9/19/2016 Mortgage Bankers Association

SPOTLIGHT ON AFFINITY FRAUD September 28, 2016

SPOTLIGHT ON AFFINITY FRAUD September 28, 2016 Moderator: Brent R. Baker, Director and Shareholder, Clyde Snow & Sessions Panelists: Robert Manchak, Senior Special Agent, FHFA OIG Nicolas Morgan, Partner, Paul Hastings LLP Michael S. Trabon, Associate, Weiner Brodsky Kider PC

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Overview • Defining “Affinity” Fraud • Why Does Affinity Fraud Continue to Occur? • Forms of Affinity Fraud and Red Flags • Recent Cases and Markets Afflicted • Measures of Prevention • Q&A

Defining Affinity Fraud

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Affinity Fraud

• Fraud directed at members of identifiable groups, including religious or ethnic communities, the elderly, or professional groups. • Fraudulent actors who promote affinity scams generally are (or pretend to be) members of the affinity group. • Definition encompasses various types of fraud currently afflicting the mortgage industry. • Multi-billion dollar segment of criminal activity, with financial impact on lenders and borrowers alike • Awareness and mitigation efforts are critical

Affinity Fraud is an Abuse of Trust

• Affinity fraud can involve any trust-based circle or community • Not limited to trust-based religious groups • Ethnic groups are also targeted – Hispanic Americans – Iranian/Persian community – South Asian community (Indian and Pakistani) • More prevalent in religious communities? • Use your head if the promoter is pulling on your heartstring

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Prosperity Theology may be one reason for predominance of affinity fraud in religious communities

Trust is Typically a Good Thing

• Studies show people who are trusting are happier and healthier – 2014 Oxford study • Geography of Bliss (Weiner) – countries with higher levels of trust tend to grow better economically and have sounder public institutions • People who trust tend to do more volunteer service in the community – 2014 Oxford study • We don’t want to eliminate something that makes America wonderful place to live • What is the solution? Trust but verify!

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Nature of Pitched Investment Varies

• Typically involves a Ponzi scheme but not always! • Definition of a “security” • Can be sale of interests in any venture – e.g., sale of interests in Orange Groves in Florida • Many real-estate based investment schemes affect the mortgage industry, directly and indirectly. • One company claimed to own every component of the RE purchase cycle from RE Agents to mortgage companies. • Often mortgage professionals are complicit

Information and Awareness are Key

• Know who your borrower really is. • Know who the professionals are that you are dealing with. • Keep borrowers informed of trending scams.

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Affinity fraud has evolved, and will only continue to do so

Con men read the newspaper (Internet) and watch TV so expect to hear pitches based on current events

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Reliance on Psychological Tricks

• Smart cons use emotion: emotion comes before logic in the mental processing chain. • Studies show emotion comes firsts (e.g., Super bowl ads, puppies). • Humans are social information processors BEFORE they are processors of fact, figures, and logic. Ohio State study (Slater). • Smart cons learn personal things about borrowers quickly – everyone wants to hear their name and the internet makes it easy. • Smart cons know to start small at first, to get borrowers enlisted. • Smart cons make the deal seem elusive or previously only available to a select few (only the rich).

• Rule #1 for investing: Risk and Reward go together and cannot be separated. • Rule #2: Every con artist tries to break Rule #1.

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Forms of Affinity Mortgage Fraud

Forms of Affinity Fraud Fraudulent Loan Modifications or Debt Relief Services • Increasingly prevalent in religious and ethnic communities in pockets across the country • Frequently involves charging borrowers upfront fees in exchange for purported provision of financial services – Includes: loan modifications (e.g., HAMP), credit repair, debt relief, bankruptcy representation, programs to short‐sell properties. – No services are actually provided. • Borrowers may be instructed to submit their mortgage payment to the third‐ party provider directly, which often leads to foreclosures. • Prevalent in southern California’s Hispanic and Indian communities.

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Forms of Affinity Fraud

Foreclosure Avoidance Schemes • Target homeowners who are at risk of defaulting on loans or who are already in foreclosure. • Homeowners are mislead into believing that they can save their homes in exchange for their transfer of the deed and up‐front fees. • The perpetrator profits from these schemes by remortgaging the property or simply pocketing fees paid by the homeowner and walking away.

Forms of Affinity Fraud Unsecured Loans (i.e., “Air” Loans) • Loans obtained by fraudulent actors for a non‐existent borrower, on a non‐ existent property. • Borrowers, whose information may have been obtained for other reasons (e.g., a prior refinance of their own property), may be entirely unaware of the fraudulent loan application. • Red flags: – Applicant unconcerned re: the type of loan, the interest rate, closing fees, or other loan terms and fees. – Discrepancies between credit report and loan application (e.g., address, accounts, employment). – Loan application submitted by someone other than the borrower.

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Forms of Affinity Fraud

Fraudulent Settlement or Closing Agent • Settlement or closing agent receives funds from a mortgage lender intended for loan closing and retains the loan proceeds without satisfying the existing liens. • Red Flags: – Excessive closing fees – Zero payment due from buyer – HUD‐1 shows unusual credits, disbursements, delinquent loans paid off, or multiple mortgages paid off. – Sales price differs from sales contract.

