Unit 3 PROCESSING Flashcards
The key to defining fraud is…
Intent
Formula for Fraud
Lie or Truth + Intent = Fraud/Not Fraud
When the borrower intends to deceive the lender
Lie
Examples of suspicious activity
- multiple properties
- unusual or unverifiable income sources
- lack of necessary docs
- untraceable funds
When seeing potential suspicious activity the MLO is expected to…
Ask questions to determine the reason behind the actions
T/F
If an MLO suspects fraud, they are obligated to report it.
True - at either the state/fed level
Penalty for mortgage fraud
1 million dollar fine AND/OR 30 years prison
T/F: The MLO may be able to stop fraud before it happens
True
These MLO actions can help address the Bor’s potential fraud, if encountered.
- Asking proper questions
- Providing quality counsel/education
T/F: Since mortgage fraud has occurred, lenders now review less applicant information.
False - more is reviewed
Technology has impacted Borrower submission of ____, since it brings more risk of fraud.
Documentation
Submission of fraudulent Borrower documentation has increased a lender’s risk
Asset Fraud
Bor provides false info about assets
Ex: artificially increased account balances, fake accounts
Income Fraud
- False sources of income
- Verbal or conspiratorial means
- Document modification
Ex: friend acts as employer to confirm false work/income
Conspiracy method
When people work together to deceive
Example in the book:
Two friends working together to show income. The friend deposits money into the account, which is shown to the lender as income. After the loan funds, the friend returns the money, as it was just a loan of assets - not consistent income.
Bank fraud
(Similar to asset fraud)
- Bor manipulation of accounts through money transfers and short term loans
Example of bank fraud, and explain
Check kiting
Fraudster writes a check from one account to another without funds to cover the amount written on the check
If reviewed at the right moment, the borrower can appear to have met certain qualifications, when the balance on paper doesn’t actually exist.
Occupancy fraud
Provide example
When a borrower applies for a mortgage claiming a less risky occupant type, than what their true intention is.
Ex: Claiming a mortgage on a primary residence (20% downpayment), rather than an investment property (25% downpayment/higher rate due to risk) - when they hope to rent it out.
Most prevalent form of Bor fraud
Occupancy fraud
T/F: Occupancy fraud is solely the Borrower’s fault.
False - The MLO may take some of the blame, if the occupancy types are not explained properly (ie. Primary, secondary, investment…)
since they’re responsible for educating the Borrower
Verbal fraud
Lying while verbally filling out the URLA, with the intent to fraudulently obtain personal gain, and deceive the lender.
Ex: purposefully advising an inflated monthly income
T/F: verbal fraud does not require intent:
False - intent IS required, when determining if a Borrower is lying.
T/F: we assume the borrower is telling the truth
True
Conspiracy fraud
When more than one person works together to commit an act of (Mortgage) fraud.
Who is a conspirator?
Provide example
A participant in fraud, (think a borrower’s accomplice)
Ex: Bor lists conspirator’s name and number as employer, so the party can verbally confirm inaccurate employment
Modified documentation (fraud)
Using a computer scanner’s software to alter Bor paystubs, W-2s, tax returns, etc.
Bona fide error
Unintentionally misinterpreting information, misspelling a name, or entering an incorrect date by accident
Examples of Bor Fraud
- Property flipping (with intent to falsely represent improvements/higher property value)
- Straw buyer
- Buy and bail
Property Flipping
Buying a house and selling it in a short period of time, for an increased profit since sold at a higher price.
Conspiracy fraud
When more than one person works together to commit an act of (Mortgage) fraud.
Who is a conspirator?
Provide example
A participant in fraud, (think a borrower’s accomplice)
Ex: Bor lists conspirator’s name and number as employer, so the party can verbally confirm inaccurate employment
Modified documentation (fraud)
Using a computer scanner’s software to alter Bor paystubs, W-2s, tax returns, etc.
Bona fide error
Unintentionally misinterpreting information, misspelling a name, or entering an incorrect date by accident
Examples of Bor Fraud
- Property flipping
- Straw buyer
- Buy and bail
Property Flipping
Buying a house and selling it in a short period of time, for an increased profit since sold at a higher price.
