BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Lender Fraud — An Update
There was a spate of lender fraud in the recent sellers’ market characterized by inflating sales prices, cash outside of escrow back to buyers, fraudulent loan applications, etc. This activity has resulted in recent news articles about indictments and license revocations by those who participated in this activity.
Now that the market has changed, and lender underwriting criteria has tightened, and with the publicity surrounding the enforcement actions against the perpetrators, one would think that we would not have to worry about lender fraud again. But, never underestimate the ability of clever (scheming) individuals to devise new ways to get around the rules.
Remember, that lender fraud can be both an affirmative misrepresentation to a lender, as well as an omission to inform the lender of a pertinent fact. Basically, it boils down to honesty and fair dealing. Start with the proposition that the lender is entitled to know THE deal, and THE borrower, and you will be OK.
Here are some scenarios to look out for and to avoid, because these will be the next round of license revocations by the DRE — and arrests by the FBI:
1. Hidden Seconds: In this scheme the offer states, for example, 20% down and an 80% first with an institutional lender. But, on an addendum that the true lender never sees, it states that, after COE, the seller will rebate all or a part of the down payment to the buyer in exchange for a second note and deed of trust on the property. This is not only illegal, it is stupid because the recorded deed of trust is the public record evidence of the fact that the lender was lied to about the amount of the down payment.
2. Rebate to Buyer: Similar to the above, but instead of a rebate to the buyer for a note and deed of trust, the price is inflated and money is rebated to buyer, or a third party, outside of escrow.
3. Short Sale — Money Back to the Seller: Some short sale sellers want some money back at the close of escrow (“I need some money to move, or I will just let the property go to foreclosure”). Virtually all short sale lenders prohibit any money back to the seller. Any attempt to get money to the seller outside of escrow, or via any circuitous method, is a violation of the lender’s instructions. This includes such practices as rebates of commission to the seller, and the buyer buying seller’s “furniture” at an inflated price outside of escrow.
4. Short Sale – Money to the Second Lender: If there are two lenders on a property in a short sale, usually the second lender will demand some payment (e.g., $10,000) or they won’t cooperate in the short sale. The first lender may allow no money to the second, or will only allow a smaller amount than the second lender demands. Any attempt by buyer or agents to get some money to the holder of the second, without the written permission of the first lender, can be lender fraud on that first’s payoff instructions.
5. Short Sale – Seller Cooperates with a Friendly Buyer: In this scenario, a buyer who is a friend or family member of the seller attempts to buy the property at a low price while convincing the lender that this is the best market price available. Then, after the sale to this buyer, and after the lender has concurred in the short sale, the property is deeded back to the seller.
Another variation has a third-party buyer approaching the seller to allow the buyer to contract to buy the property at a low price and convince the bank that this low price is the best price. Then the property is “flipped” by the buyer and the net profits are split with the seller.
6. REO Sale — High Broker Price Opinion on Short Sale: An agent who gets REO listings from a bank is asked to do a Broker Price Opinion (“BPO”) on a pending short sale prior to a foreclosure. The agent submits a high BPO, thus killing the short sale, in order to allow the property to be foreclosed upon and getting an REO listing, and maybe selling to a buyer represented by that agent.
PRACTICE TIPS
1. Do not advocate or participate in any of the above schemes, or any scenario where the lender is not being told the true story. If in doubt, check with your manager or broker.
2. If your principal is intending to do so and you know about it, you should advise your client to see their attorney. If they still insist on proceeding, withdraw from the transaction.
3. No one transaction is worth your (and your broker) losing your license(s) and permanently damaging your reputation(s).
For more on Lender Fraud, see the following Weekly Practice Tips:
Lender Fraud August, 2005
Lender Fraud – Re-visited March, 2006
Lender Fraud – One More Time August, 2006
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2008 06/20/08
