Identity Theft Prevention: How to Catch a Thief

Jonathan Foxx, PhD, MBA

Chairman & Managing Director

Here are four scenarios involving identity theft that mortgage originators encounter from time to time. Read them and then keep them in mind as I discuss how to ask for additional information in order to prevent identity theft.

1.       A law enforcement report containing detailed information about the identity theft and the signature, badge number, or other identification information of the individual law enforcement official taking the report should be sufficient on face value to support a victim’s request.

Question: Without an identifiable concern, such as an indication that the report was fraudulent, would it be reasonable for an information furnisher or Consumer Reporting Agency (CRA) to request additional information or documentation?

Answer: It would not be reasonable.

2.       A consumer might provide a law enforcement report similar to the above report, but certain important information such as the consumer’s date of birth or Social Security number may be missing because the consumer chose not to provide it.

Question: The information furnisher or CRA could accept this report, but would it be reasonable to require that the consumer provide the missing information?

Answer: It would be reasonable.

3.       A consumer might provide a law enforcement report generated by an automated system with a simple allegation that an identity theft occurred to support a request for a tradeline block or cessation of information furnishing.

Question: Would it be reasonable for an information furnisher or CRA to ask that the consumer fill out and have notarized the Commission’s ID Theft Affidavit or a similar form and provide some form of identification documentation?

Answer: It would be reasonable.

4.       A consumer might provide a law enforcement report generated by an automated system with a simple allegation that an identity theft occurred to support a request for an extended fraud alert.

Question: Would it be reasonable for a consumer reporting agency to require additional documentation or information, such as a notarized affidavit?

Answer: It would not be reasonable.

In these scenarios, a financial institution should be responsive in accordance with certain guidelines. Specificity of action must be appropriate, reasonable and proportional to the challenge. However, total reliance on the CRA is inappropriate.

Mortgage Fraud: Data Confirms Spike in 2006-2007

The Financial Crimes Enforcement Network (FinCEN) has released an analysis of Mortgage Fraud SAR Filings in Calendar Year 2012. The report was issued on August 20, 2013. This publication updates FinCEN’s prior Mortgage Loan Fraud (MLF) assessments examines Suspicious Activity Report (SAR) filings from January through December 2012 (CY 2012).

The report provides new information on the volume of SAR filings, geographic locations of subjects, and other filing trends in CY 2012. Tables covering non-geographic aspects are compared with filings from corresponding periods in2011. A section provides updated statistics on foreclosure rescue-related SARs during 2012, and filers’ voluntary use of the new FinCEN SAR e-filing report for voluntary mortgage fraud reporting through March 31, 2013.

This article offers an outline of the FinCEN report. Please visit our Library to download it.

IN THIS ARTICLE

MLF SAR Filings by Year SAR Received, 2001-2012

Mortgage Loan Fraud (MLF) SARs
Time Elapsed from Activity Date to Reporting Date

Number of Mortgage Loan Fraud SAR Filings by Year
with and without the Term “Repurchase” in Narrative

Mortgage Loan Fraud SAR Subjects - Top 20 States and Territories

Foreclosure Rescue Scams

Number of Mortgage Loan Fraud SAR Filings by Year
with Term “Foreclosure Rescue” in Narrative, 2003-2012

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MLF SAR Filings by Year SAR Received, 2001-2012

FinCEN’s data on suspected mortgage fraud shows that reports declined 25% in 2012  (from 92,561 to 69,277) as compared to the previous year. The past three years of suspected mortgage fraud suspicious activity reports (MLF SARs), if counted by the date they were received by FinCEN, accounted for approximately 46% of the past decade’s mortgage fraud SARs.

We take this to mean that filing increases or decreases are not necessarily indicative of overall increases or decreases in MLF activities over a bracketed period, as the volume of SAR filings in any given period does not directly correlate to the number or timing of suspected fraudulent incidents in that period.

However, one of the inherent features of mortgage fraud is that the suspicious activity associated with it is often only recognized and reported years after loan origination, after a review of origination documents is prompted by a loan default, repurchase demand, or other factors. As a result, many mortgage fraud SARs are filed much later than the date that the suspicious activity actually began. Thus, in 2012, 57% of SARs reported mortgage loan fraud (MLF) activities that started more than 5 years before the SAR was filed.

Anti-Money Laundering–Red Flags and the SAR Narrative

Even though AML compliance for nonbanks has been in effect since August 13, 2012, many Residential Mortgage Lenders and Originators (RMLO) still seem to have considerable difficulty in two specific areas: how to determine when a Suspicious Activity Report (SAR) should be filed, and which suspicious activity events or features may trigger the SAR filing requirement.

In one article, entitled Anti-Money Laundering Debuts for Nonbanks, I unpack the AML Program in a way that will provides some familiarity with the AML Compliance scope, while perhaps also making its implementation a bit less daunting than it might otherwise seem to be.

In another article, entitled Anti-Money Laundering Program: Preparation is Protection, I outlined many of the so-called Red Flags and other triggering events. In addition, I offered a way to construct a SAR narrative - the description to FinCEN about the alleged suspicious activity - that, based on years of experience auditing and implement AML compliance on behalf of our clients, best meets FinCEN's expectations of an informative statement.

To give you an idea of the size and complexity of a well-constructed AML Program, my firm’s AML Program is well over fifty pages – which consists of a policy statement and numerous appendices for applicable procedures. This should give you some idea of the depth and detail needed for properly implementing AML compliance. The absence of or any inaccuracies in required program components may indicate a defective policy and procedures – the very tools needed to assist in detecting and preventing money laundering or other illegal activities conducted through mortgage banking conduits.