Property flipping (fraud)
Buying a house and selling it at a profit in a short period of time, with intent to falsely represent improvements/higher property value. Typically the appraiser inflates the value, while buyer/seller takes advantage of the cash out from the sale.
Cash-out property flip
Buyer may offer a considerably higher than asking price amount, when speaking to the seller. The buyer may conditionally ask for part of the difference between the offered price+asking price back, in cash after closing.
Other red flags include
- Appraisals that have a lack of sufficient information re: the value
- the property selling higher than market
- seller claiming significant renovations w/o proof.
Straw Buyer
When an unqualified Bor attempts to obtain a mortgage by using other name/qualifying info to mask the actual Bor’s intent to purchase the property.
T/F: Straw buyers may either volunteer (family) or get paid for their participation.
True
Straw Buyer Red Flags
- Use of funds far more than 1 entity for the downpayment/to pay fees.
- Exercising a power of attorney when closing the loan
- Possible signs the Bor will not occupy the residence (unrealistic commute)
- Large downgrade in value/size from Bor’s previous home
Buy and Bail
Borrowers buying a new home, and immediately bailing on their previous old home mortgage, forcing it into foreclosure. Credit factors are kept in good condition until ready to abandon the old mort., while the old property can even be used as a fake rental property.
Popular during 2008 when Bor’s were upside down in their mortgage, and they wanted to cancel out the debt.
Liability is dependent on…
…the mortgage contract and legal jurisdiction
Buy and Bail red flags:
- new home value is significantly lower than current home
- rental agreements lack deposits
- current loans terms that may increase w/ the chance of foreclosure
Seller-Buyer Collusion
When the buyer/seller work together to withhold information from the lender, in order to gain an advantage over the other unknowing parties
Most frequent instance of Bor/Seller working together to defraud mort. lender is found with…
Undisclosed kickbacks
Undisclosed Kickbacks
Ehhh
T/F: When selling a home, the seller is not allowed to offer seller concessions to help the buyer with repairs/closing costs
False - they can
Which Fed Program Loan can a seller offer concessions to help w/ closing costs + home repairs?
And what can/cannot seller concessions go to?
Some USDA programs
Can: concessions can go to prepaid escrow deposits but never toward a downpayment
Which loan, has to bring 3.5% downpayment to the closing table?
- FHA loan
If a Bor cannot If an MLO can’t help a Bor Qualfiy for the
Fixed
An undisclosed kickback is…
Provide examples of red flags
…when the Bor doesn’t have the necessary $ for the downpayment, but the seller provides the Bor funds at close, without informing the lender.
Ex: - diff sales price for CD vs. Sales contract
- family members/business relations on both side of transaction
- funds laid to undisclosed 3rd parties on the disclosure (CD)
- Alteration of sales price to fit the appraisal
Silent second mortgage
Bor unethically withholds the existence of a lien, which impacts Bor financing. Seller gives buyer a loan for a downpayment, immediately closes, and then records a second lien separately, without informing the lender.
Boiler plate
Sales contracts that have limited details, since the buyer/seller have separate seller contracts.
Underwater
When you owe more on your home, than the property is worth
Short sale red flags
- Bor defaults w/o warning and makes no attempt to resolve debt (which is immediately followed by short sale offer)
- homeowner cites unusual/contradictory reasons for the default
- no other evidence the Bor is having financial difficulties w/the exception of mortgage delinquency (all other accounts/credit intact)
- someone w/same last name/obvious affiliation that makes the short sale offer
- short sale price offered is less than the home’s current market value
- current (delinquent) homeowner is supposed to recover cash back at Closing (as this is usually listed on the contract as fees/services for services or repairs.)
Short sale process
- Bor shows lender they have exhausted every option to sell home at/above mort balance, in order to meet their debt obligation
- They have a potential buyer willing to take on the property, less than the balance
- Prev owner is released from mort
- buyer receives a clean title on the property
- company loses $
Short sales reached their peak in…(year)
2010
In 2011, an estimated $_____ in short sale fraud occurred.
$375 million
Flopping
- What is it a symptom of?
