How Banks Are Committing Fraud, Part 2

Posted on March 26, 2013 by

In last month’s article I explained how the housing boom of the early 2000s created an equally big boom in mortgage fraud.  While the housing collapse changed the nature of the crime, the ensuing flood of foreclosures just gave the banks another reason to commit fraud.

Fortunately for homeowners, there has been a wave of investigative agencies that are exposing exactly what the banks have been up to.  While my last article covered the types of fraud that the banks have committed, this article will focus on the methods that investigators use to find the fraud in real estate deals.

Due to the fact that the fraud examinations are normally conducted with the purpose of being used in litigation, they tend to fall under the mantle of forensic accounting.  In other words, they are conducted with the assumption that the case they are investigating may end up in litigation or a criminal trial.  This means that fraud investigators must possess the skills to follow through with a mortgage fraud investigation from beginning to end.  This includes but is not limited to researching, collecting evidence, taking statements from people involved, and testifying to their findings in court or a deposition.

Effective fraud examination requires a deep understanding of specialized knowledge from four fields: accounting/auditing, investigation, law, and criminology.  Some of the offenses found in fraud cases include RICO act violations, notary misconduct, uniform commercial code (UCC) violations, and truth in lending act (TILA) violations.

The firs method we will discuss is the forensic audit.  This is an audit of all loan documentation meant to uncover violations and errors.  Forensic audits focus especially on Violations of the Real Estate Procedures Acts (RESPA), Truth in Lending Act (TILA), and Fair Debt Collection Practices Act (FDCPA).  The main violations found in forensic audits are consumer protection laws violations, state-specific law violations, reverse mortgage violations, and RESPA violations.

If one of the following types of violations is discovered in the forensic audit, there is a chance that a loan modification can performed as a result of, or in some cases repayment of, interest back to the borrower/homeowner:

  • Constructive fraud, or fraud involving material facts relating to the loan such as the terms of the loan, prepayment penalty or any other information which a borrower must know before loan is accepted.
  • Fraud or negligent misrepresentation – written or oral – made by the broker, loan officer, or notary which may have contradicted the terms of the loan documents in any way. 
  • Breach of contract

Another method of investigating a loan is a mortgage securitization audit.  This is a detailed report on the chain of title of the mortgage note.  This will disclose any violations of state trust laws and/or Internal Revenue Code.  Most importantly, a securitization audit could provide evidence that the party that purports to own a note may not be the actual owner or holder of the note.  This raises serious questions about who has the ability to foreclose on a delinquent note.

If it turns out the loan was securitized, our audits usually show that there is a chain of ownership that has not been properly executed, and that any party trying to foreclose needs to present clear ownership and explain why they have a clear right to foreclose. 

These fraud investigations and audits can give you the leverage you need to get the bank to negotiate on your terms.  This has created a huge opportunity for real estate investors.  Not only can we use this information to help underwater homeowners get out from under their homes but we can then pick up houses at incredibly low prices.



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