So, a word of caution is due: do not take the chance of buying an abbreviated or defective AML Program, in the hope of merely satisfying the “basic” FinCEN requirements. Obtaining a boilerplate document with your company’s name on it is regressive, and it is a tactic that Examiners are now regularly criticizing in adverse findings.

These days, regulators are fully aware of this ‘short cut’ to compliance. An insufficient AML Program may cause adverse examination findings. Indeed, in some cases, template-driven policy and procedures may cause Examiners to escalate their regulatory review of an RMLO’s anti-money laundering implementation.

AML compliance is a specialized area of mortgage compliance, necessitating genuine, practical, hands-on, regulatory compliance and experiential knowledge, and an AML Program must reflect precise policies and procedures that not only implement the SAR regulations but also conform to a company’s way of doing business.

Therefore, an AML Program is one policy statement and set of procedures where the purchase price should not be an operative consideration. Caveat Emptor!

This is why I want to further outline the descriptive process of completing the SAR narrative, emphasizing a simple method I call The 5 W's and the How, and I will also provide details regarding both so-called Red Flags and triggering events. So, even if a company has a skimpy or defective AML policy and procedures, at least those who implement AML Compliance may be offered some rudimentary guidelines to consider in the practical experience of actually filing a SAR.

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IN THIS ARTICLE

The 5 W's and the How

Triggering Events

Documentation Red Flags

Applicant Red Flags

RMLO's Employee Red Flags

Library Resources

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The 5 W's and the How

If I were to choose the central feature of the SAR, I would select the SAR narrative.

Each SAR requires a narrative to be provided by the SAR filer.

Over time, my firm has compiled numerous examples of common patterns of suspicious activities from our audit and due diligence reviews. Based on our experience and FinCEN’s own stated guidance, we believe that there are five interrogative categories to be considered when writing a SAR narrative: who? what? when? where? and why?

FinCEN: SAR Narrative, PowerPoint, and Mortgage Loan Fraud

On September 18, 2012 FinCEN held an Informational Webinar regarding the new FinCEN Suspicious Activity Report (SAR).

The corresponding, full PowerPoint presentation of the recorded version of this Webinar is available HERE.

For those interested in actually viewing the Webinar, HERE is the link to the FinCEN webpage.

Recently, FinCEN issued two important reports (available in our Library): 

- SAR Activity Review – Trends, Tips & Issues (Issue 22)

- Mortgage Loan Fraud Update - Suspicious Activity Report Filings in 2nd Quarter 2012 

The first report offers significant insight and guidance in monitoring suspicious activity, and the second report provides important insights regarding SAR filings related to mortgage loan fraud. For years we have worked with our bank clients on auditing their SAR filings and AML compliance, and I can vouch for the practical advantages of reading these on-going FinCEN reports to enhance your risk management responsibilities.

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IN THIS ARTICLE

SAR Narrative: "5 W's and the How"

Mortgage Loan Fraud - Statistics and Charts

Foreclosure Rescue Scams on the Rise

California: Highest 2012-Q2 Foreclosure Rescue SARs

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SAR Narrative: "5 W's and the How"

In the recent SAR Activity Review, sections are provided that outline the basic aspects toward filing a SAR. In particular, the section  on writing an effective SAR Narrative is important to consider.

FinCEN rightly states that the narrative "is a critical part of the SAR because it is where the filer can summarize and provide a more  detailed description of the activity being reported." For that reason, it is essential that the narrative be clear, complete and thorough.

This section of the FinCEN report offers the "5 W's" that I have written about extensively as a way to develop the SAR narrative. (See, for instance, my magazine article, Anti-Money Laundering Program - Preparation is Protection, August 2012.)

Our clients have learned  how to use this narrative method. The FinCEN report does not mention the "How" narrative that I have advocated - and which I will discuss below. In my view, the Anti-Money Laundering Program should have an appendix devoted exclusively to the SAR Narrative procedures, especially outlining  the "5 W's and the How" method of writing it.

The narrative must be clear, complete and thorough and the method I advocate is an effective means toward accomplishing these  goals.

FinCEN's outline is rather brief, so I will provide a much more extensive set of action steps for you to follow.

The following are the "5 W's" method provided by FinCEN, after which I will add some remarks about narrating the "How".

Who is conducting the suspicious activity?

While one section of the SAR form calls for specific suspect information, the narrative should be used to further describe the suspect or suspects, including occupation, position or title within the business, and the nature of the suspect’s business(es). If more than one individual or business is involved in the suspicious activity, identify all suspects and any known relationships amongst them in the Narrative Section.

While detailed suspect information may not always be available (i.e., in situations involving non-account holders), such information should be included to the maximum extent possible. Addresses for suspects are important: filing institutions should note not only the suspect’s primary street addresses, but also, other known addresses, including any post office box numbers and apartment numbers when applicable. Any identification numbers associated with the suspect(s) other than those provided earlier are also beneficial, such as passport, alien registration, and driver’s license numbers.

What instruments or mechanisms are being used to facilitate the suspect transaction(s)?

An illustrative list of instruments or mechanisms that may be used in suspicious activity includes, but is not limited to, wire transfers, letters of credit and other trade instruments, correspondent accounts, casinos, structuring, shell companies, bonds/notes, stocks, mutual funds, insurance policies, travelers checks, bank drafts, money orders, credit/debit cards, stored value cards, and/or digital currency business services. Specific suspect identifying information is provided in the relevant Suspicious Activity Report for RMLO filings.

