Fraud for profit is a type of mortgage fraud that involves deliberate misrepresentation, misstatements, or omissions in the mortgage lending process to reap financial gains.
Unlike fraud for housing, which typically involves individuals attempting to secure housing they otherwise could not afford, fraud for profit is perpetrated by industry insiders, such as real estate professionals, appraisers, and loan officers.
One common fraud scheme involves embezzlement and theft. In several HUD programs, administrators and participants might be entrusted with cash or assets and take them for their personal use. Embezzlement and theft are also common in mortgage fraud schemes.
The methods of embezzlement range from simple acts like taking money from the cash drawer or writing checks to cash to more elaborate methods that involve falsifying invoices and misusing credit cards of the HUD-funded organization. These methods conceal the theft and continue the fraudulent activities.
Other examples are when they steal rental or laundry receipts, falsify deposits, checks, or other accounts, or write bonuses to themselves. They may hire "ghost" employees and convert the payroll checks for their use. They may use staff, materials, or equipment for personal use, which is also a fraud.
Mortgage companies might submit false documentation or certification as to the value of pooled mortgages or falsify that the loans were FHA-insured. The pools may contain undisclosed phantom properties, mortgages included in other pools, or mortgages supported by falsely inflated appraisals.
Lenders who contract to service GNMA mortgage pools may divert receipts of monthly payments, FHA claim payments, or early payoff remittances for their personal use and not pass these funds on to investors.
Servicers or applicants to become servicers may falsify financial submissions and certifications to be approved as GNMA servicers. These schemes often seek to manipulate the mortgage process to generate unlawful profits.
Common Types of Federal Fraud
Federal agencies take fraud seriously, and individuals and companies can face serious federal criminal charges for these types of activities. Let's look at a few of the more common types of fraud for profit.
Loan Origination Fraud
Loan origination fraud occurs when false information is provided during the application process to secure a mortgage. This type of fraud can involve inflated borrower incomes, falsified employment details, or forged credit histories.
Mortgage brokers or loan officers may collude with borrowers or act independently to ensure that loans are approved, even when borrowers do not qualify.
Simply put, loan origination fraud refers to the act of intentionally providing false or misleading information on a loan application to obtain a loan that the borrower would not otherwise qualify for, usually by falsifying details about their income, assets, employment, or credit history during the initial loan application process.
It involves actively lying about financial details to deceive the lender into approving a loan. Both borrowers who fabricate information on their applications and lenders who knowingly facilitate fraudulent loans can be involved. Some common examples include:
- Inflated income: Claiming a higher income than what is actually earned.
- Fabricated assets: Listing assets that do not exist to appear more financially stable.
- False employment details: Providing fake employment information or employers.
Straw Buyer Schemes
Straw buyer schemes involve using someone else's identity, often without their knowledge, to obtain a mortgage. The straw buyer may have good credit, which is leveraged to acquire property with no intention of living in it or paying the mortgage. The real buyer, who may have poor credit or a fraudulent agenda, benefits from the transaction.
This scheme can result in defaulted loans and foreclosure, as the straw buyer is often unaware of their involvement or is unable to maintain the mortgage payments. Lenders are left with unpaid loans and potential legal complications.
Simply put, a straw buyer scheme is a fraudulent practice in which someone, known as a "straw buyer," purchases a property or asset on behalf of another person who is unable to legally buy it themselves, often by using their good credit to qualify for a loan.
The intention is to later transfer the asset to the intended recipient, usually with the straw buyer receiving some form of compensation.
This is often used in real estate transactions to circumvent credit checks or hide a property's true ownership.
The purpose is to enable someone ineligible to purchase something (due to poor credit, criminal history, etc.) to acquire it by using another person's identity and good financial standing.
Appraisal Fraud
Appraisal fraud occurs when the value of a property is deliberately inflated to secure a larger loan amount. This type of fraud is often orchestrated by collusion between appraisers and other real estate professionals.
By overstating a property's value, fraudsters can extract more money from lenders, often leaving the financial institution vulnerable when the property's true market value is discovered. Appraisal fraud can lead to severe financial losses and destabilize the real estate market as lenders are left with undervalued collateral.
Deceptive "Flipping" Schemes
Many people buy real estate to improve the property and "flip" it for profit, and in most cases, this is not illegal. However, some schemes involve rapidly buying properties below market value, having them falsely appraised, and then reselling them at inflated prices.
These flipping schemes artificially inflate market values and can defraud mortgage lenders and investors, potentially leading to significant financial losses and destabilization of the housing market.
Equity Skimming
Equity skimming involves acquiring property, often through deceptive means, and stripping it of its equity without making mortgage payments. The perpetrator rents out the property and collects rental income while neglecting loan obligations.
Equity skimming is a fraudulent practice that involves acquiring property and stripping it of its equity without making mortgage payments. The perpetrator then rents out the property and collects rental income while neglecting loan obligations.
This scheme can lead to foreclosure and significant losses for lenders, as they are left with heavily encumbered properties. Equity skimming undermines the stability of the mortgage industry and exploits both lenders and tenants who may be unaware of the precarious financial situation.
Foreclosure Rescue Schemes
Foreclosure rescue schemes prey on homeowners facing foreclosure by offering false promises of assistance, exploiting the homeowner's vulnerability, and seizing equity or ownership, a clear injustice.
What are the Legal Consequences for Fraud for Profit?
Engaging in fraud for profit violates multiple federal statutes and may result in serious criminal charges, underscoring the gravity of the situation and the potential life-altering consequences.
The Federal Bureau of Investigation (FBI) often investigates mortgage fraud, with cooperation from agencies like the Department of Housing and Urban Development (HUD) and the Internal Revenue Service (IRS).
Common criminal charges resulting from fraud for profit include:
- Conspiracy (18 U.S.C. 371): Collaborating with others to commit mortgage fraud can result in conspiracy charges, which can result in up to five years in prison.
- Wire Fraud (18 U.S.C. 1343): Using electronic communications to facilitate fraud carries penalties of up to 20 years in prison per violation.
- Bank Fraud (18 U.S.C. 1344): Fraudulent schemes targeting financial institutions can result in up to 30 years in prison and fines of up to $1 million.
- Mortgage Fraud (18 U.S.C. 1014): This law specifically addresses fraud and false statements made to financial institutions and carries severe penalties.
For additional information, contact Eisner Gorin LLP, our federal criminal defense lawyers based in Los Angeles, California.
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