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Presented by
Post Closing and Fraud
Ben Niles, Master CMB
Director/Compliance TrainingLenders Compliance Group
866-602-6660603-305-0590 (C)
Proprietary information, do not distribute or use without permission of MBBA-NH.
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Agenda1. Post Closing QC
• Why?
2. FRAUD
• What, Who, Why?
• Fraud Detection
• Fraud Prevention
Proprietary information, do not distribute or use without permission of MBBA-NH.
Principles of Mortgage Banking – Post Closing & Fraud
Why Post Closing QC is Necessary
• Identify & fix errors
• Feedback to Operations & Closing Agents
• Reduces funding delays
• Warehouse Banks sample audit loan files
• Investors review loans for credit, collateral, &
compliance
• FHFA’s OIG re o e ds that the GSE’s QC for o plia e ith all Federal & State Regs
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Principles of Mortgage Banking – Post Closing & Fraud
Why Post Closing QC
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• Identify Training Needs
• Sample Size: Minimum 100%
• Increase Sample Size if Defect Trend is Adverse
• Checklists tailored to Product &/or Investor
• Periodic Reports to Risk Committee & Management
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Principles of Mortgage Banking – Post Closing & Fraud
Post Closing QC Trifecta
• LE, CD, & APR
• Within TRID Tolerances? Fee Increases- LE to CD?
• Changed Circumstances?
• Fees within State & Product Limits?
• CD executed as approved by Lender?
• Are all closing documents properly executed?
• Watch for last minute Seller Concessions!
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Principles of Mortgage Banking – Post Closing & Fraud
FNMA Beyond the Guide- 2016 Focus
• A Culture of Quality- Senior Management
• Processing- Fraud Tools
• Underwriting- E po er U/W’s to sa NO!• Pre-Funding QC- Credit, Collateral & Compliance
• Pre-closing Document Review
• Post-Closing Document Review-
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Principles of Mortgage Banking – Post Closing & Fraud
FNMA Beyond the Guide- 2016 Focus
• Post-Closing QC- 3-C’s as a o e• QC Reports- Goal is Zero Defects
• Max 10% Minor/3% Major Defect Rates
• Self-Report- Not Eligible, Not Investment Quality
• Action Plan to Meet Defect Rates
• Annual Training- U/W, QC, & Fraud Prevention
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Principles of Mortgage Banking – Post Closing & Fraud
FNMA: 4 Most Common Defects As of August 2016
• Liabilities = 60%
• Occupancy = 24%
• Income = 6%
• Assets = 7%
• Credit, Value, & Property = 1% each
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Principles of Mortgage Banking – Post Closing & Fraud
Fraud by Region: 2015+ FNMA Data• CA: 24%
• Northeast: 23%
• Southeast: 15%
• North Central: 10%
• Southwest: 9%
• Western Region: 8%
• Capitol Region: 7%
• Northwest: 4%9
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Principles of Mortgage Banking – Fraud
Top 10 Fraud States- 2015-2016
Fannie Mae Data
1. CA 6. NJ
2. NY 7. GA
3. TX 8. MI
4. FL 9. IL
5. VA 10. AZ
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Principles of Mortgage Banking – Fraud
What is Mortgage Fraud?
• The intent to materially misrepresent or omit information on a mortgage loan application to obtain a loan that would have been denied had the lender known the truth.
• A federal crime, a felony
• No statute of limitations (wire fraud, bank fraud, mail fraud, & money laundering)
• Penalties of up to 30 years in prison, plus fines, plus restitution.
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Principles of Mortgage Banking – Fraud
Four Classes of Fraud
• Fraud for House: Borrower Misrep• Usually 1 loan
• Predatory Borrowers or Predatory Lending?