In addition, a number of different methods may be employed for initiating the negotiation of funds such as the Internet, phone access, mail, night deposit box, remote dial-up, couriers, or others. In summarizing the flow of funds, always include the source of the funds (origination) that lead to the application for, or recipient use of, the funds (as beneficiary).

In documenting the movement of funds, identify all account numbers at the financial institution affected by the suspicious activity and when possible, provide any account numbers held at other institutions and the names/locations of the other financial institutions, including MSBs and foreign institutions involved in the reported activity.

When did the suspicious activity take place?

If the activity takes place over a period of time, indicate the date when the suspicious activity was first noticed and describe the duration of the activity. Filers will often provide a tabular presentation of the suspicious account activities (transactions in and out).

While this information is useful and should be retained, do not insert objects, tables, or pre-formatted spreadsheets when filing a SAR.

These items may not convert properly when keyed in or merged into the SAR System. Also, in order to better track the flow of funds, individual dates and amounts of transactions should be included in the narrative rather than just the aggregated amount.

Mortgage Fraud and SARs

On August 16, 2012, the Financial Crimes Enforcement Network (FinCEN) issued an Advisory to highlight activity related to mortgage loan fraud, especially as it pertains to Residential Mortgage Lenders and Originators (RMLOs). The issuance serves to further clarify suspicious financial activity that may require filing Suspicious Activity Reports (SARs).*

The issuance consolidates certain information from previously issued FinCEN reports, and contains examples of common fraud schemes and potential "red flags" for activity related to mortgage loan fraud.

This Advisory, which consolidates certain information from previously issued FinCEN reports, contains examples of common fraud schemes and potential Red Flags for activity related to mortgage loan fraud. Furthermore, the data gathered supports the efforts of the Financial Fraud Enforcement Task Force (FFETF), the Treasury's broader initiative to ensure that U.S. financial institutions are not used as conduits for illicit activity, as well as the OIG's mortgage fraud initiatives of FinCEN and the Department of Housing and Urban Development (HUD).

IN THIS ARTICLE

Types of Mortgage Loan Fraud

Possible Red Flags

Suspicious Activity Reporting

Contacting FinCEN

Library

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Types of Mortgage Loan Fraud

Based on the Advisory and previous mortgage fraud reports issued by FinCEN, the following list identifies certain types of mortgage loan fraud. These are primarily based upon schemes and scams frequently reported or described in SARs or identified by law enforcement authorities.

Occupancy Fraud

Occurs when borrowers, to obtain favorable loan terms, claim that subject properties will be their primary residences instead of vacation homes or investment properties. It also occurs when subjects apply for loans for properties that others, such as family members, will actually occupy.

Income Fraud

Includes both overstating income to qualify for larger mortgages and understating income to qualify for hardship concessions and modifications.

Appraisal Fraud

Includes both overstating home value to obtain more money from a sale of property or cash-out refinancing, and understating home value in connection with a plan to purchase a property at a discount to market value.

Employment Fraud

Includes misrepresenting whether, where, and for how long borrowers have been employed; whether borrowers are unemployed or collecting unemployment benefits; and whether borrowers are independent contractors or business owners.

Liability Fraud

Occurs when borrowers fail to list significant financial liabilities, such as other mortgages, car loans, or student loans, on mortgage loan applications. Without complete liability information, lenders cannot accurately assess borrowers' ability to repay debts.

Debt Elimination Schemes

Involves the use of fake legal documents and alternative payment methods to argue that existing mortgage obligations are invalid or illegal, or to purport to extinguish mortgage balances. Individuals orchestrating debt elimination schemes typically charge borrowers a fee for these debt elimination "services."

Foreclosure Rescue Scams

Targets financially distressed homeowners with fraudulent offers of services or advice aimed at stopping or delaying the foreclosure process. Some of these scams require homeowners to transfer title - or make monthly mortgage payments - to the purported "rescuer," rather than the real holder of the mortgage. Some foreclosure rescue scams require homeowners to pay fees before receiving "services," and are known as "advance fee" schemes.

Social Security Number (SSN) Fraud and Other Identify Theft

Includes the use of an SSN or other government identification card or number that belongs to someone other than the applicant in a loan application. Identity Theft includes broader use of another's identity or identifiers (beyond an SSN) to obtain a mortgage or perpetrate a "fraud for profit" scheme.

The SAR catches a RAT

Can a SAR catch a RAT?

In its just released review of Suspicious Activity Report (SAR) trends, tips, and issues, FinCEN included a brief, but illustrative statement about how a SAR filing eventually led to an indictment obtained in a "Cash Back" Mortgage Fraud Scheme.

It is interesting to take note of this example of how proper application of FinCEN's Anti-Money Laundering requirements for residential mortgage lenders and originators may lead to reducing mortgage fraud.

Let's look at some good compliance and investigative work and find out how the SAR caught a RAT.*

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IN THIS ARTICLE

Smelling a RAT

The Scheme

The Mark

SARs to the Rescue

Bilking a Bank

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Smelling a RAT

The case had its origins in a review of SARs conducted by a specialized mortgage fraud task force. The task force then launched an investigation that led to charges against two individuals.

The defendants were charged with engaging in a scheme to defraud mortgage lenders in connection with residential real property purchases.

Not only was the SAR a critical component of uncovering the perpetrators, but also a would-be filed Currency Transaction Report (CTR) on one of the individuals further caused concern, triggering yet another SAR filing, because in addition to the SAR that initiated the case, the second SAR reported how the defendant became "very upset" when he learned that a CTR would be filed because of a series of transactions.

The Scheme

Here's how the scheme worked:

(1) One of the defendants acted as the recruiter, finding various individuals, including straw and nominal purchasers, to purchase more than 15 residential real estate properties.

