Detecting Defalcation

A part-time employee for the Company was caught red-handed stealing thousands of dollars from an escrow trust account. Her defalcation was discovered through the monthly task of dormant funds elimination.

Like all operations, Fidelity's Phoenix office has tasked its staff with reviewing the trial balance report for dormant balances, as well as its outstanding checks report for stale-dated checks. Recently while performing these monthly tasks, one of the astute escrow officers noticed a check made payable to Wells Fargo Bank in the amount of $700 on the outstanding check list.

She pulled the file and saw the check was a reissue of a previous refund. Out of curiosity she also pulled the check-issued report and noticed many of the files had an insurance check, a tax check or a refund check cancelled, and then had a check for the same amount reissued to Wells Fargo Bank or Bank of America®. She found numerous checks reissued to both entities.

She requested copies of the cancelled checks from the accounting department. The escrow officer noticed all checks written to Wells Fargo referenced the same credit card number. She noticed all checks written to Bank of America referenced the same mortgage loan number. She also discovered that fee checks were cancelled in some files and reissued to the Wells Fargo and Bank of America accounts.

The escrow officer notified the accounting manager, Kim Ahrens, and together they called Wells Fargo and Bank of America with their suspicions. Much to their dismay, both accounts were that of a previous employee. The management team in Phoenix was notified immediately.

Further investigation revealed a defalcation totaling $23,617.98. The evidence left no room for doubt. The Phoenix office made contact with the former employee. She refused to sign an admittance. Regardless, the Company fully intends to pursue criminal charges and civil restitution.

Moral of the Story
This defalcation was uncovered because the branch personnel were properly performing their part in the bank reconciliation process. Employees must follow up on dormant funds – both files with a balance and outstanding checks. Fraud can happen anywhere – even in your own office! It is important operations ensure these tasks are completed each and every month to deter defalcation in operations and to catch the thieves in their tracks sooner, rather than later.

Mortgage Rescue Scams Increasing? You Bet!

So don't forget the title side! There is little doubt that the closing and the face-to-face contact of the escrow/closing/settlement office is what drives this business, but we always have to remember that we are selling title insurance policies.

The following editorial comments were provided by Barry Wolfinsohn, regional counsel for Ticor Title's Great Lakes Region:

Our business is very competitive – as with many other industries – and of course our family of companies prides itself on leading the marketplace in customer service. A few years ago it wasn't uncommon for title offices to get caught up in the race to please customers, but unfortunately lose sight of the basic premise of our business. Remember the wonderful thing that brings us all together: title insurance.

A few years ago, fraud and forgery claims were rare and few of us worried about some of the basic risks inherent in real estate transactions. Have you ever been to one of those boring seminars on what the title policy covers … you know, the ones where they have to serve more coffee than muffins and bagels just to keep people awake? Hopefully we will soon be running short on time to attend such presentations due to an increase in business, but when you do attend, you will learn about the Covered Risks in 2006 ALTA policies (formerly Insuring Provisions or Insuring Clauses in 1992 ALTA policies). Let's take a look at the fraud and forgery coverage provided by Covered Risk 2 of the 2006 ALTA policy:

(a) A defect in the title caused by

• forgery, fraud, undue influence, duress, incompetency, incapacity or impersonation;
• failure of any person or entity to have authorized a transfer or conveyance;
• a document affecting title not properly created, executed, witnessed, sealed, acknowledged, notarized or delivered;
• failure to perform those acts necessary to create a document by electronic means authorized by law;
• a document executed under a falsified, expired or otherwise invalid power of attorney;

Many of you might have heard or might have painfully experienced the fact that fraud and forgery are now among the leading sources of claims in our Company. Prior to the Fraud Insights newsletter, could you have spotted fraud or forgery? The March 2008 edition of Fraud Insights contained an article on rescue scams and served as an EXCELLENT example of a mortgage rescue transaction and why it is problematic. Two things should stand out: the fraud risk and the possessory/title risk.

While it might not be a complete forgery because there doesn't appear to be impersonation of a seller, there is certainly a fraud risk when the terms of the transaction started to change and the power of attorney brought into question whether the missing spouse would know about and understand the varied terms.

After the deal closed, a year went by and the people realized their house didn't appreciate enough to cover the new loan amount needed and that they couldn't qualify in this changing market, you can bet that we'd see a claim from the spouse that wasn't available. This is the title problem: Is that power of attorney really valid for this transaction? Might these people be viewed as being under duress when they were backed into a corner by their financial position given today's concerns over subprime mortgages?

These questions are certainly important. Often the escrow officer is put in a difficult position of having to re-sign or explain to a customer why we can't go forward with a transaction. This is a good opportunity to review the hidden title risk that prevents us from closing such a transaction and gives us an excellent reason not to proceed. The other title problem: The undisclosed possessory interest of the seller in a rescue transaction.

Most parts of the country raise five or more "general" or "standard" exceptions, one of which reads, "Rights or claims of parties in possession not shown by public records." Also, don't forget Covered Risk – The lack of priority of the lien on the insured mortgage upon the title over any other lien or encumbrance.

In a rescue, the seller sells to an arranged investor for 12 months and – often unknown to us – leases back his/her home, purportedly with the intent of buying it back after a year. This is, of course, an unrecorded leasehold interest, and due to the agreement, it might be categorized as an equitable mortgage that would prime the interest of our insured (referred to as recharacterization risk). Since we know that the seller will be remaining in possession under a hidden lease or possession agreement, we should be raising a Schedule B exception for the unrecorded leasehold interest of the sellers. The seller's right, or option to repurchase, should also be shown as a Schedule B exception. This exception should include the possibility that the seller's right or option might be recharacterized as an equitable mortgage that would prevent the mortgage we are insuring from becoming a first lien. Aha! A title risk!

Remember – it's not all escrow! We sell title insurance, don't forget the title side!

Naked Release

A release recorded without any other instruments, such as a deed or mortgage in and around the same time frame, is referred to in the title industry as a "naked release" and is considered a red-flag warning of fraud and forgery.

Shari Gross, an assistant title officer with Chicago Title's Commercial Center, recently uncovered a fraud involving a naked release. A lender called the office to schedule a closing and requested a bring-down of his/her title commitment. When the underwriter ran the new search she noticed a naked release posted to the chain of title. The release had a good legal description, what looked like valid notary and seemingly proper signatures, but one thing seemed strange to Shari.

The document stated the lender was releasing back to an individual who did not appear on the mortgage purporting to be released. The release conveyed the property back to Yale Schiff as the borrower. However, the original mortgage contained the name of the property owner, Scott Gripman.

Upon discovering this, Shari got in touch with Assistant Escrow Officer Michelle Crockett. Together they decided to call the payoff lender and verify the validity of the release. The payoff lender was National Bank of Commerce and its officers confirmed the mortgage was not released, the document was not signed by the assistant vice president as shown and there was a balance of $147,046 to be paid on the loan. Shari and Michelle's suspicions were correct!

Michelle immediately notified the new lender that our Company would not be willing to close the new loan until a satisfactory explanation could be given about the circumstances surrounding this release. Shari and Michelle went a step further to notify their manager, other Chicago Title offices, the title plant and their area fraud committee about the incident and the parties involved.

The payoff lender worked with Shari and Michelle to send out a widespread notification of the fake release and even issued a letter to the borrower to that affect, along with a payoff letter reflecting the balance due.

For their joint efforts in detecting the fake release and saving the payoff lender and the Company from loss, Shari and Michelle have shared a $1,000 reward.