Area Takes the Nationwide Lead in Mortgage Loan Fraud
It’s nice to know that Los Angeles still leads the nation. Unfortunately, now we’re leading the nation in mortgage loan fraud.
Law enforcement authorities report a sharp increase in reports of fraud by mortgage lenders who are being stung by unscrupulous borrowers. In some cases, the fraud is as simple as overstating income by a few thousand dollars. At the other end are loan brokers, borrowers and real estate agents conspiring to borrow money for properties that don’t even exist.
Borrowers, brokers and agents who try to perpetrate a fraud today, however, risk hefty civil penalties and even jail time, although the odds are still probably against them getting caught. Loans obtained as a result of misstatements are being foreclosed on by lenders. And, lenders are starting to get serious about curtailing fraud.
“People often want to say that they make more money than they really do,” said Shelly Klimusko, senior loan officer at Metrociti Mortgage Corp. in Encino. Some people come in and ask, “How much money do I need to make?”
Some borrowers and brokers are doing all sorts of things to obtain a loan. “People just make up their tax return,” Klimusko said. They also claim that their down payment was a gift when it’s in fact a loan that has to be repaid to a third party. Some borrowers falsely sign that they’re going to live in the home that they’re buying in order to get a better loan. And, a few people even use computer desktop publishing software to produce false bank statements that fool even the banks.
There are certain loan brokers who have been conspiring to defraud lenders by submitting overstated appraisals, and some brokers have even been known to suggest ways that their clients can pull the wool over lenders’ eyes.
“This happens so often you can’t imagine,” Klimusko said. “It’s gotten to the point where many people think that it’s no big deal.”
Klimusko is disturbed by the reputation that honest brokers are getting because of the bad apples out there. Her answer to any borrower who suggests fraud is: “Your deal is not worth losing my license and career.”
Law enforcement authorities are seeking criminal and civil penalties against people involved in loan fraud. The FBI and the Office of Thrift Supervision are involved in nailing criminal defendants. Meanwhile, the U. S. attorney’s office in Los Angeles is collecting civil penalties from defendants whose criminal conduct probably couldn’t be proven in court.
The U. S. attorney’s office, for example, went after one prospective borrower this year who used a false tax return to apply for a $243,000 mortgage loan. Instead of getting the money, the borrower was reported to authorities and agreed to pay a $40,000 penalty.
In these types of cases, the borrower is asked by authorities: “Is it loan fraud or is it tax fraud? Now, let’s talk settlement,” said John Behrens, assistant regional director for the Office of Thrift Supervision in San Francisco.
“Technically, you can go to jail. But it’s inefficient to put someone in jail for lying on a loan application when the loan is current,” Behrens said. Instead, most borrowers who lie on an application are being pursued for civil penalties, while the criminal prosecutions are usually reserved for schemes involving brokers.
Brokers face administrative penalties, too, like having their licenses revoked.
“We’ve had a substantial increase in loan fraud cases,” said Steve Ellis, Los Angeles district office manager for the California Department of Real Estate. These cases account for about 25% of the department’s caseload, or about 250 to 300 cases just in Los Angeles. And, Ellis said, “the numbers are growing daily.” The department is trying to develop a fraud program to help weed out more of the bad brokers, he said, but getting such a program off the ground is tough given the state’s budget cuts.
Lenders are very slowly taking steps to curb fraud. Many borrowers are now asked to sign federal Form 4506, which allows a lender to get a copy of your tax return directly from the Internal Revenue Service. Not all lenders are requiring this form for all loans, however. And, even when the borrower does sign the release form, lenders send away for and get the real tax returns for only a small percentage of borrowers--usually after the loan has already closed.
“We try to pick up as much fraud as we can before the loan is made,” said Sam Lyons, senior vice president at Great Western Bank in Chatsworth. But, he acknowledged: “We generally don’t verify most tax returns.”
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At Countrywide Funding Corp., every prospective borrower who is self-employed or who works on commission must sign Form 4506. Of those that sign, though, only 50% are audited. If Countrywide originated the loan and it’s later found out that the borrower was lying, Countrywide usually won’t call in the loan unless there’s been some sort of default, said Ralph Mozilo, executive vice president and chief underwriting officer in Pasadena.
Countrywide is dealing with several fraud situations, Mozilo said. The FBI is investigating two cases involving Countrywide, one with a loan broker and fraudulent appraisals, another with real estate agent and so-called straw buyers who are used to obtain a loan for someone else. Another case deals with a borrower who bought two properties worth about $150,000 each. Based on false appraisals submitted by a mortgage broker, Countrywide made $250,000 loans on each of the properties. The borrower made one payment on each of the loans and has since disappeared with the rest of the money.
“When you look at the overall number of loans we close, the amount of fraud is relatively small. But, when it happens, it’s costly,” Mozilo said.
“In the past, banks knew about the problem, but when properties were increasing in value, they weren’t all that concerned,” said William Bigelson, a Northridge-based CPA. Now the problem has started costing the lenders money, he said.
“A lot of borrowers are shopping around to find someone to produce false tax returns for them,” Bigelson said. “I’m not interested in this kind of business.” But there are other accountants who have been participating in fraud, he said. “It’s a real problem in the industry, and only a small percentage probably get caught.”
