The Detection and Deterrence of Mortgage Fraud Against ...

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The Detection and Deterrence of Mortgage Fraud Against Financial Institutions: A White Paper

Produced by the July 13 ? 24, 2009 FFIEC Fraud Investigations Symposium

Participants: Donald Buford, James McGraw, Jeffry Petruy, Debra Stabile, Edmund Wong, FDIC Jacqueline Dreyer, FRB-Richmond, Elton Hill, Federal Reserve Board, Jason Tarnowski, FRB-Cleveland, Deanna Wilner, FRB-Chicago Dennis DeGrave, Vickie Apperson, NCUA Joanna Beazley, Debra Harwood, Joseph Smith, OCC Edward Bodden, Alan Faircloth, OTS Chuck Cross, CSBS on behalf of the State Liaison Committee Darlene Callis, Senior Program Adminstrator and Moderator, FFIEC



Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, State Liaison

Committee

The Detection and Deterrence of Mortgage Fraud Against Financial Institutions

Table of Contents

Section 1: Overview Purpose Introduction Background Basic Mortgage Transactions Common Mortgage Fraud Schemes Common Mechanisms of Mortgage Fraud Schemes Common Participants Conclusion

Page

1 1 2 4 6 9 10 11

Section 2: Schemes

Builder Bailout

13

Buy and Bail

16

Chunking

18

Double Selling

21

Equity Skimming

23

Fictitious Loan

25

Loan Modification and Refinance Fraud

27

Mortgage Servicing Fraud

31

Phantom Sale

34

Property Flip Fraud

36

Reverse Mortgage Fraud

39

Short Sale Fraud

42

Section 3: Fraud Mechanisms

Asset Rental

45

Fake Down Payment

47

Fraudulent Appraisal

49

Fraudulent Documentation

54

Fraudulent Use of a Shell Company

68

Identity Theft

70

Straw / Nominee Borrower

72

Appendixes

Glossary

A

Mortgage Transaction Flow Charts

B

Criminal Statutes

C

Additional Resources

D

Disclaimer: Definitions used in this White Paper are intended to provide general information to the reader and are not intended to supersede any regulatory or legal definition.

Section 1: Overview

PURPOSE

This White Paper is intended to raise the awareness of and assist examiners in identifying various mortgage fraud schemes perpetrated against financial institutions. The White Paper also provides best practices for deterring such schemes.

INTRODUCTION

In February 2005, the FFIEC agencies (Agencies)1 issued a White Paper entitled The Detection, Investigation, and Deterrence of Mortgage Loan Fraud Involving Third Parties (2005 White Paper). The 2005 White Paper focused on methods to detect, investigate, and deter third party mortgage fraud.

Financial institutions have experienced an increase in the number, volume, and types of mortgage fraud schemes resulting in significant losses. The 2009 White Paper updates mortgage fraud trends and schemes currently impacting financial institutions. This White Paper is divided into three parts, followed by appendices that include a glossary, mortgage2 transaction flow charts, listing of applicable criminal statutes, and reference materials. The first section covers:

Background: Information on the proliferation of and losses resulting from mortgage fraud.

Basic Mortgage Transactions: Descriptions of basic mortgage transactions for retail and broker-originated loans, as well as mortgage loans purchased from a correspondent.

Common Mortgage Fraud Schemes: Definitions of common mortgage fraud schemes used to perpetrate mortgage fraud.

Common Mechanisms of Mortgage Fraud Schemes: A list of common mechanisms used to perpetrate mortgage fraud schemes.

Common Participants: A list of common participants who can be engaged in mortgage fraud schemes.

1 The FFIEC was established in March 1979 to prescribe uniform principles, standards, and report forms and to promote uniformity in the supervision of financial institutions. The Council has six voting members: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the State Liaison Committee. The Council's activities are supported by interagency task forces and by an advisory State Liaison Committee, comprised of five representatives of state agencies that supervise financial institutions. 2 For the purpose of this paper, the term Deed of Trust is considered to have the same meaning as "mortgage" and the latter term is used throughout.

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