Fraud prevention: Best practices and red flags

Protecting your business from fraud can be a daunting task. With evolving technology and so many different fraudulent schemes, defrauding lending institutions has become all too common in today's market. One of the best ways you can safeguard yourself against fraud is through rigorous pre- and post-funding quality control practices.

In the past three issues of Single-Family News, we've offered readers information on the most common fraud schemes related to fraud for property and fraud for profit.

Below are three common fraud schemes with the respective red flags you should be aware of, and best practices to safeguard your business. It is important that every mortgage professional understands the common scams being used today to avoid becoming a victim of fraud.

Scheme #1: Foreclosure rescue scheme

A foreclosure rescue scheme is a type of fraud that takes advantage of homeowners who have fallen behind on their monthly mortgage payments. Review the following illustration that provides a visual explanation of how most foreclosure rescue schemes work.

Foreclosure rescue scheme 'red flags'

Some of the primary things to look out for in foreclosure rescue schemes are borrowers who are:

• Purchasing a home as an investment while continuing to rent
• Purchasing multiple rental properties simultaneously
• Purchasing the property as a primary residence when already owning a home of superior value
• Unable to contribute to funds to close

Visit the June 2007 Single-Family News article for detailed information on the foreclosure rescue scheme.

Scheme #2: False stated income fraud

A stated income loan is a loan where the income that is put on Form 65, Uniform Residential Loan Application, is not fully verified. A false stated income loan is any loan originated under a program in which the borrower's income has been misstated for qualification purposes.

Best practices to avoid false stated income fraud

The following suggestions are offered to protect all parties engaged in the origination of stated income loans:

• Ensure the most seasoned underwriters on your team underwrite stated income loans
• Review the borrower’s age, education, experience, and job position, then compare against the income listed on Form 65
• Evaluate the borrower’s accumulation of assets and consider the borrower’s debt
• Refer to online tools and databases that provide income and employment data by zip code
• If a W-2 wage earner is qualifying under a stated income program because he or she has additional income that is not documented, Form 65 should specifically state which portions of the borrower’s income are earned from which source
• If the borrower does not qualify based upon traditional income documentation, the originator may not then place the borrower into a stated income loan
• The income of a non-qualifying spouse or partner should never be added to the borrower’s income for qualifying purposes under a stated income loan

Visit the July 2007 Single-Family News article for detailed information on the false stated income fraud scheme.

Scheme #3: Cash-out purchases and illegal property flipping

Property flipping with a cash-out purchase becomes fraudulent when a buyer/borrower approaches the seller of the property and makes an offer considerably higher than the current list price. The offer will include a stipulation that the additional amount over the asking price will be given to the buyer/borrower at closing. An inflated value charged to non-existent home improvements will be used to support the inflated sales price.

Cash-out purchase fraud 'red flags'

Although challenging to detect, a fraudulent cash-out purchase may be uncovered when the following red flags are spotted in the mortgage file:

• The home may have been on the market for an extended period of time
• The sales contract may have been modified or may include an addendum regarding the payment to the borrower
• The appraisal may include red flags symptomatic of inflated value
• Many of the same red flags that accompany a traditional flip also apply to cash-out purchase fraud – straw buyer, false source of funds, and false occupancy
• The preliminary HUD-1 Form may already indicate a portion of the net proceeds going back to the borrower

Visit the August 2007 Single-Family News for detailed information about illegal property flipping and cash–out purchases.

Important fraud prevention resources

Below are some useful online resources that provide more information on dealing with fraud.

Freddie Mac Resources:

• Freddie Mac Fraud Hotline: (800) 4 FRAUD 8
• Freddie Mac's Quality Control Resources and Fraud Prevention website

Internet Resources: