Make it a Great 2008!

By Lisa A. Tyler
National Escrow Administrator

To start the New Year out with a BANG, this edition of Fraud Insights contains stories with two new types of fraud. The first story, entitled "Horrific Escrow Story About a Short Sale," is one of many stories reported to the escrow administrators by employees where the first lender is limiting the amount that can be paid to the second lien holder at closing. The ensuing mess between the parties has left us holding the bag in more than 25 deals of this same nature.

The second is a scheme recently perpetrated in Florida that could easily be replicated in other areas of the country. As a direct result of this scheme, the Company could potentially suffer losses in excess of $3.5 million. Read all about it in "The Loan Servicing Scheme."

Lastly, you have to read "Heads Up, Sister!" to discover how Maria Trangelo-Molina from Fidelity saved Chicago Title from being duped into insuring a bad transaction.

Haven't come up with your New Year's resolutions? Here are a few suggestions:

  1. Fight crime and receive a $1,000 reward to pay toward your recent holiday debts.
  2. Complete 10 hours worth of settlement training in January 2008 and skate through the rest of the year.
  3. Become famous by being featured in a future edition of Fraud Insights.
  4. Increase your business (learn how at the Fantastic Escrow Training event).
  5. Learn how to use the Internet so you can take the escrow training modules and pre-recorded Webcasts.
  6. Lose weight – get up and walk to the shredder.
  7. Lose more weight – walk to the client's office to personally deliver a copy of the Fraud Insights Newsletter.
  8. Save time – use Payoff Express by visiting
  9. Feel good about yourself ... give the gift of a free credit report with ExperianSM.
  10. Disclose, disclose, disclose!

We store all previous editions of Fraud Insights electronically and in hard copy format. If you are looking for a previous edition electronically, you can find it at under "Internal Publications." If you are looking for a previous edition in hard copy format, contact the escrow administrators at or by phone at 888.934.3354.



Horrific Escrow Story About a Short Sale

What do you do when the first lien holder's statement requires no more than $1,000 to be paid at closing to the second lien holder on a short sale and the real estate brokers offer to pitch in?

Malou Gallardo, an escrow officer at Fidelity's Brentwood, Calif. office, opened a short sale on April 5. The listing agent had started negotiating with both the first and second lenders on the property. The first lender, Chase Manhattan, had accepted a short sale payoff in the amount of $604,908.42, per their demand dated April 16, which was only valid until April 25. Chase had a payoff deadline of April 25, as the servicing of the loan was to be transferred to Litton on April 28. According to a Chase representative, there was no assurance Litton would accept the same short sale terms the sellers had made with Chase. If the escrow had not closed by the deadline, the sellers would have to re-negotiate the short sale with Litton.

At the same time, the listing agent was negotiating with the second lender, HSBC, to accept $1,000 as a short sale payoff. According to the listing agent, HSBC had verbally accepted the offer. However, they had not faxed a demand to escrow despite diligent follow ups by the listing agent and escrow officer. By April 26 the listing agent informed Malou he had spoken to someone at HSBC and they would NOT accept the $1,000 short sale offer after all. Instead they demanded $10,000!

At this point, Chase had withdrawn their offer as the first loan and it was being transferred to Litton. On April 30, Malou finally received a fax from HSBC agreeing to the short pay for $10,000. The listing agent started re-negotiating the offer of the short sale with Litton.

It took a while for the listing agent to get Litton to accept the short sale. Finally on June 6, Litton faxed Malou a short sale statement for $604,323.74. The statement called for HSBC to receive only $1,000 at closing. The listing agent continued to negotiate with both lenders and kept reassuring Malou there was a way to satisfy all parties. Malou's response was to have everyone agree to the terms of the short sale, including both payoff lenders.

To make matters worse, Malou received another short sale statement from HSBC, this time requiring $15,000 as payment in full. Malou forwarded the information to the listing agent who immediately called HSBC for clarification. According to the listing agent, he spoke to HSBC and they agreed to adjust the short sale statement to $1,000 at closing, with an additional $14,000 to be paid by the listing broker directly to HSBC outside of closing.

The listing agent e-mailed Malou the HSBC demand, which agreed to $1,000, but on the cover letter it stipulated HSBC was to receive $1,000 at closing and $14,000 from the listing broker. This additional stipulation was NOT noted on the actual short sale statement, but only on a fax cover page. The actual short sale statement still called for payment of $15,000.