(2) The recruiter orchestrated the purchase transactions while the second defendant, a mortgage broker, brokered the mortgage loans through his mortgage company.

(3) Although the buyers provided the mortgage broker with legitimate personal information, this defendant made false representations on the loan applications in regard to income, employment, and intent to occupy the residences.

The Mark

But there's more.

The criminal complaint described in detail the defendants' efforts to defraud lenders through the straw buyers, including controlling all aspects of the purchases and the accounts.

The indictment in the case charged that fraudulent or false representations were made in obtaining 100% mortgage financing, including misstatements about the purchasers' monthly income, intent to occupy the property, and existing liabilities.

In each transaction, the purchase price was above (!) the true market price of the property.

An amount approximately equal to the difference between the purchase price and the true market price was then diverted as "cash back" at the close of each escrow to a bank account for a corporation.

SARs to the Rescue

As part of the scheme, these credits, which ranged from almost $42,000 to more than $137,000, were concealed from the mortgage lenders by the mortgage broker.

The mortgage broker, through his control over the corporation's bank account, used the fraudulently obtained funds for various purposes, including extensive cash withdrawals.

The SARs uncovered the perpetrators, as follows:

(1) A SAR review team identified a SAR filed on an associate of one of the defendants.

(2) Because the SAR listed mortgage loan fraud as the suspected violation type, the team referred the SAR to a mortgage fraud task force. The filer noted that the associate apparently misrepresented information on loan applications that were not performing. Also noted was the fact that the second defendant had acted as the loan agent and broker of record on the loans.

(3) Through research, the institution found that the associate had purchased several additional properties, with mortgage loans that totaled at least $450,000 for each purchase. The same title company closed all sales involved in the fraud.

(4) Eventually investigators found several additional SARs, including one with a nine page narrative describing activity on more than 17 individuals and businesses associated with the scheme.

(5) Investigators included many of the details described in the SARs in a criminal complaint and in the indictment charging both defendants with fraud.

Bilking a Bank

The losses caused by the defendants' conduct exceeded $2,500,000.

The defendants pleaded guilty to mail fraud and structuring currency transactions with a financial institution to evade the filing of CTRs.

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* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

CFPB Issues “Early Warning Notice” Procedures

On November 7, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Bulletin 2011-04 (Enforcement), announcing plans to provide early warning of possible enforcement actions.

This CFPB bulletin outlined plans to provide advance notice of potential enforcement actions to individuals and firms under investigation, through a public notice process, called the Early Warning Notice.

The Early Warning Notice process is meant to allow the subject of an investigation to respond to any potential legal violations that CFPB enforcement staff believes have been committed before the Bureau ultimately decides whether to begin legal action.

OVERVIEW

The CFPB claims that the Early Warning Notice process is modeled on similar procedures that have been successful at other federal agencies.

The process begins with the Office of Enforcement explaining to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws.

Recipients of an Early Warning Notice are then invited to submit a response in writing, within 14 days, including any relevant legal or policy arguments and facts.

In July, the CFPB’s Office of Enforcement made public its rules regarding the initiation and execution of enforcement investigations.

The Early Warning Notice is not required by law, but CFPB believes it will promote even-handed enforcement of consumer financial laws. The decision to give notice in particular cases is discretionary and will depend on factors such as whether prompt action is needed.

EARLY WARNING NOTICE LETTER - SAMPLE

Before the Office of Enforcement recommends that the CFPB commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject's potential violations and may offer the subject the opportunity to submit a written statement in response.

The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.

The objective of the notice is to ensure that potential subjects of enforcement actions have the opportunity to present their positions to the CFPB before an enforcement action is recommended or commenced.

RESPONDING TO THE “EARLY WARNING NOTICE” LETTER

The primary focus of the written statement in response should be legal and policy matters relevant to the potential enforcement proceedings.

Any factual assertions relied upon or present in the written statement must be made under oath by someone with personal knowledge of such facts.

Submissions may be discoverable by third parties in accordance with applicable law.

GUIDELINES FOR LETTER'S FORMAT

The written statement must:

-Be submitted on 8.5 by 11 inch paper
-Double spaced
-At least 12-point type
-No longer than 40 pages
-Be received by the CFPB no more than 14 calendar days after the Notice.

The written response statement should be sent to the CFPB staff conducting the investigation, and must clearly reference the specific investigation to which it relates.

If the Office of Enforcement ultimately recommends the commencement of an enforcement proceeding, the written statement will be included with that recommendation.

Persons involved in an investigation who wish to submit a written statement on their own initiative at any point during an investigation would follow the relevant procedures described above.

LIBRARY

Consumer Financial Protection Bureau

Early Warning Notice
Bulletin 2011-04
November 7, 2011

Sample Early Warning Notice
Bulletin 2011-04
November 7, 2011

Wells Fargo's "Seventeen Worthless Mortgages"

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

On March 1, 2011, the US Court of Appeals (Fourth Circuit) filed a Per Curiam opinion. In Wells Fargo Bank, N.A. v Old Republic Title Insurance Company, Wells Fargo sought to recover the value of "seventeen worthless mortgages" - the Court's own words! - it purchased from Financial Mortgage, Inc. (FMI), a mortgage banker, in the secondary mortgage market. The scheme involved Title Pro, an agent of Old Republic, colluding with FMI to fraudulently close the real estate transactions underlying Wells Fargo's mortgages. Wells Fargo claimed that Old Republic was contractually bound to indemnify Wells Fargo for its losses. 

The Court ruled in favor of Old Republic! Let's learn why.