Forms of Affinity Fraud

Multiple Loans on Single Property • Where multiple loans for the same home are obtained simultaneously for a total combined loan amount greatly exceeding the actual value of the property. • Red Flags: – Borrower not interested in type of loan, interest rate, closing fees, etc. – Multiple recent credit inquiries on credit report. – Property records showing the mortgage lien has recently been released.

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Forms of Affinity Fraud Nominee Loans/Straw Borrowers • A single borrower (the “nominee”) from an affinity group is used to purchase a property on behalf of another member (or members) of an affinity group. • Straw borrowers may not intend to occupy the property and also may not intend to make any payments on the loan. • Or, the Investor may choose not to make any mortgage payments and rent the property until foreclosure many months later – “equity skimming” • Increasingly common in real estate markets around New York City and Vancouver, driven partially by foreign buyers. • Red flags: – Borrower buying out of price range; large use of gift funds – Power of attorney used for transaction – Many recent credit inquiries for other properties

Forms of Affinity Fraud Property Flipping • Property is purchased, falsely appraised at a higher value, and then quickly sold. • Typically the appraisal information is fraudulent. • These schemes often involve fraudulent appraisals, doctored loan documentation, or inflated buyer income. • Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees drive the scheme.

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Recent Cases of Affinity Fraud

Recent Cases: Loan Modifications & Debt Relief Services United States v. Hildago (San Diego 2013) • Mortgage loan-modification scheme that cheated more than 120 people out of $700,000, and caused many foreclosures. • Hildalgo solicited low-income Hispanic borrowers under various companies (e.g., “Community Housing Agency,” “Community Outreach,” and “Nuestra Communidad Services”). • Offered to modify their loan under HUD’s Home Affordable Modification Program (HAMP), despite having no connection to the HAMP program. • Hidalgo falsely claimed that his company had negotiated a modified mortgage, and instructed borrowers to send mortgage payments directly to his own business entities, instead of their lenders. • Resulted in numerous foreclosures.

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Recent Cases: Loan Modifications and Debt Relief ServicesLoan Modification Scheme Targeting Hispanics (Sacramento 2015) • Charged borrowers upfront fees in exchange for numerous financial services, including: – Loan modifications; credit repair; debt relief; bankruptcy filings; and programs to sell homes to “investors” with a rent-to-own option. – Made “ghost” offers to purchase victims’ properties through short sale. – Submitted sham and noncompliant bankruptcy filings that were quickly dismissed by bankruptcy courts. • Pursued economically distressed, Spanish-speaking homeowners, operating under business names such as “The Foreclosure Prevention Department.” • Advertised through Bay Area Spanish-speaking Christian radio show. • At least 30 individuals enrolled, but did not receive any services, many of whom were subsequently foreclosed on. • Defendant to pay $115,00 in restitution and sentenced to 6 years in prison.

Recent Cases: Loan Modifications and Debt Relief Services Freedom by Faith Ministries (Detroit, Michigan 2015) • Faith and ethnic-based mortgage assistance scam marketed through various Christian networks and ministries. • Fraudster offered to keep distressed borrowers out of foreclosure in exchange for a fee. • Between 2009 and 2013, the group collected fees, but did not perform any services for borrowers. – Resulted in many borrower foreclosures. • Defendant sentenced to between 30 and 90 years in prison, and ordered to pay $400,000 in restitution.

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Recent Cases: Fraudulent Originations

United States v. Taneja (E.D. Va. 2008) • Mortgage fraud Ponzi scheme focused on an Indian community in Northern Virginia. • Largest mortgage fraud in E.D.of Virginia, resulting an estimated $150 million in losses. • Owner of a regional mortgage originator had members of Northern Virginia’s Indian community take out numerous loans without their knowledge. • Taneja originated phony mortgages, preying on members of his community, and sold them to investors in the secondary mortgage market on a servicing release basis. – maintained warehouse lines of credit with numerous financial institutions, under which we was committed to sell the loans within 90 days, or repay the warehouse lender. • Submitted false loan applications, using names and social security numbers he obtained from members of the Indian community in Northern Virginia, many of whom had approached him to refinance their existing loans. • Taneja actually avoided arousing suspicion by keeping the payments on loans current.

Take-Aways: Loan Modifications and Debt Relief Services • Borrowers must be informed – Borrowers should deal directly with their servicers or the appropriate federal entity. – Borrowers must know that only their servicers can modify their mortgage. – Borrowers should know to doubt anyone who promises to prevent a foreclosure, particularly for upfront fees. – Borrowers must know that they must make mortgage payments directly to their servicer. – Borrowers must know that they are not required to transfer title in their property in order to obtain a mortgage workout

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Consumer Complaints

Consumer Financial Protection Bureau www.consumerfinance.gov/complaint

Federal Trade Commission www.ftccomplaintassistant.gov

Lender/Investor/Institutional Complaints

FBI Your Local Field Office www.fbi.gov/contact-us/field-offices

FHFA OIG (Fannie, Freddie and the FHLBs) Hotline 800-793-7724 www.fhfaoig.gov/ReportFraud

HUD OIG (FHA) Hotline 800-347-3735 www.hudoig.gov/report-fraud

Your Respective State’s Office of the Attorney General

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