The most frequently targeted consumers are often the most vulnerable members of society, such as the elderly, those with a shaky credit history, and consumers in dire financial straits.

Examples of predatory lending practices include failing to provide TILA and/or RESPA documentation in a timely manner, not disclosing MLO compensation, taking compensation based on the terms of the loan, taking kickbacks, referring settlement providers without giving the borrowers proper disclosure, and steering borrowers away from affordable loans into high-priced loans. These lending practices are unethical as well as illegal.

Another unethical practice involves inserting hidden clauses in contracts stating that a borrower promises to pay the broker or lender a fee whether the mortgage closes or not. Though regarded as unethical by the National Association of Mortgage Brokers, this practice is legal in most states.

Often, a dishonest lender will convince the consumer that he or she is signing an application and nothing else. Often the consumer will not hear again from the lender until after the time expires and then they are forced to pay all costs. Potential borrowers may even be sued without having a legal defense.

Some lenders use “bait and switch” advertising, e.g., showing favorable interest rates and for loans that only people with FICO scores of over 800 can qualify. Others convince borrowers to refinance a loan without any true benefit or influence the borrower to obtain a higher loan amount using inflated appraisals (usually in tandem with an appraiser).

The types of predatory lending and case studies will be presented in the next Unit.

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Investigation of Mortgage Fraud and Predatory Lending

Historically, real estate fraud has been a white-collar crime that has gone largely unpunished. However, in recent years, the law has begun treating real estate fraud with more severity. Mortgage fraud became such a widespread problem that the Federal Bureau of Investigation (FBI) opened a division specifically for dealing with fraud. Fraud affects entire neighborhoods by causing foreclosures and falling property values.

Since mortgage fraud takes many forms, the crimes are investigated by the Federal Bureau of Investigation (FBI), the Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), Internal Revenue Service (IRS), Postal Inspection Service (USPIS) ), and other federal and/or state agencies. If the investigation discovers a crime has been committed, it is prosecuted by the Office of the U.S. District Attorney.

Special Agents with the FBI and the IRS Criminal Investigation Unit investigate mortgage fraud and illegal real estate crimes. The FBI works closely with individual lenders, as well as national associations related to the lending industry, to locate people who are guilty of defrauding lenders. The FBI also works with the mortgage industry, through the Mortgage Bankers Association, 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.

Each year the IRS audits thousands of tax returns involving individuals and entities associated with the real-estate business. IRS Special Agents follow the money and collect evidence to prove applicable tax and/or money laundering violations. Money laundering is simply a process of trying to make illegally earned income appear to be legitimately earned. Once they have obtained the evidence, IRS agents forward their investigation to the Department of Justice for criminal prosecution.

Suspicious Activity Report All federally insured institutions must report suspected criminal violations of federal law and the Bank Secrecy Act, as well as money laundering offenses, on a standard form SAR. The Suspicious Activity Report (SAR) contains data fields for subject addresses, the institution’s main office address, and the branch address where the suspicious activity was

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discovered. Freddie Mac and Fannie Mae are required to report suspicious mortgage fraud activity on a Mortgage Fraud Incident Notice (MFIN) to an examiner-in-charge.

Sources of Data on Mortgage Fraud Compiled by the FBI • HUD Office of Inspector General (HUD-OIG) reports • Suspicious Activity Reports (SARs) filed with the Financial

Crimes Enforcement Network of the Department of the Treasury (FinCEN)

• Complaints from the mortgage industry

Mortgage Fraud Index The LexisNexis Mortgage Asset Research Institute compiles a database called the Mortgage Industry Data Exchange (MIDEX), which consists of information about persons who participated in mortgage fraud. This information is contributed voluntarily by lenders, insurers, and regulatory agencies. The Mortgage Fraud Index (MFI) is a measure of fraudulent mortgage case activity. An MFI of 0 would indicate no reported fraud to MIDEX for a state. An MFI of 100 would indicate that the reported fraud for a state is level with expectations specific to fraud rates, given the number of loan originations for that state.

According to CoreLogic’s 2015 Mortgage Fraud Report, the five highest-fraud-risk states in descending order are: Florida, New York, Hawaii, New Jersey, and Nevada. These states indicated a high level of income misrepresentation and undisclosed mortgage debt on the applications.

The report categorizes seven types of fraud and misrepresentations: applications, appraisals, verifications of employment, verifications of deposit, credit documents, tax returns/financial statements, and escrow/closing documents. In 2013, 75% of all the loans investigated had some type of application misrepresentation or fraud. Application fraud and misrepresentation includes: incorrect name(s) used for the borrower(s), occupancy, income, employment, debt and asset misrepresentation, different signature(s) for the same name(s), invalid Social Security number(s), misrepresented citizen/alien status, incorrect address(es) or address history, and incorrect transaction type

Prosecuting Mortgage & Bank Fraud Scams Typically, the specific type of mortgage fraud—illegal flipping, phantom help schemes, straw buyers, mortgage application fraud, etc.—is not prosecuted. Federal indictments involving mortgage fraud usually contain some of following offenses: wire fraud, mail fraud, bank fraud, money laundering with a mortgage fraud scheme, and racketeering (RICO).

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U.S. Code Title 18, Part 1, Chapter 47 Penalties for Mortgage Fraud

• Fraudulent or false statements, up to five years in jail and/or a $100,000 fine

• False mortgage loan application, conspiracy to commit fraud, fraud/swindles, or bank fraud, up to 30 years in jail and/or a $1,000,000 fine

Usually the U.S. District Attorney does not prosecute isolated financial fraud transactions between individuals, involving minor loss to the victims. Instead, the focus is given to any scheme with a substantial pattern of conduct, which in its nature is directed to defrauding a class of persons or entities, or the public. As we have seen, financial fraud takes many different shapes, and fraudsters wear many different masks. Where a scheme and artifice to defraud is shared by two or more, it becomes a conspiracy to defraud. [18 USC §371]

CASE STUDY: Florida Real Estate Agent and Mortgage Broker Conspires with Others to Defraud Banks - $18 Million Loss Juan Carlos Rodriguez, a real estate agent and mortgage broker from Weston, Florida, pleaded guilty to conspiracy to commit mail fraud, wire fraud, financial institution fraud, and conspiracy to commit money laundering. The Scam According to court documents, Rodriguez and other conspirators used straw buyers to submit false documentation to various mortgage lenders substantially inflating the purchase price of the properties. The fraudulent loan proceeds were laundered through multiple accounts to conceal the source and distribution of the money and were ultimately used for the benefit of the co-conspirators. The Penalty On October 17, 2012, Juan Carlos Rodriguez, was sentenced to 42 months in prison and three years of supervised release.

Federal Mortgage Fraud Offenses Title 18, United States Code, Part 1 presents a long list of crimes, some of which pertain to white-collar crimes. In a nutshell, white collar crime is lying, cheating and stealing and extends to a full range of frauds committed by business and government professionals. White-collar crime is defined as a variety of nonviolent financial crimes, generally committed by business people involving mail and wire fraud, financial fraud or swindles, money laundering, consumer fraud, insider trading on the stock market, embezzlement, and other dishonest schemes.

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Although white-collar crimes are often sophisticated and do not involve violence, criminal charges can send convicted conspirators away to prison for years. Types of white-collar crimes relating to mortgage and bank fraud that are found in USC Title 18 include falsifying loan applications and appraisals, mail and wire fraud, bank fraud, money laundering, and illegal kickbacks.

Falsifying Loan Applications and Appraisals Anyone who falsifies loan documents or appraisals has violated the provisions of Title 18, United States Code, Chapter 47, Section 1001, et seq. and could be prosecuted by the U.S. District Attorney’s Office on behalf of the federal government.

Freddie Mac Form 65/Fannie Mae Form 1003 When completing the Freddie Mac Form 65/Fannie Mae Form 1003, the borrower affirms, “I/We fully understand that it is a Federal crime punishable by fine or imprisonment, or both, to knowingly make any false statements concerning any of the above facts as applicable under the provisions of Title 18, United States Code, Section 1001, et seq.”

URAR Form Freddie Mac Form 70/Fannie Mae Form 1004 Paragraph #25 of the Uniform Residential Appraisal Report Form Freddie Mac Form 70/Fannie Mae Form 1004 includes a similar statement. It states, “Any intentional or negligent misrepresentation(s) contained in this appraisal report may result in civil liability and/or criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Section 1001, et seq., or similar state laws.”

Therefore, anyone making false statements, preparing false documents, forging instruments, or overvaluing any security, asset, or income for the purpose of obtaining a loan from the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA) shall be fined or imprisoned not more than two years, or both. [18 USC §1010].

It is a crime for anyone to knowingly make any false statement or report, or willfully overvalue any land, property or security, for the purpose of influencing the action of financial institutions. If found guilty, the person shall be fined not more than $1,000,000 or imprisoned not more than 20 years, or both. [18 USC §1014]. The list of financial institutions includes nearly every type of lender that provides mortgage loans. Therefore, anyone who falsifies loan documents would be guilty of a federal crime.

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Included Financial Institutions [18 USC §20]

1. Any bank or savings association with deposits insured by the FDIC);

2. A credit union with accounts insured by the National Credit Union Share Insurance Fund;

3. A Federal home loan bank or a member;

4. A Farm Credit Bank, production credit association, agricultural credit association, bank for cooperatives, or any division, officer, or employee thereof, or of any regional agricultural credit corporation;

5. A small business investment company;

6. A bank holding company or a savings and loan holding company;

7. A Federal Reserve bank or a member bank of the Federal Reserve System;

8. A foreign branch of a national banking association operating under the Federal Reserve Act;

9. A branch or agency of a foreign bank; or

10. A mortgage lending business or any person or entity that makes in whole or in part a federally related mortgage loan.

CASE STUDY: Wisconsin Mortgage Broker Orchestrated Fraud using Inflated Appraisals and Fraudulent Loan Applications - $5 Million Loss

Paul Zalesk, of Twin Lakes, Wisconsin pleaded guilty to wire fraud and money laundering for his part in a mortgage fraud scheme that spanned from 2004 to 2006. The Scam According to court documents, Zaleski, acting as a mortgage broker, orchestrated a scheme which involved straw buyers, fraudulent loan applications, and inflated appraisals. As a result, he was able to arrange in excess of $14 million in loans for the purchase of approximately 51 properties located in southeastern Wisconsin and northern Illinois. More than $2 million of the loan proceeds wired by the various lenders were funneled to shell companies that Zalesk established. In connection with the scheme, Zaleski represented himself as a person involved in the purchase and improvement of real estate for profit and the coordinator of a group of investors engaged in that activity. All but a few of the properties ultimately went into foreclosure resulting in a loss of more than $5 million. Zaleski used the ill-gotten loan proceeds, in part, for the purchase of additional properties and for personal expenses.

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The Penalty On January 29, 2013, Paul Zaleski was sentenced to 14 months in prison and three years of supervised release.

Mail Fraud and Wire Fraud Mail fraud and wire fraud are federal crimes. Because so many fraudulent schemes are perpetrated by using the mail or electronic means, the U.S. District Attorney frequently prosecutes violators under the White-Collar Crime Penalty Enforcement Act found in Chapter 63 of Title 18 of the United States Code.

Mail Fraud Section 1341 states that it is illegal to use the United States Postal Service or any private or commercial interstate carrier to promote fraudulent schemes. [18 USC §1341].

Essential Elements of Mail Fraud 1. Having devised or intending to devise a scheme to defraud (or to

perform specified fraudulent acts), and

2. Use of the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).

To combat telemarketing fraud, Congress amended the mail fraud statute to broaden its application to include private or commercial interstate carriers in addition to the United States Postal Service.

Wire Fraud Section 1344 states that it is illegal to promote fraudulent schemes by writings, signs, signals, pictures, or sounds through wire, radio, or television communication in interstate or foreign commerce. The elements of wire fraud under Section 1343 directly parallel those of the mail fraud statute, but require the use of an interstate telephone call or electronic communication made in furtherance of the scheme.

Essential Elements of Wire Fraud 1. Scheme to defraud by means of false pretenses,

2. Defendant's knowing and willful participation in scheme with intent to defraud, and

3. Use of interstate wire communications in furtherance of the scheme

A person shall be fined not more than $1,000,000 or imprisoned not more than 20 years if found guilty of violating §1341 or §1343.

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Lulling Letters, Telegrams, and Telephone Calls After receiving money from their victims, fraudsters often send letters, emails, or make other communication with the victims that are designed to lull the victims into a false sense of security, postpone inquiries or complaints, or make the transaction less suspect. This use of mailings or wire transmissions that helps continue the scheme is considered mail and/or wire fraud.

CASE STUDY: Texas Licensed Mortgage Loan Originator Created Fraudulent Applications and Phony Construction Invoices - $10 Million Loss

Eric Damon Johnson of Dallas, Texas pleaded guilty to conspiracy to commit wire fraud affecting a financial institution. The Scam According to court documents, Johnson was a licensed mortgage broker, and the president of Bridgemark Investment Group (BIG). Johnson and his co-defendant conspired to fraudulently obtain mortgage loans in excess of the true sales price of residential real estate properties by making false statements on loan applications and submitting fake invoices for construction upgrades or repairs that were never performed. The conspiracy resulted in more than $10 million in fraudulently-obtained loan proceeds. BIG recruited individuals to purchase residential real estate as “investors” and Johnson and his co-defendant promised investors that BIG would find tenants to rent the property and make the mortgage payments. Johnson and his co-defendant agreed to make payments to the “investors” when the loan closed that were not disclosed to the mortgage lender on the HUD-1 Settlement Statement. The loan applications were submitted to residential mortgage lenders, who on the basis of the false statements in the loan applications, agreed to fund primary and secondary mortgages for the residential real estate properties. The Penalty On September 9, 2013, Eric Damon Johnson was sentenced to 48 months in prison and ordered to pay $3,753,539 in restitution, jointly with a co-conspirator.

Bank Fraud Of course, the purpose of mortgage fraud is to defraud banks. Bank fraud is a commonly prosecuted Federal offense because it encompasses a broad array of conduct. As a result, Federal prosecutors use bank fraud charges as a way to prosecute banking and financial institution related offenses,

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including fraudulent loan applications, fraudulent loans, and mortgage fraud.

Definition of Bank Fraud, Section 1344 • A person knowingly executes or attempts to execute a “scheme”

or “artifice” to defraud a bank or other financial institution. • A person knowingly executes or attempts to execute a “scheme”

or “artifice” to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.

To combat mortgage fraud, §1344 was expanded to include financial institutions as defined by 18 USC §20.

The term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services. [18 USC §1346]

For each count of bank fraud, a person can be punished by up to 20 years in Federal prison, a $1,000,000.00 fine, or both.

