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Welcome to TRGC’s Internet Conference
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Preventing Fraudulent Closings by Richard Worsham
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Preventing
Fraudulent
Closings
Presented By
Richard Worsham, Underwriting Counsel
Title Resources Guaranty Company
The Issue
Occurrences of fraud within the real estate transaction are
taking place at an increasing rate. There has been an
increase in title insurance claims both in numbers and dollar
value. Most fraud claims result in a total loss for the title
insurance underwriter. Part of the reason for this rise in
fraud is the increased sophistication on the part of the
perpetrator.
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Our Responsibility
The title agent,
processor, examiner,
accounting functions,
etc. must be aware of
this problem. All
must know what “red
flags” to look for
during the transaction
and take the
appropriate action to
prevent fraud.
Course Objectives
Gain awareness of the
reasons why fraud is an
issue for the real estate
industry.
Understand the different
types of fraud.
Learn how to recognize the
“red flags” associated with
each fraudulent activity.
Know what to do when you
suspect fraud.
Reasons for the Focus on Fraud
Incidences of fraud and the
resulting losses have been
increasing rapidly.
2003: $225 million
2004: $430 million
2005: $1.01 billion
2006: $1.5 billion
FBI suspects much more fraud is
actually occurring than is being
recorded.
Title underwriter and lender
usually suffer the most from
fraud.
The FBI says that over 80% of all
reported fraud losses involve
collaboration or collusion by
industry insiders.
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Actual and Constructive Fraud
Actual fraud requires
false representation
with intent to knowingly
deceive.
Constructive fraud does
not require intent, and
can be found to exist
when one innocently or
negligently makes a
false representation of
a material fact.
Elements of Actual Fraud
A false representation of
a material fact
Made intentionally and
knowingly
Intent to mislead
Reliance by party mislead
Results in damage to
party mislead
Most Common Types of Fraud
Straw borrower
Property flipping/land flipping
Equity Skimming
Fictitious/stolen identity
Foreclosure schemes
Phantom sale/conveyance by
fraudulent deed
Silent second
False down payment
Forged satisfaction of
mortgage
Purchase loans disguised as
refinance
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Straw Borrower
Definition:
An individual who is
used to serve as a
cover for a
questionable
transaction.
The use of a straw
borrower will occur
when the true identity
and/or motivation of
the actual borrower
must be a kept a
secret to gain loan
approval.
Straw Borrower Example
A potential borrower
knows that he/she will not
be able to gain mortgage
approval because of poor
credit or the fraudster
wants to hide his true
identity. This person could
recruit a straw borrower
that will be able to qualify
for the loan. The loan
would close in the name of
the straw borrower.
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Straw Borrower Example
A spin on this is sometimes the pump and dump scheme, where
the house is artificially inflated with a false appraisal to get a loan
to the straw borrower.
Here we have a well known FBI photo of the front photo used in
the appraisal, and the back of the house.
Straw Borrower Red Flags
Sale price is wildly inconsistent with
property tax appraised value.
A contract addendum changes the buyer
prior to closing.
Power of attorney for customer is not
related.
Third party payoffs, large repair invoices,
very high real estate commissions.
Sale is to a relative or to a related party.
No sales agent involved or a sales agent that
doesn’t receive commission.
Indication of default by the property seller.
Unable to contact borrower at home or work
phone numbers.
Property Flipping
Definition:
Occurs when ownership
of one property
changes several times
in a brief period.
Flips are used to
artificially inflate the
value of the property
to obtain larger loans
that would otherwise
be impossible.
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Property Flipping Example
A property is appraised and is sold to Mr.
Con for $50,000. Mr. Con immediately
gets an appraisal from an unethical
appraiser. Mr. Con sells house to
unsuspecting buyer for $150,000. (If the
buyer was in on the scam he would be a
straw buyer and this would be a dual
scam-flip/straw buyer)
This example has two guilty parties. The
appraiser is key in this transaction
because he/she must artificially inflate
the value of the home in order for the
unsuspecting buyer to acquire financing.
Property Flipping Red Flags
Property owned by seller for a short period of time
or ownership changes two or more times in a short
period of time.
The mortgage has recently been satisfied.
There are property repair invoices for $1,000 or
more that are payable to third-party
contractors/vendors.
Two or more closings happen almost simultaneously.
Property seller is not on the title.
Seller is a corporation.
Parties to the transaction are affiliated.
