Despite the attention paid to mortgage fraud committed by borrowers and lenders since declines in the real estate values and the subprime loan crisis triggered severe problems in the banking industry, the number of Federal Bureau of Investigation’s (FBI) investigations of mortgage fraud and associated financial crimes is increasing. “The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations,” John Pistole, Deputy Director, told the Senate Judiciary Committee in April.
“There are so many mortgage fraud cases,” Pistole said, “that the bureau is not focusing on individual purchasers, but industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars. It is a matter of lawyers, brokers, or real estate professionals that are systematically trying to defraud the system."
Pistole said that most of the mortgage industry is “void of mandatory fraud reporting.” Indictments in mortgage fraud cases are very often for money laundering and other financial crimes in connection with mortgage fraud.
Pistole told the Judiciary Committee that the FBI supports a mandatory reporting mechanism that will prevent fraud in the future, and the creation of “Safe Harbor” provisions to protect the mortgage industry under a mandatory reporting mechanism.
Data gathered by the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department, which monitors Suspicious Activity Reports (SARs) that banks, money services businesses, casinos and others are required to submit, show that money laundering and currency transactions structured to avoid mandatory reporting are the most common types of suspicious activities associated with mortgage fraud.
The FBI currently compiles data on mortgage fraud from SARs and through the Office of Inspector General (OIG) reports, Pistole said. The FBI also receives complaints from the industry at large. The FBI partners with the Internal Revenue Service, the FDIC, and other federal agencies and State and local law enforcement in investigating mortgage loan fraud.
Preventing mortgage loan fraud and associated crime
Kathleen Bianco, author of a CCH Report, “Money Laundering and Mortgage Fraud: The Growth of a Merging Industry,” recommends filing Form 4506T, which verifies an individual’s tax information, at the beginning of the mortgage loan process, rather than at the closing of the loan. This would help to protect financial institutions from the threat of money laundering and fraud.
Accountants should support their financial services clients in their Bank Secrecy Act compliance efforts. They should also be prepared to assist clients to review and update their reporting systems that generate currency transaction reports and SARs and help train personnel to recognize suspicious activity.
Changes to Truth in Lending disclosure rules proposed by the Federal Reserve Board of Governors which took effect on July 30, might affect some mortgage loan fraud schemes. These changes include giving an applicant three days to review the final Truth in Lending disclosure before closing the loan. Lenders also cannot collect fees such as an appraisal fee upfront; the only fee they can collect upfront is a fee for running a credit report.
Trends in Mortgage Fraud
The FBI divides mortgage fraud into two distinct areas: Fraud for Housing; and Fraud for Profit.
- Fraud for Housing: Fraud for Housing represents illegal actions perpetrated by a borrower, typically with the assistance of real estate professionals. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses.
- Fraud for Profit: Fraud for Profit uses a scheme to remove equity, falsely inflate the value of the property, or issue loans relating to fictitious property(ies). The perpetrators of fraud for profit take the proceeds of the loan with no intention of occupying the house or repaying the lender. Perpetrators of these schemes engage in money laundering.
Pistole identified equity skimming and property flipping as two areas where mortgage fraud is prevalent. He said, “Identity Theft in its many forms is a growing problem and is manifested in many ways, including mortgage documents.” Foreclosure rescue scams are “particularly egregious.”
In response to this growing threat, among other proactive steps, Pistole said the FBI has set up 18 Mortgage Fraud Task Forces across the country cooperating with State and local governments.
In a recent prosecution in Dayton, Ohio six individuals were convicted on money laundering charges in connection with mortgage fraud stemming from actions they took to disguise the source of proceeds from the fraud.
Jessica A. Zbacnik, of Monroe, Ohio, the last member of the conspiracy to plead guilty, confessed to conspiracy to commit money laundering and one count of conspiracy to commit mail fraud, wire fraud and money laundering in U.S. District Court in Dayton. Her five co-conspirators had confessed to the same crimes. One also confessed to tax crimes.
Zbacnik admitted that she operated and controlled various real estate mortgage and title insurance related businesses and corporations with the object of entering into a fraudulent scheme designed to obtain monies, profits, real property, and other things of value.
Zbacnik admitted that she had helped arrange, facilitate, and manipulate documents associated with real estate sales and closings in order to fraudulently obtain excess mortgage loan proceeds generated from the sale of residential properties for the personal benefit of the defendant and her co-conspirators.
On August 6th the FBI arrested two Brooklyn, New York men, Garth Celestine and Phil A. Simon, the principals in the Home Savers Consulting Corporation who are accused of perpetrating an equity stripping mortgage loan scheme. The men were charged with conspiracy to commit wire fraud in connection with mortgage loan fraud, the New York Times reports.
In nearly every case a longtime owner with lots of equity who fell behind on a mortgage turned to Home Savers for assistance. Mr. Celestine and Mr. Simon would persuade the homeowner to transfer the deed to a “straw buyer” with good credit who qualified for a cash-out refinancing. Then, it is alleged, they drained the homes of equity, in some cases by applying for multiple mortgages on the same property. They kept the proceeds from the payouts for themselves after paying the straw buyers.