CASE STUDY: Mortgage Loan Originator, Real Estate Agents, and Escrow Agent Conspire to Commit Mortgage Fraud

At the time of the conspiracy, William Michael Naponelli of Tucson, Arizona was a real estate developer and mortgage loan originator; Walter Scott Fruit was a real estate agent and real estate developer, Bryan Atwood was a real estate agent; and Sandra Jackson was an escrow agent. They all pleaded guilty to conspiracy to commit wire fraud, bank fraud, and conspiracy to commit transactional money laundering. The Scam According to court documents, the conspirators participated in a scheme to obtain various loans between July 2006 and May 2007. Naponelli and Fruit purchased several properties using various business entities with which they were associated. They fraudulently inflated the true sales price of the properties and sold the properties to straw buyers. As part of the loan approval process, Naponelli and Fruit caused documents to be submitted that contained material false statements representing that the borrowers would provide the down payment or cash to close the real estate transactions. After the fraudulently obtained loan proceeds were received, portions of these proceeds were wired or deposited into bank accounts controlled by Naponelli and Fruit. Atwood and Jackson each obtained three properties through fraudulently obtained loans. They provided documents that contained one or more material false representations to the lenders. The properties obtained as

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a result of this mortgage fraud scheme went into foreclosure resulting in significant losses to the lenders. The Penalties On August 9, 2013, Walter Scott Fruit was sentenced to 30 months in prison and ordered to pay more than $2.5 million in restitution. On August 9, 2013, Sandra Jackson was sentenced to six months in prison and ordered to pay approximately $480,000 in restitution. On September 20, 2013, Bryan Atwood was sentenced to 15 months in prison and ordered to pay approximately $585,000 in restitution. On September 23, 2013, William Michael Naponelli was sentenced to 24 months in prison and ordered to pay $3.1 million in restitution.

Money Laundering The crime of money laundering is found at §§1956-1957. Money laundering is the act of making money that comes from “Source A” look like it comes from “Source B”. In practice, criminals are trying to disguise the origins of money obtained through illegal activities so it looks like it was obtained from legal sources. In order to disguise the illegal nature of such money, those engaged in criminal enterprises will filter their money through a number of different transactions to accomplish two goals. First, they want to make it appear as though the money was earned legitimately. Second, they want to make it difficult for auditors and investigators to determine the true source of the income. The idea is to split the money up and keep it moving.

Although money laundering can be charged by itself as a stand-alone offense, it is usually filed in conjunction with other crimes.

Crimes Most Frequently Accompanied By Money Laundering Charges

• Bank Fraud • Credit Card Fraud • Drug Offenses • Mortgage Fraud • RICO Cases • Securities Fraud • Tax Evasion

Penalties for Money Laundering Money laundering is punishable by up to 20 years in prison, a $500,000 fine or two times the value of the proceeds laundered (whichever is more), or a combination of prison and fines. It is important to understand that

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these penalties can be exacted for each count of money laundering with which a person is charged.

Money laundering is prosecuted. By taking away the profit of a crime, the deterrent effect of law enforcement is enhanced. Furthermore, it would make no sense to allow people to keep the proceeds of illegal activity.

CASE STUDY: California Woman Defrauds Lenders and the IRS Safieh Fard of Escondido, California was convicted for conspiracy to defraud the IRS and conspiracy to launder the proceeds of bank fraud. The Scam According to court documents, starting in 1997 and continuing through 2004, Fard and her co-conspirators purchased valuable residential real estate properties, including numerous beachfront properties in Newport Beach, Calif. To obtain mortgages to purchase these properties, Fard and her co-conspirators provided false information to federally insured banks that substantially overstated their income and assets on mortgage applications. Fard submitted mortgage applications that falsely stated she earned over $40,000 per month, despite claiming no taxable income on her federal income tax returns during the eight-year conspiracy. Fard and her co-conspirators bought, sold, and transferred ownership of the properties between and among themselves. Ultimately, the properties were sold to third parties resulting in substantial monetary gain. Fard and her co-conspirators then failed to report capital gains on more than $3.7 million from these sales on their federal income tax returns. The evidence further established that Fard and her co-conspirators sold Newport Beach properties to unrelated third parties and received the proceeds in a large lump-sum payment by either wire transfer or check. The proceeds were then transferred through multiple bank accounts to an account in the name of Fard’s co-conspirator, who withdrew proceeds in cash in amounts slightly below the $10,000 federal reporting requirement. Fraud proceeds were also used to buy new real estate properties. The Penalty On May 13, 2013, Safieh Fard was sentenced to 63 months in prison and ordered to pay $594,000 in restitution to the IRS.

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Kickbacks & RESPA Violations A kickback is the payment of something of value to an individual with the goal of persuading or influencing his or her decision or performance in a certain situation. Nearly every fraud scheme involves some type of illegal kickback.

Although many types of kickbacks are prohibited under federal and state law, kickbacks are not illegal per se. If a kickback does not specifically violate federal or state laws and such kickbacks are made to clients throughout the industry, the kickback may be normal, legal, and even tax deductible. According to section 162(a) of the Internal Revenue Code (26 U.S.C.A. §162), "all the ordinary and necessary expenses" that an individual or business incurs during the taxable year are deductible, including kickbacks as long as the kickbacks are not illegal and are not made to an official or employee of the federal government or to an official or employee of a foreign government.

Regarding real estate, Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. [§3500.14]. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed. Unearned fees are payments in excess of the reasonable value of goods provided or services rendered.

To prove a violation, it must be shown that there was an agreement between the parties to refer settlement service business, the transfer of a thing of value, and the referral of settlement service business.

Anyone who violates RESPA could be prosecuted by the U.S. District Attorney’s Office on behalf of the federal government. Violators are subject to criminal and civil penalties that range from being fined equal to three times the amount of any charge paid for such settlement service up to $10,000 or imprisonment for not more than one year, or both.

CASE STUDY: Florida - $4.5 Million in Kickbacks - $20 Million Loss Lonett Rochell Williams, of Woodland Hills, California was convicted for her participation in a conspiracy to commit mail fraud, conspiracy to commit money laundering, and mail fraud. The Scam According to court documents, approximately $20,448,767 in loans were issued by lenders as part of a scheme to fraudulently purchase thirty-seven properties located in Texas, Georgia, California, and Florida. Williams and her company received more than $4.5 million in kickbacks because of the scheme.

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The Penalties On January 23, 2013, Lonett Rochell Williams was sentenced to 120 months in prison.

Risk Management – How MLOs Can Protect Themselves

Real estate transactions have risk—both the borrower and the lender could suffer a loss. Sometimes real estate transactions end up in lawsuits, and when they do, mortgage loan originators are often caught in the crossfire or even in the direct line of fire. Loan originators can face disciplinary action or lawsuits that often prove costly and time consuming.

The best way to avoid or minimize disciplinary action, disputes, and lawsuits is to follow the laws and adhere to ethical lending practices and guidelines. Ethical lending practices help loan originators to act with moral integrity to avoid actions that can be considered fraudulent. By doing everything by the book and following a code of conduct, litigation may be avoided.

Steps to Minimize Risk • Treat each and every person fairly, provide all pertinent

disclosures, and objectively evaluate their financial situation • Never knowingly arrange a loan beyond the borrowers’ ability to

repay • Provide timely disclosures • Advertise loans and loan products in compliance with Reg. Z • Provide timely and accurate estimates of closing costs, fair time

tables, and clear expectations • Fully disclose all information and not make false representations • Carefully document the entire transaction • Verify that the HUD-1 statement accurately reflects the

transaction • Do not participate in or accept unethical conduct or practices • Do not give or receive illegal kickbacks. A kickback is an

illegal payment made in return for a referral that results in a transaction. This applies to almost every loan made for residential property.

• Never condone, engage in, or allow oneself to be party to unscrupulous appraisal practices

• Do not participate in dishonest or fraudulent conduct • Never ask borrowers or employees to sign blank documents

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• Immediately terminate your relationship with a borrower if the

borrower asks you to do anything that is illegal or if you become aware that the borrower has provided false information that could deceive a lender or others.

• Report fraud if it is suspected.

Comply with Federal Consumer Protection and Fair Lending Laws

In recent years, lenders and mortgage professionals have encountered scrutiny with regard to unfair lending practices. Some of the biggest mortgage companies faced class action lawsuits for misleading prospective borrowers, falsifying loan applications, and placing low-income borrowers into loan programs they could not afford.

One of the most critical aspects of risk management for mortgage loan originators concerns compliance with federal fair lending and consumer protection regulations. Legislation intended to protect the rights of individuals involved in the mortgage loan transaction has been established by the federal government. Mortgage loan originators must adhere to federal regulations, such as the Fair Housing Act, Truth in Lending Act (Reg. Z, HOEPA, etc.), Equal Credit Opportunity Act (reg. B), Fair Credit Reporting Act, Fair and Accurate Credit Transactions Act, Mortgage Reform and Anti-Predatory Lending Act, and RESPA (Reg. X). These federal laws are covered in Unit 11.

To ensure that you comply with all applicable laws and regulations • Recognize the constantly changing regulatory environment in

which the mortgage industry exists and remain current through industry publications, workshops and seminars, continuing education, and by taking advantage of opportunities to learn more about what is going on in the industry.

• Refrain from engaging in activities beyond your scope of expertise and ask for help when you are unsure of a situation.

• Have knowledge of and maintain reference materials where such rules, regulations, and laws may be researched and confirmed.

You must be knowledgeable of regulations concerning fees, timing, forms, and disclosures that are set forth by the federal government, state, and lender in order to maintain compliance. If you do not comply with the law, you could be subject to civil or criminal action and penalties.

Comply with the SAFE Act The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) requires all states to have a loan originator licensing and registration system for residential mortgage loan originators (MLOs). The SAFE Act

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provides uniform national licensing standards requiring minimum licensing and education and gives a unique identifier number to loan originators registered in the national database.

The SAFE Act prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining and annually maintaining:

• registration as a registered mortgage loan originator and a unique identifier (federal registration). This applies to individuals who are employees of covered financial institutions, or

• a state license and registration as a state-licensed mortgage loan originator, and a unique identifier (state licensing/registration). This applies to all other individuals.

The SAFE Act requires individual mortgage loan originators to register with the Nationwide Mortgage Licensing System and Registry (Federal Registry) and to maintain their registration.

Annual Continuing Education

Minimum annual license renewal requirements for individual MLOs • Continue to meet the minimum standards for license issuance. • Satisfy annual continuing education requirements, which must

include at least 8 hours of education approved by the NMLSR. The 8 hours of annual continuing education must include at least 3 hours of Federal law and regulations, 2 hours of ethics (including instruction on fraud, consumer protection, and fair lending issues), and 2 hours of training related to lending standards for the nontraditional mortgage product marketplace. [12 CFR §1008.107]

Unique Identifier Number When an MLO registers with the Registry, he or she receives a unique identifier number, which is assigned for life. The unique identifiers allow MLOs to be tracked if they move between state and federal jurisdictions and/or change employers, and help consumers to find certain information about a particular MLO when they search on the Registry’s consumer access portal.

Registered MLOs must provide their unique identifiers to a consumer upon request, before acting as a mortgage loan originator, and in any initial written communication (paper or electronic) from the MLO to the consumer. [1007.10512 c.f.r. 1008.7(b)].

The types of written communications include such items as a commitment letter, loan program descriptions, promotional items, advertisements, business cards, stationery, notepads, and similar materials.

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Complete Loan Applications Accurately

The importance of properly prepared loan applications cannot be overstated because they are used to assure the understanding and approval of all parties to the loan. Be sure to read the loan application (and other documentation) carefully before submitting it.

Comply with Do Not Contact Policies Anytime mortgage solicitation involves the use of the telephone, cell phone, fax, or email, the MLO must comply with applicable federal and state Do Not Call, Do Not Fax, and CAN-SPAM laws. You may still call, fax, and email potential clients; but you must follow certain procedures.

In general, you may make cold calls if the calls are made only between 8:00 a.m. and 9:00 p.m. Emails sent as part of an ongoing transaction, called transactional email messages, are excluded from the CAN-SPAM Act. An example would be an email sent to a client concerning an existing loan. However, an unsolicited email message sent by a MLO to people on a mailing list for the purpose of offering that MLO’s services is a commercial email message, and must follow the guidelines for commercial email messages.

Follow Advertising Guidelines Because of the wide reach of today’s advertising media and technology, advertising guidelines apply to print, the spoken word, and implication.

MLO’s Responsiblity • Comply with the spirit and letter of federal and state laws and

regulations. • Include your unique identifier number. • State clearly that rates and terms are subject to change as well as

the date the published rates are available. • Use the organization’s logo, address, phone numbers, and other

pertinent information on business cards, letterhead, and correspondence of all types.

• Disclose membership affiliations with all industry organizations.

Mortgage loan originators must advertise information that is factual, accurate, verifiable, straightforward, and that reflects well on the integrity of the mortgage industry. Advertising by any method must not be misleading or structured to be reasonably capable of misleading the public and must be in accordance with requirements of the Truth in Lending Act.

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Common Violations of TILA

• Advertising a note rate without the APR • Using a trigger term, such as the amount of the down payment,

without the required disclosures

Avoid Discrimination in Extending Credit The federal Fair Housing Act and the Equal Credit Opportunity Act (ECOA) protect borrowers against discrimination when they apply for a mortgage loan, a refinance loan, or a home improvement loan. The Fair Housing Act prohibits discrimination in residential real estate transactions and the Equal Credit Opportunity Act prohibits discrimination in all credit transactions.

The Fair Housing Act prohibits discrimination in any form, including discrimination based on the applicant’s race, color, religion, sex, national origin, familial status, and disability. In addition, the ECOA adds marital status, age, employment, or being a recipient of government support to the list. The Fair Housing Act prohibits redlining, which is the refusal to extend credit to someone based solely on the geographic location of the property.

Practices to Prevent Discrimination Obviously, not everyone who applies for a mortgage loan qualifies for one. Denying credit must be based on the applicant not qualifying for the loan. Mortgage brokers analyze factors such as income, expenses, debts, and credit history to evaluate a borrower’s application. In addition, the criteria for mortgage loans vary by lender, loan type, and the terms and conditions of the loan.

MLOs should maintain documents regarding every transaction. When discrepancies are found, the underwriter is responsible for determining if fraud has been committed or if the information given was poorly understood or conveyed inaccurately.

In the event that the borrower has a history of slow payments, charge-offs, or collections, the cause of the derogatory history must be documented. It is important in these situations to have the borrower write a letter to the lender explaining what caused the past credit problems. When a letter is provided, lenders must consider this information when reviewing the credit application.

