A man buys a house with a loan from a local bank. Instead of occupying the house as required by the lender, he rents it out, pockets the money, and defaults on the loan.
A potential homebuyer who cannot qualify for a loan finds someone who can. This straw borrower takes out the mortgage, turns it over to the homebuyer, collects a fee, and walks away from the deal.
And a mortgage broker helps a borrower prepare false tax returns in order to qualify for a loan from a mortgage bank.
Growing Problem
These are examples of three of the most prevalent types of mortgage fraud, which has become much more commonplace as a result of the nationwide boom in originations.
Speakers at a recent seminar on mortgage fraud said the boom in the mortgage industry, while generating fat profits for mortgage lenders, is also fueling an increase in fraud as lenders get sloppy trying to keep up with a torrent of loan applications, or participate in illegal activities themselves.
The seminar was sponsored by the Mortgage Asset Research Institute.
Lenders that pride themselves on speedy loan funding need to be careful not to expose themselves to increased fraud, said Patrick Neri, assistant inspector general for investigation at the Department of Housing and Urban Development.
Scam in Chicago
Take the case of Roosevelt Stacy. The Chicago-area mortgage broker ran a successful mortgage business based entirely on false loan applications. He obtained mortgages for people with bad credit ratings by faking everything from the Social Security number to the tax returns.
In a series of television commercials made by Mr. Stacy and shown at the seminar, the broker's success is comically apparent as his clothing becomes finer from commercial to commercial. Mr. Stacy is now serving a 48-month prison term for mortgage fraud.
Preliminary results from an FBI study indicate that as many as 10% of mortgage applications contain fraudulent information, said Ronald L. Dick, supervisory special agent of the Federal Bureau of Investigation's white-collar crime unit. Mr. Dick said it was too early to draw significant conclusions from the study.
Federal crime statistics show that fraud remains a pervasive problem in banking. Efforts to root out criminal activity have met with some success, but the FBI believes the problem will continue to worsen.
Heavy Caseload
As of the end of March, the FBI had 10,028 financial institution fraud cases of all kinds pending, almost half of which are considered "major." A major case is one in which at least $100,000 is lost to fraud. By the end of 1995, the FBI estimates it will have more than 11,000 cases pending, with well over 6,000 in the major-case category. While some of the increase is attributable to improved detection and reporting, Mr. Dick said fraud continues to grow.
The FBI on average spends less than a year on its cases, indicating that most of the cases the agency expects to have pending in 1995 have not yet been filed. "The problem is not going away," said Mr. Dick.
Worse After Deregulation
He said fraud in financial transactions increased significantly after the 1982 deregulation of the banking industry as banks moved into risky real estate lending. But he added that fraud in its various forms would always be a feature of the banking landscape.
"Regardless of whether the banking industry is in chaos or a state of robust health, fraud will continue," Mr. Dick said.
Speakers at the seminar gave some basic rules for lenders to follow to avoid getting caught up in fraud:
* Insist on face-to-face interviews with prospective borrowers.
* Never allow clients to sign blank forms.
* Always immediately report suspected fraud to the appropriate authorities.
And most financial institutions, the attendees were told, should consider starting an internal compliance operation. The speakers conceded that this could be costly and time-consuming but said cost would not be viewed as an excuse by regulators.
"The fraud is cutting across all ends of the business, and it's making everybody's job harder," Mr. Neri said.