Commentary and Outline

This Commentary offers a brief outline. I am leaving out citations, where possible, for ease of reading. This outline is not meant to be comprehensive, authoritative, or relied upon for legal advice. It offers only a brief synopsis of the argumentation. For citations, exhibits, and argumentation, read the judicial decision (below).

The Scheme

FMI originated mortgages and drew on its warehouse lines from several financial institutions. After the warehouse lenders advanced funds to FMI for a mortgage loan, FMI would then sell the mortgage to secondary investors, use the proceeds to pay back the warehouse lenders, and thereby replenish its lines of credit.

So far, so good.

But this is where the plot thickens.

Beginning May 2004, Wells Fargo entered into a standard Loan Purchase Agreement with FMI. This Agreement set forth the terms required by Well Fargo to purchase from FMI numerous residential mortgage loans secured by a note and deed of trust on real property, properly recorded and free from prior liens.

However, the very mortgages purchased by Wells Fargo from FMI failed at their inception, because FMI misrepresented to Wells Fargo that the mortgages were recorded in Virginia's public records system, providing Wells Fargo with first and exclusive priority over all other creditors. Eventually, Wells Fargo discovered that it actually had unsecured and/or subordinate positions on these loans, because they were not recorded nor free from the prior liens.

An Agency Agreement       

Old Republic, like most title insurance companies, appoints agents to act on its behalf to sign, countersign and issue commitments, binders, title reports, certificates, guarantees, title insurance policies, endorsements, and other agreements under which the insurer assumes liability for the condition of title.

In Old Republic's Agency Agreement with TitlePro, the latter was expressly prohibited from acting as an agent of Old Republic when, on some occasions, TitlePro might serve as a settlement agent. That is, when TitlePro performed such services, the Agency Agreement expressly prohibits TitlePro from acting as an agent of Old Republic.

FMI and TitlePro - Two Ways to Collude

Version One (Variations on a Theme) - 3 Bogus Mortgages

1) FMI secures a buyer of land or a refinancing opportunity.
2) FMI then sends the necessary mortgage documents to TitlePro.
2) TitlePro then uses the loan documents to create the appearance of loan closings (i.e., completing a HUD-1 Settlement Statement, et cetera).
3) TitlePro is now able to obtain funds from FMI's warehouse lenders (which does not include Wells Fargo).
4) After obtaining the funds, TitlePro fails to use those funds to clear title or pay off the pre-existing mortgage.
5) TitlePro transfers the funds to FMI.
6) For many transactions, FMI also creates multiple, unrecorded "first" mortgages on each property by having borrowers sign multiple sets of "original" loan documents at closing. (I'll call these "first" mortgages "bogus mortgages.")
7) FMI fabricates the notes.
8) FMI sells these unrecorded bogus mortgages to several secondary investors, including Wells Fargo.
9) In each of these transactions, FMI fails: (a) to disclose the existence of the other bogus mortgages with prior liens to purchasers of these mortgages and (b) to record the mortgages it subsequently sold.
10) Wells Fargo deals with FMI exclusively, sending payment for the notes directly to FMI's accounts.
11) Wells Fargo does not interact with TitlePro or Old Republic in any way.

Version Two - 14 Bogus Mortgages

1) TitlePro fills out a HUD-1 Settlement Statement and receives loan proceeds from the warehouse lender.   
2) The HUD-1 Settlement Statements requires TitlePro to use these funds to pay off the prior mortgages on the properties.
3) TitlePro fails to pay off the prior mortgages and release them of record.
4) TitlePro also fails to record the new mortgage in favor of FMI that "secured" the notes eventually sold to Wells Fargo.
5) In each of these transactions, FMI fails: (a) to disclose the existence of the other bogus mortgages with prior liens to purchasers of these mortgages and (b) to record the mortgages it subsequently sold.
6) Old Republic does not issue policies on these transactions, because Old Republic's Commitment letters requires the prior mortgages to be "paid and released of record" as a condition of issuing the title insurance policies.
7) For some of these transactions, Old Republic also issues a standard-form closing protection letter (CPL), agreeing to reimburse FMI for losses arising out of an issuing agent's misconduct in closing a transaction.

Scammed!

Wells Fargo now possesses seventeen worthless mortgages, all of which are presently in default.

District Court

When Wells Fargo began this action back in March 2009, it alleged six claims: (1) breach of contract; (2) a business conspiracy in violation of Virginia Code; (3) common law civil conspiracy; (4) fraud; (5) violations of Virginia's Wet Settlement Act, and (6) negligence. For all but the breach of contract claims, Wells Fargo alleged that TitlePro acted as Old Republic's agent when it closed the disputed transactions.

The District Court granted summary judgment to Old Republic because:

1) It rejected Wells Fargo's contention that Virginia's Consumer Real Estate Settlement Protection Act (CRESPA) made Old Republic liable, reasoning that CRESPA does no more than authorize non-attorneys, including title agents, who meet specific statutory conditions to serve as settlement agents.

2) It held that TitlePro did not have actual agency authority because the Agency Agreement explicitly prohibited TitlePro from acting as a settlement agent on Old Republic's behalf.

3) In accordance with Virginia law, it rejected Wells Fargo's theory of apparent authority, reasoning that Wells Fargo did not reasonably rely on Old Republic's conduct or statements allegedly cloaking TitlePro with apparent authority to act as a settlement agent on Old Republic's behalf.   

For these reasons, the District Court also granted summary judgment to Old Republic on the conspiracy, Wet Settlement Act, and fraud claims.