Avoid Non-Disclosure Non-disclosure on the part of the broker or lender occurs when the broker or lender does not disclose, inaccurately discloses, or only partially discloses fees and/or terms of a loan. This type of business practice is in violation of state and federal lending laws and regulations.

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Examples of Deceptive Non-Disclosure Practices

• In order to make closing costs look favorable, a loan officer might show the title insurance estimated cost for a loan of $550 as compared to another lender’s estimate of $1,200. The title insurance is not a lender expense, but is a charge by the title company or attorney providing the closing services and title insurance. The lender who provided the estimate for $550 is not bound by that estimate. As a result, it cannot be assumed that a lender’s costs are lower because of a lower estimate for title insurance.

• One lender discloses a single day’s interest knowing that another lender’s estimate includes 30 days of interest. The first lender’s estimate is going to look better because of this, but it in no way indicates a lower cost.

• Although a hazard insurance policy may be a lender requirement, it is an expense established by the insurance company and not the lender. In a typical transaction that requires escrow, a lender would want the policy paid a year in advance with two month’s premium placed into an escrow account. Lender A’s estimate might cover the entire fourteen months while Lender B may not disclose this requirement to make its estimate appear lower than that of the other lender.

Avoid Misrepresentation Misrepresentation (making a false statement or concealing a material fact, causing someone loss or harm) is another form of mortgage fraud. Misrepresentation in the mortgage industry is the intentional erroneous presentation of information, including false statements or omissions, on which the approval of the loan relies. It is often characterized by intentionally falsifying a borrower's status or falsifying information on a loan application for the purpose of purchasing real estate; whether for the borrower’s personal residence or for investment purposes. In many cases, the borrower is not aware of the misrepresentation, such as when industry insiders, appraisers, brokers, and mortgage loan originator conspire to buy and sell real estate without the borrower being complicit.

Examples of Misrepresentation • Falsifying employment income • Non-owner occupant claiming occupancy • Down payment loans misrepresented as gifts • Falsifying deposits

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Watch for Mortgage Fraud Red Flags According to the FBI, each mortgage fraud scheme contains some type of “material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.”

Red Flags and Common Elements of Mortgage Fraud • Mortgage broker does not disclose the name of the actual lender • Selling broker is also the loan originator • Appraisal that is considerably higher than the agreed sales price • Suspicious appraisal methods, such as the use of inappropriate

comparables • Rebates on sale prices—house sells for $200,000, but appraises

for $300,000. Seller agrees to give the excess proceeds of the mortgage (anything over $200,000) to the buyer

• Rebates on the broker’s fees—a portion of the seller’s proceeds is paid to the mortgage broker (who is also the selling real estate broker)

• Sales price inflated, without justification • Sales price inflated, based on an invoice for recent improvements

received from an unknown third party • Excessive land flipping • Multiple transactions between third parties • Real estate commission is based on a sales price that is different

than the agreed to sales price • Sales contract is amended prior to closing to substitute a new

purchaser • Agreements exist that are to be performed outside of closing or

after closing • Transactions with an unknown title company • Principals in the transaction are asked to sign blank loan

documents • Buyer falsifies his or her income and writes other false

information on the loan application • Fictitious or stolen identities used on the loan application • Two sets of settlement statements • Buyer is going to do substantial improvements to the property

and the value of the property is increased to reflect high-dollar soft costs (e.g., architect fees, engineering fees, consulting fees, or management fees) vs. hard costs (materials, etc.)

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The existence of one or more of these red flags does not necessarily mean the transaction is fraudulent. However, they do indicate that further scrutiny of the transaction may be necessary.

Summary From the Great Depression to the subprime meltdown, greed and fraud in the financial markets is a predecessor to financial turmoil. Obviously, a lack of ethical principles in the mortgage origination process allowed rampant mortgage fraud and predatory lending practices, which led to the meltdown. Ethical principles provide a guide to making decisions and also establish the criteria by which your decisions will be judged by others.

Mortgage fraud has become such a widespread problem that the FBI has opened a division specifically for dealing with fraud. The two basic kinds of fraud are fraud for property and fraud for profit. Fraud for property accounts for roughly 20% of known cases of fraud. Common cases of fraud for property involve stated income/stated assets, silent seconds, equity theft, and identity theft. Fraud for profit is a more sophisticated version of mortgage fraud because it involves real estate agents, appraisers, lenders, and closing agents or attorneys. Some examples of fraud for profit include flipping, straw buyers, bogus sales, inflated appraisals, and air loans.

Predatory lending practices harm consumers, whereas mortgage fraud harms the lenders. Predatory lending is the abusive practice of extending credit with the intent to deceive and take advantage of the borrower. Unscrupulous loan originators instigate predatory lending. Predatory lending results in loans to borrowers that include inflated interest rates, outrageous fees, and unaffordable repayment terms.

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Unit 9 Characteristics of Mortgage Fraud Scams and Predatory Lending

Introduction Unscrupulous investors, unethical real estate agents and other fraudulent loan participants are constantly trying to beat the system. They use phoney accounts, they make large deposits to temporarily inflate the amount of assets in an account, they falsify account statements to reflect different numbers than actually exist and they hide debts to skew debt-to-income ratios. These and other tactics account for billions in annual losses to the mortgage industry.

Mortgage fraud cases usually involve multiple participants including developers, borrowers, loan officers, real estate agents, appraisers, title agents, accountants, and attorneys. The common thread of mortgage fraud is greed. Because of greed, unethical people always find ways to take advantage of consumers and lenders while staying ahead of the regulators and prosecutors.

“Fraud scams look different when the market is on its way up, and when it’s on its way down. There are different sets of victims. “On the front end, we had mortgage origination fraud, either by the borrower or the mortgage broker. On the back end we got foreclosure fraud, where borrowers would get cold calls from people who offered to help save their houses. The latest were builder buyout scams, where developers and builders would use straw buyers to get houses off their books.” Benjamin B. Wagner, U.S. Attorney for the Eastern District of California,

The possibilities for fraudulent mortgage scams seem limitless—faked loan applications, credit enhancement, property flipping, property flopping, phantom help, builder-bailouts, and rigged public auctions of foreclosed properties. These are just some of the fraudulent techniques used to rip-off lenders and investors out of billions.

Even though the fraud schemes differ, they share many of the same elements—falsified loan applications, inflated and erroneous appraisals, kickbacks, mail and wire fraud, and bank fraud—that are federal crimes.

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Learning Objectives After completing this Unit, you should be able to:

• recall the types of mortgage fraud scams. • recognize the characteristics of predatory lenders and their

abusive lending practices. • identify the similarities of high profile fraud rings.

Kinds of Mortgage Fraud Mortgage fraud scams employ some type of material misstatement, misrepresentation, or omission relating to the property or potential borrower that is relied on by an underwriter or lender to fund, purchase, or insure a loan. Federal investigators have identified an increase in frauds and schemes in the real estate business. These schemes victimize individuals and businesses, including low-income families lured into home loans they cannot afford, legitimate lenders saddled with over-inflated mortgages, and honest real estate investors fleeced out of their investment dollars. The two basic kinds of fraud are fraud for property and fraud for profit.

Fraud for property typically represents illegal actions conducted solely by the borrower, who is motivated to acquire and maintain ownership of a house under false pretenses. Borrowers who commit fraud for property make misrepresentations on their residential mortgage loan applications. Common cases of fraud for property involve borrowers making misrepresentations on their loan applications including but not limited to misrepresenting income and expenses (particularly easy with no doc loans), lying about the property being owner-occupied versus tenant- occupied, and lying about the source or amount of the down payment. Fraud for property accounts for roughly 20% of known cases of fraud.

Fraud for profit is a complex scheme involving multiple parties, including mortgage lending professionals, in a financially motivated attempt to defraud the lender of large sums of money. A high percentage of mortgage fraud for profit involves collusion by industry insiders, such as appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the industry. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth much less. In large schemes with multiple transactions, banks may lend millions more than the properties are worth. Some examples of fraud for profit include borrowers making misrepresentations on loan applications or outright creating bogus loan documents with fraudulent qualifications, flipping, straw borrowers, straw buyers, inflated appraisals, and air loans.

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Example: Fraud for profit schemes frequently include a straw buyer whose credit report is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest settlement agent who might prepare two sets of settlement statements or makes disbursements from loan proceeds that are not disclosed on the settlement statement, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. The parties involved share the money and the mortgage eventually goes into default.

Falsified Loan Applications and Fake Documents More than half of the mortgage fraud cases that the Federal Bureau of Investigation (FBI) investigates involve fraud on the mortgage application. Sometimes, loan applicants (with or without the knowledge of the mortgage loan originator) falsify income and employment history to obtain financing to purchase a property. Although illegal, it is not nearly as devastating as a mortgage fraud ring that involves many professionals—bank loan officers, real estate agents, appraisers, accountants, and mortgage brokers—working in collusion to defraud lenders. All of these people profit from various commissions, fictitious sales, and fees—often on loans based on faked loan applications.

Falsifying employment, identity, income, assets and deposits, and undisclosed debt are some of the most common forms of fraud in the application process.

CASE STUDY: Maryland Ring Prepared Fraudulent Loan Applications

Edgar Galdamez of Rockville, Maryland was convicted of wire fraud in connection with a fraud scheme. The Scams According to court documents, from at least September 2006 through May 2007, Galdamez and others contacted individuals who wished to purchase homes as investment properties. Galdamez and others prepared and submitted false loan applications in the buyers’ names to the lending institution to qualify these individuals for loans that they otherwise were unqualified to obtain. For instance, they typically inflated the buyer’s income and omitted liabilities. They also falsely stated that the purpose of the property was to be the borrowers’ primary residences in order to receive a lower interest rate. Galdamez knew that the property was intended to be used as an investment property. These residential mortgages were destined to fail because the borrowers did not have the income or assets to make the necessary mortgage payments.

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Galdamez and others profited from these fraudulent transactions by collecting origination fees, commissions, and brokers’ fees from each loan that closed. As a result of the fraud scheme, the lender lost $515,000. The Penalty On January 23, 2014 Edgar Galdamez was sentenced to 18 months in prison, followed by three years of supervised release, and ordered to pay $515,000 in restitution and forfeiture, the amount of loss resulting from the scheme

Often, mortgage fraud investigators find two sets of settlement statements. One settlement statement is prepared and provided to the seller accurately reflecting the true selling price of the property. A second fraudulent statement is given to the lender showing a highly inflated purported selling price.

Measures of Fraud Risk The CoreLogic Mortgage Application Fraud Risk Index has six measures of fraud risk on loan applications: income and assets, undisclosed debt, occupancy, employment, identity, and property.

Income and Asset Fraud Income and/or asset fraud is an intentional misrepresentation of income and/or assets on a mortgage loan application in order to qualify for a mortgage. Others lie about the assets that they have available for the down payment.

A stated income/stated asset loan (liar loan) had its place. However, they can easily be abused by a borrower providing false information because there was no documentation required. Liar loans depended on a borrower's credit score and the LTV rather the the borrower's actual ability to repay the mortgage. Liar loans combined with inflated appraisals put borrowers into homes they could not afford. Because of the Ability to Repay/Qualified Mortgage rules, lenders are verifying sources of income.

However, unscrupulous borrowers are undaunted by the more stringent requirements and try to circumvent the process by falsifying W-2s, bank statements, and other records to meet the tougher income and asset guidelines lenders have adopted. Lenders are less ready to accept paper documentation, such as a bank statement, because it can be edited using something like Photoshop before it was printed. The best way to verify the data is to obtain it in digital form directly from the financial institution or original source, with no interaction from the borrower who might be tempted to tamper with the information.

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CASE STUDY: Massachusetts Former Attorney Convicted in Phony Down Payment Fraud

Marc D. Foley of Needham, Massachusetts was convicted of wire fraud and money laundering. The Scam According to evidence presented at trial, in December 2006 and January 2007, Marc D. Foley, a former attorney who operated a real estate practice in Needham, participated in a scheme to defraud six mortgage lenders in connection with $4.9 million in real estate loans for the purchases of 24 condominium units in Dorchester. When Foley and an associate, acting under his direction, closed the loans, documents sent to the mortgage lenders falsely represented that funds ranging from $9,300 to $39,000 had been collected at the closings from the borrowers, when in fact the borrowers made no down payments and paid no funds at the closings. Furthermore, Foley entered into an undisclosed agreement with the seller to subtract from the seller’s proceeds all the funds that were reported to the lenders as coming from the borrowers. Foley also used various other means to conceal from the lenders that the borrowers had not provided funds for the purchases. The Penalty On December 20, 2012, Marc D. Foley was sentenced to 72 months in prison and three years of supervised release.

Undisclosed Debt Fraud Undisclosed debt fraud is an intentional failure to disclose debts during the loan application process. Undisclosed debt is a leading cause of mortgage fraud.

Fannie Mae recognizes this and states in its Loan Quality Initiative (LQI) guidelines that, “Lenders are responsible for determining that all debts incurred or closed by the borrower, up to and concurrent with settlement on the subject mortgage loan, are disclosed on the final loan application that is signed by the borrower at closing. These debts must be evaluated and included in the qualification for the subject mortgage loan. Lenders must have adequate internal controls and processes to support this requirement.” [Lender Letter LL-2010-03].

Lenders are protecting themselves by pulling a second credit report a few days before the scheduled closing. This “last-minute credit report” shows if a borrower has obtained—or even shopped for—new debt between the date of the loan application and the closing. If borrowers have made applications for credit of any type—for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card—the closing could be put on hold pending additional research by the lender.

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But, what does a lender do when borrowers try to hide debt, such as a private loan between family members that does not show up in a credit report? In the past, this sort of thing could be difficult to catch. However, underwriters can review all transactions in the submitted bank accounts to look for regular payments that are not tied to general living expenses or utilities. There is a good chance it is a debt payment of some sort. The underwriter should ask the borrower for clarification of the payment.

CASE STUDY: Ohio Mortgage Broker Falsifies Documents - $1 Million Loss

Antoinette Payne of Euclid, Ohio was found guilty of conspiracy to commit wire fraud and conspiracy to commit money laundering. The Scam According to court documents, Payne worked as a mortgage broker and loan officer for Supreme Funding, a mortgage broker in Euclid, Ohio. She was also the owner of TLC Properties and Designer Loan Properties, which were simply sham companies which she used to receive kickbacks and reimbursements for undisclosed down payment assistance she was providing to purchasers from the various loans’ closings she was handling. These funds were in addition to the fees paid to Payne as a mortgage broker and loan officer in handling these transactions. Payne recruited purchasers for properties and promised to pay them money for filling out the paperwork for mortgage loans where the price of the properties had been greatly inflated. She also provided any down payments as necessary. Payne also falsified the income and asset on the loan documents of the purchasers she recruited to ensure their approval. She provided phony lists of improvements to the lender to support the inflated price of the real estate. Once the purchasers stopped making payments on the mortgage loans, the properties went into default, resulting in a loss to lenders in the amount of approximately $1 million. The Penalty On November 29, 2012, Antoinette Payne was sentenced to 27 months in prison and ordered to pay more than $1.3 million in restitution.

