Small lenders, what type of fraud are you seeing in your business?

Question

I get hard money and trans deals proposed fairly often that are suspicious or don't pass the smell test even before I start to investigate title, etc.  Sometimes my suspicions are correct, sometimes not, often I never end up knowing for sure...so I am always trying to fine tune my nose.

Was wondering if you could share your experiences about what type of fraud you are seeing and how those borrowers presented themselves to you and how you caught on.

I recently had a transactional deal that got pretty close to funding before I discovered that the title company was a front company claiming to be First American.  It was pretty sophisticated with a temporary copycat webpage, etc.  It was only when I looked closely at the wire instructions that I knew something was wrong because I had dealt with First American before and this wasn't the same.

Bill Gulley · Answer

Eric, sorry I don't have any stories of getting ripped off as a lender.....none....notta, not that some didn't try.

Any time someone came in (mostly commercial deals) as if they had just found the best thing since sliced bread and were overly ecited, I get leary quickly, over-selling a deal is just a tip off that I'm not getting the true picture.

The concept of dual control of adminstrative functions is a good way to limit issues. Verify information given by third parties.

You had a good catch with that issue and I delt with three title plants and escow agents. Before I started I met them personally and those in the office. If I closed something say in St. Louis, my escrow folks would coordinate it with their company there, so I knew that their work was insured. I did coordinate deals out of town but verified the closers there before settlements by calling other banks/lenders.

This as well as a good letter of settlement instructions to closing agents avoided both problems you and Ann mentioned. Any partnership or LLC requires cert. of good standing with partners names, minutes authorizing the transaction, IDs of those signing and certified funds disbursed by the escrow. Granted this would not keep a partner from kicking back funds after closing.

Kick backs seem to be common with rehabs, over charging by contractors and doing additional work or cash back and phantom workers.  Having a construction disbursement officer is a good idea as such items are audited and work is checked with lien waviers from names of every check.

Eric, I guess you are devising your compliance program here, a book could certainly be written about it but if you think in terms of audit controls, not just in financial terms but also through administrative functions, you can avoid scammers.  And there is no substitute for a good nose either, reading people is an art you need to be good at.

Eric M. · Answer

Ann Bellamy
Great tip.  I knew of that website because a friend of mine was in on a drug charge (we all make mistakes) and I could keep track of his transfers.
But I never thought of cross checking borrowers with it.

Ann Bellamy · Answer

Great post topic Eric, and maybe you will have lots of other lenders chime in.

We funded (yes funded and closed) on a loan about 6 years ago that had the rehab 95% complete before the borrower/buyer closed, as the seller had allowed the buyer to work on the property before closing.  The seller was also buying his partner out of the deal, and the partner was out of state, so that payoff was conducted by the closing attorney with notarized docs, etc.

Turns out the check mailed to the "partner" after closing was received by and defaced by the buyer, with the "Pay to the Order Of" changed to the buyer's name.  The buyer apparently deposited or cashed the check from the attorney by changing it to be made out to himself.

Surprise, surprise, we didn't get any payments, and the buyer didn't complete the rehab.

Fast forward, we received a deed in lieu from the buyer instead of foreclosing (great negotiating by the attorney involved) and when we went into the house to finish the rehab, we found the fixtures and electric switches and sockets had no plumbing and wiring behind them.

Two lessons learned:

1. No payoff to "partners" - they can payoff the partner after they sell the house rehabbed and done.
2. If it looks too good to be true..........it probably has no wiring or plumbing.  :-(

As a side note, it turned out through networking that the borrower had done federal time for mortgage fraud.  I wish I had known about this website at the time, but it's now on my list of due diligence if I don't know the borrower:  www.bop.gov.  It's a list of all federal inmates past and present.  I also google everyone now.  It's amazing what turns up in a google search, including the court documents involved.