How To Spot Loan Fraud
Loan fraud is a serious problem in the United States that harms not only lenders who are ripped off, but also real estate investors and other borrowers who pay higher fees as a result of criminal activity in the lending system. The Federal Bureau of Investigation, one of the chief federal government agencies that combats loan fraud, has confirmed that such activity has become more pervasive and sophisticated in recent years.
A 2005 FBI report, Financial Institution Fraud and Failure, stated:
Criminal activity has become more complex and loan frauds are expanding to multi-transactional frauds involving groups of people from top management to industry professionals who assist in the loan application process. These professionals include loan brokers, appraisers, accountants, and real estate attorneys. Such transactions are sometimes hidden against a backdrop of genuine transactions which give them an appearance of legitimacy.
That "appearance of legitimacy" should be a warning to investors not to be fooled by mere assurances that activities are on the level. Investors need to educate themselves about the loan process, ask specific questions and insist on documentation and verification throughout the transaction.
If any part of a transaction seems too good to be true or triggers feelings of suspicion, trust your instincts and walk away. It's better to sleep soundly at night than to risk your peace of mind on what might turn out to be illegal activity.
Nor should investors be fooled by the complexity of a transaction or the involvement of multiple people. Complexity might be a shield for fraudulent goings-on, and multiple people can and do cooperate with one another to perpetuate criminal acts in a group or "ring." Collusion is a common characteristic of loan-fraud scams.
The Mortgage Bankers Association of America has created a Web site, StopMortgageFraud.com, www.stopmortgagefraud.com. The Web site includes a borrower's bill of rights, 10 warning signs of abusive lending and contacts to report suspicious lending activity.
The section on warning signs cautions borrowers about such red flags as blank signature lines, missing loan documents, inflated loan amounts, unexpected settlement costs, undisclosed balloon payments, repeated inappropriate refinancings and the like. Legally required loan documents include a Good Faith Estimate, Truth-in-Lending Statement and HUD-1 Settlement Statement. (HUD is an acronym for the U.S. Department of Housing and Urban Development.)
Lenders use documentation to verify the information on a borrower's loan application, hunt for other information that wasn't disclosed and cross-check information from one source against information from another source. Investors should ask for documentation and follow up with telephone calls to confirm the documents are legitimate and accurate. Be wary of mismatched handwriting, erasures, white-outs and documents that don't display the proper logo or letterhead. Any of those characteristics may suggest a document has been fraudulently altered or may be an outright forgery.
Investors also need to educate themselves about lending fraud. Ask professionals in the business and other investors to share their experiences and expertise. When in doubt, consult a trusted professional, mentor or financially sophisticated friend.
To report suspicious loan activities, contact the Federal Bureau of Investigation, Federal Trade Commission or state and local law enforcement authorities.
Copyright 2006. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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