Plus:

4) The District Court rejected the breach of contract claim, reasoning that Old Republic could assert the same defenses against Wells Fargo as it could against the assignor of the contract, FMI, and one such defense -- fraud -- shielded it from contractual liability. (The District Court also ruled that the negligence claim failed because, in negligence claims, the common law duty protecting person or property does not extend to Wells Fargo's acquisition of worthless notes. Wells Fargo did not challenge this holding on appeal.)

Appeals Court

Wells Fargo appealed, arguing that:

(1) an assertedly "ambiguous" agency agreement and Old Republic's course of conduct raise genuine issues of material fact as to the scope of TitlePro's agency;

(2) the District Court misinterpreted CRESPA;

(3) TitlePro furthered the conspiracy by issuing title insurance instruments, as authorized by Old Republic, thus making the latter liable in conspiracy; and,

(4) a provision in Old Republic's title insurance policy absolved Wells Fargo (an innocent purchaser for value) of any fraud-based defenses Old Republic may have against FMI.

Yet the Appeals Court upheld the District Court's ruling. Why?

Back to that Agency Agreement

So, why did the Appeals Court affirm the District Court?

Because there are two provisions of the Agency Agreement, though seeming to conflict with each other, which rather serve separate, but complementary ends.

On one hand, a section requires TitlePro to record documents "necessary to insure the interest," not every document necessary to close the transaction. The primary purpose of this settlement-like duty is to "minimize the risk of loss under the title insurance policies," not create a general agency relationship capturing all the agent's settlement activities.

On the other hand, in another section, Old Republic unequivocally withholds consent for TitlePro to act as an agent when TitlePro performs "any escrow, closing or settlement" services. Courts throughout the country, including those interpreting Virginia law, agree that such an express limitation on agency duties controls.

Accordingly, Wells Fargo ran out of luck and Old Republic was off the hook.

Justice Served?

On November 13, 2008, the owner of FMI, Vijay Taneja, pled guilty to one count of conspiracy to commit money laundering in violation of federal law and received a sentence of 84 months imprisonment, to be followed by three-years of supervised release.

But what about that little matter of those "seventeen worthless mortgages?"

Click for the Per Curiam Opinion.

What do you think?

I would welcome your comments.

Please feel free to email me at any time.

FinCEN: 2010 Mortgage Fraud Report

On March 28, 2011, FinCEN issued its Mortgage Loan Fraud Update (Report) for the period January 1, 2010 to December 31, 2010.

This update to FinCEN's prior Mortgage Loan Fraud (MLF) studies looks at Suspicious Activity Report (SAR) filings in CY 2010, with a particular emphasis on the 4th Quarter of CY 2010 (Q4). It provides new information on reporting activities, geographic locations, and other filing trends in Q4 and CY 2010. 

As in previous updates, this update also includes tables and illustrations of various geographies that compare Q4 and CY 2010 filings based on the dates on which the suspicious activities are reported to have begun.

A review of the full year data shows the number of suspicious activity reports (SARs) involving mortgage loan fraud (MLF) increased 4 percent in 2010 to 70,472 compared with 67,507 MLF SARs filed in 2009.

The report also shows that the growth rate of MLF SARs began to slow over the last two to three years. Looking at just the 2010 fourth quarter, filers submitted 18,759 MLF SARs, a 1 percent decrease from the 18,884 filings over the same period in 2009.

FinCEN also reported that all types of SARs filed by depository institutions in 2010 fell 3 percent to 697,389 compared with 720,309 SARs filed by depository institutions in 2009. 

However, the total number of SARs filed in 2010 by all types of financial institutions covered by the Bank Secrecy Act grew nearly 4 percent to 1.3 million SARs up from 1.9 million filed in 2009.

Trend

Since 2001, the number of MLF SARs filed has shown a consistent upward trend, albeit at a slower rate of growth in recent years.

Bankruptcy

The Report found that references to bankruptcy have steadily increased over time in MLF SAR filings. In 2010, 6 percent of all MLF SARs contained a key term related to bankruptcy in the SAR narrative, compared to 1 percent in 2006 and 2007.

In 2010, mortgage loan fraud was cited in 54 percent of all SARs referencing bankruptcy fraud, up from 42 percent in 2009. Some MLF SARs specified the type of bankruptcy filing, most frequently Chapter 7, which was cited in 27 percent of 2010 reports citing both bankruptcy and MLF.

Flopping

Flopping occurs when a foreclosed property is sold at an artificially low price to a straw buyer, who quickly sells the property at a higher price and pockets the difference. Anecdotal feedback on this practice from law enforcement and industry sources suggests that the volume of related MLF SARs is much lower than the actual number of suspected flopping incidents. The increasingly dated activities reported on SARs suggests a lack of emphasis on this type of current activity.

Filers in their SARs also called attention to debt elimination scams as one of the emerging practices. 

Debt elimination scams were cited in nearly 1,300 MLF SARs in 2010. In these SARs, filers noted subjects sending a variety of documents or bogus payment methods to financial institutions, in attempts to eliminate or satisfy mortgage obligations. SAR filers over the course of 2010 explicitly referenced "flopping" in 112 SARs last year. This compares with relatively stable occurrences of suspicious activity involving broker price opinions and short sales in 2010.

5 Highest MSAs Per Capita - MLF SAR Filings

The Report contains data of state, county, and metropolitan statistical area (MSA) by total number of and per capita filings of MLF SARs.

Nevada had the highest number of MLF SARs per capita in 2010, followed by Florida, California, Illinois, and Georgia.

The 5 MSAs with the highest per capita filings of MLF SARs in 2010 were Miami; Las Vegas; San Jose, CA; Riverside, CA; and Los Angeles.

