Discover how to safeguard you and your clients by avoiding common fraud tactics in the private lending industry.

We often live with a false sense of safety when it comes to fraud: We know it can happen, but we don’t ever think it will happen to “me.” The blunt reality is fraud is happening every second of every day.

Private lending is no exception—and even more ripe for the taking than ever before.

Not all fraud is a multimillion-dollar scam. Consider this situation that occurs often in companies: A new team member is on the job for the second day at XYZ company. By the end of the day, said team member is on the phone with a major national bank accompanied by HR.

Why? The team member had just purchased and provided $1,000 in gift cards to a scammer. The team member didn’t think she’d be targeted for phishing since her email account was just two days old. She read the email too fast and saw a manager’s name in the email contact preview (versus actually looking at the full email address). The request—a manager requesting gift cards to show appreciation for a borrower—wasn’t out of the ordinary.

And that’s exactly where fraud thrives—in the subtle variances that are overlooked or don’t present glaring red flags. So much fraud exists because it looks “normal.”

Remember these three words in any financial transaction: Trust, but verify.

FlipCo Financial was founded on the core value of “by investors, for investors.” The founders analyzed the pain points that often killed good deals and created a product that removed funding obstacles. The result is a program that does not require credit checks, personal guarantees, or third-party appraisals or inspections. It is also “doc-lite.”

All this streamlining comes with a higher level of risk tolerance: The very barriers that have been removed for investors act as vetting mechanisms that also protect against fraudulent transactions.

This is where a title company becomes more integral to the funding process. By producing clean title reports, validating borrowers through doc signing and recording, wiring instruction confirmations, and much more, the title company provides a level of security and comfort.

But what if the title company itself is the scam?

Fast forward from email phishing scams involving gift cards to an even costlier example of fraud, where we graduate to the five- and six-figure club of wire fraud plaguing private lending. The words “wire fraud” are possibly the two most feared words in finance. We’re reminded of its costly potential daily.

So, recently when we received a transactional funding request at Flipco Financial, we followed our standard practices. We collected our due diligence documents, A-B/B-C contract, responsive title company, clean title report, and call to verify wire instructions. Check, check, check, check.

Transactional funding should be a quick turnaround. Funds never leave the title. Briefly, here’s how the process works: Wholesalers use it to purchase a property and quickly resell it to an end buyer/investor (usually within days or a week). Because the wholesaler nearly always has the end buyer ready to go, the funds for the wholesaler’s original purchase never leave title. Instead, they go to title and are sent back to the lender when the wholesaler promptly resells the property to the end buyer. Funded and done.

But, there we were, almost 24 hours out from when funds should have been sent back—and they hadn’t been.

After our deep dive following this unfortunate series of events, we pieced together how we got “got.”

The “wholesaler” created a fraudulent title company by stealing the identity of an existing one, going as far as registering the fake title company address literally across the street from the real one. They stole staff headshots, names, and titles and created coordinating emails and a website.

But what about the property? It was legit! Unfortunately, the actual owner has been dealing with numerous liens being placed on their home by fraudulent lenders as it gets passed from one company to another.

And the end buyer? Non-existent off paper, just like the title company.

There were no glaring red flags in the transaction but rather a combination of multiple low-grade “Oh, that’s normal” variances. We did trust and verify. We followed our process of working with a title company to produce a clean title report and called the title company to verify the wiring instructions. Initial checks on that title company came back clean, because a real, legitimate title company did in fact exist.

Again, the other variances that we overlooked seemed plausible: Because the end transaction of our “wholesaler” to the end-buyer was completed at the end of the day, they told us the accounting person had left already for the day, and the wire would be sent in the morning. Just missing an end-of-date wire cut-off and the final fundings being pushed to the following morning is not uncommon. But when we still couldn’t get confirmation in the morning, the scam came tumbling down. In hindsight, another small clue that something was amiss was the timestamps on the signed documents. They were barely minutes apart—almost instantaneous—as if it was the same person completing the signing (and as it turns out, it was!).

Tips for Combatting Fraud

Here are some key takeaways for better protecting your team against fraudulent transactions.

• Validate all parties associated with a transaction with the coordinating licensing board. This can include brokers, title companies, appraisers, inspectors, and realtors. Confirm they are licensed and are in good standing. Also, confirm that the information provided to you matches.
• Do not let the fear of losing a funding control the underwriting. In today’s slower market, lenders, loan officers, and brokers alike are holding onto deals much tighter, trying to find workarounds for deals they would have previously passed on.
• Leverage your network. Although there is not a universal “Do Not Fund” list any of us can cross reference for new borrowers, we can build a network of collaborative colleagues open to having frank conversations about whether you should work with certain parties.
• Validate wiring instructions. How were the instructions provided? Through a secure message or a standard email? Always call to verify wiring instructions before sending a wire. If there is a last-minute change to the instructions, be sure to complete additional verification.
• Original copies are the best. Be cautious of borrowers who can only provide screenshots of documents, scans of printed documents, and/or photos of computer screens.
• Know who you’re doing business with. In a digital age, using only text and email can be tempting. Keep in mind, however, not being able to speak to a new contact via phone or an in-person meeting (if local) can be a flag.
• Using document verification or AI underwriting tools does not make you untouchable. You still need internal checks and balances. There are no guarantees with any software.
• Trust your gut. In this digital age, it is easy to be lulled into a false sense of security by relying on technology and routine procedures. Yet, the human element—our instincts and due diligence—remains our strongest defense.

By continuing to share our stories and strategies, we can collectively fortify our defenses against the ever-evolving tactics of fraudsters.