Cathy McDaniel | www.cathymcdaniel.com Georgia Residential Mortgage Fraud Disclosure: Legal Information is not legal advice! Always consult a lawyer if you need legal advice. Video: https://www.youtube.com/watch?v=hNURYMKQW-M What is Fraud? Fraud is a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her disadvantage, loss or harm. Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by cleverness, sneakiness, wiliness, deception, or other unfair means. It’s About the Money Fraud is a complicated topic. It can take many forms and can pop up in almost every step of a real estate transaction. Lying, cheating and stealing for financial gain loosely defines white collar crime. Those who engage in white collar criminal acts are more sophisticated than ever. They take advantage of special circumstances likes disasters and mortgage issues and use new technology and other resources to make their scams more believable and effective. Mortgage fraud involves intent, not mistakes. Mortgage fraud is multi-billion dollar criminal activities that creates significant negative financial bearing on homeowners, devastates family, hurts communities, can destroy a business and adds a great impact on the national economy. Federal, state and local law enforcement officers are on the front lines in the battle to protect their communities from fraud and scams. They identify, investigate and prosecute. What is Mortgage Fraud? (e.g., purchase, refinance, modification) Act of inducing a loan though means which involve either implied or expressed deceit, i.e. Material misstatement, misrepresentation, or omission of information relied upon by an underwriter or lender to fund, purchase, or insure a loan. It Involves the entire process of obtaining a residential mortgage, including solicitation, application, origination, negotiation of terms, third-party provider services, underwriting, signing and closing, funding of the loan and mortgage loan purchase from a correspondent. 1 Cathy McDaniel | www.cathymcdaniel.com Documents involved may include residential loan applications or other applications; appraisal reports; HUD-1 settlement statements; supporting personal documentation for loan applications such as W-2 forms, verification of income and employment, bank statements, tax returns, and payroll stubs; and any required disclosures. Residential mortgage fraud continues to receive much attention and has been more prevalent in Georgia. An FBI assistant director testified that fraud is "pervasive" in the mortgage market and is growing fast. With sophisticated electronic document-preparation programs, unethical mortgage loan officers, brokers, real estate agents and lawyers can create fake FICO scores, fake tax returns, fake identities and obtain inflated appraisals. According to the FBI, based on existing investigations and mortgage fraud reporting, 80% of all reported fraud losses involve collaboration or collusion by industry insiders. Fraud for Profit – Fraud for Housing Mortgage fraud generally takes two forms: “fraud for profit” and “fraud for housing.” Fraud for profit, also referred to as industry insider fraud, (i.e., brokers, loan officers, appraisers, closing agents, etc.) is fraud where the “motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. The FBI reports that, based on existing investigations, 80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders. Fraud for housing is fraud where a borrower perpetrates a fraud in order to acquire or maintain ownership of a house. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan. Mortgage fraud and schemes awareness and best practice techniques are critical to combating mortgage fraud. What is the difference between mortgage fraud and predatory lending? Mortgage fraud is different from predatory lending. A lending institution is deliberately deceived by another actor in the real estate purchase process — such as a borrower, broker, appraiser or one of its own employees into funding a mortgage it would not otherwise have funded, had all the facts been known. “Predatory lending,” on the other hand, is a term used to describe a range of lending practices harmful to borrowers. Example: “Equity stripping” as a predatory lending practice, generally refers to foreclosure “rescue” schemes where an owner sells the house and leases it back at a higher monthly payment to stave off foreclosure. Once the individual falls behind on those new payments, the house is taken away and any equity built up in the home is lost. The Georgia Residential Mortgage Fraud Act – Signed May 5, 2005 The Georgia Residential Mortgage Fraud Act (O.C.G.A. § 16-8-100 et seq.) authorizes the Attorney General and district attorneys to prosecute cases of residential mortgage fraud. Georgia was the first state in the nation to have a statute that targeted residential mortgage fraud, and the statute has been the model for over a dozen other states which have followed Georgia's lead. Georgia’s legislation covers a variety of fraudulent acts in connection with home mortgages, from fraudulent appraisals and sales contracts to fraudulent representation of financial information by a purchaser in obtaining a mortgage, to foreclosure fraud. This Act covers anyone who knowing misleads another property in the “mortgage lending process.” 2 Cathy McDaniel | www.cathymcdaniel.com The phrase “mortgage lending process” is defined very broadly as “the process through which a person seeks or obtains a residential mortgage loan including, but not limited to, solicitation, application or origination, negotiation of terms, third-party provider services, underwriting, signing and closing, and funding of the loan.” This essentially covers the entire process. The term “residential mortgage loan” includes loans secured by an interest in one- to- four family residential properties in Georgia, including refinancing and renewals. General Provisions Under the Georgia law, a person commits the offense of residential mortgage fraud when, with the intent to defraud, the person: Knowingly makes any deliberate misstatement, misrepresentation, or omission during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process Knowingly uses or facilitates the use of any deliberate misstatement, misrepresentation, or omission, knowing the same to contain a misstatement, misrepresentation, or omission, during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process Receives any proceeds or any other funds in connection with a residential mortgage closing that such person knew resulted from fraud; or Files or causes to be filed with the official registrar of deeds of any county of Georgia any document the person knows to contain a deliberate misstatement, misrepresentation, or omission Allows civil forfeiture Not mutually exclusive; other laws may also apply First law in the United States Penalties for Violating the Law A person who commits mortgage fraud is subject to imprisonment for up to 10 years and/or a fine of up to $5,000. In addition, Georgia’s RICO (Racketeer Influenced and Corrupt Organizations) statute includes residential mortgage fraud within the definition of racketeering activity. A violation of the Georgia RICO statute is a felony punishable by five to twenty years imprisonment and/or a fine of up to the greater of $25,000 or three times the amount of any monetary value garnered by the violator from the violation. Who Suffers From Mortgage Fraud? Mortgage fraud hurts lenders, victimizes homeowners and reduces confidence in the nation’s housing market. Lenders: high default rates Neighborhoods: deteriorated properties, vacant houses, crime Tax Base: fraudulent sales dominate select areas, tax values Overlap into non-fraud areas, county-wide tax base increases Borrowing Public: as loan sources lose money from fraud, mortgage rates rise for the residential borrower 3 Cathy McDaniel | www.cathymcdaniel.com How Serious is the Mortgage Fraud? Mortgage fraud is often a complicated crime that can involve both mortgage lenders and borrowers. It's estimated, for example, that about 10 percent of the nation's mortgage applications contain either mistaken or intentional omissions. What makes an intentional omission different from an inadvertent one is often difficult to prove, which is why mortgage fraud prosecutions were, until more recently, relatively rare. While mortgage fraud is more prevalent than in previous years, it is also prosecuted on a more regular basis by the FBI and other national, state and local law enforcement agencies. Six-figure fines and lengthy jail times are not uncommon and federal laws enacted with the collapse of the real estate market in 2007-09 have made such penalties even harsher. By definition, such fraud can clearly be committed by both lenders and applicants, even though the latter may not think their misrepresentations or omissions are significant enough to be a concern. Mortgage fraud results in an estimated $6 billion to $10.5 billion in annual losses in the United States, and the number of cases reported continues to skyrocket each year.