The 5 counties with the highest number of MLF SARs per capita were Miami-Dade, Gwinnett in Georgia, Broward and Orange in Florida, and Nassau in New York.

In both CY 2010 and 2010 Q4, California and Florida were the highest ranked states based on total numbers of subjects, followed by New York and Illinois. These four states consistently had the highest rankings every quarter of 2010.

For both the quarter and year, Nevada had the highest number of MLF subjects per capita, followed by Florida, California, and Illinois.

This was a change from 2010 Q3, when Florida was 1st in MLF subjects per capita and Nevada 3rd. In addition, Hawaii jumped in the Q4 rankings to 10th in MLF subjects per capita, up from 13th in Q3 and 26th in Q2.

"Other" Suspicious Activity

Nearly half of the filings involved debt elimination scams, while 13 percent included misrepresentation of income or employment.

Another 13 percent were for Social Security number misuse and 9 percent loan modification fraud.

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FinCEN: Mortgage Loan Fraud Update
SARs from January 1, 2010 to December 31, 2010
Issued: March 28, 2011

FHA: Updates Quality Control Requirements

On January 5, 2011, HUD-FHA issued Mortgagee Letter 2011-02, which clarifies quality control requirements relating to several important areas: (1) due to recent changes to the lender eligibility criteria for participation in FHA programs (i.e., "Helping Families Save Their Homes Act of 2009" (HFSH Act)); (2) "Continuation of FHA Reform: Strengthening Risk Management through Responsible FHA-approved Lenders" (Final Rule FR 5356-F-02); and, (3) Mortgagee Letter 2010-20.

Additionally, this Mortgagee Letter clarifies Quality Control requirements for servicing transfers and loan sales, reporting of fraud and material deficiencies, and the required timeframes for mortgagees to review rejected applications.

Especially if you are a Sponsoring Third Party Originator, we urge you to revise your Quality Plan immediately and implement the requirements contained in Mortgagee Letter 2011-02.

Effective: Immediately

SPONSORING THIRD PARTY ORIGINATORS

Beginning January 1, 2011, FHA will neither approve applications for approval as a loan correspondent, nor monitor lenders acting in such capacity for the purpose of the origination of loans submitted for FHA insurance. All lending entities performing in the capacity of a loan correspondent will thereafter be referred to as Sponsored Third Party Originators.

Consequently, all FHA-approved mortgagees will be responsible for performing quality control reviews of their Sponsored Third Party Originators.

The procedures used to review and monitor Sponsored Third Party Originators must be included in a mortgagee's FHA-approved Quality Control Plan.

Therefore, the Quality Control Plan must be reviewed and, where required, revised with respect to the review of loans originated and sold to the mortgagee by each of its Sponsored Third Party Originators.

• Mortgagees must determine the appropriate sample amount of each Sponsored Third Party Originator's loans to review based on volume, past experience, and other factors specified by the Department in Paragraph 7-6(C) of HUD Handbook 4060.1, REV-2.

• Sponsors must document the methodology used to review Sponsored Third Party Originators, the results of each review, and any corrective actions taken as a result of their review findings.

A report of the Quality Control review and follow-up that includes the review findings and actions taken, and the procedural information (such as the percentage of loans reviewed, basis for selecting loans, and who performed the review), must be retained by the mortgagee for a period of two years.

EARLY PAYMENT DEFAULTS

In addition to the loans selected for routine quality control reviews, mortgagees must review all loans that are originated or underwritten by their company and that are originated by their Sponsored Third Party Originators that go into default within the first six payments (referred to as early payment defaults). (Handbook 4060.1, REV-2 defines early payment defaults as loans that become 60 days past due within the first six payments.)

• Mortgagees must perform reviews of early payment defaults within 45 days from the end of the month the loan is reported as 60 days past due.
  

• The Early Payment Default review report and follow-up, including review findings and any actions taken, along with procedural information (as specified in HUD Handbook 4060.1 Rev.-2, Paragraph 7-6 (E)), must be retained by the mortgagee for a period of two years.

SALES AND TRANSFER OF LOANS

Mortgagees are responsible for determining whether the Mortgage Change Record was reported accurately to HUD via the FHA Connection on servicing transfers or sales of loans. Mortgagees' Quality Control Plans must contain a requirement to ensure the review of all Mortgage Change Records for accuracy, as follows:

For cases involving the transfer of legal rights to service FHA-insured loans:

• The transferee must report the change of legal rights to service to HUD The transferor should verify that the change of legal rights to service has been reported, and that all details contained in the report are accurate.

For cases involving the holder's sale of loans:

• The holder (seller) must report the sale of loans to HUD The buyer must confirm that the sale of loans has been reported, and that all details contained in the report are accurate.

REPORTING OF FRAUD OR MATERIAL DEFICIENCIES

If a mortgagee discovers potential fraud or other serious material deficiencies, it must be immediately reported to the HUD via the Neighborhood Watch Early Warning System (see: Handbook 4060.1 Rev.-2, Paragraph 7-3 (J)).

• Management is expected to review and respond accordingly to each instance of fraud or other serious material deficiency, indicating what steps if any have been taken to cure and/or resolve these violations.

• All corrective actions taken in response to instances of fraud or other serious material deficiencies should be reported to the Department via the Neighborhood Watch Early Warning System.
  

• Mortgagees must monitor all loans they originate, underwrite or service for potential fraud or serious material deficiencies throughout the lifecycle of the loans.

REJECTED APPLICATIONS

Rejected applications must be reviewed within 90 days from the end of the month in which the decision was made.

