Thursday, October 13, 2011

FinCEN: Fraud and Mortgage Rescue Schemes

The Financial Crimes Enforcement Network (FinCEN) has just released its 20th issue of the SAR Activity Review - Trends, Tips, and Issues. The publication provides information about SARs and Remote Deposit Capture risks, Organized Retail Crime, Health Care Fraud, Elder Financial Exploitation, and more.
Of particular interest is a section devoted to the U.S. Trustee Program's (USTP) civil enforcement activity targeting bankruptcy-related mortgage fraud and mortgage rescue schemes. The USTP is a unit in the Department of Justice (DOJ) responsible for overseeing the administration of bankruptcy cases and private trustees. In that capacity, it also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.
In this SAR Activity Review, USTP provides information regarding its role in combating these schemes, and, importantly, provides tips to financial institutions on detecting such unlawful activity.
The following outline provides:
  • A Brief statement
  • Financial Consultant Schemes (Red Flags)
  • Sale-Lease Back and Property Transfer Schemes (Red Flags)
  • Reverse Mortgage Schemes
  • Library – Download Issuance
A Brief Statement
Bankruptcy-related mortgage fraud and mortgage rescue schemes use know how to exploit the federal bankruptcy court system.

Perpetrators of mortgage foreclosure rescue fraud schemes use these courts as a means to defraud vulnerable consumers in jeopardy of losing their homes to foreclosure or eviction.

Here's a strategy used by perpetrators:

1) The filing of a bankruptcy case triggers an automatic stay.
2) This filing then immediately stops all collections actions.

Point 1: Perpetrators often take advantage of the automatic stay, using it to give consumers the impression that the perpetrators' false promises of saving their homes are true since collection activities cease - at least temporarily.

Point 2: In some of these schemes, perpetrators use the courts by recommending to consumers that they file bankruptcy to eliminate their unsecured debt and thereby position themselves to buy back their houses as part of a sale-lease back scheme.

Point 3: Sometimes the perpetrators themselves file bankruptcy to discharge the debt they incurred as part of their mortgage fraud schemes. 

Financial Consultant Schemes
  • This is the most common mortgage rescue frauds encountered in bankruptcy. In this scenario, the perpetrators falsely tell desperate homeowners that, for a fee, they can help the homeowners save their homes by working with their lenders to stop foreclosure and modify or refinance their loans. Perpetrators identify homeowners through advertising on TV, on radio, in local newspapers, or on the Internet; through connections with churches and other affinity-based ethnic groups; or through foreclosure lists available from local governmental agencies. Homeowners are told to make their mortgage payments to the perpetrators or are required to pay the perpetrators a monthly consulting fee, or both. Of course, the perpetrators do not contact the lenders. Instead, they file serial fraudulent bankruptcy cases in the homeowners' names, sometimes without the homeowners' knowledge or consent, to use the automatic stay to stop the foreclosure.
  • Here's a variation: homeowners are directed by the perpetrators to quitclaim fractional interests in their homes to fictitious individuals or businesses. Bankruptcy cases are then filed serially in the names of the fictitious individuals or businesses to continue the operation of the automatic stay. A third variation involves the perpetrators transferring fractional interests to unsuspecting individual debtors with pending bankruptcy cases without their knowledge or consent. Under any of these scenarios, because collection activity has been suspended, homeowners mistakenly believe that the perpetrators have fulfilled their false promises, and the homeowners' continue to pay the perpetrators.
Red Flags

