by Joe Bird
Many serious cases of fraud are not readily discernable. That should come as no surprise – those perpetrating the fraud spend much time and energy concealing it and convincing their victims that all is right with the world. Sometimes it is as hard to see, as is another planet in another galaxy light years away. Example – the recent insider trading cases involving sophisticated computer trading, only detected by using recordings of conversations. Others, like Bernie Madoff’s pyramid scheme, are hidden right out in the open, too incredible to be recognized for what it was. Thus, understanding the symptoms of fraud is critical since it can’t always be detected with the naked eye.
We have developed a sense for a certain kind of fraud involving mortgage brokers and banks and are always on the lookout for certain symptoms when consulted by our clients.
Whether you are an employee, a loan officer, a branch manager, a loan applicant or someone else working in the industry, you can be brutalized financially. Consider the various HUD and FHA rules the brokers and banks are required to certify they comply with in order to write loans backed by the FHA or HUD mortgage insurance, making the loans more valuable and saleable [and hence more desirable to make]. To insure that the broker is invested in the process and financially able to support market fluctuations and insure compliance with underwriting standards which help to eliminate risky loans, HUD and the FHA have created rules and regulations that are designed to require the broker or lender take on the risk of the business of brokering loans. The idea is to prevent the branch managers and employees from being the financial support for the operation as this allows for the business to be established with virtually no investment and consequently no monitoring or sense of responsibility for the loans that are made. This leads to loan defaults and government insurance claims for bad loans.
Some symptoms include the existence of subleases, intended by the broker or lender to limit their liability for long term lease rent associated with a typical 5 year commercial lease for a brokerage office. This is a sign that the lender may have a “cut and run” approach to the business, intending to abandon the employees and loan applicants if the mortgage market declines. Any lender with a lease to in the name of the branch manager or any person or entity other than the lender is suspect. The same is true for other branch operation infrastructure costs like copy machines, computers, telephones, etc.
Another typical symptom that can get past the most experienced mortgage professional is size of the lender’s cut. Some brokers and lenders lure experienced mortgage professionals into their trap by offering very low “house” fees, making it appear the branch will garner more of the profits. Be wary. The old adage that, “if it seems like too much a good deal it is probably not true” is often the case. If there is not enough in the lender’s cut of the mortgage loan to cover all the operational costs, then the lender or broker often resorts to “up charging” the expenses they charge the branch for leads and other costs, perhaps HR management fees. These costs can be hidden in the accounting statements. The house needs a fair % to make the process work and support the branch. Look for house fee rates that are low in comparison to other brokers and lenders. If they are too low the house is probably taking it in some other fashion.
Consider the size of the branch network-how many small branches exist as opposed to a real brick and mortar office? While branch offices are not illegal and are often the only way to provide mortgage brokerage or lending services, having too many branches that are of minimal size is a temptation for a lender/broker to close offices as quickly as they were opened. If the operations are spread thin, so is the commitment to the operations.
Also consider the firms reimbursement policy for expenses and the branch account management structure. Are there ambiguous standards for what is repaid? Is there a lack of a firm policy as to when and expense must be repaid? These are not good signs. The ability to hold onto the funds of employees is a temptation for a desperate broker or lender. Are the accounts separate, or must the broker and manager have access to and use a common account? If the lender/broker does not immediately pay all the loan commissions and profits to the employees at each pay period, beware. What may seem like a convenience or even a generous offer to let you hold back income until you really need it is likely a trap, allowing the lender/broker to withhold payment and sometimes avoid ever paying it. The existence of a so-called “draw account” is another tell tale symptom of fraud.
In summary, there are many signs that are indicative of fraud inside a mortgage brokerage of mortgage lender. Employees are most susceptible because a broker/lender is financially motivated to treat a branch like a separate franchise instead of part of the operation. As testified to by Jim Hodge, infamous mortgage broker “pirate” and CEO of Allied Home Mortgage Capital Management, we got into the business because my son told me that is where the big profits were in the mortgage business. Testimony from Allied v Secretary of Housing and Urban Development, US DC Southern District of Texas. Look for these signs or symptoms. They are the signs and symptoms we look for in selecting case that we can successfully prosecute for our clients.
If you think you have a mortgage fraud claim, give us a call. The fraud lawyers at Mahany & Ertl have helped people across the U.S. in a wide variety of fraud cases – including the largest federal false claims case in the U.S. against a mortgage broker – our $2.4 billion case against Allied Home Mortgage.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Detroit, Michigan; Milwaukee, Wisconsin; Portland, Maine & Minneapolis, Minnesota. Services available in many other jurisdictions.