When Does Our Duty to Report Fraud End?

One of the most valuable lessons learned from the Office of the Comptroller of Currency Consent and Stipulation Order was our failure to report suspected fraud to the highest level of executives with the funding lender. The lender claimed it would have noticed the trend earlier and would have been able to reduce losses had it been provided with amended HUD-1 settlement statements.

Teri Moore, Escrow Officer with Chicago Title in Washington, clearly understands the importance of providing the lender with an amended HUD-1, even after closing has occurred. On Aug. 31, 2008, Teri closed a sale transaction in which there were no real estate agents involved, but everything else about the transaction seemed to be customary. The title report showed two deeds of trust against the property. The first was in favor of IndyMacBank™, and the second was in favor of Wachovia. The prorations and payment of fees associated with the sale were customary. The buyers got their loan through a loan officer at Wells Fargo. The loan officer appeared to be the one coordinating everything, but not to an unusual degree – at least not until after closing.

A few weeks after closing Teri received her payoff check back from Wachovia, along with a letter stating the loan had been paid in full on Aug. 30, 2008 – exactly one day before Teri's file closed. Wachovia also included a copy of its recorded release.

Teri immediately contacted the sellers and asked why they signed a HUD-1 which reflected this payoff. They told Teri to contact the loan officer and went on further to explain the loan officer opened up a new line of credit using the equity in the house they were selling just one week prior to closing. The loan officer advised them to pay their loan off and the balance of the line would be used as the buyer's down payment. You read it right: The balance of the SELLERS' new credit line would be used for the buyers' down payment.

The loan officer (not a mortgage broker) who works for Wells Fargo coordinated all of this. He even made arrangements to meet with the buyers to review, sign and notarize their loan documents, all of which is acceptable under the Company's document execution guidelines since he is an employee of the funding lender. He also hand delivered the borrowers' closing funds – two Wells Fargo cashiers checks, one for $75,000, and the other for $28,000.

As they say, hindsight is 20/20. Due to the new information, Teri reviewed the borrowers' loan application. According to the 1003, the borrowers banked at IndyMac and Wachovia. So why did their down payment funds come from Wells Fargo? Teri quickly ordered a payoff statement for the sellers' new line of credit at Wells Fargo. The payoff amount just happened to be for $28,000 more than their original payoff to Wachovia.

Teri contacted the loan officer who told her to call the sellers back. He assured Teri they knew what was going on and would bring in the additional funds due. The sellers told her to call the loan officer back. When she called him for the second time he said he would take care of it. Soon after Teri received a wire transfer from the buyers' account to payoff the seller's credit line!

Teri received funds, amended her HUD-1 to show the deposit by the buyer, including the full description: "Funds deposited to pay sellers' credit line." She sent the amended HUD-1 to the loan officer instructing him to have his borrower approve it. The loan officer asked Teri if she was going to forward this amended HUD-1 on to anyone else. The loan officer was nervous and for good reason. His misrepresentations to his own company would soon be uncovered. An incident report was filed with the Wells Fargo Fraud Investigation Unit.

Moral of the Story
Our duties don't stop simply because a file has closed. Teri became aware of a material misstatement that would clearly affect the lender's decision to underwrite the loan, a condition often cited in lenders' closing instructions. Although the file had already closed, it was still important to report these incidents in an effort to prevent them from occurring again. Wells Fargo was very appreciative of Teri for taking the time to work so diligently on a closed file, preparing an amended HUD as soon as practicable and submitting it to them. Not only is this a good practice, it is one of the conditions of our consent and stipulation order we entered into with the Office of the Comptroller and HUD.

Great job Teri! In recognition of her extraordinary efforts, Teri was rewarded $1,000 and a letter of recognition from the Company.

Bonded Promissory Notes

Offices from all over the country have reported receiving Bonded Promissory Notes as closing funds on all-cash transactions. The remitter of the note claims the note serves as payment in full of the buyer's funds to close.

Amy Pasek, Escrow Manager of our Liberty, Mo. escrow office, received a contract from one of her good customers where the buyer was purchasing a property for $699,000 cash. The buyer deposited a $100 earnest deposit check. The buyer's agent called the day after we received the contract asking for an estimated settlement statement, which Amy sent to her exclusive of tax information. Then the buyer's agent informed Amy that she (the buyer's agent) was due an additional 10 percent commission from the BUYER, as well as the normal cut of the commission the seller was paying. Amy asked her to put her statement in writing, which she did.

The following day, a certified letter appeared in the office with a note that said:

TO WHOM IT MAY CONCERN:
By the enclosed payment, this account is paid in full. I expect that the Account will reflect this within the customary 10 days allowed by Law.
Thank you for your assistance in this matter.