Unusual fees on the HUD-1.(assignment or referral
fees)
Preferred appraiser is not used.
Equity Skimming
Definition:
Involves an individual engaging
in a pattern of acquisition of
residential rental real estate
(often at inflated values)
through federal loans
programs, failing to make
payments, and diverting rental
proceeds for personal use.
Since the individual fails to
service the debt or properly
maintain the property, a
default occurs.
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Equity Skimming Example
Mr. Criminal inquires about purchasing a
property from Ms. Seller. Mr. Criminal
obtains financing from XYZ Lending. Mr.
Criminal purchases property and rents the
property to tenant. Mr. Criminal leaves
town and never makes a payment on
mortgage. Mr. Criminal uses all rental
proceeds for his own personal use. XYZ
Lender then has to foreclose on the house.
Unsuspecting renter is required to find a
new living arrangement.
Often times, Mr. Criminal will work with an
unethical appraiser and arrange for the
property value to be inflated in this scheme.
Equity Skimming Red Flags
Inflated sales price, i.e. property listed
for $300k but contract is for $350k.
Buyer gets financing on higher value and
equity is drawn out via repair invoices,
HELOCS, inflated commissions.
Transfer of entire or fractional interest
to property shortly before foreclosure.
Numerous “doing business as” designations
and individuals in the chain of title.
Use of mail drop boxes as company
addresses.
New corporation formed holding a single
asset.
Fictitious/Stolen Identity
Definition:
The theft of an individual’s
personal identification and
credit information, which is
used to gain access to the
victim’s credit facilities and
financial institution accounts
to take over the victim’s
credit identity. Perpetrators
may commit identity theft to
execute schemes using fake
documents and false
information to obtain
personal information through
various means.
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Fictitious/Stolen Identity Example
Perpetrators will gain
information from:
Obituaries
Mail theft
Employment or credit
applications
Computer hacking
Trash retrieval
Perpetrators will then
use this information to
get approved for a
mortgage.
Fictitious/Stolen Identity Example
2nd Example –
Seller pretends to be the
owner of the property.
There’s no conveyance, he
merely assumes the owner’s
identity.
Seller hires a bona fide
realtor and lists it for sale.
Seller claims to live in another
city, so requires the closing to
be a mail out.
Seller either presents false
identification or uses a fake
notary in the mail out closing.
Seller pockets the proceeds
from sale.
Fictitious/Stolen Identity Red Flags
Pertinent documents are
unsigned or undated.
Power of attorney is used.
Signatures on credit documents
are illegible and supporting
identification does not exist.
Price of purchase not
indicated.
Down payment is not in cash,
i.e. source of deposit is a
promissory note.
Customer wants to close
outside of the title office.
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Foreclosure Schemes
Definition:
The perpetrator identifies
homeowners who are at risk
of defaulting on loans or
whose houses are already in
foreclosure. Perpetrators
mislead the homeowners into
believing that they can save
their homes in exchange for a
transfer of the deed and upfront fees. The subject
profits from these schemes
by re-mortgaging the
property or pocketing the
fees paid by the homeowner.
Foreclosure Schemes Example
Mr. Subject contacts Mr. Smith
directly when he hears that Mr.
Smith’s house has gone into
foreclosure. Mr. Subject tells
Mr. Smith that he can help him
save his house. All he has to do
is transfer the deed to Mr.
Subject for one year and Mr.
Smith can rent during this time.
Mr. Subject promises that he
will transfer deed back to him in
one year. Mr. Subject then
refinances for cash or resells
the property and disappears.
The loan defaults and the lender
forecloses.
Foreclosure Schemes Red Flags
Recent transfer of title.
Frequent transactions by
same person.
Lender is changing in middle
of the transaction.
Buyers do not occupy the
property.
Sub-prime lender is being
used.
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Phantom Sale
Definition:
The perpetrator may identify
an apparently abandoned
property and record a
fictitious deed to transfer
the property into his name.
Once the perpetrator has
recorded the necessary
documents, he applies for and
executes a loan. He pockets
the loan proceeds and
disappears.
Phantom Sale Example
The Phantom sees an abandoned
property in a neighboring town.
He creates a fictitious deed and
has the property filed in his
name. He calls a lender and
refinances for cash. He doesn’t
make any payments to the lender
and disappears with the cash.
The lender is left incurring the
debt. Sometimes The Phantom
will use a straw borrower to
assist with this scam.
