DAVID J. WILLIS ATTORNEY
http://www.LoneStarLandLaw.com
Copyright © 2015. All rights reserved worldwide.

Mortgage Loan Fraud in Texas

by David J. Willis, J.D., LL.M.

Introduction

According to the FBI, mortgage loan fraud continues to involve billions of dollars in annual losses. The Financial Institution Fraud Unit of the FBI has stepped up its investigation and prosecution of criminal loan fraud, particularly where mortgage industry professionals and insiders are involved. For the fiscal year ending September 30, 2007, the FBI received nearly 50,000 SAR’s (“suspicious activity reports”) of mortgage fraud. As a result, in 2008 the FBI decided to focus on mortgage fraud at the expense of other white-collar crimes. Everyone involved in the real estate sales process is the potential subject of scrutiny. Prosecutions are not limited to actual mortgage and bank fraud. There are also prosecutions for conspiracy, mail/wire fraud, identity theft, and money laundering. 

Additionally, the Residential Mortgage Fraud Act (passed in Texas in 2007) amended certain sections of the Finance Code, Government Code, and Penal Code. The Act created a Residential Mortgage Fraud Task Force (Gov. Code Sec. 402.032) under the direction of the attorney general which includes the consumer credit commissioner, the banking commissioner, the credit union commissioner, the commissioner of insurance, the savings and mortgage lending commissioner, the presiding officer of the Texas Real Estate Commission, and the presiding officer of the Texas Appraiser Licensing and Certification Board. The Task Force facilitates the sharing of information and resources in aid of enforcement. 

There is also the matter of civil liability. Lenders are reacting by filing civil suits against the perpetrators of mortgage fraud.

What does mortgage fraud look like?

Examples of fraudulent schemes include property flipping based on false loan applications and inflated appraisals (this category does not include buying property at a bargain price and then selling it for fair market value for a profit – that is entirely legal); nominee loans using the name and credit of straw buyers; equity skimming in “subject to” transactions; phony second liens to contractors who never perform any work; “silent seconds” that involve concealing the loan of a down payment to a borrower, when the down payment was supposed to come from the borrower’s own funds; use of fictitious or stolen identities; and foreclosure schemes that mislead homeowners into paying fees and signing a deed in to an investor allegedly to stop foreclosure. Common to most of these schemes are inflated appraisals that create phantom equity, kick-backs (payments not shown on the closing statement), and falsified loan applications. 

One can be reasonably sure that loan fraud has occurred when it is clear that a lender would not have made a particular loan if it had known all the facts, and the lender was prevented from knowing the facts by means of misrepresentation and concealment. Putting it another way: inducing a lender to make a loan based on false pretenses is fraud. 

The FBI uses two categories: “fraud for housing,” which is a single borrower who misrepresents assets and/or liabilities in order to purchase a home; and “fraud for profit” which involves mortgage professionals of all types who act collectively to defraud a lender.

Many transactions, while not plainly illegal, fall into a gray area that is increasingly suspect. The popularity of “no money down” investment programs on TV, the internet, and advanced by seminar gurus has added huge numbers of people to the investment game and resulted in ever-more intricate get-rich-quick strategies. The FBI attitude toward many of these schemes is openly disdainful.

Temptations of the Investment Business

A visit to the courthouse steps on foreclosure day is akin to watching sharks being fed at the aquarium.  The problem, of course, is that it is impossible for all fledgling investors to become overnight millionaires. Real success involves hard work over time. Unfortunately, the intense competition involved in the real estate investment can lead impatient and unethical investors to look for profits in ways that cross the line. 

Legitimate investors should avoid investment programs that sound too good to be true, either to the investor or homeowner. Programs that ask a homeowner to sign incomprehensible documents with weird names often involve fraud. If a deal is just too complicated for the average person to understand, it may well involve fraud. If it involves several people signing interests back and forth to one another and not recording anything, it is probably fraud. 