Denny R. Hardin "Agent"

Attached was a Bonded Promissory Note in the amount of $769,260 (the exact amount shown on the estimated settlement statement). Amy called Denny Hardin to inquire what exactly the note was. He told Amy to take the check to our trust bank and deposit it and it would eventually clear. He also said that he cuts and pastes about 300 of the notes each day. Amy told him that we wouldn't accept the note as good funds for closing. Hardin insisted, saying he is a private bank of the U.S. Treasury.

Just by conducting a Google™ search, Amy found Denny R. Hardin had some trust issues with the United States Government. She also discovered that coincidentally, the buyer and Hardin lived at the same address. But, prior to that Amy already had her radar up – who puts $100 earnest money down on a $700,000 home? Amy informed our other offices and agents that our Company will not insure the transaction. It didn't take Amy long to sniff this one out and shut it down as far as our offices are concerned. And for her efforts Amy has been rewarded $1,000 and a letter of recognition from the Company.

Moral of the Story
By definition an escrow is a transaction where an impartial third party (escrow agent) acts as an agent to all parties (seller, buyer, borrower and lender, etc.), and acts only under instructions in delivering papers, drawing and recording documents, and receiving and disbursing funds. It is the responsibility of the settlement agent to ensure that all funds received are collected funds prior to disbursing. Settlement agents must scrutinize any unusual forms of payment received and a Bonded Promissory Note is an unacceptable form of payment.

Parties to our transactions have attempted to deposit these instruments as payment in full for the purchase of real property. This typically occurs on all cash purchase transactions. The buyer hand delivers a Bonded Promissory Note to his or her settlement agent and demands a receipt. These notes should not be accepted.

What Does a Bonded Promissory Note Look Like?
The sample shown here is one of the many versions out there. There are other forms with similar appearance and content.

Along with the note, remitters include other statements or documents which try to establish the legitimacy of the note as payment. They also include warnings which state failure to honor the note or return the note without cause will be certified as a conversion of liability to the settlement agent. These instruments and statements are not legitimate and should not be accepted.

If you have been provided with a Bonded Promissory Note, return it immediately and resign from the transaction as described in Technical Memorandum 96-2008. If you are unsure, contact your local management, underwriting or National Escrow Administration at settlement@fnf.com, or by phone at 949.622.4425 for further assistance.

Dirty Rotten Kids

A son checks his mother out of a nursing home and takes her to her residence for a two-hour lunch. During that time he has the loan officer call the house to verify her residency for a reverse mortgage. Then he returns his mom to the nursing home, thinking the deal is done.

Mandie Driessen from Chicago Title's Helena, Mont. office is familiar with reverse mortgage loans, as she closes them regularly for her local customers. She recently opened a $93,000 reverse mortgage transaction where the elderly homeowner had suffered a heart attack. The homeowner's children were working fast to secure a reverse mortgage, so their mother would have money to pay for the care she needed.

The property used to secure the loan was owned by the mother (a widow) and located on an Indian Reservation. Mandie had to order the title report from another title company, since our family of companies does not have an office in the area. Mandie received the title report and loan documents and started working up the file. She contacted the loan officer to find out where the signing would take place. The loan officer indicated the mother would be at her house. Mandie contacted BancServ to try to find a signer in the remote area where the property was located.

Next she contacted the title insurer for delinquent tax information. The searcher at the tax insurer informed Mandie that she was a personal friend of the mom and said she had visited her in the nursing home within the last week. She also indicated the mother hadn't lived in the property for months. The searcher went so far as to say the children were scoundrels and they were probably taking out the equity in their mother's property for their own gain.

Mandie contacted the loan officer who said the mother was only in the nursing home temporarily to have her valve replacement tested, but that she was back at home and ready to close. Mandie had her suspicions so she contacted the nursing home. A caregiver verified the mother was still a resident of the nursing home. When Mandie said she needed to schedule a loan closing with the mother, the caregiver indicated her son had checked her out of the nursing home for lunch a week earlier. The caregiver indicated they were gone for about two hours and said the mother thought the loan closing was completed by her son, because she gave him Power of Attorney. Mandie concluded that must have been the precise time the loan officer called to verify she was occupying her residence!

Mandie returned the loan package and loan proceeds and resigned from the transaction after realizing the mother was not a resident of the subject property and might not have the mental capacity to execute reverse mortgage loan documents.

Moral of the Story
Reverse mortgages are becoming increasingly popular because they can give many seniors greater financial security, allowing them to use the reverse mortgage payments to supplement Social Security, meet unexpected medical expenses and make home improvements. There are five eligibility requirements for a reverse mortgage:

• The borrower must be a homeowner.
• He or she must be 62 years of age or older.
• The borrower must own the home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan.
• The borrower must live in the home.
• The property itself must be a one-to-four family unit, town home, condominium, or mobile or manufactured home attached to real property.

If we become aware of the violation of any of the eligibility requirements prior to closing, we must make the lender aware. Mandie was right to follow her instincts and to resign from the transaction. For her keen sense of awareness and high degree of integrity, Mandie received a $1,000 reward and a letter of recognition from the Company.