• Fraud for Profit: Schemes & Conspiracy• Usually multiple loans
• Usually multiple players
• Institutional Fraud: Enterprise Level for Profit
• So ereig Citize ’s Fraud: fastest gro i g12
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Principles of Mortgage Banking – Fraud
Loan Level Fraud
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• Appraisals: • Comp Shopping
• Bogus Appraisal Data & Phony Rehabs
• Assets: Source of Funds & Recent Deposits
• Debt: Undisclosed
• Employment/Income: Salaried or Self Employed• Fraudulent Paystubs, W- ’s, & ’s
• Occupancy: Investment Property or Owner Occupied
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FRAUD Schemes
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• Appraisal Identity Theft
• Builder Bailouts (Hidden Seconds)
• Investment Clubs
• Misrepresentation of Current Owner
• Rental of Vacant Property
• Sale of Vacant Property- (rentals & 2nd homes)
• Arts & Crafts Docs
• Cyber Security Breaches- Identity Fraud
• Ransomware now targeting businesses
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Principles of Mortgage Banking – Fraud
FRAUD SCHEMES – o ’t
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• Phantom Renovations
• Property Flipping & Flopping
• Rapid Refi’s (Hides details of purchase)
• Straw Buyers
• Foreclosure Rescues
• Cash-out Purchases
• Deed Fraud
• Reverse Occupancy
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Principles of Mortgage Banking – Fraud
FRAUD SCHEMES – o ’t
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• Short Sale/Payoff Fraud
• Wire Transfer (new wire instructions re-directs funds)
• So ereig Citize ’s Mo e e t • Reverse Rental (occupying a rental property)
• SSN- Identity Theft (used in fraud for profit schemes)
• Shot-gunning (multiple simultaneous loans, same house)
• Air Loans (straw or non-existent buyer or non-existent
property
• Wire Transfer Fraud
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Principles of Mortgage Banking – Fraud
So ereig Citize ’s Mo e e t
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• Domestic Terrorism- decentralized via the Internet
• , a ti-go er e t e ers & gro i g.• Members believe they are sovereigns, not subject to:
• IRS taxes
• Local Laws
• State Laws
• Federal Laws
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Principles of Mortgage Banking – Fraud
So ereig Citize ’s Mo e e t
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• Financial Fraud for Profit- Typical Fraud Schemes, or
• Retaliate against Gov’t employees- create & record
fraudulent financial instruments & records
• Judgements
• Liens
• False claims
• False IRS refund filing
• See FNMA tutorial at fa ie ae. o u der A ti-Fraud
Part ership Trai i g Series Ta .Proprietary information, do not distribute or use without permission of MBBA-NH.
Principles of Mortgage Banking – Fraud
Local Fraud Cases
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• Confed Mortgage Co Institutional Fraud
• Countrywide Financial Corp Institutional Fraud
• Dime Mortgage Co Builder Bailouts
• Bankeast Mortgage Corp Victim of Flips in MA
• a a k i Mai e I sider Co spira• Mortgage Broker in Pittsburgh, PA defrauds a ME Wholesaler*
• Closing agent in PA defrauds a ME Wholesaler*
• * Fu di g ires se t to Broker’s or Closi g Age t’s a ou t & diverted- existing mortgage was not paid off.
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Principles of Mortgage Banking – Fraud
Recent Fraud Headlines• 9 in NJ Charged in $10M Fraud
• 4 in PA Charged in Multi-Faceted Conspiracy
• NY Man Arrested by FBI for Ponzi Scheme
• Businessman & Attorney Guilty of Loan Fraud in MI
• Former CA LO Arrested- Straw Buyer Scheme
• Former Nashua Man- Equity Stripping Scheme
• Thieves Steal Whole House- deed fraud at epidemic levels in Manhattan; European & Asian investors are easy targets in Detroit.
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Principles of Mortgage Banking – Fraud
Recent Fraud Headlines
• NH Mortgage Consultant- Loan Mod Fraud
• NH Lawyer Sold Home He Did Not Own
• MA Woman Sentenced for Appraisal Fraud
• Hopkinton Brothers Indicted- Straw Buyers
• MA Fraudster Gets 6+ Years- Mortgage Scam
• Boston Man Convicted- Straw Buyers
• MA Attorney Jailed for Stealing Closing Funds
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Principles of Mortgage Banking – Fraud
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Straw Buyers: Former Realtor & Real Estate Developer
Sentenced to Prison for Massive Mortgage Fraud
In June 2015 Michael David Scott, 51, of Mansfield, pleaded guilty to
counts of 32 counts of wire fraud, 14 counts of bank fraud, and 22 counts of
money laundering. developer sentenced to 135 months in prison and
ordered to pay restitution of over $11,374,201 and to forfeit $7,413,712.
From September 2006 to April 2008, Scott purchased 3-4 unit ulti’s in
Roxbury and Dorchester, converted ulti’s to o do’s, & sold u its to stra buyers.
Scott submitted mortgage loan applications that falsely represented key
i for atio , su h as the u ers’ i o e, perso al assets, do pa e t, and intention to reside in the condominiums to 9 national mortgage
companies and one local bank. Proprietary information, do not distribute or use without permission of MBBA-NH.
Principles of Mortgage Banking – Fraud
Fraud & Misrep Docs• Applications (1003)
• Appraisals
• VOD’s- Source of Funds
• VOE’s, Pa stu s, W- ’s• ’s• Closing Docs
• Credit Docs
• Remember: Liabilities = 60% & Occupancy = 24%
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Principles of Mortgage Banking – Fraud
Return of the Three Dumb Monkeys
• See No Evil: SIVA Loans
• Speak No Evil: SISA Loans
• Hear No Evil: NINA Loans
• The Golden Rule: Trust But Verify!
