Predatory Lending & Mortgage Fraud
Mortgage Fraud can be committed by buyers or lenders, this post contains two videos; the first on a lender's role in fraud, and the second from the FBI regarding buyer's role in fraud. Mortgage fraud perpetrated by a lender can occur on an initial loan or during a loan modification or refinance.
Mortgage loan fraud occurs when false statements are made to qualify for a loan. A number of fraudulent practices can get real estate licensees in trouble. False statements include bogus earnest money deposits (double contracts or hidden contracts).
Don't be a Victim; Read my business partner's post on "March is Mortgage Fraud Prevention Month".
A second, undisclosed mortgage can be involved. For instance, a broker writes a transaction for an 90% conventional loan, representing that the buyer is putting 10% down payment. Meanwhile, the seller is actually carrying back a second mortgage, but this is not disclosed to the lender and constitutes loan fraud.
Lenders need to know this as they are assessing both their risk and the buyer. A down payment goes into their risk assessment which, more than likely, will determine if they will make the loan and at what interest rate.
Each year, the Federal Bureau of Investigation (FBI) and Financial Crimes Enforcement Network (FinCEN) reports an increase in Suspicious Activity Reports (SARs) related to mortgage fraud. Estimated annual losses are in the billions of dollars! These shocking results tell us that more efforts are needed to combat this growing trend. By reporting illegal activities, we can do our part in reducing mortgage fraud.
As an ethical Realtor that takes great pride in honesty and integrity, I only refer to lenders I know and trust and have a long-standing good relationship with. If you're shopping in SW Ohio, I'd be pleased to make some referrals for you.
"Mortgage fraud is the fastest-growing white collar crime affecting the United States today." Karen Spangenberg, Section Chief-Financial Crimes Section Federal Bureau of Investigations
- The use of deceptive or fraudulent sales practices in the origination, closing, or servicing of a loan secured by real estate;
- Steering the borrower to a high cost loan rather than the standard investment quality loan; structuring a high cost loan with payments the borrower clearly cannot afford;
- Increasing the borrower's interest rate following default or missed payments;
- Failing to provide accurate loan balance and payoff amounts;
- Failing to provide all government mandated disclosures;
- Failing to report good payment histories to credit bureaus;
- Identifying (falsely) that your loan is a line of credit;
- Charging excessive prepayment penalties;
- Inserting a mandatory arbitration clause;
- Changing loan terms at closing;
- Falsifying loan documents; and
- Forging signatures.
High cost mortgages (consumer loans) deserve special treatment. Generally, a loan is predatory if the interest rate is anywhere from 6 to 10 points over Treasury Securities for first mortgages and 9 points for second mortgages.
The trigger for fees in a high cost mortgage would be without regard for the buyer's ability to pay off the loan. In some states, you cannot refinance unless there is a tangible net benefit (North Carolina). In the District of Columbia, a homeowner may contest foreclosure if the loan being foreclosed was a predatory loan.
Fortunately today, most mortgage lenders are honest, ethical professionals committed to doing a good job for their clients. Most are licensed, bonded, subscribe to a "code of ethics," and are members of a national trade association. State departments of financial institutions keep close watch on licensed mortgage brokers. Federal regulators audit most large institutions to assure compliance with the law. Today's borrower has every reason to step confidently into any mortgage company office and receive full, fair, and competent service.
Predatory loan officers can also deceives the borrower by:
- hiding fees or points;
- assigning an adjustable rate loan rather than a fixed rate loan; mandating unneeded insurance or a prepayment penalty; or
- selling a sub-prime mortgage loan when the borrower could qualify for a lower cost conventional loan.
Buyers also sometimes commit mortgage fraud in a variety of ways from falsifying information about income, taxes, employment, attempting to hide debt and other important instances of non-disclosure.
In the end, it never turns out well for buyers attempting to "pull the wool" over a lender's eyes and hurts everyone involved. Attempting mortgage fraud will not only not help a buyer achieve the goal of home ownership, but can cost them that opportunity for the rest of their lives.
As Realtors, we need to stress the importance of buyers being honest with lenders about their financial particulars, but also give guidance and educated cautions to buyers about avoiding predatory lending.