Also, some perpetrators believe that giving their documents creative names will exempt them from the law. The problem for con artists who dream up these documents is that courts look to substance over form, and prisons are now offering long-term housing to these clever folks. Juries may not always understand the technicalities of mortgage finance but they intuitively understand fraud. Here are some other tip-offs that you may be dealing with a mortgage loan con artist:

“This is a great investment! You’ll make great money with no effort.”
“There’s no need to talk to a lawyer. These are all standard forms.”
“Just sign this blank loan application here. We’ll do all the paperwork.”
“We put the property in your name. You’re totally secure.”
“We pay all the costs and you get half the profit! Easy money!”
“We’ll pay you a bonus at closing. You’ll have cash in your pocket and instant equity.”
“We’re going to manage and sell the property and then split all the profits with you.”
“God has sent us to you to give you abundant wealth.”

The Straw Buyer

The straw buyer scenario is particularly common. Here’s how it works:

  1. A crooked investor generally looks for two categories of homes: those owned by distressed sellers who are behind on payments and new-home builders who have unsold inventory that is draining them because of the interest carry.

  2. The perpetrator recruits straw purchasers/borrowers who are willing to allow their names and credit to be used in exchange for an up-front, off-the-closing statement kick-back (often $10,000 or more) and then buys the property in their names. The note, deed of trust, and other loan documents, including an affidavit of intent to occupy, are all signed by the straw purchasers at a title company closing that appears legitimate.

  3. A real estate broker accomplice may be involved to make this easier and eventually collect a commission from a “client” the broker never met, never obtained a buyer’s representation agreement from, and never gave an IABS to.

  4. A mortgage broker accomplice submits a fraudulent loan application and supporting documents that show the straw buyer as having significantly higher income than is actually the case.

  5. An appraiser accomplice inflates the value of the property, often by $100,000 or more.
  6. The amount of the loan applied for exceeds the true market value of the house.

  7. A title company may be complicit in this process in order to facilitate a smooth closing with no questions.

  8. All the various accomplices and co-conspirators get paid large fees at closing, either on the closing statement for vague and unspecified charges, or off the closing statement altogether.

  9. The house is placed on the market but does not sell because its value is grossly inflated.

  10. The lender forecloses, taking a loss (part of which is passed on to HUD or a mortgage insurer) and ruining the credit of the straw purchaser. By then, the con artists have left with profits in hand.

Looking back on this scenario, it is clear that the whole transaction was concocted so that the co-conspirators could generate large up-front fees for themselves. 

Interestingly, straw buyers often allege that they were wronged. They even file lawsuits. It is difficult to feel sorry for them, however, since they willingly signed blank documents and gladly received an under the table pay-off at closing. They cooperated in the fraud and benefited from it. 

In the past sub-prime lenders were complicit in this process. Eager to make loans and collect fees, many did not supervise the underwriting process as thoroughly as they should.

Applicable Law

In addition to the usual civil statutes that may be violated (statutory fraud, deceptive trade practices, etc.) numerous criminal statutes may be involved:

FEDERAL CRIME LAW PENALTY
False statement on a HUD loan 18 USC 1012 1 year, fine, or both
False statement to obtain credit 18 USC 1014 2 years, $5,000, or both
Mail/wire fraud 18 USC 1341,1343 5 years, $1,000, or both
Concealment 18 USC 1001 5 years, $10,000, or both
Conspiracy 18 USC 371 5 years, $10,000, or both
Racketeering 18 USC 1961 20 years, $25,000, or both
Money laundering 18 USC 1956 20 years, $25,000, or both
Aggravated identity theft 18 USC 1028 20 years, $25,000, or both

In addition, the Residential Mortgage Fraud Act amended Texas Penal Code Section 32.32(b) to state “A person commits an offense if he intentionally or knowingly makes a material false or misleading written statement to obtain property or credit, including a mortgage loan.”  If the value of the property or amount of the loan exceeds $200,000, which is the case with the median-priced family home, then the offense is a first-degree felony punishable by 5 to 99 years in prison and a fine of $10,000.

