Check Signers Carry Large Responsibility

In our business we encounter many types of fraud. Sometimes it takes the form of embezzlement or defalcation. What do these terms mean?

Embezzlement – The stealing of money entrusted to one's care.

Defalcation – The fraudulent appropriation of funds or property entrusted to one's care but actually owned by someone else.

Both of these terms boil down to the same thing:

Theft – The act of stealing; the wrongful taking and carrying away of the personal goods or property of another; larceny.

What can you do to prevent this type of theft against the Company and protect the integrity of its trust accounts? First, carefully review all checks that you are asked to sign. As a check signer you carry a large responsibility. Reviewing the payees and comparing them to the disbursements shown on the check register is a requirement of all check signers. If you are unsure about the benefiting party of a disbursement, ask for additional supporting documentation.

All checks that are made payable on behalf of a consumer should clearly indicate who the payee is, who the check benefits and to what account it should be credited. For example, if you are instructed by the lender to pay a consumer's credit card, you should make the check payable to "Visa, FBO Lisa Tyler, Account #123456." This leaves no question to an auditor about your disbursements. It also makes it very easy for the other check signer to comfortably sign the check.

Company policy states that check signers must review and sign the Final Check/Check Disbursement Register when signing checks. By following the example above, the signer is able to quickly verify that the payee benefits one of the principals of the transaction. Otherwise, a check signer would need to stop and review the supporting documentation.

We can apply these same guidelines to proceeds being deposited to a seller or borrower's bank account. As a word of caution, do not use a window envelope – the account number and account holder information may also show through.

A common thread in many escrow embezzlement cases is the transfer of funds from one file to another in order to cover shortages caused by the embezzler. Our Company requires transfers from one escrow file to another to be approved by a manager.

Embezzlement hurts us at many levels. First, we usually have to cover losses and devote time and resources to the investigation. Second, it breaks down trust between colleagues within the Company. Lastly, it affects the integrity of our entire industry, since consumers entrust us with their funds.

Our Company takes an aggressive approach toward employees who steal. We do everything we can to prosecute and recover any amounts taken. In addition, we file a 1099 with the IRS to report the ill-gotten gains.

Letter to the Editor

A Washington State loan officer tries to outsmart one of the Company's finest escrow managers by directly depositing the buyer's down payment and closing costs into the Company's trust account.

The following Letter to the Editor was submitted to Fraud Insights from Sue Moody, Escrow Manager in Lynnwood, Wash.

Dear Lisa Tyler,

I had a "short sale" transaction that was scheduled to close around the end of July 2007. The closing was delayed because I didn't receive the buyer's loan documents. We actually had two buyers, one out-of-state and one in-state. The out-of-state buyer deposited his portion of the closing funds in advance of the closing date. He was not a borrower on the new loan.

When I inquired with the loan officer about the status of the documents, he stated the in-state buyer was waiting for a Home Equity Line of Credit (HELOC) to close on her current home. The loan officer asked if he could loan the buyer the money for the closing, and if I would prepare a note for the repayment. I replied, "No, unless the new lender is made aware of the secondary financing."

As time went on, and still no loan documents, the loan officer asked if he could wire money in on her behalf. I told him if anyone other than our buyer/borrower deposited money with us, it would need to be approved by the lender and we would require third-party deposit escrow instructions.

The loan documents finally arrived, so of course it was a mad rush to close the deal. We sent out closing documents to the out-of-state buyer. When the in-state buyer came in to sign, her Realtor® and loan officer came with her. We provided her with wire instructions and she said that she would wire transfer her down payment and closing funds later that day.

The money didn't show up in our trust account. During the course of the next couple of days, the loan officer lied to the listing agent in an e-mail stating the buyer had wired in the additional funds. Unbeknownst to the loan officer, I had a long relationship (17 years) with the listing agent and I had confirmed that, in fact, no wire had been received.

When caught at his own game, the loan officer called to say the lady was on her way to our office with a cashier's check. Back and forth the story went – wire transfer, cashier's check – we weren't sure what we would get. Finally, the loan officer called and again stated that the buyer was on her way to our offices with a cashier's check.

Then, the next thing I knew, he e-mailed a copy of a bank receipt for an internal transfer. I had no way of knowing whose account the money came from, and I had to wait 24 hours for our accounting department to get confirmation of the deposit and post the funds to our escrow file. I explained that there was a time lapse and reiterated that he couldn't just deposit money into our account. I looked at the buyer's loan application to see if she had that same Bank of America account number listed – she did not.

I was suspicious of this loan officer, so I asked for a copy of a check from that account with the buyer's name on it. If her name and account number were not on the check, the lender's approval and third-party deposit escrow instructions were needed. The loan officer e-mailed a check copy to me, but only the buyer's name appeared in the left corner, with no address. I was really suspicious at this point, so I tried to track down the teller that handled the transfer.