• The 3rd Time is Not a Charm.
• Why do some players not learn from history?
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Principles of Mortgage Banking – Fraud
Return of the Three Dumb Monkeys• Non-QM does not exempt Lenders from:
• Fraud Statutes: Federal & State
• Repur hase R&W’s: for life of loa• Investor Litigation: loss recovery
• Regulatory Enforcement: Odds favor the Regulators
• UDAAP- deceptive practices
• Fair Lending- discrimination, protected classes
• Predatory Lending- pricing & programs
• ATR- credit, collateral (equity), & capacity
• SARs- mortgage fraud is reportable
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Principles of Mortgage Banking – Fraud
The Bottom Line• 90% of Stated Income is Misrepresentation.
• Self-E plo ed Borro er’s ’s are the real issue.• If the a ot erif i o e ith their ’s, either
• Application income fraud- true income is too low to qualify,
or
• Income tax fraud- not paying full taxes on true income.
• Solutio is to U/W usi g ’s. If DTI > %, use Residual Income U/W.
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Principles of Mortgage Banking – Fraud
Major Ba ks Fi ed $ B as of -30-
• WSJ reported on 3/3/16 $110B in bank fines for toxic loans leading up to the financial crisis.
• $110B in fines were paid to Treasury, SEC, DOJ, FHA, Fannie Mae, Freddie Mac, & State Attorney Generals.
• Pension Funds, Life Insurance Cos., Private Equity Firms, & Hedge Funds will add $Billions more.
• A e tit that ought the To i PMBS’s is fili g suits.• Litigation will run at least another 5 years.
• Blowback to Originators: Wall Street is suing to claw back losses.
• Call this the sins of the past!
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Principles of Mortgage Banking – Fraud
Current Fraud Trends• Highly organized schemes
• Collusion between property seller, broker, appraiser
and title closer
• Collusion is the new norm
• O e Stop Shoppi g• One person controls the entire transaction from sell of
property, origination, appraisal through closing
• All have value issues / losses
• Loans are kept current for period of time28
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Principles of Mortgage Banking – Fraud
Borro ers’ Role i Fraud S he es• Borrower is not aware of scheme
• Naïve
• Good FICO score
• Trustworthy
• Borrower not aware of:
• Loan level misreps
• Inflated value
• Quit claim deed
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Principles of Mortgage Banking – Fraud
Red Flags: Flips & Rapid Refi
• Refinancing borrower not title holder- As seen on preliminary title & at top of appraisal
• Be are of LLC’s- hides true owners
• HUD-1 payoff of private financing (usually property seller)
• Appraiser may leave date property originally acquired field blank or enter a fictitious date
• Double escrows
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Principles of Mortgage Banking – Fraud
Appraiser Identity Theft:
License &/or Signature
• Approved appraiser signs name for colleague who
is not an approved appraiser
• Name / signature used by associate in office
• Final appraisal report altered prior to
origination/closing
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Principles of Mortgage Banking – Fraud
Appraisal Red Flags
• On purchase, appraisal pre-dates purchase agreement
• Borrower name is missing or wrong
• Va a t i stead of o upied o refi a e• Te a t i stead of o er for o er o upied • Borrower and owner different and there is a prior sale
for substantially less on a refinance
• Appraisal ordered / provided by interested party
• Appraisal Independence Regs should prevent this.32
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Principles of Mortgage Banking – Fraud
All Have Value Issues!!!
• Phantom renovations
• Inappropriate, unreliable, unverifiable data
sources
• Material misrepresentations and omissions
• Ide tit theft of appraiser’s li e se / sig ature
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Principles of Mortgage Banking – Fraud
Misrep of Subject Data & Value (
14412 Memory Lane
• Original appraisal $128,000
• 1.5 stories
• Brick
• 4 bedrooms/2 baths
• Finished basement
• 2 car garage
• 1,254 square feet34
Appraisal Fraud - Detroit, MI
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Principles of Mortgage Banking – Fraud
You cannot have appraisal fraud
without conspiracy & usually
lender complicity.
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Principles of Mortgage Banking – Fraud
Appraisal Fraud Prevention
• Do ’t put a target or esti ated alue o the appraisal order
• Never provide comps to an appraiser
• Have a single individual (outside of sales) order all appraisals on a rotating basis
• Report appraisal fraud / questionable practice to law enforcement / licensing boards
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Principles of Mortgage Banking – Fraud Prevention
Appraisal Fraud Prevention
• Document prior sales
• Document length of time for renovations
• Get interior photos – do drive bys
• Verif that Seller a d / or O er is i title; resolve discrepancies
• Verify the comps & data source
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Principles of Mortgage Banking – Fraud Prevention
Appraisal Fraud Prevention
• Is appraisal dated prior to the purchase
agreement?