The listing agent insisted the escrow could close on the $1,000 fax cover letter from HSBC and that he would handle the $14,000 payment after closing.

Malou suggested showing a credit to the seller of $14,000 from the listing agent and escrow sending the entire $15,000 to HSBC at closing. He stated that Litton would NOT accept the final settlement statement reflecting a credit from the listing broker and a higher payment to the second lien holder.

Malou decided to call HSBC to see if they really had agreed to accept the balance of $14,000 post-closing from the listing agent. The agent Malou spoke to said they would have to investigate and call her back.

In the meantime, Malou contacted Litton to find out if they would amend their statement to allow for the listing agent to credit the $14,000 to the seller and for HSBC to ultimately receive $15,000. Litton flat-out refused. They would not agree for HSBC to get any funds in an amount more than $1,000, and stated that if there were more funds in the transaction they should be paid toward their shortage.

The listing agent asked Malou to prepare two settlement statements - one showing HSBC getting $1,000 to fax to Litton and another showing HSBC getting $15,000 for all other parties. Malou was appalled and told the listing agent that she could only prepare one settlement statement reflecting the actual terms of the transaction. She patiently reiterated to the listing agent that ALL PARTIES will have to provide escrow a mutually agreed acceptance of short sale before we can close.

On July 9 Malou received cancellation instructions. She cancelled her transaction, but kept track of the property address and parties' names only to find out the transaction was closed by a competitor company on July 18.

While Malou must be disappointed to have spent so much time and energy on a transaction that ultimately cancelled, she did receive a $1,000 reward for saving the Company from a potential loss.

Moral of the Story
On December 6 the FBI announced its launch of a Mortgage Fraud Task Force. The government task force is charged with the research and discovery of impropriety during a short sale. Anyone involved in deception is investigated and prosecuted.

Beware! When lenders negotiate short sales on government-backed loans, the lender looks to the loan sponsor (FHA, VA, FNMA, GNMA) for full or partial reimbursement of their losses. The government reviews the transaction before issuing the reimbursement funds to the lender. However, they have the right to refuse payment if during the government's investigation they uncover any of the following items:

  1. More paid to the underlying lien holders than called for in the original payoff statement.
  2. Property flipping when the original payoff statement prohibited the property from being sold in a double-escrow or assignment escrow.
  3. Broker or buyer contributions toward the seller's prohibited costs – such as moving allowances.

We all know how important it is that we adhere to the new lender's closing instructions. It is equally important that we adhere to the short sale lender's payoff instructions.


The Loan Servicing Scheme

These days, servicing rights are originated, sold and tracked without recorded assignments. This makes it hard to determine the legitimate loan servicer and creates an opportunity for fraud against an uninformed closer.

The Plan:
Seller conveys property to buyer outside of escrow and subject to existing financing. Seller and buyer are participants in the scheme. Buyer obtains new financing from lender, using the services of a mortgage broker.

The Scheme:
A refinance transaction is opened at the title company by the mortgage broker. In preparation for closing, escrow closer seeks payoff information regarding seller's loan. Escrow closer requests payoff information from seller and/or mortgage broker. Seller and/or mortgage broker provide escrow closer with a payoff letter from ABC Servicing Company, which purports to be a mortgage servicing company. The letter provides a payoff amount and address. At closing, escrow closer sends the payoff funds to ABC Servicing Company at the address provided in the payoff letter and a lien release is requested.

The Result:
A loan policy is issued insuring the refinance lender as the holder of a first lien on the property. Subsequent to closing, it is learned that ABC Servicing Company is, in fact, owned by one of the participants in the scheme. The payoff funds are never remitted to the actual payoff lender.

Foreclosure actions have been instituted by the prior lenders naming the insured lender as an inferior lien holder. The insured lenders have submitted claims under their loan policies, and the Company is exposed to significant liability under these policies.

Moral of the Story
The key to this scheme is the use of a "fake" servicing company and the reliance by the escrow closer on the payoff letter presented by the seller or mortgage broker. Consequently, in order to avoid losses resulting from this type of scheme, all reasonable steps must be taken to ensure that the payoff information, including amount and payee, are accurate.

