Fraudulent Money

This economy has some people getting very creative with their forms of payments. In the January 2009 issue we told you about a fraudulent form of currency – the Bonded Promissory Note. Some people aren't quite as creative, however, as we have recently seen an increase in buyers creating their own checks and depositing them as earnest money or closing funds. Donna Carter, in our Grass Valley, Calif. office, had just this kind of fraud occur in one of her files.

The buyers sounded like a great couple – a doctor and a nurse. They agreed to purchase the property for $2,000,000 cash, and in good faith wrote a check for $60,000 representing the earnest money deposit. The buyer even submitted a letter from the V.P. of Private Client Services at his bank stating he had more than sufficient liquid assets on deposit in order to purchase the property.

The money was deposited on April 14, 2009. On April 17, 2009 our office received a notice stating that the issuing bank was unable to locate the account on which the check was drawn. Donna immediately notified the real estate agent and sellers. She also contacted the buyer to inform him. Donna explained she would need their funds either wired or certified for any deposited funds from this point on. The sellers were extremely motivated to sell their home, however, and the buyers showed a sincere interest, so the sellers decided to give the buyers a second chance.

The buyers agreed to wire the entire sales price into escrow - $2,000,000. Donna sent the buyer her wire instructions and waited, and waited, and waited - nothing. Finally, the seller issued a 24 hour Notice to Perform. The buyer promised to perform and stated he would go to his bank first thing in the morning to get a cashier's check, bring it in to Donna and sign his closing papers. When Donna arrived at her office that morning she found an envelope containing another personal check from the buyer in the amount of $2,000,000. The check was drawn on the exact same bank as the first check, same account number – heck – it was even the same check number!

It turns out the checks were nothing more than something the buyer typed up on his home computer. After closer review, it was noted that the personal checks were missing the ABA number in the top right hand corner. This is a tell-tale sign of fraud, as illustrated in Tech Memo 78-2008 – "Protecting Our Trust Accounts." At this point the listing agent decided to do a little more investigating of her own. She called the issuer of the letter from Private Client Services at the bank to find out the cause of the delay. It turned out the letter was fraudulent too, and the person who signed the letter wasn't even an employee. Even more egregious was the fact that the letter came from Presidential Bank, while the personal checks he kept depositing with Donna were from Chase Bank.

Who gets hurt in this type of fraud? The seller does. They took their house off of the market thinking they had a bonafide buyer. The sellers were going through a divorce and filing for bankruptcy and really needed the sale. In addition, any proceeds they did receive from this sale were going to be deposited with a 1031 exchange company to help defer the capital gains. Needless to say, this transaction did not close. The sellers have filed a police report with the local authorities and our file is the subject of a subpoena.

The Company has a strict policy not to disburse on anything other than unconditionally collected funds, which is why it is important to understand the difference between conditionally collected and unconditionally collected funds. Typically when funds are deposited into our trust account, the bank gives the account immediate credit for the amount of the deposit. This means they will allow us to draw or disburse against the amount deposited.

However, if the funds are uncollected for any reason, they will reverse the credit and deduct the amount of the deposit from our balance on deposit. If this occurs and the file is disbursed, the money used to fund the file is other people's money. Depending on the instrument, the clearance and status of the credit to our account could take a significant amount of time before it becomes unconditionally collected. In our story it took 3 days before we were notified by the bank that the first remittance was counterfeit.

Unfortunately this is not the only incident like this reported. Here are a few tips to protect the Company from these types of scams:

• Adhere to your state good funds law (if applicable).
• Follow the Company's policy regarding collected funds.
• Report the incident to your local manager or National Escrow Administration per our Fraud Policy.
• Once a deposit is returned as uncollected, require all future deposits be deposited by wire transfer or cashier's check.
• Immediately notify the seller and other parties to the transaction in writing.
• Don't waste time chasing a buyer down or listening to their empty promises. If they don't replace the funds immediately, simply resign.

Although Donna couldn't save the sellers from losing a sale or the real estate agent from losing a big commission, she did her best to inform all parties of the facts surrounding the buyer's lack of funds. The real key is constant communication. Nothing makes a seller or real estate agent more angry than finding out at closing the buyer's deposit was returned a month earlier for insufficient funds. For Donna's diligence, constant communication and for sharing her story with us she has received a $1000 reward and letter of recognition from the Company.

Uninsured Deed Affidavit

An escrow officer ordered a copy of a previously recorded deed at the request of the lender, only to realize it was an uninsured deed. She immediately called for an affidavit from the previous owner validating the conveyance, only to have her transaction completely fall apart just before funding.

Debbie Bentley, from Fidelity's San Jose offices in Northern California, had an order opened for a cash-out loan in the amount of $250,000 on property in Southern California. The loan was from a local hard-money lender who regularly initiates private money loans. He had not worked with Debbie in the past.