Occupancy Fraud Occupancy fraud is a type of mortgage fraud, whereby the borrower lies about whether or not the home will be owner occupied. The borrowers state on the application that they intend to live in the home they are buying when it’s actually an investment property.

Lenders generally use slightly less stringent eligibility requirements for primary residences, e.g., (lower down payments and lower interest rates,

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than for investment properties. Therefore, some borrowers intentionally deceive lenders in order to obtain the lower down payments and interest rates. A lender that discovers the fraud could revoke the mortgage and call the entire loan due and payable.

Even though this may seem trivial, it is bank fraud. Lenders typically charge higher interest rates for investment properties due to their higher delinquency rates. The lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. It is considered fraud because the borrower has materially misrepresented the risk to the lender to obtain more favorable loan terms.

CASE STUDY: Arizona Conspirators Use Occupancy Fraud & Straw Buyers to Defraud Lenders

Daniel Morar of Phoenix, Arizona pleaded guilty to conspiracy to commit wire fraud. The Scam According to court documents, from July 1, 2006 through January 1, 2007, Morar and others conspired to use straw buyers to purchase multiple properties and to receive cash back following the closing of the real estate transactions. Morar and others directed the straw buyers to submit loan applications that falsely represented their assets, income, liabilities, source of down payments, and the intent to occupy the homes as their primary residences. Based on these false misrepresentations, lending institutions wired funds to close the real estate transactions. In fact, the straw buyers were unable to afford the multiple properties and would not be using any of the properties for their primary residences. Throughout the conspiracy, the cash back from at least 19 transactions were deposited into Morar's bank accounts. For each transaction, the cash back was falsely represented on HUD-1 forms as funds for remodeling work. However, the remodeling work was either minimally completed or not done at all. The cash back was used for personal expenses. In addition, a portion of the cash back proceeds were wired to accounts in Romania controlled by family members. The Penalty On July 29, 2013, Daniel Morar was sentenced to 60 months in prison, three years of supervised release and ordered to pay $222,784 in restitution.

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Employment Fraud Employment fraud occurs when a borrower claims self-employment in a non-existent company or intentionally misrepresents an employer’s name, length of employment, position or related information on a loan application to provide justification for a fraudulent representation of the borrower's income.

CASE STUDY: California - Real Estate Broker submitted- False Loan Applications - $5.5 Million Loss

Hoda Samuel of Elk Grove, California was convicted of a mortgage fraud scheme that caused more than $5.5 million in loss. The Scam According to evidence presented at trial, Samuel, a licensed real estate broker, owned and operated Liberty Real Estate & Investment Company and Liberty Mortgage Company. Between April 5, 2006 and February 26, 2007, there were 30 fraudulent sales transactions where Samuel was the real estate agent for the buyer in 29 of the home sales and represented the seller in at least 15 transactions. Each transaction involved false statements on loan applications in order for unqualified buyers to qualify for the loans. These included false statements about income, employment, and rental history. False documents were created and submitted to lenders to support these lies. Persons were paid to answer lender calls and affirm the false statements. All of the properties went into foreclosure. Samuel not only falsified the borrowers’ ability to repay the loans, she also falsified the value of the collateral securing these loans. Fraudulent purchase prices, often exceeding the actual asking prices by $15,000 to $40,000, were inserted into contracts that included repairs and costs for disability access modifications. At times, the buyers’ minor children were named as building contractors so that money could be funneled back to buyers. The excess amounts were paid back to the buyers. The repairs and remodeling were seldom if ever done, and the lenders were unaware that the true purchase price for each property was below the total amount funded. The Penalty On August 15, 2013, Hoda Samuel was sentenced to 120 months in prison.

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Identity Fraud In identity fraud, an identity is intentionally altered, created, or stolen to obtain a mortgage. The applicant's name, personal identifying information, and credit history are used without the true person’s knowledge. The first sign that a person’s identity was stolen can be a receipt of a notice of default on a property that he or she does not own.

CASE STUDY: Oregon Loan Officer submitted- False Loan Applications

Kamau Herndon was convicted of aggravated identity theft. The Scam Herndon, a former loan officer at Lighthouse Financial Group in Vancouver, Washington, was indicted in February 2009, on aggravated identity theft charges after he submitted three materially false loan applications to purchase homes for his girlfriend. The applications totaled more than $1.5 million for homes located in Milwaukie and Portland, Oregon and Edmonds, Washington. The Penalty On March 29, 2010, in Portland, Ore, Kamau Herndon was sentenced to 24 months in prison, to be followed by one year of supervised release.

CASE STUDY: Wisconsin Scammer Steals Mother’s and Sister’s Identities

Randez J. Long, of Milwaukee, Wisconsin was convicted of bank fraud and money laundering. The Scam According to court documents, from approximately January 2008 through April 2008, Long, and others working with him and at his direction, purchased or sold approximately 35 residential properties in the Milwaukee area. In particular, Long bought at least 11 properties in his sister’s name and seven properties in his mother’s name without the consent of either relative. The purchases were typically financed through mortgage companies or federally insured banks. Long, along with others working for him, sent these institutions loan applications and documents that contained false and fraudulent information regarding the borrower’s employment, assets and income. Long and others also provided prospective lenders with false documents purporting to verify the borrower’s employment, income and assets. In some cases, Long inflated the purchase price of the residence, which enabled him to divert significant proceeds of the sale to himself, or to an entity that he controlled.

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Long frequently provided the funds that the nominal buyer was supposed to contribute to the purchase. He also would contact the lender that the borrower was unable to pay the loan and negotiate a fraudulent “short sale.” Long and others would then provide lenders with false documents, including offers to purchase and settlement statements, for amounts substantially less than the amount owed to the lender. At the same time, Long would then fraudulently arrange to sell the property to a third party for substantially more than the amount represented to the lender. The Penalty On July 29, 2013, Randez J. Long was sentenced to 21 months in prison, three years of supervised release, and ordered to pay $984,043 in restitution to the victims.

Property Fraud Property fraud is the intentional misrepresentation of a property’s value as higher than or lower than market value to achieve illegitimate profit. A dishonest appraiser inflates the value of the property and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value. When the seller gets the check at the closing for a phony amount, he pays off the appraiser and anyone else involved in the scam. Usually, the borrower does not make any payments and the house goes to foreclosure.

Some fraud rings are so brash, that the property does not even exist and the loan is an air loan. According to the FBI, an air loan is a non-existent property loan that has no collateral. The scammer invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones and use them as the employer, appraiser, credit agency, and so forth for verification purposes. Air loans are the ultimate con in mortgage fraud.

CASE STUDY: Maryland Conspirators Prepared Fraudulent Loan Applications & Inflated Appraisals - $1 Million Loss

Kimberly Eileen McMillian of Baltimore, Maryland and Glenroy E. Day of Oxon Hill, Maryland were convicted of wire fraud in connection with a fraud scheme involving more than $1 million in fraudulently obtained mortgages. The Scams According to court documents, McMillian told a man who had bought three houses in Baltimore and had finished renovations on two of them that she had clients from the New York area who were interested in purchasing the properties.

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When he agreed to sell, McMillian submitted loan application packages to a loan officer at a mortgage corporation in connection with the three properties, as well as a fourth property. The four loan application packages were subsequently approved. Virtually all the information submitted in the four loan packages was false. In two cases, the purported buyers were individuals who had already returned to their home countries or planned to do so in the near future; the other two “buyers” listed on the loan applications were either stolen or fictitious identities. In none of the four cases was there a real individual who actually intended to live in the properties and make the mortgage payments on them. Moreover, the representations made and the supporting documentation provided on each loan application relating to the employment, income, and financial assets for each purchaser were false. McMillian arranged to have Day, an unlicensed appraiser, prepare the appraisal reports on all four properties because she knew he would provide an appraisal at the specific contract price without regard to the actual condition or value of the property. For two properties located, Day admitted that he falsely represented that both properties had been recently upgraded and renovated. Day further admitted that these two appraisals also included interior photographs that were actually taken in completely different and thoroughly renovated houses. Day’s appraisals indicated that each of the four appraisals had been reviewed and approved by a licensed appraiser, but the individual specified has denied that he saw or reviewed any of the four appraisals. Based on the false information provided relating to the four “buyers” and the condition and market value of the properties, the mortgage company agreed to extend financing on each of the four properties, totaling $1.094 million in all. McMillian received a total of approximately $278,000 from the four transactions at the closings, although she in turn transferred $122,000 of the settlement proceeds to another individual and an associate’s business checking account. Day received approximately $2,000 that he had charged for preparing the four appraisals. Following the closings, the mortgage on each property soon went into default. Typically, either no mortgage payments were made at all, or only a couple of payments were made. The Penalties On November 12, 2013, Kimberly Eileen McMillian was sentenced to two years in prison followed by five years of supervised released and ordered to pay $1,028.003.20 in restitution.

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On November 12, 2013, Glenroy E. Day was sentenced to two years’ probation, with the first year to be served in home confinement, and as a special condition, ordered Day to perform 200 hours of community service during his second year of probation. He was ordered to pay $540,000 in restitution.

Inflated Appraisal A dishonest appraiser inflates the value of the property and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value. When the seller gets the check at the closing for a bogus amount, he pays off the appraiser and anyone else involved in the scam. Usually, the borrower does not make any payments and the house goes to foreclosure.

CASE STUDY: Kansas Appraiser gets 200 Months in Prison Wildor Washington, Jr., of Leawood, Kansas was convicted of one count of conspiracy, seven counts of wire fraud, and three counts of money laundering. The Scam Washington admitted to conspiring with other defendants to obtain mortgage loans for several properties in Kansas and Missouri by submitting inflated property appraisals and other false information to lenders. The Penalty On April 6, 2010, in Kansas City, Kan., Wildor Washington, Jr., of Leawood, was sentenced to 200 months in prison and ordered to pay more than $3.7 million in restitution after his conviction on mortgage fraud charges. Four other co-defendants in this case have also been sentenced: Kara E. Robinson-Franks was sentenced to 36 months; Scott Alexander received 12 months and a day; Victoria Bennett was sentenced 24 months; and Terrence Cole received 37 months.

Mortgage Fraud Rings & Collusion A mortgage fraud ring that involves many professionals—bank loan officers, real estate agents, appraisers, accountants, and mortgage brokers—working in collusion to defraud lenders is devastating. All of these people profit from various commissions, fictitious sales, and fees—often on loans based on faked loan applications.

There is a “cookie-cutter” aspect to this scam—falsified income, falsified employment histories, false assets stated on the loan applications, and false declarations of primary residence. Often non-existent down

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payments are provided and straw buyers are used. A straw buyer is a person used to buy property in order to conceal the actual owner. The straw buyer does not intend to occupy the property or make payments. In fact, no payments are made and the lender forecloses on the loan. The straw buyer is usually compensated for use of his or her identity.

CASE STUDY: Former Arizona Mortgage Broker Defrauded Lenders for over $17 Million

Michele Marie Mitchell and Jeremy West Pratt of Phoenix, Arizona pleaded guilty to conspiracy to commit wire fraud. The Scam According to court records, Mitchell held herself out to be a mortgage broker, loan officer, and real estate investor. Between October 2005 and February 2007, Mitchell and Pratt recruited people with good credit scores to act as straw buyers to purchase one or more properties as investments. Mitchell and Pratt enticed the straw buyers by offering to pay a kickback of up to $15,000 per property or to make the mortgage payments until the property could be resold for a profit, or both. The conspirators submitted false loan applications and supporting documents to induce lenders to fund loans. At the close of escrow, they enriched themselves by directing a portion of the loan proceeds, or “cash back,” to a company which one of them controlled. Mitchell obtained mortgage financing for 17 properties and induced lenders to fund approximately $17 million dollars in loans. Pratt aided Mitchell’s efforts in eight of the 17 properties. The conspirators failed to make the mortgage payments as promised and each of the 17 properties went into foreclosure. The Penalties On July 30, 2012, Jeremy West Pratt was sentenced to six months in prison and three years of supervised release. On November 26, 2012, Michele Marie Mitchell was sentenced to 30 months in prison, three years of supervised release, and ordered to pay $110,490 in restitution.

The scammer invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones and use them as the employer, appraiser, credit agency, and so forth for verification purposes.

An entire industry operates underground to boost consumers’ credit scores and/or bank balances so they will qualify for home loans. Currently two credit enhancement scams are in play. The first involves credit cards and the other involves renting bank accounts.

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The first type of credit enhancing is the practice of piggybacking on someone else’s credit. For example, if you have good credit and add an authorized user to your credit card, the person you add inherits your good credit history and automatically receives a boost in his or her own credit rating. Credit enhancement companies take advantage of this by paying consumers with good credit scores to allow strangers to piggyback on their credit card accounts. Then they charge loan applicants with poor credit scores an advance fee to improve their credit scores to the high 700s in as little as 90 days. Of course, this is bank fraud.

“Whoever knowingly executes, or attempts to execute, a scam to defraud a financial institution by means of false or fraudulent pretenses can be fined up to $1 million or imprisoned up to 30 years, or both,” [18 USC §1344 (1998)]

Some loan applicants do not have sufficient money in the bank to qualify for a mortgage. They can rent the bank accounts from a credit enhancement company. Credit enhancement companies rent bank accounts with substantial balances to loan applicants in order to qualify for a mortgage. The accounts and money are real, but they do not belong to the loan applicants who claim them. The loan applicant pays a fee to the credit enhancement company and receives a bank account in his or her name. Because it is a fraudulent sub-account, the loan applicant is never allowed access to the money. When mortgage underwriters check to verify the deposits, they are told the money is in the name of the loan applicant.

CASE STUDY: Missouri Phony Down Payments & Fraudulent Bank Accounts

Michael D. Robinson of Kansas City, Missouri was convicted of conspiracy to commit mail fraud for his role in a mortgage fraud scheme in Missouri. The Scam According to court documents, Robinson purchased foreclosed houses and then sold them to buyers at inflated prices. He bought and sold houses personally and through companies he established. To advance the scheme and make sure buyers were approved for loans, Robinson gave buyers money for down payments to buy houses. He put money into a bank account in a buyer’s name to make it appear to the lender that the buyer had money to qualify for a loan. Robinson falsely stated that buyers had provided down payments. In order to get the lender to approve loans at inflated prices, Robinson contracted with an appraiser who provided inflated appraisals based on false information.