In an effort to avoid this or similar schemes involving fake servicing companies, the following steps should be taken to avoid such losses:

  • Escrow closers should not accept payoff letters from the parties to the transaction.
  • Require the seller to provide a loan statement or mortgage statement, such as a monthly or quarterly invoice or payment coupon.
  • Obtain the payoff letter directly from the lender or the servicing company as listed thereon.
  • Use the Mortgage Electronic Registry System (MERS) to find out who the current loan servicer is. You can now do so online at
  • A payoff letter provided by a servicer that does not indicate, on its face, that the entity issuing the letter is the servicer for the lender of record should not be accepted.
  • If the escrow closer is unable to obtain the necessary confirmation regarding the payoff, the escrow closer should require that an executed lien release from the lender of record be obtained and held in escrow pending closing.
  • If the identity of the lender of record differs from the payment coupon or the resulting payoff letter, reasonable efforts must be used to confirm that the loan was assigned and that the entity providing the payoff information is the entity that is authorized to issue a valid lien release.


Heads Up, Sister!

Believe it or not, the entire real estate community does not realize the FNF family of companies is comprised of five powerful brands, however, sometimes their lack of knowledge works to our advantage.

It is customary practice in southern California for a purchase contract to call for one company to serve as the escrow holder and another company to serve as the title insurer. Maria Trangelo-Molina, an escrow branch manager for Fidelity's Van Nuys, Calif. office, was named as escrow holder on a $710,000 sale transaction with Southland Title as the title insurer.

The seller on the purchase contract was Yolanda Rivera Magana. The owners of record were her parents, Louis B. Rivera and Esther L. Rivera, who held title as joint tenants. According to Yolanda, her father died in 2000 and her mother died in 2003. After her mother passed away, Yolanda executed a "quit claim" deed as the successor trustee of The Rivera Living Trust to herself individually.

Southland Title issued a preliminary report that showed title under Louis and Esther as joint tenants. In order to clear the cloud on the title, Southland Title required original death certificates for Louis and Esther, as well as a copy of the trust agreement. Maria obtained the required documents and sent them to the title officer for review.

The title officer discovered that the schedule of trust property attached to the trust agreement was left blank. The title officer could have passed title to the trust and subsequently honored the deed to Yolanda if the schedule had listed the subject property as a trust property. Since that particular page was left blank, the successor trustee was asked to consult an attorney. Yolanda would have to go to court and present to the judge that it was Esther's intent to transfer the property into her trust. Southland was not willing to proceed until the cloud on title was fixed.

The listing agent, now aware of the issue with the title, contacted Chicago Title Company to insure the property. The buyer and seller insisted the escrow remain with Maria at Fidelity National Title.

Maria's gut feeling was that the listing agent was going to fill in the schedule of trust property by listing the subject property as a trust property. By doing this, Chicago Title could rely on the trust agreement to pass title to Yolanda, as successor trustee. She wanted to prevent the listing agent from doing something stupid, so she told him that since she was aware of the deficiency in the chain of title and the trust agreement, she could not allow Chicago Title to be exposed to possible claims and/or damages.

Then, as a further precaution, Maria contacted the title officer at Chicago Title and advised him that when the trust agreement was presented to her and Southland for review, the schedule of trust property did not list the subject property. When the listing agent and seller presented the documents independently to the title officer at Chicago Title, the title officer informed them of the conversation that had just taken place with Maria. He asked the listing agent and seller not to present him with falsified documents and told them to seek legal counsel to fix their cloud on the title.

The buyer (who was also a real estate broker) phoned Maria to let her know how upset the listing agent and seller were, because of the added time and expense it would take to clear the title to the property. According to the buyer, the listing agent said, "Maria should have kept her mouth shut and allowed Chicago Title to insure the property and then she could have taken her escrow fee." The buyer said she didn't care one way or the other, since she would have an owner's policy protecting her ownership interest. Maria's response was simple: She told the agent that Chicago and Fidelity are sister companies, owned by the same parent company and a loss to one affects the entire organization.

For Maria's honesty and extra efforts, she was rewarded with $1,000 by the Company. She might have lost a dishonest listing agent as a future customer, but who wants to do business with a potential crook anyway?

Moral of the Story
If Maria had allowed Chicago Title Company to insure this transaction, there is a chance that other heirs to Louis and Esther's estate could have protested the sale. A failure of title in Maria's story could have cost the Company a claim of $710,000, and this does not even include the cost of legal defense.

As employees of the Fidelity Family of Companies, we have an obligation to improve the profitability of the Company. Escrow employees have many opportunities to do just that by protecting the entire organization from future claims that result in losses.