Also, Fin. Code Sec. 343.105 requires that lenders and mortgage brokers give the following notice in 14 point type to residential borrowers at closing:

WARNING: INTENTIONALLY OR KNOWINGLY MAKING A MATERIALLY FALSE OR MISLEADING WRITTEN STATEMENT TO OBTAIN PROPERTY OR CREDIT, INCLUDING A MORTGAGE LOAN, IS A VIOLATION OF SECTION 32.32, TEXAS PENAL CODE, AND DEPENDING ON THE AMOUNT OF THE LOAN OR VALUE OF THE PROPERTY, IS PUNISHABLE BY IMPRISONMENT FOR A TERM OF 2 YEARS TO 99 YEARS AND FINE NOT TO EXCEED $10,000.

I/WE, THE UNDERSIGNED HOME LOAN APPLICANT(S), REPRESENT THAT I/WE HAVE RECEIVED, READ, AND UNDERSTAND THIS NOTICE OF PENALTIES FOR MAKING A MATERIALLY FALSE OR MISLEADING WRITTEN STATEMENT TO OBTAIN A HOME LOAN.

I/WE REPRESENT THAT ALL STATEMENTS AND REPRESENTATIONS CONTAINED IN MY/OUR WRITTEN HOME LOAN APPLICATION, INCLUDING STATEMENTS OR REPRESENTATIONS REGARDING MY/OUR IDENTITY, EMPLOYMENT, ANNUAL INCOME, AND INTENT TO OCCUPY THE RESIDENTIAL REAL PROPERTY SECURED BY THE HOME LOAN, ARE TRUE AND CORRECT AS OF THE DATE OF LOAN CLOSING.

The borrower must sign this notice. “Failure of a lender, mortgage banker, or licensed mortgage broker to provide a notice complying with this section to each applicant for a home loan does not affect the validity of or enforceability of the home loan by any holder of the loan” (Fin. Code Sec. 343.105d).

Broad Potential Liability for Investors

There are so many definitions of fraud in various statutes that prosecutors have little trouble finding one that can be used against an investor. The Residential Mortgage Fraud Act added another by amending Section 402.031 of the Government Code, which now defines fraud as “any act that constitutes a violation of a penal law and is part of an attempt or scheme to defraud any person.” Moreover, this section imposes an affirmative duty to report fraudulent activity to “an authorized governmental agency” if “a person determines or reasonably suspects that fraudulent activity has been committed or is about to be committed.” Loan officers, escrow officers, realtors, and attorneys all have this duty. Compliance results in immunity for the reporting individual. Failure to comply makes one a potential coconspirator.

Conspiracy is something of a catch-all for both prosecutors and civil plaintiffs. Even if it cannot be plausibly shown that a real estate investor directly engaged in unlawful or wrongful acts, he or she may nonetheless be forced to defend against charges or allegations of conspiracy—which in terms of the legal consequences can be just as serious. The elements of civil conspiracy are (1) two or more persons (2) who have an unlawful or wrongful objective they intend to accomplish, (3) who have a meeting of the minds on the objective or course of action to be pursued, (4) followed by the occurrence of one or more overt unlawful or wrongful acts, (5) which result in damages as a proximate result. Conspiracy charges can cast a wide net. Accordingly, the most prudent approach is to keep one’s distance (and plenty of it) from any suspicious parties or transactions.

These new laws make sobering reading for anyone involved in the sale, purchase, financing, and closing of residential home transactions. Who is affected? Any person (not just the primary wrongdoers) with actual knowledge of the fraud can be indicted for a felony criminal offense, all the way down to the notary. Moreover, culpable mental intent can be inferred from the circumstances, a relatively light burden for prosecutors.

Much of fraud prevention is common sense. If you suspect fraud in a transaction, immediately remove yourself from involvement and report the activity. Do not sign blank documents. Check out the people you’re dealing with.  Be alert for irregularities. Ask questions.  If the answers are overly complex or outright ridiculous, walk away from the deal. 

DISCLAIMER

Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well as we do not give tax advice. Reading this article does not make you our client. This firm does not represent you unless and until it is retained and expressly agrees in writing to do so.

Copyright © 2015 by David J. Willis, all rights reserved. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, LoneStarLandLaw.com.