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The Penalty On June 5, 2013, Michael D. Robinson was sentenced to 12 months and a day in prison.

Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30 years in federal prison or $1,000,000 fine, or both. It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.

CASE STUDY: Hawaii Mortgage Broker Falsifies Documents Estrellita “Esther” Garo Miguel, a Honolulu mortgage broker, was convicted of conspiracy to commit wire and mortgage fraud, wire fraud and mortgage fraud, and money laundering. The Scam According to information presented in court, Miguel was the owner and operator of the mortgage business titled Easy Mortgage. Miguel and others regularly submitted loan applications to lenders with false employment, income and residential occupancy information in order to induce lenders to fund loans for residential purchase. Miguel and other conspirators working for Easy Mortgage also sought to deceive lender underwriters by providing false documentation concerning a borrower’s history of employment, payment of rents and bank account deposit information. During the existence of the five-year conspiracy to defraud mortgage lending institutions, over 200 fraudulent loans were obtained involving over 100 properties. Miguel and her coconspirators utilized a number of methods to get lender underwriters to authorize loans, including false employment and income information, fake Verification of Rent and Deposit forms, along with bank statements which had been cut and pasted to appear as if they were actual bank statements reflecting bank deposits of loan applicants. Some fraudulently obtained loan proceeds were funneled into a bank account controlled by Miguel and later distributed to her and others. The Penalty On January 8, 2013, Estrellita “Esther” Garo Miguel was sentenced to 52 months in prison.

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CASE STUDY: California Mortgage Company Owner Ordered to Pay $5.8 Million in Restitution

Amy Nicole Schloemann, aka Amy Kinney, of Vallejo, California was the ring leader in a conspiracy to commit mortgage fraud. She pleaded guilty to conspiracy to commit wire fraud. The Scam According to court documents, Schloemann was the president of Hiddenbrooke Mortgage Company, a real estate and mortgage brokerage company in operation from 2005 through 2007 in Vallejo, California. Between 2006 and July 2007, Schloemann conspired with others to purchase more than 18 properties in California in the names of fictitious identities and using straw buyers. As part of the conspiracy, Schloemann supervised others who processed loan packages with materially false information, including contracts that reflected inflated sales prices above the original sales prices. The purchase loans, which were 100% financed, exceeded the sales prices received by the sellers. The excess amounts from the loan proceeds, or “profits” from the transactions, were dispersed through escrow to entities controlled in part by Schloemann. All but a few of the properties involved in the conspiracy were foreclosed due to the failure to make mortgage payments. The lenders sustained significant losses as a result of the fraud. The Penalty On June 14, 2013, Amy Nicole Schloemann was sentenced to 36 months in prison, three years of supervised release, and ordered to pay $5,805,902 in restitution.

Illegal Property Flipping Flipping occurs when a person buys a property at one price and re-selling it within a short period at a higher price. The second sale may occur on the same day (double escrow) or take place a few days later. Flipping property is not illegal.

What makes flipping fraudulent is an artificially overinflated sales price. Property flipping is best described as purchasing properties and artificially inflating the appraised value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the flipper.

How does the scam work? Con artists buy a property with the intent to re-sell it an artificially inflated price for a considerable profit, even though they only make minor improvements to it. In order for this scheme to work, the sale needs to appear to be an arm’s-length transaction. The con artists need to find someone to buy the property from them quickly. So,

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they contact a friend or acquaintance and tell them that they can make several thousand dollars by just applying for a loan to buy the house. This person is known as a straw buyer because they don’t intend to live in the house.

The con artist also pays an appraiser a fee to submit a false and artificially-inflated appraisal report to the bank. Appraisers who are hired for these deals are usually from another area and do not know the area. Occasionally the appraiser is in on the fraud, but usually the appraiser receives the regular fee and inadvertently helps in the transaction by providing an appraisal that is over value, either by not following the rules of appraisal or by inattention to detail.

The bank then makes the loan to the straw buyer. The con artist will sometimes make one or two of the mortgage payments to the lender. Then, after the con artists pay off the straw buyer and the appraiser, they keep the rest of the money. It is then up to the bank to foreclose on the property, but it will take a huge loss on a home that was never worth the amount of the loan they made.

CASE STUDY: Florida Property Flipping Ring - $36 Million Loss Andrew D. Norman of Akron, Ohio, Jason Herceg of Fairlawn, Ohio, and Jack R. Coppenger of Akron, Ohio were convicted of conspiracy to commit bank fraud, conspiracy to commit wire fraud, and filing a false tax return for their role in a mortgage fraud scheme in Florida and a separate scheme to defraud two elderly investors. Straw Buyer Scam This mortgage fraud scheme relied on straw buyers from Ohio to buy properties in the Panama City, Florida area at inflated prices, resulting in $36 million in losses to lenders. According to court documents, Norman and Herceg operated a company under the name of V.P. Equity LLC and, with Coppenger, procured straw buyers and submitted false loan documents to banks to purchase Coppenger’s lots in Florida in a mortgage fraud scheme. The lots in Florida had already been inflated in value as part of a land flip. The straw buyers essentially sold their good credit scores to Coppenger in order for Coppenger to secure loans, through the straw buyers’ names, for Florida lots. Coppenger promised the straw buyers that if they signed the loan application and paperwork, Coppenger would pay them an inducement amount. Coppenger then promised the straw buyers that he would make all the mortgage payments for the property and would make any down payments that were necessary, and that, once the property was developed and sold, they would split the profits equally.

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Ultimately, Coppenger failed to make the mortgage payments on these loans, resulting in a loss of approximately $36 million. Illegal Flipping Scam According to court documents, Norman, Herceg, Coppenger, and others, conspired to defraud two elderly individuals by selling them a Florida property for $7 million. Moments before the sale, Norman and Herceg, with Coppenger’s help, bought the property, through their partnership, 104 Investments, from the original seller and inflated its value by approximately $2.5 million. They then sold this property to these elderly individuals, who were told they were buying the property from the original seller. These elderly victims were never told of the last minute “flip” and that they were actually buying the land from Norman, Herceg, and 104 Investments. Norman, Herceg, and 104 Investments received approximately $2.5 million from this gain, and funneled portions out to themselves and paid $690,000 to Coppenger as a kickback for setting up the fraudulent scheme. The Penalties On May 21, 2013, Andrew D. Norman was sentenced to more than three years in prison and ordered to pay more than $15 million in restitution for his role in a mortgage fraud scheme. On June 28, 2013, Jason Herceg was sentenced to more than three years in prison and ordered to pay more than $14 million in restitution for his role in a mortgage fraud scheme. On July 8, 2013, Jack R. Coppenger was sentenced to ten years in prison and ordered to pay more than $35 million in restitution for his role in a mortgage fraud scheme.

CASE STUDY: Texas Property Flipping Ring - $20 Million Loss Robert Brooks of Lantana, Texas was convicted of conspiring to commit bank, wire and mail fraud, and of aiding the filing of false income tax returns. Robert Brooks’ mortgage loan scheme involved over 40 properties and defrauded financial institutions of over $20 million. In addition, Brooks submitted false 2007 income tax returns for himself and his wife, and for a partnership, which contained a false business expense.

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The Scam Evidence presented during trial revealed that from May 17, 2005, until February 21, 2008, twenty individuals (appraisers, loan processors, and title company employees), under the direction of Robert Brooks, participated in a mortgage fraud scheme where Brooks purchased properties at fair market value then resold them at an artificially inflated price to straw buyers. He paid kickbacks from loan proceeds to the appraisers, loan processors, and title company employees for their participation in the scheme. Brooks used the proceeds from the sales to the nominees to pay: • for his initial purchase of real estate, • closing costs for both his purchase and sale to the nominee, • the nominee’s down payment, • the nominee for the nominee’s participation, and • the mortgage for the first 12 months, after which each mortgage

went into default.

The Penalty On July 2, 2013, Robert Brooks was sentenced to 135 months in prison, five years of supervised release and ordered to pay approximately $8.5 million in restitution for his role in a mortgage fraud operation involving a series of property flip schemes.

CASE STUDY: North Carolina Father/Son get 60/87 Months in Prison Adam and Alford Rooks were convicted of conspiring to commit wire fraud and mail fraud, aiding and abetting wire fraud, and conspiring to launder money. The Scam From approximately January 1998 until about April, 2004, Adam and his father, Alford Rooks devised a scheme to defraud home buyers, banks and other lenders to obtain money and property from the home buyers and lenders by materially false and fraudulent pretenses. Adam Rooks bought about four tracts of land in Whiteville, N.C., subdivided the properties, put trailers on them, and sold them to low income people from around the area. In the beginning, Adam Rooks was selling these properties himself with the help of Alford Rooks and others. He partnered with two mortgage brokers to finance the mobile homes. Adam Rooks falsely stated to the buyers the estimated cost of the property, the payment amounts, and his ability to secure loans.

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After taking their Social Security numbers and names, he would then turn the information over to the other brokers and they would falsify the loan applications, sending them in for approval. Most of the properties initially sold by Adam Rooks were foreclosed by lenders who were co-conspirators. The defendants began purchasing the foreclosed proprieties and solicited others, often times other mortgage brokers, as 'investors' to purchase the new price-depressed foreclosed properties and resell them quickly at prices inflated by false and fraudulent real estate appraisals. The Penalty On January 4, 2010, Daniel Adam Rooks, aka Adam Rooks was sentenced to 87 months in prison, to be followed by five years of supervised release. Alford Rooks, Adam's father, was sentenced to five years probation.

Property Flopping Property flopping is the opposite of property flipping. Like flipping, flopping is the intentional misrepresentation of house prices. Whereas flipping usually takes place when housing prices are rising, flopping occurs when values are depressed. Property flopping involves deflating the value of the property below market value and selling it to a friendly party, who resells it at a higher price on the deal.

Property floppers defraud banks by buying short sales at prices below what legitimate buyers are willing to pay. In these scams, real estate agents obtain fraudulent deflated appraisals to persuade banks to sell houses at below-market prices to investor groups. Then the investors, who are often part of the fraud, flip the houses at fair market prices to ordinary homebuyers and split the quick profit with others in the fraud ring.

CASE STUDY: Florida Real Estate Broker/Loan Officer Flopping Scam

The Penalty John Lebron of Tampa, Florida was convicted to conspiracy to commit wire fraud, wire fraud affecting a financial institution, and making false statements to a financial institution. The Scam According to testimony and court documents, Lebron was a Florida-licensed realtor and worked as a loan officer. Taking advantage of the downturn in the real estate market, Lebron participated in mortgage foreclosure rescue fraud and short sale fraud. This is sometimes called “flopping” a house.

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As part of the scheme, Lebron had hand drawn signs placed on the side of the road, usually in low income neighborhoods. These signs often advertised the sale of nonexistent houses. The purpose of the signs was to generate leads, to prey upon unsophisticated people, particularly those losing their houses in foreclosure. Working with another Florida-licensed real estate agent, Lebron opened up a company, called EZ Investments. During their first deal, they used a victim whose house was falling into foreclosure. Lebron arranged for a straw buyer (his sister) to buy the house in a non-arm’s length transaction. Lebron also served as the loan officer, thus receiving the mortgage broker’s commission, although another loan officer’s name was placed on the paperwork to conceal what Lebron had done. Lebron also took the check that represented the proceeds of the sale of the home from the distressed home owner without her knowledge. After the straw purchaser “bought” the house, Lebron paid the original mortgage for a short time to prevent the victim from detecting the fraud. He then arranged a short sale of the house to his brother-in-law, in another non-arm’s length transaction. Six days later, using simultaneously recorded deeds, the property was resold to a “credit partner,” that is, another straw purchaser, who Lebron had arranged to buy the house before the short sale proposal was submitted to the bank. This straw purchaser, essentially unemployed, was added on to bank accounts under the control of the conspirators to make it appear that he had assets. The down payment for the transaction was funded through those bank accounts. Fake pay stubs were created to give the appearance that the buyer had an income to support the loan. In these deals, the conspirators pocketed the money that should have gone to the original distressed home owner. They also received the mortgage broker commission for arranging the first straw purchaser’s loan and other commissions and fees, and got the difference between the short sale amount and the new loan. The straw purchasers were each paid $5,000 for their role in the scheme. In addition, Lebron acquired four other loans through fraud. During the course of the conspiracy, Lebron used stolen and false identities; fraudulently verified his own employment claiming jobs he never had; and, for at least one of the properties, bought it as his primary residence when he legally could not move into it. Lebron committed these crimes while on pretrial release and while on probation. The Penalty On April 17, 2013, John Lebron was sentenced to 26 years in prison, a 5-year term of supervised release, and to pay restitution of $1,469,300.

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Rigged Foreclosure Bids With the abundance of foreclosures, bid-rigging groups flourish on the steps of county courthouses. Bid rigging is the practice whereby two or more investors decide not to bid against a designated bidder among them at a public auction so that the designated bidder buys the foreclosed property at an artificially low price.

Some bid-rigging groups work together to flip the property and divide the profits. However, in some bid-rigging groups, the designated buyer pays a few thousand dollars to the other members of the group for staying out of the bid. Then the “winner” flips the property to make a nice profit. On the next deal, the group might decide to follow the same plan and allow another member to get the property.

Bid rigging violates the Sherman Anti-Trust Act. Conviction carries a maximum prison term of 10 years and a $1 million fine.

CASE STUDY: Alabama Father and Son Foreclosure Bid-Rigging Fraud

Two Alabama real estate investors, Robert M. Brannon of Laurel, Mississippi and his son, Jason R. Brannon of Mobile, Alabama were convicted for their participation in conspiracies to rig bids and commit mail fraud at public real estate foreclosure auctions in southern Alabama. The Scam According to court documents, the Brannons and their company, J&R Properties LLC, conspired with others not to bid against one another at public real estate foreclosure auctions in southern Alabama. The Brannons and their company participated in the bid-rigging and mail fraud conspiracies from as early as October 2004 until at least August 2007. After a designated bidder bought a property at a public auction, which typically takes place at the county courthouse, the conspirators would generally hold a secret, second auction, at which each participant would bid the amount above the public auction price he or she was willing to pay. The highest bidder at the secret, second auction won the property. The Penalty On May 20, 2013, Robert M. Brannon and his son, Jason R. Brannon were, each were sentenced to serve 20 months in prison for their participation in conspiracies to rig bids and commit mail fraud at public real estate foreclosure auctions. The Brannons and their Mobile-based company, J&R Properties LLC, were ordered to pay $21,983 in restitution to the victims of the crime.