- definition
- symptom of rise in short sales
- Homeowner convinces the lender they can’t sell the home for the true value, and request a short sale
- Homeowner ensures no quality bids are accepted for the prop. by enhancing cosmetic problems that can be easily fixed (smells, flaking paint, false water damage)
- accomplice offers extremely low bid
- lender resources do not allow time to validate info
- homeowner lien released/ clean title is transferred
- accomplice sells home for higher price, splitting profits w/orig owner
When do flopping schemes work best?
When a lender is overwhelmed by the volume of troubled mortgages and doesn’t have time to research value of short sale properties
What were fraudster profits per short sale in 2011?
$55k per short sale
Non-Arms length sale
- Individuals willingly commit fraud to live in the home at a reduced cost, as a variant of the straw buyer scenario
- homeowner works w/accomplice (typically a relative/business relationship)
- accomplice makes a short sale and gets a smaller mort. on the property
- accomplice deeds the title back to orig. owner so they can cont. to live in the home/service mort. @ reduce cost
How do lenders avoid a non-arms length sale?
Explain/define it
- Lenders require Bor’s to sign an arms length affidavit
- signed statement that req. Bor to promise they won’t sell their home to someone whom they have a relationship w/
(TRID)
Acronym
Regulation __ and __
TILA - RESPA Integrated Disclosures
Regulation Z+X
TRID rule aka Know Before You Owe Rule (KBYO)
- who made it/why
- Developed by CFPB
- To simplify info info provided to mortgage borrowers
TRID Actions
- Combines RESPA’s Good Faith Estimate and initial TIL lending Statement into the Loan Estimate (LE)
- LE is the name of the first pricing disclosure
- the Final Disclosure (HUD-1) settlement statement for RESPA and final TIL Statement for TILA we’re convinced in the Closing Disclosure (CD)
LE
Loan Estimate (disclosure)
(CD)
Closing Disclosure
- Provides final costs of entire transaction (like a receipt)
TRID applies to all ____ Mortgages
Close ended
Does TRID apply to open end forms of credit?
No
T/F - Reverse mortgages and HELOCs are exempt from TRID requirements
True
- Goal of TRID
- new specifics
- record retention
- Simplify info provided to mort. loan borrowers
New specifics
+ Section 19 of TILA (MDIA) gain an intent to proceed from Bor
+ Intent to proceed must be gathered verbally, electronically, or in written form PRIOR to charging any fees
*Exception: cred report fee
Record of intent must be retained for 3 years from date upon it was received
TRID rule falls under what law?
TILA
Charges and Fees per TRID disclosures break down into what two categories?
Loan Costs and Other Costs
What are considered Loan Costs (per TRID disclosures) + examples
Loan Costs
- Origination Charges
+ app fee, u/w fee, and points
What services/fees can the Bor shop for?
Pest inspection Survey Lender’s title insurance Settlement agent Title search
Services the Bor CANNOT shop for
Appraisal Credit Report Flood determination Flood monitoring Tax monitoring Tax status research
(All fees)
Other Costs of the Loan
- Taxes/Gov’t fees
- Recording fees/other taxes
- Transfer taxes
- prepaids
- homeowner’s insurance
- mortgage insurance
- prepaid interest
- property taxes
- initial escrow payment
- owner’s title policy
LE details # of pages, expiration, necessary action, retention rules
- 3 pages
- Valid 10 business days from date of disclosure
- no Bor intent returned > new LE generated on change in circumstances
- must be retained 3 years after consummation
What is a revised LE required to have?
Reason for the revision
T/F - No fees can be charged (except for CBR), until after the LE has been disclosed, and Bor’s intent to proceed has been expressed
True
(TIP)
Total Interest percentage (over next 5 years per page 3 est of LE)
APR change that requires redisclosure of Initial LE
- 1/8 of 1% for fixed loans
- 1/4 of 1% on ARMs
Confirm Receipt for LE communicates this to the Bor (third page)
Per (MDIA), the Bor doesn’t have to accept the loan, just ack. they received it and intend to move forward
Closing Disclosure (CD) # of pages, expiration, necessary action, retention rules, when there are errors
- 5 pages
- final transaction amounts
- due 3 bus. days prior to loan consummation
+ refi on prim residence/reverse mort. Closing possible 3 bus days prior to consummation, So CD provided at close
+ Bor can request CD 24 hours before close - Must be retained for 5 years from date of close
- If errors, must be redisclosed by lender within 30 days from date closing
What could the CD’s Page 1, closing info “property value” be based on?
