Mortgage Broker Siphons Proceeds
Pay attention to all the red flags in this transaction involving unsuspecting borrowers in Northern California who were duped by their mortgage broker. The mortgage broker diverted the proceeds from a cash-out refinance to an unrelated third party – who later turned out to be his wife!
The cash-out refinance was opened in a remote escrow branch in Northern California by Michael Bowman with Capital Direct Lending. He had never done business with our office before. Upon receipt of the loan documents the settlement agent arranged for an out-of-office signing with a BancServ notary. Just prior to the signing appointment the mortgage broker moved the signing location, causing the escrow officer to find another available BancServ notary. The mortgage broker offered to pick up the documents from the first notary and deliver them to the new signing location.
The mortgage broker inserted a document into the signing package that read as follows:
This shall serve as confirmation the additional proceeds available to you of $6,132.68 or whatever is remaining that will be used to modify your existing principle [sic] balance and reducing it from $98,500 down to $92,368 thereby invaliding [sic] the existing amount of $98.5k shown on the note and modifying it with a new amount of $92.3K total amount due. Also, the interest rate has been returned to the original 4.875% from the current 5.00%. This is contingent upon the additional cash proceeds not being disbursed to you directly but only to a third party. These monies, the proceeds, will be transferred as a wire immediately at the close of escrow to a neutral third party who will then transfer these funds to the lender as a reduction in your principle [sic] balance.
Believe it or not the borrowers signed this nonsense! And, they signed an instruction authorizing the wire transfer to an account at Wells Fargo Bank belonging to an unrelated third party. The mortgage broker then delivered the documents back to the escrow branch office.
After the three-day right of rescission lapsed, the lender funded and the settlement agent began disbursing funds from the file, including the wire transfer of funds into the Wells account of an unrelated third party. Just as the settlement agent was about to send out the mortgage broker compensation her phone rang. The caller on the other end was a co-worker who claimed Michael Bowman was using their escrow branch's Federal Express account number to ship packages related to this and other transactions.
The settlement agent contacted the mortgage broker's main office location, asked for their overnight delivery account number and explained to Capital Direct Lending's owner that Michael Bowman had been using the Company account number for his own personal use. Capital Direct Lending's owner promised to reimburse the Company their expenses.
Because of the previous red flags, the settlement agent called the borrowers to tell them the refinance had closed and the funds were wired per their instructions to Wells Fargo. The borrowers were shocked to say the least. Evidently they didn't read any of the documents they signed including the instruction diverting the funds to an unrelated third party's account. They were under the impression they would receive proceeds in the amount of $6,000. The settlement agent told them the name of the person who was to receive the wire transfer. The borrowers had no clue who that person was.
The settlement agent called for a reversal of the wire transfer. Wells Fargo insisted they needed the account holder's authorization to return the wire. They began calling the account holder, who did not answer her home phone, office phone and cell phone. The settlement agent contacted the owner of Capital Direct only to find out the account holder in question was Michael Bowman's wife!
Capital Direct then sent a fax notification indicating Michael Bowman would be wiring the funds directly to the lender to reduce the principal balance of their loan as promised. The settlement agent confirmed the wire was never received by the lender.
The settlement agent escalated the issue to FNF's National Escrow Administration and Treasury Departments. After further investigation it was discovered the mortgage broker, Michael Bowman, had his real estate license suspended indefinitely by the Department of Real Estate in 2002.
The borrower contacted the FBI Fraud Unit only to be told their case was too small. The FBI officer stated the Bureau will only investigate cases involving the theft of $100,000 or more. The borrower was advised to contact the local authorities. This will be an ongoing story as the mortgage broker is reported to the Department of Real Estate and other regulators in the State of California.
Moral of the Story
Payments to unrelated parties in a transaction are strictly prohibited! In a refinance transaction, loan proceeds may only be paid in strict compliance with the written closing instructions provided by the funding lender. Any request to pay additional parties must be listed in the 1300 section of the HUD-1 and approved in accordance with the lender's instructions. In most cases, approval of the HUD-1 or closing statement by the funder is not sufficient.
If a principal requests these types of disbursements, it is best to say it is against our Company policy. It is the settlement agent's fiduciary duty to remain neutral and safeguard the funds on deposit, ensuring all of the conditions are met. Lenders expect full disclosure of all receipts and disbursements in accordance with written mutual instructions. If a lender disapproves of any requested disbursement be sure to notify the party in writing.
Settlement agents may accept written instructions to deposit proceeds directly into a bank account on behalf of the principals. Settlement agents may also cut separate checks or send a wire in the name of each individual seller or borrower. Multiple disbursements to the same payee are not acceptable, especially when asked to disburse in increments of $10,000 or less, as this might be perceived as participation in a money laundering scheme.