Assignment layering and masked entities are turning routine deals into high-risk traps.

Straw buyer fraud in hard money lending often reveals itself through contract assignments within wholesale transactions. Fraudsters often try to obscure their identity by layering multiple assignments, making it difficult to trace who originally entered into the purchase agreement and who ultimately controls the property.

This method is particularly common among transactions presented by a supposed wholesaler and often brokered deals. The broker can serve as a buffer, further obscuring the actual details of a transaction. For instance, a wholesaler might assign a contract and then reappear as a member of the borrowing entity, effectively masking their control of the deal.

Another common presentation involves the use of family members or associates as the borrower of record. In these cases, a bad actor who has previously defaulted or been flagged by a lender will enlist a relative or friend to serve as the public-facing borrower. The true operator of the project stays behind the scenes, reaping the benefits of funding while evading lender scrutiny. Additionally, newly formed entities are often used in these schemes to conceal past failures or default history. Without thorough vetting, a lender may unknowingly fund a deal involving a high-risk operator.

The Goal

The primary goal of a straw buyer scheme is to gain access to funding while shielding the real operator’s identity and track record. Fraudsters seek to off-load liability onto a third party—someone with a clean name, no negative borrower history, and no immediate red flags. This allows the true controller to receive funding for a project without disclosing past issues (e.g., loan defaults, project failures, or credit red flags).

In addition to avoiding liability, these schemes often conceal profits through assignment fees or by holding undisclosed equity positions behind the scenes. Once the loan funds, the straw buyer may play little to no role in execution, which significantly increases the risk of mismanagement or default.

Frequency

Straw buyer fraud is a recurring issue in the hard money space. Although it may not appear in every pipeline, it happens often enough to merit continuous monitoring and cross-departmental discussions among underwriting, origination, and compliance teams.

Hard money’s appeal to investors combined with its relatively lax documentation requirements has fueled a rise in fraud attempts. Although this rise is based on anecdotal evidence, it tracks with the broader mortgage industry, where the fraud risk is also rising.

In the second quarter of 2024, the CoreLogic Mortgage Application Fraud Risk Index jumped 8.3% year-over-year, with one in 123 applications flagged, and applications for multiunit homes spiked to a 3.5% fraud rate (one in 27).

Though straw buyer fraud is more prevalent in wholesale and brokered channels, no lending channel is immune. It’s critical that all departments remain vigilant. Lenders must embed red flag checks, regular fraud training, and cross-functional case reviews to mitigate the evolving threat.

Impacts and Costs

Straw buyer fraud can have serious financial and operational consequences. One of the most concerning aspects is the lender never truly knows who is behind the project. The person executing the project is the single-most important variable in determining loan success. When that individual is hidden behind layers of assignments or shell entities, the lender’s risk assessment becomes fundamentally flawed. If the loan defaults, locating the real party behind the deal can be extremely difficult, especially if falsified documents or confusing ownership structures were used.

Although an asset in competitive markets, the speed of private lending can also be a liability. The pressure to close quickly may result in skipping due diligence steps, particularly when assignment paperwork appears clean on the surface.

Reputational harm is also a concern because repeated bad loans tied to undisclosed operators can erode trust among investors and partners. Finally, operational resources are drained when internal teams must spend hours investigating post-close issues, rereviewing documents, and initiating legal recourse that could have been avoided.

Best Practices for Prevention

Lenders should adopt proactive measures to identify and prevent straw buyer schemes. First, incorporate onboarding processes for brokers and wholesale partners  into funding review. Quality brokers vet deals thoroughly and willingly participate in a lender’s application process to access funding lines, rather than evading scrutiny.

For individual transactions,  it’s crucial to require full transparency of contract assignments. Any deal involving assignments should include the original purchase contract, all assignment documentation, and disclosures of all parties receiving assignment fees. Conduct entity searches to identify overlapping ownership or shared registered agents between entities. Though layered entity structures can make this challenging, public records can still reveal patterns and relationships.

Borrower intake should involve more than a loan application. Take the time to learn how the borrower found your company, what experience they bring, and what they’re trying to achieve with the project. In the absence of credit or background checks, which is common in agile hard money lending environments, it becomes even more important to gather narrative-based borrower insight. Trust but verify. If the narrative and experience are adequate, a borrower should easily be able to provide documentation to support the claims. Client  resistance to providing additional clarification or documents is a flag.

Be particularly cautious with newly formed entities. Although new LLCs with no track record are not inherently fraudulent, you should flag them for further review. A borrower who appears unfamiliar but is overly prepared with loan documentation may also indicate coaching or concealment.

