It is important for all lenders to know that there is no such thing as preventing fraud or being fraud-proof. To think you are fraud-proof opens you up to lax behavior and ultimately, puts you at greater risk. What we can do as lenders, is think about how to be fraud-resistant, and thereby remain vigilant against fraud.

Before delving into discussions about fraud, it is important to understand exactly what it is, and what it isn’t.

Generally speaking, there are four elements that must occur for the action or omission to be a fraud:

1. The fraudster must have made a false representation to the victim, and made that representation as if it were a statement of fact;
2. The false representation must have been known to the fraudster to be untrue at the time the representation was made;
3. The fraudster made the representation for inducing the victim to rely or act upon that representation; and
4. The victim did rely or act upon that representation and did so to their detriment.

Additionally, the false representation need not be an overt statement or action. A fraudster may also make a false representation by omission; that is, staying quiet or leaving something out when he or she should have made an actual representation.

Fraud is: A false statement (or lack thereof) passed off as fact, known to be false, for getting the victim to rely upon it, which they did, and suffered damages as a result.

Now that we understand what fraud is in theory, lets dive into some examples of mortgage fraud.

ASSET RENTAL

Cash or other assets are temporarily placed in the borrower’s account to qualify for the mortgage loan. These assets are not really owned or controlled by the borrower, but another individual or entity just let the borrower borrow those assets to make the appearance of a large asset pool.

This is a fraud because the borrower is representing to the lender that the money in the account is owned and controlled by him or her, and its done to induce the lender in thinking the borrower has more cash on hand than they really do.

Suggestion: Looking for a longer history of bank statements and identifying large, out of place or context deposits can help catch this, as well as comparing it with income from tax returns, and asking follow-up questions to the borrower about where the money came from, can all help catch this.

FAKE DOWN PAYMENT

A Borrower making a fake, fictitious or forged document (potentially including others in the scheme) to meet the LTV requirements.

Other than doing your best to spot suspicious documentation and following up on them, this fraud should not make it through closing since the title agent or escrow company should be making sure that the actual down payment funds are already accounted for and held for the closing.

Suggestion: Proper follow-up communication with the closing agent, whomever or whatever it may be, to confirm their receipt of the buyer/borrower’s down payment.

FRAUDULENT APPRAISAL

Borrower may team up with an appraiser who also commits fraud by falsifying information or intentionally providing inaccurate information in the appraisal.

Suggestion: It is a best practice for a lender to hire its own trusted appraisal company. The appraisal company may subcontract the appraiser though, so, it is also wise to have your own in-house appraiser or other person trained to review appraisals and raise red flags if issues are found.

FRAUDULENT DOCUMENTATION

Any use of forged, falsified or incomplete documents, intended to mislead.

Experience is really the only way to develop a healthy and more accurate filter for fraudulent documents.

Suggestion: When using inexperienced staff, have multiple layers of review, and instruct them to be overly suspicious and slow down. As always, follow up with a borrower or other provider of the suspicious document to ask questions.

FRAUDULENT USE OF SHELL COMPANY

Used to disguise and hide true nature of ownership, control, location of assets. Also used to fictitiously show a long business existence (buying an older shell company with an established “history”).

The borrower will typically have mysterious transactions in the sale or acquisition of the company or equity interest, or a multilayered ownership by other entities rather than natural persons.

Suggestion: The best one can do here is to ask questions and for more documentation. If you can’t piece together its history or chain of command or ownership, there may be a problem.

EQUITY SKIMMING/STRIPPING

Inflating appraisal and/or selling price to get a bigger loan, more cash than the property is worth. Or inflating sales price through multiple prior transactions between LLCs, all controlled by the same individual(s) for increasing value; creating a false sales history with an inflated price to get a larger loan.

Suggestion: A best practice is to check municipal records for the recent sales transactions and whom they were between. You can also usually check with the secretary of state for the ownership information of the companies you see in the transaction history. You may not wish to check all 50 states, but the company is typically formed in the state the property is in, or Delaware. If successive companies have the same or related owners, that is a red flag.

STRAW OR NOMINEE BORROWER

An individual with much stronger or preferable financial background is used to be the borrower even though this individual has little to no connection and control of the loan, proceeds or project. May be removed or replaced quickly and at will. They are sometimes paid for their services.

Suggestion: Ask the borrower details about the loan transaction. Make sure the person with the better financial background is at least one of the individuals signing a personal guaranty. If they are not willing to make a guaranty that should raise a red flag.

FALSE RENTAL ASSETS

A borrower can fake a multitude of information and documents to make the property seem income producing from rentals, such as:

• Occupancy rate
• Current occupancy status
• Future occupancy status
• Lease terms or leases themselves
• Existence or non-existence of Landlord – Tenant disputes

An appraiser or another third-party inspector could be used to confirm occupancy and lease terms, and even speak with tenants to get a better understanding of the conditions. As always, be suspicious.

ENDING FRAUD ONCE AND FOR ALL

Notice that none of the provided suggestions definitively stated, “this will prevent the fraud.” These suggestions can only help lenders catch some instances of fraud or can help them to be more fraud resistant. In the private lending industry, as in others, there will always be an element of reliance upon others and their representations. Lenders can only do their best to resist fraud and pass along their experiences to others to prevent them from making the same mistakes.