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Foundations On-DemandFraud Schemes Workbook

Foundations On-DemandFRAUD SCHEMES

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Introduction To Fraud Schemes

The mortgage industry continues to see an evolution of fraud. Fraud in loan files is found by a close review of all documentation and a solid understanding of common red flags. To learn more about Red Flags for Fraud in Loan Files, click here.

Despite loan officers’, processors’ and underwiters’ best efforts to indentify deceptive tactics, fraudsters are constantly adapting. Our industry is seeing larger mortgage fraud schemes, which involve multiple loans, multiple misrepresentations and numerous participants. Not only are these schemes more challenging to detect, but the losses to the lending community are much greater. News headlines show evidence of these trends almost daily.

It’s important that everyone within the mortgage lending community stay well informed about the different types of fraud schemes. Also, make sure to familiarize yourself with your company’s Fraud Escalation process.

In this series you will learn about the following Fraud Schemes:

Backwards Application and Identity Theft Strawbuyer and Occupancy Fraud Flip Transactions Real Estate Wire Fraud Foreclose Rescue Chunking Air Loans and Builder Bailout Internet Fraud

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The term Backwards Application may not be familiar, but this scheme is the one of the most common in the mortgage industry and played a significant role in one of our county’s largest economic meltdowns. In backwards application schemes, the mortgage fraud perpetrator fabricates the unqualified borrower’s income and assets to meet the loan’s minimum application requirements. Some characteristic include:

Income is inflated or falsified Assets are created Credit reports are altered Previous residences data is altered

Example:

A borrower’s monthly income is $2000. Their loan officer leads the borrower to say that they earn $5000 per month based on the amount needed to qualify for the mortgage, resulting in a fraudulent loan application and income documentation. The motivator for a backwards application is profit. The perpetrator is committing fraud by falsifying information to close a loan and make money. The borrower may or may not be aware that their actions are fraudulent.

Backwards Applicationand Identity Theft

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Identity Theft is another common form of fraud. Each year, tens of millions of Americans are victims of Identity Theft. There are two types of Identity Theft.

Please record your answer in the space provided.

What is Consumer Identify Theft?

What is Professional Identity Theft?

Backwards Applicationand Identity Theft

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Strawbuyer and Occupancy Fraud

Strawbuyer schemes are one of the most costly forms of mortgage fraud.

Please record your answers in the space provided.

What is a Strawbuyer Scheme?

What are the red flags for Strawbuyers?

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Strawuyer and Occupancy Fraud

Let’s review a real example of a strawbuyer marketing email. It is an attempt to recruit people to use or essentially sell their “good credit” to purchase a home for a real estate investment group. Circle or highlight anything that stand out to you as a concern.

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Occupancy Fraud is directly tied to the strawbuyer schemes. The motivations for these fraudsters may include a lower down payment requirement, reduced interest rate, or property flipping. They could also be looking make a profit from the sale of the property. Occupancy fraud schemes might result in vacant properties that can reduce the value of other homes in the neighborhood.


In what ways are Strawbuyers connected to Occupancy Fraud?

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Flip Transaction

Watch Me!Flip Transactions

Flipping properties has become a mainstream topic thanks to the shows all over the home improvement TV channels. In general, a property that is in need of renovations is purchased by an investor with the goal of completing renovations to improve the property and resell it for a profit. HGTV fans can rest easy knowing that property flipping is legal and can be a great investment!

However, not all flip transactions are legal. Unfortnately, illegal flisp occur all the time. In these scenarios, a fraudster will purchase a dilapidated hime and try to resell the home for a profit. What makes this illegal is that no work is doen to warrent the value increase and the appraisal has been falsified to inflate the value at or above the true market value. Without renovations, the home’s value should not increase. To make it wors, the appraiser may have included photos of a different home or pulled comparables from a distant neghbor to try to validate the artificial value.


What is an illegal property flip scheme?

What document is generally falsified in order to complete a flip transaction?

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Flip Transactions


A builder and a realtor purchased a home in Southern California for $300,000. The property is located in a neighborhood with well-maintained homes selling for approximately $600,000. The property is in need of significant repairs, including:

Roof replacement Kitchen renovation 2 Bathroom renovations New HVAC system New flooring and paint throughout They did not make those improvements.

Instead, the walls were painted, flooring was replaced, and the HVAC was maintenanced. The home is under contract for $600,0000. An appraiser, recommended by the realtor, supported the $600,000 value on the appraisal indicating that the full repairs were completed.The report also shows photos of a different property in an attempt to support the value increase.

Is this flip legal? Why or why not?

Who are the perpetrators of flip transactions?