Maintain consistency in tracking this information within a CRM so that multiple team members can detect patterns (e.g., repeated phone numbers, emails, or banking info linked to past bad actors). For example, if a loan application is for John Smith but the ACH authorization for interest payments lists another individual not shown on any entity or application paperwork, understanding how they are tied to the funding is imperative.

Technology plays a vital role in fraud prevention. A customer relationship management (CRM) system such as Salesforce or HubSpot can log contact information, flag repeated behavior, and track entity overlap. State-level business registries and tools like LexisNexis, Clearbit, or even OpenCorporates can help verify business ownership and identify common actors.

Lenders can also create assignment tracking templates or flow charts to visualize the movement of property contracts. This creates transparency around who initially secured the deal, who assigned it, and how it reached the final borrower. Consistent use of these tools helps prevent assignment layering from going unnoticed.

Finally, most loan origination systems (LOS) have built-in capabilities for workflows and automations. A good first step is to speak with your account manager to understand how to leverage your existing tech stack.

To maximize your technology, determine the data points most helpful to your deal analysis. Email, phone numbers, social security numbers, and employer identification numbers are good unique identifiers to start with. Include those trackable fields in your LOS. (If you don’t have a field to track, you cannot aggregate the data for your system to automatically raise flags.) Then, build monitoring processes and reporting around those criteria.

Mitigation

If straw buyer fraud makes it past closing, strong legal protections   are the next line of defense.

Your loan agreements should include acceleration clauses that allow for immediate callback of the loan in cases of borrower misrepresentation or undisclosed changes in ownership. Personal guarantees tied to individuals with verifiable assets can provide leverage in recovery. Cross-default clauses can be effective when dealing with borrowers who operate multiple entities.

Indemnification clauses should explicitly state the borrower will be held financially responsible for any losses or legal expenses arising from undisclosed third-party involvement. In extreme cases, clauses that void funding obligations upon discovery of fraud can offer additional protection. Where feasible, requiring full recourse terms for first-time borrowers or those with complex assignments can act as a deterrent.

When a borrower is discovered to have committed fraud, their information should be recorded immediately in an internal watchlist maintained by each lender. This list should include flagged names, emails, phone numbers, and bank accounts. Maintaining a centralized internal list ensures institutional memory, even as staff and leadership change, helping your team avoid inadvertently approving future deals from known bad actors.

[EDITOR’s NOTE: It is critical that this information remain strictly internal. Sharing such a list across companies or attempting to create an industry-wide blacklist raises serious legal risks, including liability and potential antitrust violations. Although it may seem helpful to coordinate across lenders, doing so could expose participants to significant legal and reputational consequences. You must avoid any perception of cooperative blacklisting efforts. Each company should maintain and act upon its own internal records, based solely on its underwriting processes and findings.]

Work only with trusted title companies that perform rigorous legal and due diligence checks. Title officers can offer valuable insight into unusual deal structuring or recent property transfers. Require them to provide complete property histories and flag rapid resales that might indicate a recycled fraud attempt. Post-closing audits of first-time borrower deals should be standard, and borrower banking information must always match the entity on record to confirm legitimacy.

Several tools are available to aid in mitigation. Property research platforms like DataTree and PropStream offer deep visibility into property ownership history. CertifID and similar platforms can verify wire instructions and prevent funds from being misrouted to unauthorized accounts. AI-driven software can identify behavioral patterns across deals, flagging repeat behaviors associated with known fraud risks. Additionally, custom modules within loan origination systems can be programmed to automatically flag suspicious borrower or deal characteristics.

Further, the AAPL Vendor Guide (aaplonline.com/vendors or Private Lender’s Winter issue) can help you find attorneys with experience in private lending documentation. It is important the attorney has specific private lending experience, not just real estate experience,  to ensure state-level compliance related to borrowers, collateral, and loan products.

Eyes Wide Open

Straw buyer fraud is a persistent and evolving threat within the hard money lending ecosystem. As the industry continues to grow and attract new players, the risk of fraud increases, particularly when speed and flexibility are prioritized over rigorous borrower scrutiny. Lenders must remain vigilant, balancing their desire to serve investors quickly with the need to protect capital.

By implementing structured onboarding, transparent deal documentation, and consistent borrower intake procedures, lenders can minimize exposure. Leveraging technology helps to detect patterns, store historical data, and assist with decision-making. Remember, however, technology—particularly AI—should be used as a tool to enhance processes, not as your only line of defense. If fraud does occur, a well-prepared mitigation strategy can contain the damage and preserve long-term operational integrity. Proactive awareness and coordinated prevention are essential to maintaining trust, performance, and safety in today’s private lending market.