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Quality Control Requirements for Direct Endorsement Lenders
Mortgagee Letter 2011-02
January 5, 2011

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FinCEN: 7% Increase in Mortgage Fraud

On December 14, 2010, the Financial Crimes Enforcement Network (FinCEN) released two mortgage fraud reports entitled Mortgage Loan Fraud SAR Filings, which together cover the first six months of 2010.

One report covers January through March 2010, and the other covers April through June 2010.

For previous announcements on this subject, please visit the Compliance ALERTS section of our Archive.

Taken together the reports show that suspicious activity reports (SARs) indicating mortgage loan fraud (MLF) climbed 7%, rising to 35,135 in the first half of 2010 compared with 32,926 in the first half of 2009.

In part, the increase is being attributed to increased attention to older loans spurred by repurchase demands.

In the first quarter of 2010, 78% of reported activities occurred more than two years prior to filing, compared with 44% in the same period of 2009, showing a continued focus on loans originated from 2006 to 2008.

First Quarter

Second Quarter

Key Findings

References to bankruptcy in SARs have steadily increased, rising to 7% of MLF SAR filings in 2010, compared to 1% in 2006 and 2007.

SAR reports referencing "short sale" and "broker price opinion" appeared 827 times and 41 times in SARs respectively during the first quarter of 2010. (Short sales and broker price opinions mentioned in SARs are sometimes associated with a particular type of flipping scheme known as "flopping." Flopping occurs when a foreclosed property is sold at an artificially low price to a straw buyer, who quickly sells the property at a higher price and pockets the difference.)

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FinCEN: Suspicious Activity Report Filings from January 1-March 31, 2010, Mortgage Loan Fraud Update, December 2010
FinCEN: Suspicious Activity Report Filings from April 1-June 30, 2010, Mortgage Loan Fraud Update, December 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FinCEN: Proposes Non-Bank Lenders File SARs

On December 6, 2010, the Financial Crimes Enforcement Network (FinCEN) proposed a requirement that non-bank residential mortgage lenders and originators, just like other types of financial institutions, establish anti-money laundering (AML) programs and comply with suspicious activity report (SAR) regulations. The requirements are provided in a Notice of Proposed Rulemaking.

The Bank Secrecy Act (BSA) authorizes the Treasury to issue regulations requiring financial institutions to keep records and file reports that the Secretary determines "have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism." The subject proposed rulemaking regarding residential mortgage lenders is derived from that authority.

At this time, the only mortgage originators that are required to file SARs are banks and insured depository institutions.

According to FinCEN, analyses of SARs in FinCEN's mortgage fraud reports show that non-bank mortgage lenders and originators initiated many of the mortgages that were associated with SAR filings.

The Notice of Proposed Rulemaking intends to provide prevention of mortgage fraud, including such activities as false statement, use of straw buyers, fraudulent flipping, and even identity theft associated with mortgage borrowing. These illegal activities, and others, have been identified in information provided by SARs.

This Notice of Proposed Rulemaking was informed by comments received following an Advanced Notice of Proposed Rulemaking (ANPRM) issued last year on July 21, 2009.
Comments: Due 30 days after publication in the Federal Register.

Lenders Compliance Group provides a robust and comprehensive risk assessment for auditing SARs. If you would like to prepare for the SARs filing requirements and/or provide independent testing and monitoring for compliance, please contact us.

Minimum Requirements

(1) Policies and Procedures: incorporate policies, procedures, and internal controls based upon the loan or finance company's assessment of the money laundering and terrorist financing risks associated with its products and services.
Policies, procedures, and internal controls must:

(i) Include provisions for complying with the applicable requirements of Subchapter II of Chapter 53 of Title 31, United States Code ("Records and Reports on Monetary Instruments Transactions"),

(ii) Integrate the company's agents and brokers into its anti-money laundering program, and

(iii) Obtain all relevant customer-related information necessary for an effective anti-money laundering program.

(2) Compliance Officer: designate a compliance officer who will be responsible for ensuring that:

(i) The anti-money laundering program is implemented effectively, including monitoring compliance by the company's agents and brokers with their obligations under the program;

(ii) The anti-money laundering program is updated as necessary; and

(iii) Appropriate persons are educated and trained.

(3) Training: provide for on-going training of appropriate persons concerning their responsibilities under the program.
A loan or finance company may satisfy this requirement with respect to its employees, agents, and brokers by:

(i) Directly training such persons or

(ii) Verifying that such persons have received training by a competent third party with respect to the products and services offered by the loan or finance company.

(4) Independent Testing: provide for independent testing to monitor and maintain an adequate program, including:

(i) Testing to determine compliance of the company's agents and brokers with their obligations under the program.

(ii) Determining that the scope and frequency of the testing is commensurate with the risks posed by the company's products and services.

NOTE: Such testing may be conducted by a third party or by any officer or employee of the loan or finance company.

(5) Compliance: compliance is subject to examination by FinCEN or its delegates, under the terms of the Bank Secrecy Act. Failure to comply with the requirements may constitute a violation of the Bank Secrecy Act.

(6) Effective date: an anti-money laundering program that complies with the all requirements must be implemented on or before the later of six (6) months from the effective date of the regulation, or six (6) months after the date a loan or finance company is established and becomes subject to the requirements.

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FinCEN: Anti-Money Laundering Program and Suspicious Activity Report
Filing Requirements for Residential Mortgage Lenders and Originators
Notice of Proposed Rulemaking (12/6/10)

FinCEN: Advance Notice of Proposed Rulemaking
Federal Register, Vol. 74, No. 138 (7/21/09)

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.