Phantom Sale Red Flags
Recent deed
transfer.
Documents that do
not appear to be
legitimate.
Appraisal appears to
be much higher than
it should be.
No realtor involved.
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Silent Second
Definition:
The buyer of a property borrows cash
for down payment or closing costs from
the seller through the issuance of a
non-disclosed second mortgage. The
primary lender believes the borrower
has invested his own money in the down
payment, when in fact, it is borrowed.
The second mortgage may not be
recorded to further conceal its status
from the primary lender.
Silent Second Example
Mr. Buyer tells Mr. Seller
that he would like to buy his
house. However, he doesn’t
have enough money for the
down payment. Mr. Buyer
convinces Mr. Seller to loan
him the money needed for
the down payment. Mr. Buyer
agrees to pay him back in the
future. Mr. Buyer
represents this money as his
own to the primary lender.
Lender provides financing.
Silent Second Red Flags
Being asked to prepare or
record a purchase money
mortgage that will not appear
on the closing statement.
Being asked to create a
separate HUD-1 that is
intended to be given to other
parties to the transaction
that will not be disclosed or
given to the lender.
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False Down Payment
Definition:
The borrower colludes with
a third party, such as a
broker, closing agent, etc.
to reflect an artificial down
payment. When this
scheme is carried out with
collusion by an appraiser,
the true loan-to-value
greatly exceeds 100% and
has the potential to cause
substantial loss to the
lender.
False Down Payment Example
Mr. Schemer convinces
mortgage broker to apply for
the loan with the
representation of a down
payment of 20%. Broker
agrees because Mr. Schemer
promises to pay him $100.
Mr. Schemer doesn’t make
any payments on the
mortgage and the lender
forecloses. The lender
thought the LTV was 80%,
but it is really 100% and Mr.
Schemer files for bankruptcy.
False Down Payments Red Flags
Buyer asks you to record a down
payment that has not flowed
through your escrow account or
that of licensed real estate
brokerage.
Broker mentions to you that the
buyer put down less money than is
reflected on the mortgage
documents.
Down payment is very large and
appraisal appears to be very high.
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Forged Satisfaction of Mortgage
Definition:
Seller provides the closing agent
with a payoff statement that
appears to show the mortgage as
satisfied. In reality, the seller
had the lender send him the
payoff statement directly and he
alters it to his benefit. The
alterations are done very
precisely and are not easily
recognizable by the closing agent.
a/k/a Payoff Fraud
Forged Satisfaction of Mortgage Example
A seller volunteers to offer assistance in obtaining the payoff
statement as the closing agent was having challenges obtaining
it from the lender in writing. Seller has lender fax the form to
them directly. Seller alters payoff statement to her benefit to the
tune of $90,000. The alterations were not easy to recognize and
therefore the closing agent closes the loan and the figures were
not questioned until after the closing.
Forged Satisfaction of Mortgage Example
The payoff is sent to the lender in the normal course of business
and the lender returned the payoff check indicating that the
payoff was short by over $90,000. The new purchaser receives
notice of foreclosure from the payoff lender and that is when the
underwriter is notified of the claim.
Legal actions then need to be taken to help recover the funds, if
possible, from the seller.
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Forged Satisfaction of Mortgage Red Flags
You are asked to accept a
payoff statement from a
seller directly instead of
giving written authority
from the seller to obtain it
from their lender.
Property address on the
payoff statement is
different than the one
that is to be insured.
Forged Satisfaction of Mortgage Red Flags
You also need to be on the lookout
for sellers that are in distress,
i.e. about to be foreclosed on by
existing lender.
A large number of outstanding
charges on the payoff statement,
such as large interest charges,
escrow shortages and late fees.
The existing loan is in foreclosure.
If so, contact the FORECLOSURE
attorney for a complete payoff
statement.
Purchase Loans Disguised as Refinances
Definition:
Purchase loans that are
disguised as refinances to
circumvent down payment.
Additionally, refinances
require less documentation.
The reduced documentation
requirements make it easier
for a perpetrator to commit
fraud. This action can be
used in conjunction with
property flipping.
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Purchase Loans Disguised as Refinances
Customer falsifies type of loan they
wish to pursue on the property. They
state that they already own the
property and that they want to
refinance for a term and rate change.
Lender puts through the refinance
and the closing agent closes the loan.
