Tuesday, June 15, 2010

OTS: Fraud and Insider Abuse


The Office of Thrift Supervision (OTS) issued a revised Examination Handbook on Fraud and Insider Abuse on June 14, 2010. Substantive changes include:

  • adding a discussion on Suspicious Activity Reports (SARs) reporting requirements and the applicability of the "Safe Harbor" provisions for SAR filers;
  • adding a discussion on the FDIC's white paper entitled, "Impact of New Activities and Structures on Bank Failures" and highlighted factors that contributed to the four costliest institution failures from 1997 through 2002;
  • providing updated statistics and red flags on mortgage fraud, identity theft, check fraud and payment card fraud;
  • adding a discussion on fraud risk management and detection methods based on AICPA guidance; and,
  • streamlining the internal controls section.

In 2009, the President elevated the fight against mortgage fraud to a cabinet-level priority and expanded the task force to include OTS, OCC, the Federal Reserve, The Federal Housing Finance Agency, HUD, and the Special Inspector General for the Troubled Asset Relief Program.

The President's task force joined the work that the Federal Trade Commission had already begun with their "Operation Stolen Hope" program to crack down on mortgage foreclosure rescue and loan modification scams.

Given more recent concerns like mortgage fraud, consumer loan fraud and identity theft, SARs data is more important than ever. Law enforcement agencies use the information reported on the SARs to initiate investigations and the agencies use the information in their examination and oversight of supervised institutions. The usefulness of the SAR database depends on the completeness and accuracy of the reported information.

Accordingly, we advise you to be sure that your institution is accurately and fully completing SARs.


Appraisal Abuse Red Flags

  • No appraisal or property evaluation in file.
  • Mortgage broker or borrowers that always use the same appraiser.
  • Appraiser bills association for more than one appraisal when there is only one in the file.
  • Unusual appraisal fees (high or low).
  • No history of property or prior sales records.
  • Market data located away from subject property.
  • Unsupported or unrealistic assumptions relating to capitalization rates, zoning change, utility availability, absorption, or rent level.
  • Valued for highest and best use, which is different from current use.
  • Appraisal method using retail value of one unit in condo complex multiplied by the number of units equals collateral value.
  • Use of superlatives in appraisals.
  • Appraisal made for borrower.
  • Appraisals performed or dated after loan.
  • Close relationship between builder, broker, appraiser, lender and/or borrower.
  • Overvalued (inflated) or high property value.

Mortgage Fraud Red Flags

Straw Borrower Schemes

  • Borrowers purchasing property described as a primary residence, but outside of their home states, or located an unreasonable commuting distance from their stated employers.
  • A quit claim deed is used either right before, or soon after, loan closing.
  • Investment property is represented as owner-occupied.
  • Someone signed on the borrower's behalf.
  • Names were added to the purchase contract.
  • Sales involve a relative or related party.
  • No sales agent involved.
  • Indication of default by the property seller.
  • High FICO score.
  • Power of attorney for borrowers.
  • Good assets, but gift used as down payment.
  • Repository alerts on credit report.

Flipping Schemes

  • Fraudulent appraisal.
  • Inflated buyer income.
  • Ownership changes two or more times in a brief period of time.
  • Two or more closings occur almost simultaneously.
  • The property has been owned for a short time by the seller.
  • The property seller is not on the title.
  • There is a reference to double escrow or other HUD-1 form.

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Fraud and Insider Abuse
Regulatory Bulletin, RB 37-54 (May 18, 2010)
Revised: June 14, 2010