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Editorials

Fraud Report Opens Door to Client Education

By warning clients about common scams, brokers can educate and aid

By Janine Atamian

This past May, the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) published its Mortgage Fraud Report, noting trends related to loan modification and foreclosure-rescue scams.

Mortgage brokers can use the report information to educate homeowners needing loan-modification services. By outlining concerns and making consumers aware of fraud attempts and trends, brokers can gain credibility. They also can leverage the report by sending direct mailings and newsletters to prospects and by posting relevant information about the findings on their Web site. Those who do also should consider noting if the states in which they operate require a license to act as a loanmodification negotiator.

If applicable, brokers also can discuss states' fee limits with their clients and explain their policies for abiding by these limits. In many ways, brokers are in the best position to educate consumers, many of whom might not realize that under no circumstances should a negotiator require the signing of a deed whereby property is transferred.

Brokers can act as negotiators, too, by approaching lenders with modification plans that offer advantages to all parties involved.

To educate their clients, brokers should be aware of some common fraud patterns and typical fraud attempts.

Fraud patterns emerge

By collecting and analyzing data — and by providing guidance, regulatory information

and training to financial institutions and criminal investigators — FinCEN helps in the fight against mortgage fraud. The organization often relies on the filing and analysis of suspicious-activity reports (SARs) for insights and data points.

In April 2009, FinCEN issued an advisory report requesting information that would help identify and address loan-modification and foreclosure-avoidance fraud. In this advisory, it provided guidance on the preparation of SARs and identified potential red flags.

In response to the advisory, the number of SARs by entities required to produce them increased to more than 3,000 in 2009 from 28 in 2004.

This past May's report, which includes statistics from '04 to '09, reflected that increase and identified distinct patterns in the perpetration of fraud. More specifically, it outlined two typical scenarios that dominated loan-modification and foreclosure rescue scams:

  1. Use of straw borrowers, equity skimming, property theft or a combination of them
  2. Advance-fee scams

Although the bulk of SARs came in 2009, many scams remained undetected for years after the suspicious activity occurred. According to the FinCEN report, not only was there fraud in the loan-modification industry, but it also was multilayered and thriving — and had been for some time. A CoreLogic report released this past July, meanwhile, revealed that mortgage fraud has declined since 2007.

According to reports, fraud contributed to the subprime (aka, nonprime) mortgage collapse. Here's a closer look at two typical loan-modification and foreclosure-rescue fraud attempts.

Straw borrowers

In almost all loan-modification and foreclosure-rescue scams, the scam artist purported to be a qualified specialist and preyed upon financially troubled homeowners who typically were older. In many scenarios, the scammers not only defrauded the homeowner but also deceived a new lender.

The popularity of straw-borrower scams increased during the height of subprime lending, when credit and lending guidelines were loose and no-income-verification programs were popular. The scams generally involved a "specialist" who required borrowers to deed their home to another individual in a sale transaction, after which the original homeowners would rent to own until their credit or financial position improved. At that time, the specialist would help the borrowers repurchase their home under favorable loan terms. Alternatively, the specialist would agree to sell the property and take part of the proceeds, a process known as equity-skimming.

Often, the original homeowners remained in the house and paid rent to an individual who didn't make the requisite mortgage payments. This left the original homeowners facing foreclosure and eviction. In some cases, the so-called specialist would be the purchaser in the new transaction.

After the sale closed and the deed was recorded, the scammer would resell the house for a higher price in the inflated market. In other cases, a group would flip the property several times at inflated prices.

In other instances, the scammer would enlist a straw buyer to purchase the home. The scammers would then take out a loan on the property, extracting all the remaining equity, another equity-skimming operation. Ultimately, the original homeowner would be left homeless, and the new brokers or lenders often received a repurchase request or an increased default ratio on their portfolios.

These types of scams often involved multiple players, including:

  • Buyers who gave lenders false information, such as misrepresented income, employment and occupancy;
  • Appraisers who supplied inflated values or failed to report comparable sales; and
  • Settlement agents who assisted with flips or diverted funds.

Advance fees

These scams increased as credit and lending guidelines tightened. For example, almost as soon as the Hope Now Alliance — a collaboration between the federal government and various lenders, investors and counselors to assist homeowners with loan modifications and foreclosure avoidance — came to be in '07, companies popped up with the words "hope now" in their name. Many of these groups targeted borrowers with financial woes and offered them false guarantees of avoiding foreclosure.

In one common scenario, fake specialists required borrowers to pay a hefty advance fee — often thousands of dollars — for loan-modification-negotiation services. The fraudsters often provided false evidence of their expertise or relationships with lenders and admonished borrowers against reporting the relationship with the specialist or that any fee was paid, saying it could jeopardize the negotiation and cause the borrowers to lose their home.

In some instances, monthly charges or milestone charges were included, in addition to the upfront fee. In many instances, fraudsters did little to help bring about a loan modification. Often, they didn't contact the lender as the loan continued toward foreclosure.