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Flip Transactions

There are several red flags to look for as indicators of potential illegal property flipping transactions. Red flags for illegal property flip include:

The title indicates the seller newly acquired the property.

The Owner of Public Record does not match the purchase agreement or title. Strawbuyers are commonly connected to illegal property flip transactions.

No real estate agent is used. Property was recently in foreclosure or acquired

at a low price. Appraised comparable properties from distant

neighborhoods or other flip properties. No work has been done to the home to warrant

the price adjustments. No real estate agent is used.

If you see these discrepancy, proceed with caution and follow your company’s fraud escalation process.

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Real Estate Wire Fraud

Real Estate Wire Fraud is one of the fastest growing cybercrimes in the US. New technology provides real estate professionals and consumers’ more convenient access to funds. That innovation also provides greater access to clever fraudsters.

What is Real Estate Wire Fraud?

How does this fraud commonly occur?

Example:

A realtor or real estate settlement agent opens an email that contains a virus or malware. The email account is hacked and allows the perpetrator to gain access to sensitive information and to generate emails that appear to be from a reliable source to trusting home buyers or sellers. Wiring instructions, for what appears to be the real estate transaction, are provided and the customers lose their funds as soon as they complete the transfer.

How can we prevent real estate wire fraud?

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Foreclosure Rescue

A foreclosure rescue scheme is a type of fraud that targets homeowners who have fallen behind on their mortgage payments and are facing potential foreclosure. The fraud perpetrator promises the homeowner that they can prevent the foreclosure, modify loan terms, pay off the delinquent mortgage and help the homeowner stay in the property. Ultimately the homeowner is forced out of their home and stripped all equity.


How does foreclosure rescue work?

Foreclosure rescue scams can affect anyone in financial distress, but commonly perpetrators targets seniors who are unable to make their payments, but also have significant equity in their home.

Sadly, this type of fraud is very difficult for lenders to detect and prevent. Loan Servicing departments who work with borrowers behind on their payments have some opportunities to pinpoint fraud. They can pick up on cues in conversations, ask probing questions, and educate borrowers on the importance of not signing over title without careful consideration or legal counsel.

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Chunking

We have all seen “We Buy Houses” signs or advertisements for real estate investment seminars. Be cautious, they may actually be a chunking scheme. Chunking occurs when the perpetrator offers to eliminate mortgage debt, without actually paying it off.

A common objective of chunking schemes chunking/real estate investment clubs.


What concerns do you have with this example?

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Chunking


What are the components of debt-elimination schemes?

What are the components of chunking/real estate investment clubs?

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Air Loans and Builder Bailout

Watch Me!Air Loans and Builder Bailouts

Both air loan and builder bailout schemes have significant involvement by an appraiser as well as multiple other perpetrators.


What is an air loan scheme?

When an air loan defaults, how does this impact the lender?

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Air Loans and Builder Bailouts


What is a builder bailout scheme?

What are the different ways a builder bailout can occur?

Perpetrators of this fraud scheme may include a builder with an appraiser, mortgage loan officers, and sometimes a title or settlement agents. But luckily there are some red flags that a mortgage professionals and look for to help prevent this fraud.

Builders promoting no money down purchases

Buyers barely qualify for a loan Sources of funds is questionable Property was recently in foreclosure or

acquired at a low price. Secondary Financing is listed by source is

unclear Indicators of Strawbuyers

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Internet Fraud

It’s not surprising that mortgage related internet fraud is on the rise. The lending community is seeing an increase in fraudulent documents that are produced using online tools. Tech savvy fraudsters even have websites providing tips on how to create fake income documentation. As a result lenders are experiencing larger scale and very costly losses.

These schemes are complex and well planned. In some cases entire loan files have been fabricated. In a digital world, these documents are easier to produce and harder to detect. Some recent examples of internet fraud include:

Paystubs and W2s created for companies that do not exist.

Verification of employment routed through fake call-centers create specifically to verify a false employment.


What are a few red flags that you can look for to help identify Internet Fraud?

You can expect internet related fraud to continue to evolve. It’s important that you stay aware of new fraud rings and indicators. Escalate any questions or concerns using your company’s fraud escalation process or hotline.

Watch Me!Air Loans and Builder Bailouts

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Fraud On-DemandFRAUD SCHEMES

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Flip Transactions

6. What is an illegal property flip scheme? A fraud for profit scheme when a home is

purchased and resold within a short time frame at an artificially inflated value.

7. What document is generally falsified in order to complete a flip transaction?The flip typically involves a fraudulent appraisal. Often the fraudulent appraisal will indicate significant renovations to a property to justify the increased value, when there may have been no renovations completed or only minor cosmetic improvements.