The first two people I spoke to at Bank of America said that they couldn't give me the information for privacy reasons. When I finally reached the teller herself, I explained who I was and that I was just trying to confirm the name of the account holder. She said, "Oh yes, I remember the gentleman – he's a regular customer of ours." I asked if the account belonged to the loan officer in question, and she confirmed the check had indeed been drawn from his business checking account. I asked if our buyer/borrower was on the account. The teller said she was not.

I confronted the loan officer. He didn't deny what he had done. He was mad at the teller for divulging the information to me. At this point I contacted the lender to see if they would allow the deposit from the loan officer. They said that any contributions would have to be approved by underwriting.

Initially I thought that this could be done quickly, but it didn't turn out that way. The lender was a table-funding lender and had funded the loan on July 31, 2007, and by this point it was already Aug. 2, 2007. The lender wanted the wire returned before it would even send the loan back to underwriting for approval. This could take several days. We told the buyer she could bring us a cashier's check with her name showing as remitter, or a wire transfer. She finally wired us the money.

As each day passed, I had to obtain another approval from HSBC on the short sale. On Friday, Aug. 3, 2007, I finally had all of the buyer's money and was ready to close, but I couldn't reach HSBC. The one and only person that could approve the short sale payoff amount was out of the office that day. On Monday, Aug. 6, 2007, I obtained the approval letter for the reduced proceeds on the short sale and extension. I closed the transaction and cut a check back to the loan officer for his "fraudulent" deposit into our trust account.

The not so funny thing is that on Aug. 1, 2007, I was attending the FNF seminar and you talked about short sale transactions. From what I learned during your class, I was willing to bet that the loan officer and buyers were in on the purchase together as a quick investment. Somewhere along the line I learned that one of the delays in the lender getting loan documents to us was that they wanted to treat it as a non-owner occupied loan. The loan officer insisted that it was owner occupied (the in-state buyer) and he was able to push it through that way. I worry that this file will come back to haunt me, but I'm glad that I've attended your classes, read your stories in Fraud Insights and listened to my gut instincts about this loan officer.

Thanks for all that you do!

Sue Moody
LPO, Escrow Manager
Chicago Title Insurance Company
Lynnwood, WA

We admire Sue's cunning ability to outsmart the loan officer and to protect the new lender in her recent transaction. Sue has received a letter of recognition along with a $1,000 reward as a small token of our appreciation. On behalf of the entire Company, thank you to Sue!

Have You Expired?

With the use of those handy rubber notary stamps, it can be very easy to lose sight of your notary expiration date. The following story was submitted by Danna Jo Rexroad, Arizona Escrow Administrator for Fidelity National Title Group.

If you serve as a notary public, you have a responsibility to know exactly when your commission expires. If you do not know, there is always the danger of continuing to notarize documents with an expired commission. When one of our escrow settlement officers recently noticed her commission had expired, she realized she had notarized several purchase transactions without renewing her commission. Although this is a problem that took a lot of work and time to fix, it was amazing that the escrow officer was able to put her hands on every single escrow file that was affected by this oversight – she must keep her notary journal very well documented.

So how did we fix this? First, she contacted her management team and together they contacted the lenders and explained what happened. Fortunately, this particular escrow settlement officer primarily closed for a local homebuilder so the lender and seller were the same on all transactions.

The lender was grateful we discovered this oversight and that we took such quick action to correct it. The lender sent us all of the loan documents that had to be re-signed and re-notarized. Then we contacted all the borrowers and the seller to re-sign the documents before a commissioned notary. Everyone was cooperative.

The Company's losses were minimal and represented the costs of re-recording, overnight delivery, courier and any approved outside signers – not to mention the "soft cost" of the employee and management time it took to rectify the situation. The lender is covered under both the extended lender's title insurance policy and the closing protection letter, so doing what it takes to fix this and paying for it now is a lot cheaper for the Company than having to buy back all of those loans down the road.

What Can Happen To A Person Who Notarizes Documents If They Aren't A Legally Commissioned Notary?
According to the Secretary of the United States any person harmed in such a situation can file a civil suit against the notary, with criminal prosecution an option if fraud is involved. The Secretary of State's Office also states that if it is notified that a notary has continued to notarize documents after his/her commission has expired, they will make a note in their files, which will come up the next time that person applies for a notary commission.

When you realize you have made a mistake, step up and take measures to fix it. Ignoring a problem never makes it go away. Involve your manager and that will usually save the Company and yourself a lot of grief and minimize losses. As far as the customer is concerned, it's not the problem that will make or break a relationship, but how you deal with it. This particular problem was dealt with in an honest and organized manner.

Lessons Learned
As the notary public, you have a responsibility to be aware of your commission expiration date. There are a few ways you can do that:

1. Review your seal when you stamp a document.
2. Display your certificate on your office wall where you can look at it every day.
3. When you see something like "my commission will expire …" on the notarial certificate (acknowledgement or jurat), write in your expiration date in addition to placing your seal on the document.

Remember: If your commission has expired, you cannot continue to notarize documents, even if you have submitted an application for renewal. You must wait for your new certificate and new seal. The renewal process takes just as long as applying for a new commission, so it's best to start the process about two to three months prior to your expiration date.