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Builder Bailout Scams The collapse of the housing bubble had a devastating effect on builders and developers—particularly those that were in the middle of projects. Builder bailout scams are common in any distressed real estate market. Faced with rising inventory and declining demand for newly constructed homes, they employ bailout scams to offset losses and potential bankruptcy.

Two common scams are using straw buyers and selling the properties with a phantom down payment.

In the first scenario, developers find straw buyers for the houses. By falsifying income and asset information, the straw buyers obtain loans and purchase the properties. The builder pays off any building costs with the proceeds. Then, the straw buyers allow the properties to go into foreclosure.

In the second scenario, the builder provides buyers with a phantom down payment. To do this, the builder inflates the value of the property and creates documentation to convince the lender that the buyer has a down payment. In essence, the lender funds 100% of the purchase price.

CASE STUDY: North Carolina Attorney Disbarred and Sent to Prison Troy Anthony Smith was convicted of participating in mortgage fraud and money laundering conspiracies. The Scam Troy Anthony Smith was an attorney with an office in Waxhaw, North Carolina. Smith served as a closing attorney for two mortgage fraud rings operating in Union and Mecklenburg Counties. The mortgage fraud rings agreed with a builder to purchase a property at a set price. The fraud ring then arranged for a straw buyer to purchase the property at an inflated price, which was usually between $200,000 and $500,000 above the true price. The builder sold the property to the buyer at the inflated price and the lender made the mortgage loan based on the inflated price. The difference between the inflated price and the true price was distributed among the members of the fraud ring. To induce lenders to make the mortgages, the participants caused loan packages to be prepared and submitted to lenders that contained false and fraudulent information. Smith and other attorneys received the proceeds of the fraud into their trust accounts and distributed the funds to the members of the mortgage fraud rings.

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The Penalty On January 24, 2011, Troy Anthony Smith was sentenced to 18 months in prison and three years of supervised release. Troy Anthony Smith was disbarred from the practice of law in North Carolina.

CASE STUDY: Kennedy (4 years in Prison) and Gensmer (3 Years in Prison)

Christopher Glenn Kennedy and Beau Gensmer were convicted of wire fraud and money laundering. The Scam From July 2007 to September 2008, Kennedy and Gensmer executed a mortgage-fraud scheme. In April 2007, a multi-unit condominium building was built in Prior Lake by a development company owned by one of Gensmer’s relatives. The units were listed for sale but were removed from the market after only a few were sold. Later, during the summer of 2007, Kennedy and Gensmer solicited three individuals to purchase multiple condominium units as investments. Kennedy and Gensmer assured the “investors” they would pay nothing to buy the properties because the down payments and monthly mortgage payments would be provided to them by the two of them. Moreover, they recruited the investors by telling them that the condos would be rented for a time but ultimately sold at a profit, and that the investors would share in that profit. In order for the investors to qualify for mortgage loans, Kennedy and Gensmer caused accountants to prepare tax returns that reflected inflated income figures. Those returns and other fraudulent documents were then submitted to potential mortgage lenders by the two men. They also temporarily deposited money into the bank accounts of some of the investors to make it appear to potential lenders that the investors had more cash on hand than they actually did. Because of those actions, ten mortgage lenders funded the purchase of 18 condominium units by the three investors. Eventually, Kennedy and Gensmer stopped supplying the property purchasers with monthly mortgage payments, causing the loans to go into default and then into foreclosure. The defendants in this case admitted that due to their actions, mortgage loan lenders wire transferred funds on 15 different occasions. The men also admitted that on two occasions, they used some of those fraudulently obtained funds as down payments to a title company for additional condo purchases, and that the title company was owned in part by individuals with an ownership interest in the entity that originally constructed the condo building.

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The Penalty On November 17, 2010, Christopher Glenn Kennedy and Beau Gensmer were sentenced to 48 months and 36 months in prison, respectively.

Predatory Lending Predatory lending is the abusive practice of extending credit with the intent to deceive and take advantage of the borrower. Unscrupulous loan originators instigate predatory lending. Predatory lending results in loans to borrowers that include inflated interest rates, outrageous fees, and unaffordable repayment terms.

Unscrupulous mortgage loan originators and lenders often target elderly, poor, or uneducated borrowers. Often they will use bait-and-switch tactics, knowingly advertising low rates and terms that are not readily available to borrowers without perfect credit. They do not disclose the true costs of the transaction to the borrower and then pressure the borrower into signing a contract with terms that are more expensive and hidden fees.

Characteristics of Predatory Lenders Predatory lenders make money preying on homeowners and lenders by perpetuating and modifying old schemes (i.e., straw buyers and property flipping) or creating new schemes (i.e., phony loan modification and foreclosure rescue scams).

Characteristics of Predatory Lenders • Offer easy access to money but often use high-pressure sales

tactics. • Inflate interest rates, charge outrageous fees, and have

unaffordable repayment terms. • Steer or direct borrowers to high-rate/high-fees loans even though

the borrowers could have qualified for loans with lower fees and rates.

• Trick buyers into taking out a loan they cannot afford to repay, knowing the homeowner is at a high risk of losing the home to foreclosure.

• Use harassing collection tactics. • Aggressively seek out distressed homeowners. • Provide little or no information about the loan modification, short

sale, or foreclosure process. • Ask for an upfront fee before providing any services. • Accept payment only by cashier's check or wire transfer. • May claim government affiliation.

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• Guarantee to get a loan modification or stop the foreclosure process–no matter the circumstances.

• Use affinity marketing, i.e., Spanish-speakers marketing to Spanish-speakers, Christians to Christians, senior citizens to senior citizens, and so on.

• Offer “testimonials” from other customers. • Tell homeowners to cease all contact with mortgage lenders,

lawyers, or housing counselors. • Tell homeowners to make their mortgage payments directly to

them, rather than their lenders. • Coerce homeowners to transfer their deeds to them. • Offer to buy the house for cash for much lower than the selling

price of similar houses in the neighborhood. • Pressure homeowners to sign papers they have not had a chance

to read thoroughly or do not understand.

Many states have passed laws to protect consumers against predatory lending practices. Only one federal law—the Home Ownership and Equity Protection Act (HOEPA)—is specifically designed to combat predatory lending.

Characteristics of the Victims Predatory lenders target victims from a specific demographic, with common characteristics such as ethnicity, nationality, age, and socioeconomic variables, including occupation, education, and income. They have been known to recruit ethnic community members as co-conspirators to participate in mortgage loan origination fraud.

Underwater and distraught homeowners facing foreclosure become easy prey for the scammers. According to a recent report by the National Foreclosure Mitigation Counseling program established by Congress, 58% of homeowners receiving foreclosure counseling listed unemployment as the main reason for default. High unemployment and mortgage loan delinquencies/defaults are contributing factors to an increasing pool of homeowners vulnerable to mortgage fraud and predatory lending.

Scammers use a variety of tactics to find homeowners in distress. Some search through public foreclosure notices or purchase lists of delinquent borrowers from companies that specialize in compiling these lists, and then send personalized letters “offering help” directly to homeowners. Others place ads on the Internet, on television or radio, or in newspapers; posters on telephone poles, median strips, and at bus stops; or flyers and business cards on car windshields. There have been instances of scammers crashing nonprofit housing workshops, posing as troubled borrowers, and then working the homeowners with sales pitches.

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Scammers use a combination of accurate information, lies, phony legal documents, and high-pressure sales tactics to convince homeowners that it is in their best interest to let the scammers help them. Scammers always want the deal closed ASAP—before the homeowner has time to ask family or friends for advice.

Simple—but Deceptive—Messages Scammers Use “Stop foreclosure now!”

“Get a loan modification!”

“Over 90% of our customers get results.”

“We have special relationships with banks that can speed up the approval process.”

“100% Money Back Guarantee.”

The people and companies that prey upon homeowners in foreclosure use many tactics to gain the homeowner's trust.

CASE STUDY: Ohio Man Gets 33 Months in Prison for Fraud and Tax Evasion

Julian M. Hickman was convicted of conspiracy and willful failure to file income tax returns. The Scam Between March 2002 and June 2008, Hickman and others recruited unsuspecting individuals to buy residential properties, the majority of which were low income, dilapidated and otherwise depressed residential properties, at prices artificially inflated above legitimate fair-market values. Hickman admitted that he and his co-conspirators participated in 107 separate fraudulent real estate closings and netted more than $3.8 million from the deals. Although he received over $1.7 million in gross income in 2003, 2004, and 2005, he failed to file federal income tax returns. According to court documents, this scheme led to foreclosure against owners of more than 90% of the properties. The Penalty On December 10, 2009, Julian M. Hickman was sentenced to 33 months in prison, to be followed by three years of supervised release, and ordered to pay a $12,500 fine.

They have been able to get away with these practices because loan documents are not easy to understand, borrowers are not always well informed, and there is pressure to close the loan. Sometimes borrowers are not encouraged or even given enough time to review all the documents before signing.

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Abusive Lending Practices The Office of the Controller of the Currency (OCC), which regulates national banks, issues guidelines to tell banks how to guard against abusive lending practices. These guidelines outline a number of abusive lending practices that often accompany predatory loans. Some of these include packaging excessive or hidden fees in the amount financed, refinancing of mortgages that results in the loss of beneficial terms, and equity stripping. However, the end result of all types of predatory loans is to reduce a borrower’s equity in the property and increase the potential for foreclosure.

Packing, Excessive Fees, and Padding Packing is the inclusion of fees and costs in the amount financed, which include points, mortgage broker fees, prepayment penalties on a prior loan, and charges for additional related products, such as single-premium credit life insurance, without the borrower’s informed consent. Some borrowers may think packing is a benefit because they will not have to pay these fees upfront at closing. However, by adding the fees and expenses to the amount financed (which can be repaid over time), borrowers may be more easily convinced to accept excessive or unnecessary fees. For example, credit life insurance is rarely required for loan approval, but an uninformed borrower could consent to its inclusion. Credit life insurance provides for repayment of the loan should the borrower die. Because the borrower does not have to prove insurability, it is more expensive than insurance purchased separately. Fannie Mae and Freddie Mac will not buy any loan that includes financed credit insurance.

The inclusion of excessive rates and fees in the amount financed is another type of predatory lending. It is reasonable that a higher risk loan would command higher rates and fees; however, charging excessive rates to a borrower who actually qualifies for lower rates or fees is unethical. In addition to excessive rates, predatory loans often include junk fees and charge for services that were supposedly done on behalf of the borrower. In general, fees in excess of 5% of the loan amount may be considered predatory. As with packing, these excessive rates and fees are financed into the loan, decreasing the homeowner’s equity.

Padding is the unethical and often illegal practice of increasing or duplicating closing costs. Predatory lenders can pad costs by charging the borrower recording fees, document preparation fees, credit report fees, and the like in excess of the actual cost. Another example would be to charge a borrower for a detailed appraisal when only a drive-by appraisal was done. Obviously, having the borrower pay twice for the same charge by itemizing them twice on the closing statement is illegal.

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CASE STUDY: Maryland Mortgage Broker’s Fraud Gets Her 135 Months in Prison

Jennifer McCall, Chief Executive Officer of the Metropolitan Money Store, was convicted of bank fraud and conspiracy. The Scam McCall was a licensed mortgage broker, but was not licensed to provide credit repair. In May 2005, McCall incorporated Metropolitan Money Store, located in Lanham, Maryland, to offer foreclosure consultation and credit services to financially distressed homeowners. From September 2004 to June 2007, McCall along with Wilbur Ballesteros, Ronald Aaron Chapman Jr. and others conspired to fraudulently promise to help homeowners who were facing foreclosure because of their inability to make monthly mortgage payments to avoid foreclosure and to repair their damaged credit. The homeowners were directed to allow their homes to be titled in the names of third party purchasers (straw buyers). Using the homeowners’ properties, the conspirators applied for mortgages and prepared and submitted fraudulent loan applications to mortgage lenders to obtain inflated loans in the straw buyers’ names. At settlement time, the conspirators imposed numerous fees and required “seller contributions” and imposed fees for services, which were not performed, disclosed, or explained to the homeowners. Additionally, they transferred the sale proceeds out of the escrow accounts into the conspirators’ business and personal bank accounts and converted a substantial portion of those funds to their personal use. Jackson and McCall withdrew these funds and paid for goods and services for themselves. Because of this scheme, the total loss attributable to Jennifer McCall, including the estimated losses to the mortgage lenders, is $16,880,884. The Penalties On December 7, 2009, Jennifer McCall, was sentenced to 135 months in prison and ordered to pay $16,880,884 in restitution. Wilbur Ballesteros was sentenced to 63 months in prison and ordered to pay $16,859,950 in restitution. Ronald Aaron Chapman, Jr. was sentenced to seven days in prison, 10 months of home detention with electronic monitoring and ordered to pay $268,279 in restitution. All defendants were sentenced to serve five years of supervised release following their prison terms.

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Unfair Prepayment Penalties A prepayment penalty is the fee or charge imposed upon a borrower, who wants to pay off a loan before its maturity. Although, most conventional loans do not have prepayment penalties, many subprime loans have prepayment penalties that often are imposed for more than three years. Because the prepayment penalties were so egregious, borrowers were forced to pay the excessive penalty (often thousands of dollars) or remain in the high interest rate loan. As a result of the problems caused by prepayment penalties, HOEPA was passed amending the Truth in Lending Act and establishing requirements for certain high-rate/high-fee loans. The rules, found in Section 32 of Regulation Z, ban most prepayment penalties from high-rate/high-fee loans if the consumer’s total monthly debt payments exceed 50% of his or her monthly gross income at the consummation of the loan.

Loan Flipping Loan flipping is the repeated refinancing of a loan within a short time period, without any real benefit to the owner. The mortgage loan originator’s primary objective is to generate additional loan points, loan fees, prepayment penalties, and other fees. Some lenders intentionally originate ARMS or structure loans so the payments are unaffordable so that borrowers will apply for a new fixed-rate loan to pay off the entire balance. Often, homeowners are encouraged to refinance again and again every several months until there is no equity left in the property.

Equity Stripping In equity stripping (or skimming) a financially troubled owner is approached by a foreclosure specialist who promises to help stop the foreclosure or locate a purchaser. Equity stripping occurs when these predators prey on people who are often uninformed and in need of help. In this scheme, the homeowner is promised an opportunity to buy back his or her home at some future time if the owner simply conveys ownership of the property to a straw buyer. In exchange, the homeowner is promised the right to continue to live in the home as a tenant. The agreement is often constructed in such a way that the individual is actually forfeiting all rights to the property along with any equity the property has accumulated over time.