8. In the example provided, was the flip legal? Why or why not?The flip involves a fraudulent appraisal, which indicate that renovations were made to the home, when, in fact, there were none.

9. Who are the perpatrators of flip transactions? Based on the scenario provided, the Realtor,

Builder, and Appraiser have all participated in fraud for profit. Although it is important to know that property flipping schemes may include anyone in the Lending and Real Estate Services community – Realtors, Builders, Appraisers, Loan Officers, Underwriters, Home Inspectors, etc.

1. Cosumer Identity Theft: The type of identity theft that occures when someone’s

identy and credit history are used to complete a credit transaction.

2. Professional Identity Theft: The type of identiy that occurs whe nan idustry

professional, like an appraiser has their identity sotle in order to complete fradulent forms.

3. Strawbuyer Scheme: A type of fraud that diguises the true buyer of the

transcation. A strawbuyer is a person who makes a purchase on behalf of another person. Most frequently, this is when the real buyer cannot qualify for the transaction themselves.

4. Red Flags for Strawbuyers: Income,savings or credit are not consistent with the

applicants overall profile. Post-closing you may find early-default and/or the mortgage payments are being made by someone other than the borrower of the loan.

5. In what ways are Strawbuyers connected to Occupancy Fraud?

A type of fraud that includes a borrower applying for mortgage without the intention of occupying the home as indicated on their loan application. Example: A property that is actually to be used as an investment property listed as a primary residence on the loan application

Backwards Application and Identity Theft


Fraud SchemesAnswer Key!


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ChunkingReal Estate Wire Fraud

Foreclosure Rescue


10. What is Real Estate Wire Fraud? A type of fraud that occurs when funds are

electronically transferred to a fraudulent account, most commonly as a result of a fraudulent email.

11. How does this Fraud commonly occur? Real Estate Wire Fraud commonly originates with

an email hacker sending a fraudulent email to an unsuspecting mortgage professional or consumer (buyer or seller of real estate).

12. How can we prevent Real Estate Wire Fraud? Real Estate Wire Fraud can be prevented by making

sure that real estate professional and their customers are well educated on what these emails may look like and be encouraged to verify wiring instructions and any last minute changes. In general, real estate professionals should always use a secured email and anti-virus software.

13. How does Foreclosure Rescue work? Scammers will present themselves as helping a

borrower by convincing them that they are being “rescued” from a foreclosure. The borrower is asked to sign a few legal documents to restructure their debt. In reality, the borrower is unknowingly assigning title to the scammer without any financial compensation. In many cases the borrower is also signing a Power of Attorney, giving the scammer full control of the situation.

14. What are the components of debt-elimination schemes?

Sometimes this scheme may include a fraudulent cashier’s check that can be sent to the bank to satisfy a mortgage.

15. What are the components of debt-elimination schemes?

Ponzi, investment club, or chunking schemes pitch investment opportunities to naïve real estate investors and generally involve the sale of properties at artificially inflated prices. These often occur through real estate investment advertisements or seminars

16. What is an Air Loan Scheme? A fraud for profit scam that relies on a fraudulent

appraisal indicating property value with land and dwelling (home). In reality, they a duped into securing a vacant parcel of land.


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20. What are the red flags you can look for to help you identify internet fraud?

Borrower’s income is not sensible with the borrower’s employment profie. Borrower on the job for a short period of time while earning substantial income. Employer cannot be found through internet searches. Employer’s location is not valid based on searches. Paystub templates are similar for different borrower’s and different employers. Tax deductions are not accurate or consistent.

Internet Fraud

Air Loans and Builder Bailout


17. When an air loan defaults, how does this impact the lender?

In most foreclosures, the lender will incur financial losses even when the property is resold. In an air loans, the property will immediately be without the dwelling and therefore at a lower price. This significantly increases the financial loss potential for the lender. These losses can impact the lender, title insurance company and potentially unsuspecting homebuyer that may have been duped into believing that a home would be built on the property.

18. What is a Builder Bailout scheme? This type of fraud commonly occurs in distressed

real estate market. The builder, with short term construction financing obligations to pay, is unable to sell enough homes in the project to pay off construction debt and is unable to secure new financing.

19. What are the different ways a builder bailout can

occur? Convince buyers to purchase a property with

undisclosed down payment or closing costs paid by the builder. Make false promises of community amenities such as a pool or clubhouse with fitness center. Provide excessive undisclosed upgrades and incentives to the buyer. Involve strawbuyers. Entice real estate investors by overstating income potential or offering property management services that later will not be available. Sell a property to corporations that they have set up to shift liability and inflate property values.

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