Red Flag (18x22)-1Mortgage payments stop being made.
Mortgage payments abruptly stop with no contact from the homeowner and/or default occurs on the mortgage within a month or two after the loan is made.
Red Flag (18x22)-1The foreclosure process is stayed by a bankruptcy filing.
The filing of the bankruptcy case may be in tandem with the sudden failure to make regular mortgage payments.
Red Flag (18x22)-1The debtor in the bankruptcy case that stayed the foreclosure is not the borrower.
Red Flag (18x22)-1The debtor does not disclose a fractional interest and/or other ownership in real property in his/her bankruptcy documents.
Failure to disclose such interests may indicate a fractional interest or property transfer scheme.
Red Flag (18x22)-1Serial bankruptcy cases are filed and/or numerous lenders file motions seeking relief from the automatic stay to proceed with foreclosure and/or eviction actions.
Where the perpetrators file serial bankruptcy cases, especially those involving fractional interest schemes, financial institutions should expect to see other lenders filing motions seeking relief from the bankruptcy automatic stay as well.
Sale-Lease Back and Property Transfer Schemes
  • In this scheme, the perpetrator gains control of an individual's home and skims real or manufactured equity from the property. The perpetrator tells the homeowner that the home can be saved by selling it to a third-party purchaser chosen by the perpetrator - also known as a "straw purchaser" - and then renting it back from the purchaser for an amount less than the homeowner's current mortgage payment. Frequently the perpetrator promises that the homeowner can buy the home back within a certain period of time at the same price at which it was sold, thus protecting the homeowner's "equity." (In some schemes, the perpetrator persuades the homeowner to file bankruptcy in order to repair the homeowner's credit and place the homeowner in a better position to obtain financing to buy back the home.)
  • The perpetrators of these schemes profit by gaining control of the properties and obtaining fraudulent loans in the straw purchasers' names based on inflated appraisals of the properties' value. The inflated sales price creates a significant amount of "fake" equity that the perpetrators take through fees that are included in the closing payoffs. Moreover, the perpetrators may arrange to have any remaining sales proceeds signed over to them, rather than to the homeowners. The straw purchasers usually receive some money at closing for each property purchased. Eventually the straw purchasers file bankruptcy to discharge the mortgage debt incurred in their names. Usually, they do not disclose payments received at closing in their bankruptcy documents. In the end, the homeowners lose their homes.
  • A version of this scheme involves renters. Homeowners desperate to sell their homes are persuaded to "sell" their property to the perpetrators based on false promises that the perpetrators will obtain new loans to pay off the homeowners' existing mortgages. The perpetrators do not get financing, but instead put renters in the properties and collect the rents. No mortgage payments are made and the financial institutions are not notified of the title transfer. To further the scheme, the perpetrators may file incomplete serial bankruptcy cases in the homeowners' and/or renters' names without their knowledge or consent for purposes of obtaining the automatic stay to stop the collection actions.
Red Flags

Red Flag (18x22)-1The bankruptcy documents are incomplete.
The lack of complete documentation may indicate a potential for fraudulent activity. In some cases, the bankruptcy filings are not in the name of the borrower.
Red Flag (18x22)-1The debtor does not disclose that property was transferred just before the bankruptcy filing and/or does not disclose owning any property.
Despite this failure to disclose the property transfer or ownership, the debtor's residential address is listed as the address of the property subject to the mortgage.
Red Flag (18x22)-1The debtor claims that the bankruptcy case was not authorized and/or was not aware that a bankruptcy was filed on his or her behalf.
This may indicate that a fraudulent filing was made in the debtor's name by another party.
Red Flag (18x22)-1The bankruptcy case is not pursued by the debtor and is short-lived.
As a result, financial institutions may find it difficult to gather detailed information beyond the filing information about the debtor or the suspected perpetrators.
Red Flag (18x22)-1The debtor's bankruptcy documents show the purchase of multiple properties over a relatively short period of time without the income or assets to support such purchases.
This may indicate that the debtor was a straw purchaser in a mortgage or mortgage fraud rescue scheme.
Reverse Mortgage Schemes
  • This pernicious scheme is becoming more widespread and involves federally-insured home equity conversion mortgages (HECMs), reverse mortgages that are available to individuals who are 62 years of age or older. Perpetrators of bankruptcy-related HECM schemes may be organized rescue fraud rings, neighbors, or members of the homeowner's family. In many cases, the borrowers are in poor health and may suffer from memory loss. These vulnerable homeowners are persuaded to sign paperwork prepared by the perpetrator, including power of attorney authorizations.
  • Once the perpetrator obtains the necessary signatures, the perpetrator takes control of the borrowing process and elects to receive the home equity loan proceeds in a lump sum. If the homeowner does not have equity in the home, the perpetrator typically generates a false appraisal to manufacture equity. The perpetrator pockets the loan proceeds, and the homeowner loses the equity and may be unable to retain the home.
  • In some situations, the perpetrator may also file bankruptcy on behalf of the homeowner to extinguish unsecured debt the perpetrator may have incurred in the homeowner's name or to stop other related collection activities.
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Financial Crimes Enforcement Network
The SAR Activity Review
Trends Tips & Issues
Issue 20
October 2011