There is a practice occurring coast to coast and border to border that can potentially affects thousands of unsuspecting Mortgage Brokers and Loan Officers as it relates to mortgage fraud. More specifically this epidemic relates to a very precise set of circumstances that number in the millions. In fact over the last year an epidemic of prosecution has erupted against Mortgage Brokers and Loan Officers that is unparalleled in the history of our industry. Think about the monstrous rolling stone bearing down on Indiana Jones with the difference being Indiana knew what was after him and those in the industry do not.
I am talking about the millions of stated loans that have been originated over the last decade and the ticking time bomb inside each one. If you, as a Mortgage Broker or Loan Officer, have ever originated a stated loan then you are at risk for prosecution resulting in federal prison time, fines and full restitution to lenders for their loss. The fines and restitution can end up in the millions, effectively ruining a financial future while the prison time can derail your life forever as you become an identified felon. Many innocent Mortgage Brokers and Loan Officers are being blindsided and wrongfully convicted.
“If you, as a Mortgage Broker or Loan Officer, have ever originated a stated loan then you are at risk for prosecution resulting in federal prison time, fines and full restitution to lenders for their loss.”
Who is at risk and why? Again, if you are a Mortgage Broker or Loan Officer who ever originated a stated income mortgage loan, whether it is prime, alt A then you are at risk. You need to be aware of how to protect yourself and your family should you find yourself being questioned by the FBI with respect to one of these stated loans.
While every situation is different this is a typical example of what happens and how the story unfolds. A stated loan goes into default and foreclosure ensues. As part of the process the quality control team/fraud team, or similar group from the current servicer, checks the stated income against filed tax returns and discovers the income is over stated. It almost always is and thus the loan is fraudulent. Studies have shown that in over 90% of all stated loans the borrower’s income was significantly exaggerated and in over 60% of the loans the income was more than doubled by the borrower.
At this point a Suspicious Activity Report, or SAR, is filed with the FBI and the FBI opens an investigation. The first step the FBI takes is usually to contact the borrower and ask them to come to their office for a discussion and they are usually led to believe they are not in trouble but rather the FBI is looking for additional information regarding the lender, Mortgage Broker or the Loan Officer. Keep in mind this is not a court of law and statements made and questions asked in any format, whether truthful or not, being fair game for the FBI investigators.
During the course of the meeting the stated income aspect of the loan comes up and the borrower is asked if the income was correct given the actual tax returns. The borrower admits that the income on the application was not correct and was in fact elevated to gain loan approval. Then comes the big question. Did your loan officer assist you in coming up with a stated income number that would allow you to qualify? Remember this is a borrower who is already facing economic challenges, thus the foreclosure, and is no doubt very concerned if not outright scared now that they are in an FBI office being questioned about this fact. Predictably the borrower implicates the loan officer, whether true or not, and tries to be perceived as “cooperating” with the FBI and mitigate their own responsibility as an uneducated and unsophisticated borrower.
Very shortly thereafter the Mortgage Broker or Loan Officer is called and asked to meet with the FBI and help them clarify facts with respect to the borrower and his fraudulent mortgage loan application. The loan officer will be questioned extensively as to whether he thought the stated income provided by the borrower was accurate and if they did a lot of stated loans etc. However as this questioning goes on the loan officer frequently ends up implicating themselves, as they now realize the borrower has stated they provided the income figure, and are completely unprepared for this type of meeting with the FBI. The tact frequently taken is if, in fact, the Mortgage Broker or Loan Officer is innocent they still should have known the income was bogus and did not do their due diligence by rejecting the application. This is where it gets real sticky even when the Mortgage Broker or Loan Officer adhered to the underwriting guidelines. Part of virtually every prosecution in these types of cases is that beyond guilt or innocence the Mortgage Broker or Loan Officer should have known, given their experience, that the income stated by the borrower was inflated and therefore they should have refused to participate in the loan.
The ongoing investigation may turn up other stated loans with that lender and the Mortgage Broker or Loan Officer and they may or may not become part of a widening investigation depending on the performing status of those loans. The Mortgage Broker or Loan Officer and borrower are both indicted for several counts of mortgage fraud facing up to 30 years in federal prison and full restitution of the entire loan(s) amount and a large fine. The lender, who frequently enabled all this even educating and encouraging the Loan Officer, is never pursued and instead takes the position of the good guy who has been significantly damaged by the Mortgage Broker or Loan Officer and the borrower. In other words the FBI goes after all the easy low hanging fruit and ignores the lender as they have millions of dollars’ worth of attorneys on staff and their success against them in these specific types of cases has been very limited.
“Please don’t misunderstand me, if as a Mortgage Broker or Loan Officer you engaged in this kind of fraudulent behavior you face serious prison time, fines and restitution. ”
Almost immediately there is pressure by the prosecution on the Mortgage Broker or Loan Officer and the borrower to plead guilty, accept responsibility and get a more favorable sentence. Frequently they are told there will be no other prosecution for other stated loans that may be questioned in the future if they plead guilty now. The longer a defendant waits to plead the less likely a better deal becomes.
For those of you who are unfamiliar with Federal Court it operates differently than state courts. First of all, and many attorneys will completely agree, you become guilty until proven innocent. After all this is the FBI that investigated the circumstances and that holds pragmatic sway in federal court in the aftermath of the mortgage meltdown fueled by fraud. Secondly the “Federal Sentencing Guidelines” are in play and variance from those guidelines is a hard fought legal battle. The longer the accused waits the more difficult it becomes to get a variance. To a significant extent the deck is stacked. The guidelines provides a reference table that is driven by the amount of fraud, how many counts exist, the category level it falls into and the fine is also driven by this guide. If you would like to see this guideline go to http://www.ussc.gov/Guidelines/2011_guidelines/index.cfm and http://www.ussc.gov/Guidelines/2011_Guidelines/Manual_HTML/5a_SenTab.htm
All too often by the time a Mortgage Broker or Loan Officer hires legal representation it is usually deep into the process, the individual has pled guilty and most of the legal efforts are directed towards mitigating restitution. Please don’t misunderstand me, if as a Mortgage Broker or Loan Officer you engaged in this kind of fraudulent behavior you face serious prison time, fines and restitution. However there are many innocent individuals who have found themselves buried in an indictment on the word of an “unsuspecting and unsophisticated” borrower who is trying to shift all accountability to the Mortgage Broker or Loan Officer. These are almost always loans that were originated during the financial mortgage bubble and there are literally millions of them with a very high percentage those going into default and foreclosure. Again, if you ever originated a stated loan of any kind you are at risk regardless of your guilt or innocence.
For those other individuals who have done stated loans and have not been questioned by the FBI you should have plan of action in place and an attorney identified should it become necessary.
What makes the above so difficult is that, once again, studies have shown is that in over 90% of all stated loans the borrower’s income was exaggerated and in over 60% of the loans the income was more than doubled. You must be aware and vigilant as the federal courts are full of these types of cases and the end result all too often is devastation for the Mortgage Broker or Loan Officer. Long term potential sentences exists with restitution and fines that can run into the millions depending on the loan(s). Additionally federal prison, unlike state prison, allows little if any time off for good behavior
I highly urge you to be vigilant, prepared and don’t take any of the above lightly. Your future and your family’s future depend on you doing nothing less. These types of situations are going to continue for years as mortgage lenders try to obtain restitution for the foreclosures occurring under the stated loan products created by the industry.
Neill E. Fendly, CMC
Mortgage Defense, Inc.
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