Mr. NoEthics takes deed and is now
owner of the property without any
equity invested. Mr. NoEthics then
rents property to unsuspecting tenant
and collects monthly rent. Mr.
NoEthics does not make payment to
lender and disappears. Lender tries
to foreclose on house.
Purchase Loans Disguised as Refinances
Example 2
Mortgage broker submits order to
you and lender as the refinance of a
contract for deed when it is really a
sale. Mortgage broker presents you
with an unfiled contract for deed
that shows a balance owed. Mortgage
broker then asks you to show the
contract for deed as vesting title in
borrower, or asks that title in the
“prior” owner be shown as subject to
the unfiled contract for deed.
Mortgage broker then submits the
order to lender as a refinance of a
contract for deed.
Purchase Loans Disguised as Refinances
- Red Flags
Borrower provides
statement of
ownership instead of
written authorization
to allow you to acquire
it from the lender.
Unfiled Contract for
deed/land installment
contract.
Check with the “seller”
under the contract
whether this exists?
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Purchase Loans Disguised as Refinances
- Red Flags
The parties asked you to
review the title commitment
to show title vesting in a
different way than the
commitment was originally
drafted.
The parties asked you to
prepare the closing
statement in a way that
differs from the terms of
the contract.
The parties provide you with
a deed filed outside of
closing.
Short Sale Flips
Defined –
When Buyer at a
short sale wants to
immediately resell
the property at a
marked up price.
Short Sale Flips
Example –
Desperate Debtor needs to sell house because he is
threatened with foreclosure
Bob Realtor tells him he can arrange for a short sale and
save his credit.
Bob locates Ed Investor, who is willing to buy the house at
a higher price than what the Payoff Lender is willing to
take.
Bob drafts a contract from Desperate Debtor to himself,
and then contracts to sell the house to Ed Investor.
Bob asks Title Company to close both transactions, but
asks that Title Company only provide Payoff Lender with
the HUD between Desperate Debtor and Bob Realtor.
Bob then closes a resale of the property to Ed Investor,
and pockets the difference in the prices.
Bob will often ask Title Company to close both
transactions simultaneously, and ask that the purchase
from Desperate Debtor be funded with the proceeds from
the sale to Ed Investor.
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Short Sale Flips –
What to Do.
Any time there is a resale following
short sale.
Lender instructions generally require
that no resale of the property be
closed by title company for some
period following closing.
Inform the person who brings you the
deal that you MUST inform both the
payoff lender and the new lender (if
any) of the flip in order to insure.
HUD-1 Items
Only the following information
should ever be placed on the
HUD-1:
Figures that are shown on your
closing instructions from the lender.
Contract credits and allowances that
are shown in the real estate
contract.
Recording fees.
Title examination fees.
Attorney’s fees.
Title insurance premium.
Payment to vendors for which you
have legitimate bills for payment.
Proper Execution of Documents
It is the responsibility of the closing
agent to verify the parties to the
transaction through the collection of
the identification from those parties
to the closing transaction.
Do not close the transaction if you
are not able to adequately verify a
party to the transaction.
Be very wary of real estate agents,
loan officers and other parties to a
real estate transaction who provide
you with signed documents that were
not witnessed by you or one of your
staff members.
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Proper Execution of Documents
TRGC generally
requires that out of
office closings occur
either in a title
insurance company or
before a bonded notary
service such as
Bancserv.
We are looking for
bonds in the 7-figures,
not a standard notary
bond.
Proper Execution of Documents
In any out of office closing
you should –
Receive a copy of photo
identification of the
signatories relied upon by
the notary.
Verify with the state that
the notary is properly
licensed.
Verify you are dealing with a
licensed title company or
bonded notary service.
Prevention Tips
Know your customers –
be aware of disreputable
clients.
Beware of the “super
rush”.
Ask questions – if it
doesn’t look correct to
you, ask your supervisor
for guidance.
Understand the deal –
sometimes very
confusing deals are
indications that
something is wrong.
Make sure all record
owners execute your title
documents.
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fin
If you have any
questions, you
can always call
underwriting,
where we
ALWAYS have
an opinion.
Thank You for Attending!
The Password is… Prevention.
Please, send an email to [email protected] with your:
Name,
Work mailing address and phone number,
Escrow license number (in applicable),
Email address, and
The PASSWORD from this class.
Send all this information before 5pm tomorrow
or you will not receive credit for this class!
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