Debbie ordered a title report. The report she received from the title department looked normal, except the property was free and clear of any encumbrances. There was an office note that a deed recorded the prior month.

Debbie received the loan documents and e-mailed them to a BancServ notary for signing by the borrower in Southern California. The signing went well and the documents were sent back to Debbie, who packaged the documents and sent them back to the lender to wait for funding. In the meantime, the borrower called Debbie two to three times a day questioning when the funds would be available.

The hard money lender called Debbie and asked her about the office note regarding the deed that had recorded a month prior. Debbie contacted the title officer who sent her a copy of a deed. The deed was given with no consideration and the name of the grantee was not family, but a third party. After reviewing the deed, Debbie knew she would have to obtain an Uninsured Deed Affidavit – completed, signed and notarized by the previous owner shown on that deed.

Debbie printed the affidavit and called the borrower to make arrangements to have the document signed by the original owner in the presence of a Company approved notary. She tried several times to reach the borrower by phone but, all of a sudden, he was no longer communicating with her. Debbie even sent him an e-mail explaining the additional requirement of having the affidavit signed by the original owner, but she received no response.

Three days later Debbie still had not heard back from the borrower. She was in the process of cancelling her file when she received a phone call from a real estate agent explaining the previous deed found in her transaction was fraudulent. The agent went on to explain that they had opened a police investigation and had already placed Lis Pendens on the property, clouding the title from further conveyances or encumbrances.

The agent also explained to Debbie that he was the nephew of the legal owner of the property, who is an elderly woman under the care of hospice. The nephew found out about the fraudulent conveyance because the county offices sent him a letter informing him that this deed had been recorded and questioning if there were any concerns. Shortly thereafter the attorney representing the owner's estate contacted Debbie confirming the real estate agent's story.

Debbie immediately cancelled her file. As a result of her actions the Company avoided insuring a lien against property that had been stolen from an elderly person. She protected not only the Company but the heirs of the elderly person's estate by requiring the Uninsured Deed Affidavit. For her efforts, Debbie has received a $1,000 reward from the Company as well as a letter of recognition.

Moral of the Story
An Uninsured Deed Affidavit ratifies the actions of the grantor on a previously signed deed by having them swear and affirm:

• They were the grantor in the deed.
• They executed the deed on the date shown on the face of the deed.
• It was their intent to convey all of their interest in the subject property.
• The deed is valid and in full force and effect and they claim no ownership.
• The purpose of the affidavit is to induce the title company to insure a future transaction.

Even though the preliminary report did not require an Uninsured Deed Affidavit, Debbie made the prudent decision to require one on her own. Insisting the affidavit be signed by the prior owner in the presence of an approved notary public warded off another forgery by the thieving borrower. Her actions protected the Company and the elderly owner against the criminal intent of the borrower to draw out equity in the elderly owner's home. Debbie protected the Company from a future claim that surely would have been brought on by the new lender as well. If the deal had closed as planned, the new lender would have filed a claim once their deed of trust was found to be unenforceable. Their lien would have been found unenforceable since the trustor/borrower wasn't the legal owner of the property and had no right to encumber the property.

Fraud Insights Quiz

Return the completed quiz for a chance to win a Starbucks gift card worth $10. E-mail your responses to settlement@fnf.com.

Hint: You can find answers to the above questions in previous editions of Fraud Insights. Previous editions can be found at home.fnf.com by going to Business Tools and then Internal Publications.

• Fill in the Blanks: In addition to raising awareness, it is our goal to provide employees of FNTG with tips and tools that will aid in the ___________ and ___________ of fraud.
• Volume 1 Issue 2 of Fraud Insights contained an article entitled "Caught in the Act – Loan Officer Forges Security Instrument." Who was the hero in that story?
• Lisa Tyler
• Karen Lynaugh
• Darlene Phillips
• Bill Duggen
• In Volume 1 Issue 3 we learned the following valuable information: "An illegal resident may hold title to real property like anyone else. His (or her) title is insurable, with no special exceptions, even if you know his/her immigration status. Nor do you have any obligation to report his/her immigration status to law enforcement. If you learn that a party to the transaction is an illegal resident, extra care is required to verify his/her identity, as many illegal residents use forged drivers' licenses. However, it is possible for an illegal resident to have a valid identification, such as a Mexican driver's license, and though he/she cannot obtain a Social Security card, an illegal resident can obtain an Individual Taxpayer Identification Number (ITIN)."

  Who provided us with these words of wisdom? _______________________________

• From Volume 1 Issue 4 – How much does it cost to purchase a fake identification card over the internet? __________________
• What is the Fraud Hotline number for reporting acts of internal misconduct? __________________

The first ten (10) people to e-mail settlement@fnf.com the correct answers to all five (5) quiz questions will receive the valued prize of a Starbucks gift card. Don't delay, respond today! Be sure to indicate "Fraud Insights Quiz" in the subject line of your e-mail.