Many of the borrowers caught up in these scams failed to realize that Hope Now provides free counseling and assistance to consumers seeking loan workouts, which can include loan modifications that create manageable mortgage terms or modified repayment plans.

Another advance-fee scam has involved a fake specialist providing baseless theories to borrowers about debt elimination in exchange for payment. The specialist would often advise borrowers that two theories govern securitization of property and negate the requirement of repayment:

  • Redemptionist theory, which argues the federal government assumes responsibility for the debt
  • "Freeman in Nature" theory, which argues that a mortgage loan is illegal and borrowers have no duty to repay

Helping borrowers

This past May's FinCEN report calls out scammers and their schemes, both of which deteriorate the mortgage industry's reputation. Although the federal government thus far has determined that loan-modification negotiators don't fall within the "mortgage loan originator" definition for purposes of the Secure and Fair Enforcement for Mortgage Licensing Act, many states have enacted laws requiring licensure as an originator to offer loan-modification services. Accordingly, many unlicensed individuals who provide such services could be, by definition, acting illegally.

In many cases, mortgage brokers are the best individuals to provide assistance. Although free loan-modification assistance exists, many troubled borrowers complain that such assistance is minimal or that the process is overwhelming.

Although some states have capped the fee that can be charged for offering loan-modification services, brokers can provide it as an ongoing service to clients and strengthen their reputation. Providing such assistance could lead to referrals and marketing potential. In addition, when clients are ready to buy or refinance later, they'll be more likely to come back to the broker who helped them.

Brokers also can help by filing SARs voluntarily. Although only certain institutions are required to file SARs — mortgage brokers and originators weren't on the list, as of press time — brokers can do so of their own volition. In many cases, brokers can assess and identify emerging fraud trends before regulators can.

By understanding fraud trends and helping put a stop to them — and by educating borrowers and leading them to successful loan modifications and foreclosure avoidance — brokers can work for good, promote their services, and position themselves and the industry for long-term success.

The Time for E-Closings Is Now

Electronic mortgages benefit brokers and borrowers alike

By Janine Atamian

Electronic closings are changing the way mortgage brokers, lenders, title companies, attorneys and borrowers do business. E-closings are no longer an imaginary concept; they're happening now and will likely be the way we conduct most, if not all, real estate transactions in the near future.

Some time ago, the question was whether e-notes had the same specific legal benefits under the Uniform Commercial Code as paper promissory notes. Thanks to the Electronic Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transaction Act — laws Congress enacted to spur the growth of electronic commerce — this is no longer the case. Electronic mortgage documents are now enforceable in every jurisdiction in the United States.

The question becomes: Are you and your settlement-providers prepared for e-closings?

Several lenders have implemented e-closing platforms, and some already charge a paper-handling fee for loans that don't close electronically. Brokers should think of such fees as penalties and seek settlement-providers with e-closing capabilities.

Although some brokers might view eclosing mandates as unnecessary hurdles in an ever-changing mortgage market — perhaps even sources of customer frustration, confusion and loss of business — such a perspective cheats reality. In

fact, e-closing platforms offer brokers another way to increase communication with customers, educate clients and serve their needs, and increase revenues.

And if you like to think green, e-closings save trees.

Congress enacted ESIGN to facilitate the use of electronic records and signatures and to ensure their validity. Lawmakers were careful to preserve the underlying consumer-protection laws that ensured consumers' rights to receive certain information in writing. Consumers can receive ordinarily printed disclosures electronically if they offer their consent and if the business clearly discloses specific information before it obtains consent. Consumers also must consent electronically in a manner that demonstrates their ability to access information in an electronic format, such as by sending a confirmatory e-mail from their home computer.

When the National Telecommunications and Information Administration, on behalf of the Department of Commerce and the Federal Trade Commission, conducted a study to evaluate the effects of the law's requirements, some commenters expressed concern about the additional steps required to establish borrower consent. A face-to-face meeting or teleconference with borrowers would still require borrowers to take what many brokers considered an unduly, burdensome step of sending a confirmatory e-mail.

The law, however, was created with technological neutrality that allowed for flexibility and broad parameters to obtain consent. It also helps brokers engage their borrowers and increase dialogue. Brokers can get creative. Instead of being passive participants and waiting for borrowers to send the confirmatory e-mail, brokers can send an e-mail to borrowers and require a response that would adequately obtain consent.

Additionally, brokers can use this e-mail to address borrowers' other concerns or questions. The informality of e-mail may make some borrowers feel more secure asking questions they might be uncomfortable voicing on the phone or in face-to-face meetings. Essentially, brokers can turn the requirement into a conduit for addressing and assessing borrowers' needs, further developing their relationships.

Moreover, e-closing platforms can enhance borrowers' confidence in brokers and their company. Proper compliance establishes a company's legitimacy and credibility while differentiating the company from unethical and unscrupulous industry practitioners.

By making sure borrowers understand which information will be the subject of electronic disclosures — and that they must consent to receive that information electronically — originators take on the role of educator, which often comes withincreased borrower trust. Brokers also can enjoy a more advisory role by promoting borrower awareness.