CASE STUDY: California Real Estate Broker Orchestrated Fraud Ring

Martha Rodriguez of Downey, California and Edward Seung Ok of Huntington Beach, Califoirnia were sentenced for their roles in orchestrating a real estate fraud scheme that caused nearly $13 million in losses.

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The Scam From May 2003 until November 2005, Rodriguez, Ok, and three others used computerized foreclosure databases to locate victims, who were then promised refinancing services. The scheme was operated through Rodriguez’s real estate and escrow agencies, Silvernet Properties in Downey and Bellasi Escrow in Seal Beach. Instead of obtaining refinancing, Rodriguez and her co-conspirators submitted loan applications in the names of “straw buyers” who were purportedly buying the properties. In some cases, the defendants paid the straw buyers for the use of their personal information. In other cases, the defendants used personal information of people without their knowledge. The loan applications for these straw buyers – which always contained false information – caused a series of lenders to fund more than 100 mortgages worth more than $40 million. The loan proceeds were used to pay off the loans in default, sometimes to make a few mortgage payments on the new loans, and to provide some instant cash to homeowners. However, the remaining proceeds, typically representing the bulk of the homeowner’s equity, were skimmed off by Rodriguez and her co-conspirators. Even though they were promised that they would be able to keep their homes, the victim homeowners usually lost title to their homes. The lenders suffered losses when the straw buyers then failed to make loan payments and the new loans went into default. Lenders were often unable to foreclose because the straw buyers did not know the properties were in their names. The scheme targeted commercial lenders and more than 100 homeowners across the Southland. The Penalty On February 17, 2010, Martha Rodriguez, was sentenced to 120 months in prison. Edward Seung Ok was sentenced to 180 months in prison.

Equity Theft Frequently, this type of fraud occurs on properties that are owned free and clear or the property is vacant. In equity theft (or deed scam), fraudsters locate an unoccupied property and forge a deed transfer or a satisfaction of lien. Then they obtain new mortgages on the property without the true owner’s knowledge. The homeowner does not know about it until he or she receives a notice of default, or worse yet, an eviction notice.

Another variation of equity theft happens when a fraudster sells a vacant property that he or she does not own. Fraudsters forge ownership documents for the property and tell the unsuspecting buyers that they will carry back the mortgage. The buyers deposit cash into a phony escrow account and receive phony settlement documentation. The fraudsters walk away with the buyers’ down payment.

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Asset-Based Loan Asset-based lending is the practice of predatory lenders making loans without regard to the borrower’s ability to repay the loan. Rather, the predatory lender makes the loan based on the borrower’s equity in the property and on the foreclosure value of the property. If the borrower defaults on the loan, the lender simply forecloses the loan and sells the property to satisfy the debt. This practice may result in higher-than-normal foreclosures.

Phantom Help Scams Phantom help schemes are still widespread because there are still many distressed homeowners. Phantom help schemes are often used in association with advance fee or loan modification schemes. The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees.

Since the passage of the Mortgage Assistance Relief Services (MARS) Rule in 2010, it is illegal for companies to collect any fees until a homeowner has actually received an offer of relief from his or her lender and accepted it. [16 CFR Part 322]. This “foreclosure rescue” often involves forging deeds and selling the home or securing a second loan without the homeowners’ knowledge.

Bogus phantom help companies identify homeowners who are in foreclosure or at risk of defaulting on their mortgage loan. They can get the names of homeowners facing foreclosure easily from public records or the newspaper. When a lender schedules the home for public auction, the matter becomes public record. In just more than half of the states, a lawsuit must be filed and anyone can check the court documents to find the list of lawsuits. In the other states (including California and Massachusetts, for example), the process does not go through the courts; foreclosure sales simply must be advertised publicly, such as in the local newspaper.

Short Sale Scams Short sale scammers, calling themselves short sale negotiators or short sale processors, may promise to expedite a short sale for an upfront fee or for a percentage of the sale price. Charging advance fees is illegal in many states. Oftentimes, the short sale negotiator takes the fee and does little or nothing in return.

CASE STUDY: Louisiana Short-Sale “Fee” Fraud Scott Rister of Shreveport, Louisiana and William Clay Goodwin of Bossier City, Louisiana were convicted of mail fraud in connection with a real estate mortgage loan.

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The Scam According to court evidence, Rister and Goodwin worked together to arrange short sales of residential real estate in the Shreveport/Bossier area. They identified residential property owners whose homes were scheduled for foreclosure or in bankruptcy. Rister offered to arrange short sales for their homes and informed them that Goodwin would attempt to negotiate with the financial institution that held the mortgage to settle the outstanding mortgage. Rister also told the home owners that the home owners would not see a profit from the short sales, and added that Rister and Goodwin’s only compensation was a broker’s commission, which was typically 5 to 6 percent of the sales price. However, Rister and Goodwin included fees and liens on the HUD-1 settlement statements without the home owners’ knowledge, permission or consent. The fees and liens were listed in favor of LLCs created and owned by Rister and Goodwin. The conspirators took advantage of those who were caught in tough financial situations and used their knowledge of the real estate industry to add extra costs without informing the customers involved of the charges. The Penalty On May 23, 2013 Scott Rister and William Clay Goodwin were sentenced to serve six months in prison and two years of supervised release for mail fraud. The judge also ordered them to pay $8,150 in restitution to victims of the scheme.

Loan Modification Scams There is an abundance of loan modification companies because so many homeowners are still underwater. These companies often claim to be affiliated with, or approved by, the government. In fact, the scammer's company name and website may sound like a real government agency, and include terms like federal, HAMP, MHA, HARP, HAFA, or other words related to official U.S. government programs. These scammers say they will assist delinquent homeowners who are on the verge of losing their home, by offering to renegotiate the terms of the homeowners' loan with the lender. The scammers require large fees up-front and often negotiate unfavorable terms for the clients, or do not negotiate at all.

CASE STUDY: California Phony Loan Mod Scammer Sentenced - $670,000 Loss

Christian Hidalgo of Chula Vista, California was convicted for his participation in a mortgage loan-modification scheme that cheated over 120 people out of over $670,000, and resulted in the loss of many homes to foreclosure.

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The Scam According to court records, between approximately March 2009 and October 2011, Hidalgo falsely told victims facing foreclosure that he could lower their mortgage payments. Hildalgo made these false claims through a variety of business entities based in San Diego and Chula Vista, California, including: “Expo Enterprises”, “United Housing”, “Community Housing Agency”, “National Resource Services”, “Retro Management”, “My Community Outreach”, and “Nuestra Communidad Services”. In order to carry out his fraud, Hidalgo sent hundreds of solicitation letters in which he falsely represented that these businesses were affiliated with the U.S. Department of Housing and Urban Development (HUD), and its Home Affordable Modification Program (HAMP). The letters would direct the recipients to contact one of Hidalgo’s business entities by telephone, or obtain information from one of the websites he had created to advertise his services. Hidalgo targeted low-income persons in Southern California with Hispanic surnames by obtaining marketing leads that specialized in the Latino community. When the victims responded to the solicitation letters, Hidalgo or one of his employees would promise to provide relief under the HAMP program, despite having no connection with this government program. Hidalgo and his employees would then falsely represent that they would negotiate a modified mortgage payment on behalf of the victims with the victims’ respective lenders. In exchange, the victims were instructed to send mortgage payments directly to one of Hidalgo’s business entities instead of their lenders. Although Hidalgo and his employees promised the victims that their payments would be held untouched in an impound account, and ultimately sent to the victims’ lenders at the end of negotiations, none of the money was forwarded. This often resulted in the foreclosure of the victims’ homes as a result of the lenders’ failure to receive mortgage payments. For his part, Hidalgo spent the victim funds in a variety of ways, including purchasing a BMW, diamond rings, a large-screen television, and firearms. All of these items were seized by the United States and forfeited as part of Hidalgo’s sentence. The items will be sold at auction, with proceeds going to the victims. Hidalgo’s scheme was discovered after Special Agents from the United States Postal Inspection Service of the Downtown San Diego Station received over 750 undeliverable solicitation letters in April 2011 sent by Hidalgo and associates. The solicitation letters appeared to offer loan modification services and a free consultation regarding HAMP, or another HUD home-loan restructure program.

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Because the letters bore non-existent or incorrect return addresses, Postal Inspection agents began investigating the legitimacy of the offered services. In conjunction with the HUD Office of the Inspector General, agents interviewed hundreds of victims, conducted various searches, and seized property purchased with proceeds obtained pursuant to Hidalgo’s fraudulent scheme. The Penalty On May 21, 2013, Christian Hidalgo was sentenced to 57 months in prison and was also ordered to pay full restitution to all of his victims.

Mortgage Rescue Scams The mortgage rescue scam promises to “rescue” homeowners who are behind on their mortgage payments and facing foreclosure. These con artists pose as foreclosure counselors and convince desperate homeowners that they can save a house from foreclosure if the homeowner deeds the property to them and pays an exorbitant upfront fee.

The homeowners are promised that they can stay in the home make rent payments for specified period of time and then eventually buy the home back. In many cases these rent payments which are supposed to be forwarded to the mortgage company are never sent. Instead the specialist keeps all the money and the home continues through the foreclosure process. The homeowner ends up getting evicted from his or her home.

In some cases, the specialist refinances the loan or take outs a second mortgage on the home effectively stripping away any equity that was left. They may sell the home without the homeowner’s knowledge to another unsuspecting party. Either way the homeowner loses whatever money he or she had in the home.

CASE STUDY: Minnesota Phony Foreclosure Help – Homeowners Lost Homes

Richard Scott Spady of Bloomington, Minnesota was convicted for his participation to commit wire and mail fraud in connection with properties in foreclosure and one count of filing a false income tax return. The Scam According to court documents, Spady operated a company called Unified Home Solutions (UHS), which identified homeowners who were facing mortgage foreclosure or already in foreclosure proceedings. UHS then found third party investors to purchase the homes, planning to sell them back to the original homeowners within one to two years.

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In the meantime, the distressed homeowners could live in their homes. Although in foreclosure, the homeowners still had some equity in their homes. When the properties were sold, the original homeowners received checks for that equity, which they then signed over and the proceeds were used to pay expenses and divided among the investors, UHS, and others. Spady admitted that false mortgage loan applications and loan closing documents were prepared and that lenders were not told about the distribution of equity from the sales, including rolling one homeowner’s equity into the purchase of a subsequent home for an investor. Fewer than 10 percent of the homeowners who used UHS were able to retain their homes, and all the homeowners lost their equity in the process. Spady also admitted that for the tax years 2006 and 2007, he failed to report over $100,000 in income on his tax returns, resulting in a tax loss of more than $30,000. The Penalty On July 31, 2013, Richard Scott Spady was sentenced to 24 months in prison and two years of supervised release. Spady and his co-conspirators were ordered to pay $1,127,129 in restitution.

Forensic Audit Scams In the forensic audit scam, a forensic loan auditing company offers to have an attorney or other expert conduct a forensic audit of the homeowner’s loan documents. The expert reviews mortgage documents to determine if the lender complied with state and federal mortgage lending laws. Some advertise that they are “Attorney Based” or “Attorney-Affiliated”, when in fact there is no attorney. The auditors say that homeowners can use the forensic evidence and report to avoid foreclosure, speed the loan modification process, reduce the loan principal, or even cancel the loan.

Equity Share Scams The collapse of the housing bubble and the downturn in the economy had a devastating effect on homeowners who may have found themselves facing foreclosure. A new “equity share” scam using a Limited Liability Company (LLC) was introduced as a way to salvage the homeowner’s property. Of course, the scammers look for less sophisticated or desperate people, who still inevitably lose their homes.

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CASE STUDY: New Jersey Father and Son Phony Help Team - $4.4 Million Loss

A father and son were convicted for running a mortgage loan fraud scheme that succeeded in obtaining $4.4 million in mortgage loans. Vito C. Grippo, the president of Morgan Financial Equity Shares and Vanick Holdings, LLC, based in Holmdel, New Jersey pleaded guilty to conspiracy to commit wire fraud, filing a false tax return for the years, and aiding and procuring the filing of a false tax return. Frederick “Freddie” Grippo, formerly a loan officer at Worldwide Financial Resources and an officer of Vanick Holdings, pleaded guilty to conspiracy to commit wire fraud. The Scam According to court documents and statements made in court, between January 2008 and February 2010, Vito Grippo held Morgan Financial out to the public as a company that could help homeowners who faced foreclosure on their homes through an Equity Share Program. The Equity Share Program involved creating a limited liability company (LLC) in the name of the homeowner’s house, in which the homeowner would supposedly own a 90% interest with the rest to be owned by one or two private investors. In reality, the so-called investors invested nothing and were instead straw buyers recruited by Vito and Frederick Grippo, because they had good credit. The Grippos and their associates then applied for mortgages in the names of the “investors” for the purchase of the properties owned by the homeowners in distress. The homeowners frequently did not understand that they would be transferring title to their homes to the “investor.” Once the new loan application was filled out, it would be submitted to Worldwide Financial Resources for processing, where Freddie Grippo, a loan officer, would see to it that the loan was approved. Once the loan was approved and the loan money was wired to the settlement agent for a given transaction, Vito Grippo would direct the settlement agent to forward a portion of those loan proceeds to bank accounts that Vito Grippo controlled. In addition, Vito Grippo did not report over $1.8 million in gross income for the years 2006, 2007 and 2008. The Penalty On June 13, 2013, Vito C. Grippo was sentenced to 96 months in prison and five years of supervised release. On June 13, 2013, Frederick “Freddie” Grippo was sentenced to 41 months in prison and three years of supervised release.

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High Profile Fraud Ring Cases In the first quarter of 2014, Interthinx reports that California continues to be the riskiest state for mortgage fraud. It is joined by Washington, D.C., Florida, Maryland, Arizona, Connecticut, New Jersey, Massachusetts, Arkansas, and Colorado. Interthinx provides comprehensive risk mitigation solutions for the financial services industry.

Mortgage fraud perpetrators tend to operate in geographic locations where opportunitities are plentiful. These are markets that have high levels of distressed properties, underwater loans, and worried borrowers. Both California and Florida fit that description.

The downturn in the housing marketing in 2008 and 2009 exposed Miami as one of the national leaders in real estate and mortgage fraud. The prosecution of mortgage fraud cases skyrocketed in state and federal courts.

Special Agent in Charge, John V. Gillies of the FBI Miami Division states that, “South Florida continues to be a hot spot for mortgage fraud.”

