A series of small loans for out-of-state properties exposed underwriting flaws and a sophisticated fraud scheme.

In early 2023, we closed six loans with a new borrower. Although it was unusual for us to fund multiple loans for a single borrower without a prior history with us, the deals appeared low risk. The loans were relatively small, and the borrower was highly qualified: a real estate professional with a credit score above 750 and $2 million in cash.

Four loans closed in January and two in March. The borrower lived and worked in real estate in Massachusetts, but the properties were in Indiana. He explained the out-of-state activity by saying he was introduced to a successful real estate group in Indianapolis that helped him find, purchase, and rehab the properties. He claimed to have already completed a few successful projects with the group.

At first, everything seemed fine. The transactions closed and the borrower made the monthly payments. But no rehab draws were ever requested on any of the properties.

In November 2023, the borrower defaulted. He told RFG he had been scammed by the Indianapolis group, had taken loans from multiple private lenders, lost all his money, and no longer had any funds to pay the loans.

Through his attorney, he offered deeds in lieu of foreclosure in exchange for complete release of liability—an offer RFG declined. The potential losses would likely be significant, title issues were unresolved, and subordinate liens still needed to be cleared.

RFG filed claims with the title company named in the Closing Protection Letters, but the claims were denied. It turns out that the title agency that closed the loans was part of the scam. The CPLs were fraudulent—issued in the name of an insurer that had previously rescinded the title agency’s authority. No legitimate title policies had been issued by that insurer. With no insurance protection, foreclosure was necessary to clear title.

Indiana counsel began foreclosure proceedings, but in the meantime, the offending title agency closed its doors. After some sleuthing, RFG located the agency employee who had closed the transactions and was now working elsewhere in the title industry. After some choice words, the employee miraculously produced title policies—this time from a completely different title insurer–and began working to resolve the title issues. It appears the threat of legal involvement was very motivating.

Meanwhile, RFG began speaking to other local clients about buying the six properties. The borrower agreed to sell them and give all proceeds to RFG. Once title issues were resolved, RFG was convinced the borrower had no ability to pay and agreed to release the borrower from future liability in exchange for signing all the sale documents.

In the end, RFG minimized its losses by lending to the buyer of the properties. Although the properties were worth less than the loan payoffs, the new loan’s interest and fees helped offset most of the losses from the sale. Even so, the underwriting failures were clear—and the underwriter at issue is no longer with RFG.

Underwriting Failures

Both the borrower and RFG were victims of very sophisticated scammers. But the truth is, RFG did a poor job in underwriting these loans. Holes in RFG’s underwriting policies were compounded by the underwriter’s failure to follow existing underwriting guidelines, leaving RFG exposed.

No one questioned who the borrower’s partners were. A Google search for the Indianapolis group would have revealed some ugly facts. Further, no one questioned how the borrower met them, what their involvement was, etc.

The most glaring errors were made with the titles. These properties were all repeatedly flipped between entities owned and controlled by the members of the group the borrower was aligning with, leading to artificially inflated values. The borrower overpaid his “team” for all the properties and was then left holding notes far in excess of the value of the collateral. The title commitment for one of the RFG properties shows three transfers of the property in the four years preceding the loan. It is still unknown whether the appraiser was involved in the scam or not.

Other than overlooking the chain of title, no one at RFG noticed that the title commitments lacked the name of a title insurer, which is highly unusual. Further, the commitments were not properly marked up to reflect exceptions and removals from Schedule B, Part II. The requirement for marked up title is found in RFG’s lending guidelines, but the safeguard was ignored.

Further, the settlement sheets for the loans do not reference a title insurer. Instead, it refers to “Owner’s Title Insurance” and “Lender’s Title Insurance.” The name of an insurer should be there, not the generic name. This is another point in RFG’s guidelines that was overlooked.

The biggest error, however, was in not knowing where RFG was sending its money. RFG’s policy has always been to call the underwriting insurance carrier before sending a wire to confirm that the agency receiving the funds is an authorized agency. For unknown reasons, this was not done on these loans. RFG wired money to a title agency that was not authorized to receive it and not authorized to provide a CPL or a title policy. If that check had not been ignored, it is highly likely these loans would not have closed. Further, without title insurance, there was no carrier to make an insurance claim against for the encumbered title, making the foreclosure more extensive and expensive.

Aftermath and Lessons Learned

RFG has filed complaints with local Indiana law enforcement, the FBI, and the Indiana Department of Insurance, which is dealing with other claims against the title company. Unfortunately, as in other cases where RFG has made criminal complaints, law enforcement has not shown any interest in investigating and pursuing the matter.

This experience reinforced several painful but critical lessons:

Never skip underwriting safeguards, even for borrowers who look strong on paper.

Always verify the authority of any title agent before wiring funds.

Treat remote borrowers, particularly those working with unfamiliar partners in distant markets, with more scrutiny.

Fraud in private lending often hides in the details. And in this case, overlooking some of them cost RFG and the borrower time and money.