• Do ’t a ept i o plete appraisal reports!• Call the borrower
• Use AVM’s, Collateral Tools, & Desktop Re ie s
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Principles of Mortgage Banking – Fraud Prevention
Appraiser Identity Theft Prevention
• Conduct audits of approved appraisers
• Have signatures on file
• Establish direct communications with appraisers; call them to verify authenticity of reports and signatures
• Spot checks – review appraisals at time of origination
• Get to know your appraisers
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Principles of Mortgage Banking – Fraud Prevention
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Basics of Fraud Prevention
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• Sr. Management Support (culture)
• Annual Fraud Training
• E po er U/W’s to Sa NO!• Notify Investors & Authorities
• Hire Honest Staff
• Practice Integrity & Ethics
• Avoid Conflicts of Interest in Hiring
• Increase Pre-Funding QC (targeted)
Principles of Mortgage Banking – Fraud Prevention
Efforts to Prevent/Detect Fraud
• Obtaining information independently- Credit- Employment
• Re-verify by phone, using your phone number, not theirs. Get number from Company Website or Internet Directory.
• Detail Instructions to Closing Agents: Verify revised wire instructions directly with your contact by phone & email.
• Freddie Mac Exclusionary List• 1-800-4FRAUD Hotline• Publications: Go to Fannie Mae & Freddie Mac Websites. • Attend FNMA QC & U/W Boot Camp
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Principles of Mortgage Banking – Fraud Prevention
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Internet Resources
• Ways to verify sales history and ownership of
subject and comps
• Title commitment
• Tax records www.searchsystems.net
• www.SearchTheNationalMLS.com
• Map distance www.mapquest.com
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Principles of Mortgage Banking – Fraud Prevention
Fannie Mae Resources• Common Red Flags
• Fraud Schemes & Their Characteristics
• Misrepresentation Data
• Loan Defect Categories
• DU Potential Red Flag Messages
• www.fanniemae.com/singlefamily/mortgage-fraud-prevention
Anti-Fraud Partnership Training Series : 13 Tutorials43
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Principles of Mortgage Banking – Fraud Prevention
Additional Fannie Mae Resources
• QC Self-Assessment, 10-2014
• Appraiser Quality Monitoring FAQS, 06-2014
• Selli g R&W’s- Origination Defects &
Remedies, 10-2015
• Tools & Processes to Increase Certainty &
Reduce Repurchase Risk,
• Post-Purchase Review & Reports Lender Job
Aid, 201544
Principles of Mortgage Banking – QC
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Freddie Mac Resources
• www.FreddieMac.com/singlefamily/preventfraud/
• Fraud Hotline: 1-800 4 FRAUD 8
• Freddie Mac Exclusionary List
• Dis o er Gold Thru Qualit • Fraud Mitigatio Pra ti es• Mortgage S ree i g Pro ess: Red Flags• www.FreddieMac.com/learn/pdfs/uw/ex_lst_lp.pdf
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Principles of Mortgage Banking – Fraud Prevention
Additional Fraud Prevention Resources • AVM’s (automated valuation models
• MLS (Multiple Listings Services)
• MARI (Mortgage Asset Research Institute)
• Lexis Nexis
• DataVerif ’s Drive Report
• Core Logi ’s LoanSafe Collateral & Fraud Manager
• Rapid Reporting Verifications
• Undisclosed Debt Monitoring (Experian, CBC)
• Reverse Directories, White Pages, Yellow Pages
• Linked-In
• Google as a last resort for information46
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Principles of Mortgage Banking – Fraud Prevention
AML/SARS Case Study
• Application #1 submitted for SI Program, $5,000 GMI
as self-employed: Declined
• Application #2 re-submitted for Fannie Mae
Program, $12,500 GMI as salaried; paystubs show
$14,000 GMI & are numbered consecutively.
• Bank statements show no payments to Paychex, the
payroll company on the paystubs
• SSN used by multiple individuals (Lexis Nexis)
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Principles of Mortgage Banking – Fraud Prevention
AML/SARS Case Study, Cont.
• Wife convicted of theft & fraud (not on loan)
• Business bank statements show massive transfers to
& from Pakistan, UAE, China, Hong Kong, Singapore,
India, France, Canada, & within USA.
• $2M+ Large Deposits
• $1M+ wired to businesses that are either
unverifiable or shell companies
• Would you deny the loan? File a SARS?48
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Principles of Mortgage Banking – Fraud Prevention
49Post Closing QC & Fraud
Ben Niles, Master CMB
Director/Compliance TrainingLenders Compliance Group
866-602-6660603-305-0590 (C)
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