Clarify the differences
- Sale price > if purchase loan
- appraised prop. value > refinance
- estimated prop. Value > refi, but no appraisal obtained
T/F: it’s normal for the escrow amount to change in the CD, Compared to the LE
True
T/F: Aggregate total of costs listed on the CD, Should not exceed 10% of what was on the LE
True - exception being if a Bor uses a service not on this list; amount of that change = unimportant to CD
CD highlights…
- Seller concessions, aka seller credits
- Other existing Loans (pg 3)
- pg -4 escrow account + fact Bor could lose property
- pg 5 - contact info for CFPB
FCRA acronym + Goal + Memory trick for regulation __
- FCRA - Fair Credit Reporting Act
- reg V
- (V is like an arrow and you never know whether credit will approve or deny someone - it could go either way)
- Ensures Fair and accurate credit reporting
- ensures lenders protect consumers against identity theft/handle info w/confidentiality
- can get free cred report though credit reporting agencies once a year
- promotes/ensures accuracy of cbr/accurate info/
The Amendments added to FCRA
FACTA - Fair and Accurate Credit Transactions Act
- all derogatory/neg info should be reported on CBR for no longer than 7 yrs
- bankruptcies reporter no longer than 10 yrs
- cred score/key factors that affect score must be included
- indication of account closed/disputed by consumer
- disputed consumer accounts must be responded to within 30 days
What is the link to get a free cred. report?
AnnualCreditReport.com
CRA
Consumer Reporting Agencies
Who regulates the FCRA and FACTA?
CFPB
The Disposal Rule
Per FACTA, all sensitive information should be disposed of via burn/pulverize/shredding/file+media deletion of consumer report info in order to avoid identity theft
Identity Theft Prevention (FCRA+FACTA)
- CRA one call fraud alert not less than 90 days, if suspicion of identity theft
- extended fraud alert if submitted identity theft report, at least 7 years
- alert for active duty service members during time away, at least 12 months
- contract info on CRA
- CRAs must block info within 4 bus days, so no new credit extensions during freeze
Red flags rule
- Identify RF w/possible patterns
- Create guidelines to address transactions after more than 2 yr inactivity, and provide consumer notice
- Verify guidelines/procedures via quality control, compliance officer, and training
Who regulates the Red Flag Rules?
FTC - Federal Trade Commission
FTC
Federal Trade Commission
If FCRA/FACTA violation, who/when could be penalized?
Mortgage professional OR institution
2-5 years after violation
Gaining info under false pretenses or misleading consumers penalty, re: disclosures…
(Both criminal and civil)
Fine, 2 years in prison
Civil: actual damages, punitive damages, + attorney fees
Gram Leach Bliley Act (GLBA) aka
- Financial Services Modernization act of 1999
- Protects consumers non-public personal info > Privacy Protections Regulation P
- Regulatory Authority > CFPB
- All other rules for planning/protections = FTC Safeguards Rules > regulates by fed trade commission
Regulation P (GLBA)
- Can’t disclose non-public info to third parties
- Must have option to opt out of the sharing of their info
Pretexting
Aka - phishing
Obtaining non-public info through false pretenses
What must be hand delivered, mailed, posted on website w/ Bor ack., shown on screen, to be in compliance with Reg P?
Privacy Policy Disclosures
Fairness Laws (4)
- ECOA - equal credit opportunity act
- FHA - Fair Housing Act
- HMDA - Home Mortgage Disclosure Act
- HPA - Homeowner’s Protection Act
Laws Re: Consumer Contact (5)
- FCRA - Fair Credit Reporting Act
- FACTA - Fair and Accurate Credit Transactions Act (amendments included in the FCRA)
- Gramm-Leach Bliley Act
- Do Not Call Laws
- Esign Act
- Mortgage Acts and Practices (MAP)
Financial Crime Laws (3)
USA patriot act (uniting and strengthening America by providing appropriate tools required to intercept and obstruct terrorism)
- in response to 2001, sept 11