Before the mortgage bust, the Central Valley was the heart of California’s housing boom. A decade of explosive population growth in the Central Valley provided ideal conditions for mortgage fraud.

Benjamin B. Wagner, U.S. Attorney for the Eastern District of California, refers to California’s Central Valley as “ground zero” for real estate fraud. “Many communities in this district are dotted with foreclosed homes, which depress property values and serve as magnets for vandalism and petty crime.”

The “House King” of South Florida A recent example of a Florida white-collar crime is a case that the FBI nicknamed “The House King”. Angelo Puentes (the House King) made millions in the Florida real estate market and was “living large” before he left the country after the housing market crash. Puentes was so influential he created his own glossy real estate magazine called House and was revered as a real estate guru. In fact, you can still see videos produced by the House King Magazine on You Tube.

Angel Puentes used a classic loan origination scam with all the players—straw buyers, real estate agent, licensed mortgage broker, and title attorney. Mortgage applications were falsified to inflate the value of properties, defraud lenders, and line the pockets of the fraudsters.

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The House King paid straw buyers to sign bogus mortgage applications claiming that purchased homes would be their primary residences—when in reality, they had no intention of living there. The fraud was so extensive that some buyers had closings with three different lenders on the same day.

An attorney signed off on the fake documents, and the lenders—believing everything was legitimate—made the loans. The applications also inflated the value of the properties. If a home was appraised at $400,000, for example, the bogus loan application might list the value at $500,000. Puentes pocketed the extra money and used it to pay his accomplices. He then paid the mortgage for a number of months until he could flip the property for a further profit—or sometimes he rented it out to generate more income. But then he stopped paying. After taking his ill-gotten profit, Puentes simply walked away from the mortgage, leaving the lender with a toxic asset.

In 2011, Puentes was convicted on multiple counts of wire and bank fraud and for defrauding three lending institutions out of approximately $10.5 million and was sentenced to more than eight years in prison.

Because of Puentes and other fraudsters like him, South Florida real estate was artificially inflated and legitimate South Florida residents paid too much for their homes. When the market crashed, many of those homeowners were left underwater.

Crisp & Cole – Moguls of California’s Central Valley For those of you not familiar with California, the Central Valley located in the middle of California, is 450 miles long and 40 to 60 miles wide, encompasses 22,500 square miles, and stretches from Redding in the north to Bakersfield in the south. The northern part of the Central Valley is called the Sacramento Valley and the southern part is called the San Joaquin Valley. From 2000 to 2005, the number of residential building permits in the region increased dramatically. From 2000 to 2008, population in the Central Valley increased by 15.2%--faster than any other part of the state. The builders created a huge inventory of houses that they had to sell, creating a “feeding frenzy” by mortgage brokers and lenders to make loans. It meant a lot of money was being made, and everybody wanted a piece of the action.

“I have cases where entire subdivisions were ALL mortgage fraud. Nobody ever moved in. It was just a big scam to flip the houses and extract the equity.” Benjamin B. Wagner

As long as everyone was making money (real estate agents, mortgage brokers, lenders, appraisers, and anyone else involved in a real estate transaction) and the borrowers saw the value of their homes continue to rise, there were few complaints. When the market is going up, everybody

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is making money and nobody cares. However, when the market turns, all of a sudden people are losing money, and they start reporting it.

Because of the explosive growth in the Bakersfield area, fraud rings, such as the Crisp & Cole Real Estate firm made a fortune while the market was inflating. The once highflying Crisp & Cole Real Estate firm was actually a full-service mortgage fraud factory. Principals of the firm, David Marshall Crisp and Carlyle “Carl” Lee Cole, wowed conservative Bakersfield by barreling down streets in convoys of expensive cars, showing up to fundraisers with bodyguards, and airing ads that featured a private jet and Gull-Wing Mercedes-Benz McClaren.

David Crisp and Carl Cole were featured on magazine covers as the faces of Kern County’s explosive housing boom. They were instant millionaires. In June 2005, REALTOR Magazine featured 25-year-old Crisp in its “30 under 30” spread on the nation’s top real estate professionals. In October, The Sacramento Bee wrote about Crisp as a symbol of Bakersfield’s hot housing market. And, in December, LORE (Lives of Real Estate) magazine profiled the Crisp & Cole partnership in a piece titled “The Rocket & The Rock”. Coverage included a glossy photo spread with images of the pair holding champagne flutes and Crisp lounging in a jet.

Crisp was featured on the front page of The Bakersfield Californian in June of 2006. The story detailed his rapid rise to success and lavish lifestyle. Crisp describes himself as an “up-and-coming mogul” who follows a “fake it till you make it” approach. He said the company typically owned 45 to 60 investment properties at a time.

These real estate tycoons, once protected by bodyguards and driving luxury cars, face decades in prison.

The Scheme David Crisp and Carl Cole, owners of Crisp and Cole Real Estate (CCRE), utilized CCRE a real estate brokerage, and Tower Lending, an affiliated mortgage brokerage to orchestrate an extensive loan origination mortgage fraud scheme. The scheme included approximately 140 fraudulent mortgage transactions on 108 properties with loans totaling $142 million. Carl Cole admitted that he and the co-conspirators caused losses of at least $29,884,498 to the defrauded lenders due to the conspiracy.

Between January 2004 and September 2007, Crisp, Cole, and others at CCRE and Tower Lending carried out a conspiracy to defraud mortgage companies and federally insured financial institutions. They used straw purchasers to acquire properties at inflated prices with funds borrowed from lenders, often using 100% financing and based on false and fraudulent loan applications. The conspirators frequently resold the properties from one straw buyer to another, each time at an inflated, higher

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price in order to extract the purported increased “equity” from the property for their benefit. Ultimately, most of the properties were foreclosed upon after the defendants failed to make the mortgage payments when due.

The Fallout FBI assistant special agent Manuel Alvarez called the fraud scheme, “without a doubt one of the most egregious examples that our office has seen. Mortgage fraud doesn’t just hurt lenders, it hurts taxpayers because loans sometimes are guaranteed by the federal government, and it hurts innocent homebuyers who purchased houses based in part on the sales price of comparable homes nearby. Many people in Bakersfield have lost their homes as a result of this fraud. By no stretch of the imagination are these victimless crimes.”

The People Involved in the Fraud Ring Particularly with white-collar crime, every fraud scheme has key players in the middle surrounded by concentric circles of associates and “bit” players. This scheme involved the Cole and Crisp families, their employees, several mortgage brokers, appraisers, real estate agents, loan officers, certified public accountants, bank/financial institution employees, straw buyers, and builders.

Cole Family Carlyle “Carl” Lee Cole (66). Carl Cole, a licensed real estate broker, was the former managing broker and secretary of Crisp & Cole Real Estate. In 1991, he obtained a California real estate salesperson license and in 2003, he obtained a California real estate broker license. In 2001, he was working as a salesperson for Kyle Carter Real Estate when David Crisp joined the firm. Shortly thereafter, they formed their own firm, Crisp & Cole Real Estate. The California Bureau of Real Estate revoked Cole’s broker license November 14, 2008.

On February 24, 2014, “Carl” Cole was sentenced to 17 years and seven months in prison for mail fraud; bank fraud; wire fraud; and conspiracy to launder money. Carl Cole was ordered to pay $28,516,887 in restitution to lenders.

Caleb Lee Cole (37). Caleb Cole is the son of Carl Cole.

On February 24, 2014, Caleb Cole was sentenced to six months in prison (followed by 21 months of electronic monitoring) for mail fraud and conspiracy to commit bank fraud. Caleb Cole was ordered to pay $663,950 in restitution

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Crisp Family David Marshall Crisp (31). David Crisp, licensed real estate salesperson, was the former chief executive of Crisp & Cole Real Estate. He obtained his California real estate salesperson license in 2001 and joined Kyle Carter Real Estate where Carl Cole worked. The California Bureau of Real Estate revoked Crisp’s salesperson license October 15, 2008.

On March 31, 2014, David Crisp was sentenced to 17 ½ years in prison for mail fraud; bank fraud; wire fraud; and conspiracy to launder money. David Crisp was ordered to pay $28,516,887 in restitution to lenders.

Jennifer Anne Crisp (31). Jennifer Crisp is the wife of David Crisp.

On March 31, 2014, Jennifer Crisp was given 5 years probation for her roll in the conspiracy as a straw buyer. She was also ordered to pay $1.7 million in restitution.

Kevin Patrick Sluga, CPA (61). Kevin Sluga, Jennifer Crisp’s father, pled guilty to wire fraud for false verification of employment letters. He was the accountant for CCRE at the time of the crimes. He admitted that he created CPA letters containing false employment and income information to help straw buyers obtain loans to buy property worth more than $12.6 million. His actions defrauded lenders of nearly $4 million. He has since lost his CPA license.

On August 18, 2014, Kevin Sluga was sentenced to to 20 months in federal prison followed by 36 months supervised release, and was ordered to pay $3,979,625.93 in restitution.

Leslie Sluga (58). Leslie Sluga, Jennifer Crisp’s mother, pled guilty to wire fraud for acting as a straw buyer. At the direction of one of the owners of CCRE, she obtained loans through fraudulent means to acquire property worth approximately $2.5 million. Her actions defrauded lenders of approximately $912,556.

On August 18, 2014, Leslie Sluga was sentenced to to three years of probation and ordered to pay $912,556.18 in restitution.

Megan Balod (32). Megan Balod (Jennifer Crisp’s sister) intentionally used false information on loan applications for 11 properties between May 2004 and 2006. Her actions defrauded lenders of more than $851,000.

On June 2, 2014, Megan Balod was sentenced to 36 months of probation for acting as a straw buyer.

Employees Julie Dianne Farmer (45). Julie Farmer was Crisp & Cole Real Estate’s (CCRE) chief operations officer and managed its business operations and business accounts. She and co-defendants David Crisp and Carl Cole

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oversaw and managed the conspiracy to defraud the lenders, and directed co-defendants and others in furtherance of the conspiracy.

On April 22, 2014, a federal jury found Julie Farmer guilty of conspiracy to commit mail fraud, wire fraud and bank fraud; and of conspiracy to launder money. On Septenber 29, 2014, Julie Farmer was sentenced to three years in prison followed by five years of supervised release and to serve 4,000 hours of community service. Additionally, the judge order her to pay $2.9 million in restitution and face the criminal forfeiture of $15 million in property and assets related to her actions.

Sneha Ramesh Mohammadi (51). Sneha Mohammadi, a California licensed real estate broker, was the former Chief Financial Officer of Crisp & Cole Real Estate and officer manager at Tower Lending. She admitted causing lenders losses of at least $11,197,811 based on her involvement in the conspiracy. In addition to her role as an employee of CCRE, Mohammadi also admitted purchasing properties as a straw buyer based on false and fraudulent applications, in furtherance of the conspiracy. The California Bureau of Real Estate revoked Mohammadi’s broker license August 12, 2008.

On November 14, 2014, Sneha Mohammadi was sentenced to 18 months in federal prison followed by five years of supervised release for her involvement in the extensive mortgage fraud scheme that ran from January 2004 to September 2007.

Jerald Allen Teixeira (31). Jerald Teixeira, former loan officer at Tower Lending, pled guilty to wire fraud for false statements on loan documents. He was the first to admit to criminal activities at the then defunct Crisp & Cole Real Estate and Tower Financial companies. He admitted complicity to the fraud by using false and fraudulent information on many of the loans he processed, but, said that what he did was mainly at the direction and request of Crisp and Cole, as well as office manager Julie Farmer and Chief Financial Officer Sneha Mohammadi. Teixeira himself used false information to purchase 11 properties with a total value of $4.4 million between October 2004 and December 2006. His California real estate sales license expired January 6, 2007.

On February 9, 2015, Jerald Teixeira was sentenced to 3 years of probation and to restitution in the amount of $1,079,389.12..

Christopher Lance Stovall (41). Christopher Stovall, former loan officer with Tower Lending, voluntarily surrendered his California real estate broker license on June 23, 2011. Stovall knowingly submitted false information in mortgage loan applications for two Bakersfield homes that were purchased using straw buyers; then resold at a higher price for profit. Loans on both homes later defaulted costing lenders nearly $2.5 million.

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On June 2, 2014, Christopher Stovall was sentenced to 12 months in prison followed by 30 months of superives release for mail fraud for making false statements on loan documents.

Robinson Dinh Nguyen (31). Robinson Nguyen was a former sales agent of Crisp & Cole Real Estate. The California Bureau of Real Estate revoked Nguyen’s salesperson license October 15, 2008.

On January 30, 2011, Robinson Nguyen (31), of Fresno, was sentenced to 27 months in prison followed by three years of supervised release, and was ordered to pay $433,000 in restitution for conspiring to commit mail, wire and bank fraud.

Jayson Peter Costa (41). Jayson Costa was unlicensed, but worked as a “loan officer” for Tower Lending. He admitted that he caused lenders losses of at least $7,580,019 due to his role in the conspiracy.

On March 24, 2014, Jayson Costa was sentenced to 78 months in prison.

Michael Angelo Munoz (34). Michael Munoz was a former sales agent of Crisp & Cole Real Estate. His California real estate salesperson license expired January 4, 2013.

On May 5, 2014, Michael Munoz Charged was sentenced to 2 years in prison for his role in the conspiracy to commit mail fraud, wire fraud and bank fraud; and to launder money.

Jeriel Salinas (32). Jeriel Salinas was a former sales agent of Crisp & Cole Real Estate. His California real estate salesperson license expired December 15, 2011.

On May 12, 2014, Jeriel Salinas was sentenced to 19 months in prison and ordered to pay $1,488,762 in restitution.

The Moral You may notice that most of their illegal activities date back 10 years to 2004. The conspirators probably never thought that they would be caught, much less convicted, and sentenced. As we have seen with this case, a person may be investigated and interviewed now, but may not be indicted or even convicted for up to ten years while the federal agents are investigating.

Now, Carl Cole and David Crisp face 17 ½ years in prison, which is a completely different lifestyle from being lauded as some of the “nation’s top real estate professionals”. However, they still might be considered “a symbol of Bakersfield’s hot housing market” and the fiasco that followed.

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Summary Unfortunately, it appears that mortgage fraud continues to increase and that much of the fraud is not discovered until after borrowers default on their loans. Predatory lending has no legal definition, but is a common term for illegal and immoral activities on the part of mortgage professionals. Mortgage fraud and predatory lending are not limited to the office of a mortgage broker or loan officer—it is practiced by a wide variety of industry professionals.

In many cases, it involves a network of like-minded, unethical individuals who enter into a fraudulent relationship. However, an ethical mortgage professional does not enter into such relationships and will not condone these fraudulent activities.