What is Lender Fraud?

Fraud is any intentional misrepresentation or concealment of information in order to deceive or mislead. Lender fraud involves manipulating contracts, appraisals, sources of down payments, and sales prices in order to help buyers qualify for higher loan amounts. Although real estate licensees can easily get caught up in lender fraud, many others can be held liable as well, including buyers, sellers, appraisers, and mortgage brokers.

Why Should I Care?

Lender fraud carries with it substantial fines and sanctions, and one who commits lender fraud can face sanctions from many different directions. First, and most significantly, one may be criminally liable under both federal and state laws. One who commits fraud can be held criminally liable under a number of federal laws, including the Racketeering Influenced and Corrupt Organizations Act (“RICO”), which carries with it both hefty civil penalties, such as treble damages and attorneys� fees, and criminal sanctions of up to 20 years in jail. In addition, one can be held liable under federal wire fraud statutes if interstate wire communications are used to defraud another. Wire fraud statutes allow up to $1,000,000 in fines and up to 30 years in jail.

Under state law, one could be found guilty of falsifying financial statements or by committing fraud and deceit with respect to a mortgage broker. Falsifying financial statements is a Class A misdemeanor, which brings with it up to 1 year in jail and up to a $6,250 fine per occurrence. Committing fraud and deceit with respect to a mortgage broker is a Class C felony, which brings with it up to 5 years in jail and up to a $125,000 fine per occurrence.

Individuals may also be civilly liable for damages resulting from a fraud. Those damages could be quite substantial, and could include general damages, punitive damages, and attorneys� fees.

In addition, one can be sanctioned administratively, such as being fined by an administrative agency, like the Oregon Real Estate Agency, or by having one�s license revoked. One may be required to disgorge any profits from licensed activities which involved fraud, and may never be given the chance to obtain a new license.

Assisting someone in the commission of a fraud is as serious as committing the fraud itself, and carries with it the same penalties. This is known as “conspiracy,” and is an invitation for trouble. Although one may not believe he or she is doing anything wrong, he or she may be assisting another who is committing the fraudulent act. The fraudulent actor need not have actually committed the fraud, he or she must only have intended to commit it, and the “innocent” co-conspirator need not have been involved in every stage leading up to the fraudulent acts.

Types of Lender Fraud

Although lender fraud exists in many different forms, we will address the most common types, which are the most likely to pull in “innocent” real estate licensees.

Delayed/Forgiven Second Mortgage The first type of lender fraud is the delayed and/or forgiven second mortgage. This occurs when a buyer makes an offer with a separate addendum, which is not provided to escrow, that states that the seller will provide secondary financing to the buyer. The second mortgage is not recorded until after closing, and the buyer consequently qualifies for a higher loan with the lender. The forgiven second mortgage is similar to the delayed second mortgage, but differs in that the mortgage is either gifted back to the buyer or excused by the seller after closing.

Owner Occupancy Loans A second type of lender fraud is when a buyer applies for an owner occupancy loan in order to receive a more favorable rate, but has no intention of living in the home.

Appraisal Pressure A third type of lender fraud is appraisal pressure, in which a real estate licensee suggests that the appraiser must provide an appraisal with a minimum value, or states that the appraiser is to call the real estate licensee with the value before completing the final appraisal report. In addition, a real estate licensee may ask an appraiser to withhold descriptions or photos of unfinished areas, problems, or negative aspects of a property.

Inflation of Sales Price A fourth type of lender fraud is raising the sale price of a property to cover costs, repairs or cash back to buyer after closing, without disclosing the arrangement to the lender. However, this practice does not constitute fraud on the lender if there is full disclosure.

Renting Income, Jobs or Assets The last type of lender fraud we occasionally see is a buyer who “rents” an income, job, or assets in order to qualify for a loan. This often occurs when a buyer is unemployed, and a family member of the buyer agrees to employ the buyer for a short period of time so that the buyer will qualify. A buyer�s family member may also temporarily place assets in the buyer�s name, such as depositing funds into the buyer�s savings account, so that the buyer will qualify for a higher loan.

How Do People Get Caught?

People get caught for committing lender fraud in many different ways. It is important to be aware of the multitude of agencies involved in lender fraud, including but not limited to the FBI, Department of Justice, HUD, the Oregon Real Estate Agency, the Oregon Department of Consumer and Business Services, and the Oregon Appraiser Certification and Licensure Board.

The first way in which people get caught for committing lender fraud is through foreclosures. Lenders may investigate foreclosures, which may result in a finding of fraud. A lender may determine from its investigation that a buyer qualified for the loan solely based on a fraud committed on the lender.

Second, many lenders conduct routine audits of transactions for quality control purposes. One industry source has stated that lenders audit 1 in every 10 transactions.

Third, there are instances of FBI informants being present in mortgage brokers� offices. These informants are charged with the duty of being the eyes and the ears of the FBI, and will report any potentially fraudulent activity they witness or suspect.

Fourth, mystery shoppers may be employed by the government or by private organizations in order to check in on real estate licensees, mortgage brokers, and other individuals who may be apt to commit lender fraud.

Lastly, fraud may be uncovered based on complaints made by individuals who become aware of the fraudulent activity.

Tips to Avoid Committing Lender Fraud

The following are simple tips to keep real estate licensees out of trouble. First, if it smells bad, it probably is bad. Second, do not participate regardless of being told by another that “it is ok, we do this all the time.” Third, do not write side agreements, as all information must be disclosed to the lender and title company. Fourth, do not pressure appraisers to appraise property at a certain value. And lastly, withdraw from a transaction or situation immediately upon learning of a potential fraud so as to avoid being deemed a co-conspirator, and bring the matter to the attention of your principal or managing broker.

 
This column contains general information only and must not be construed as legal advice. Questions may be submitted directly to Grayson Law LLP by fax at (503) 775-1765, by email at or by mail at 7959 SE Foster Road, Portland, Oregon 97206.