E-closings provide another benefit by addressing potential fraud and deception before it occurs. Unlike some consumer protection laws that provide remedies after fraud has occurred, ESIGN establishes safeguards to help avoid abusive tactics and practices. The act affords consumers who receive electronic records and who provide electronic signatures the same protections as those who use traditional, paper-based transactions. Additionally, ESIGN mandates that consumers continue to receive comprehensive disclosures and that electronic records be stored securely.

The act discourages providing electronic information to consumers without Internet access and using price to persuade consumers to accept electronic records. It also ensures consumers' ability to not only access but also retain electronic records.

Furthermore, e-notes must contain only the same terms and conditions allowed for on paper promissory notes to be legal and enforceable instruments, and they must include e-signatures definitely attributable to the signor.

When brokers implement e-closings, many find them instantly more convenient and efficient. In some cases, final loan documents can be signed in 20 minutes or less. Many jurisdictions allow for electronic recording of security documents. Those documents often can be delivered to a lender's post-closing department automatically upon completion of the e-signing, substantially reducing courier or overnight fees and resulting in additional savings and substantially fewer delayed fundings.

Ultimately, e-closings can cut costs, improve compliance and enhance brokers' service. In time, it's almost certain that eclosings will dominate the mortgage landscape. Brokers who get on board early can reap the benefits and build their clientele before the advantages become the norm.

Leveraging the GFE

The new good-faith estimate can promote communication and help brokers shine

By Janine Atamian

As mortgage brokers continue to use the new good-faith estimate and work under the revised Real Estate Settlement Procedures Act (RESPA), they can benefit by understanding how to use the GFE to encourage dialogue with borrowers and to build business.

The new GFE clearly delineates a summary of loan terms and estimated costs and charges. It also details key dates associated with a loan.

It does not, however, itemize closing costs. Instead, the document provides a flat-line total of fees regardless of who pays the fees or who receives them. It also doesn't allow for disclosure of seller credits, which can be confusing. Herein exists a great opportunity.

Mortgage brokers should define and detail terms and conditions and guide consumers to the program that best suits their needs. Because the new GFE doesn't allow for itemization, it creates a conduit for brokers to have in-depth conversations with consumers that may not have occurred previously. These discussions benefit brokers and consumers by fostering better customer service and active communication.

The GFE also encourages the disclosure of more than one loan scenario. This lets brokers understand their clients' wants and needs, particularly as they apply to the tradeoff between settlement charges and interest rate. It also gives borrowers a chart to compare GFEs from different brokers. This encourages brokers to talk about the pros and cons of specific scenarios and provides brokers with new information.

Terms of agreement

With some limited exceptions, brokers bind themselves to the loan terms and settlement charges they list on their GFEs. The interest rate disclosed must be valid through a date set on Page 1, and the settlement charges and other loan terms must be valid for at least 10 days. This gives borrowers 10 days to shop for other loan options and allows brokers the same amount of time to stay in touch and answer borrowers' questions.

Brokers also can help clients select services such as title insurance. The total charge of this service and others can't increase more than 10 percent of the quoted amount on a GFE, if borrowers use companies brokers identify or choose. This also creates opportunity.

Many borrowers aren't familiar with a title agent or provider of other required services and may be unaware of the criteria other than price they should use in making a decision.

Brokers can shine by offering insights about providers and by recommending those with a deep understanding of RESPA and a proven track record of compliance. This can help borrowers receive exemplary service.

Brokers also can engage borrowers in discussions about how they're paid. Under RESPA, the days of front-end and backend compensation for brokers are gone. All broker compensation must be indicated clearly upfront. Any yield-spread-premium or discount points must be shown on Page 2 of the GFE.

Brokers as negotiators

Mortgage brokers should see themselves as negotiators. They negotiate with service-providers for better pricing and service, and they negotiate with lenders to find the most-beneficial loan terms for their borrowers. High-volume brokers can negotiate with lenders for waivers of underwriting fees and other traditional lender fees.

Based on volume, brokers also can ask for better back-end pricing, which could lead to higher credits for consumers. Theoretically, this means if borrowers use the shopping chart on Page 3 of the GFE to compare a loan scenario brokered to a specific lender against a direct retail loan the same lender offers, the broker's deal could be more appealing because closing costs would be less. By discussing this with borrowers, some brokers can find themselves closing more loans.

Ultimately, the new GFE encourages active dialogue between brokers and consumers and highlights the services offered by brokers, who should conduct research and present alternatives to borrowers. Brokers who have worked with various products and programs can make educated comparisons of the benefits and disadvantages of different scenarios.

By working with a broker, borrowers can find the loan process less time-consuming, more satisfactory and more convenient. Brokers who encourage discussions that assist borrowers through the process should find themselves building business on a foundation of service and knowledge.

Propelled by Konnessi
*We do not provide any legal services in the State of North Carolina. - We do not provide any products or Services in the State of Texas.