Loan Officers Abscond With Broker Fees?

Loan officers from two different states embezzled funds from their employers by redirecting the payments to themselves at closing. These actions caused mortgage brokerages to implement tighter controls.

One of our operations in Georgia received a call from the owner of a local mortgage brokerage. He asked if we could run a search in our system to locate the transactions closed with his brokerage and how much was paid to his company in broker fees. The owner of the brokerage had discovered his branch offices had been instructing settlement agents to deliver the broker checks to their branch office. In some cases, they would forward the checks to their corporate office, and in other cases, simply endorse the checks over to themselves and cash them. The brokerage owner was in the process of contacting all the title companies in town to gather his evidence, determine the extent to which this occurred and file charges against loan officers guilty of this theft.

Not long after this request, a similar inquiry came in from another mortgage broker from Washington. His loan officer opened his own bank account in the brokerage name. This loan officer was originating loans and having the checks sent to his attention so he could negotiate the checks and disburse the funds to himself.

The owners of these brokerages learned a valuable lesson. They knew the settlement agents were not to blame since they simply followed the loan instructions by making the check payable to the brokerage. Unfortunately, these owners did not have the proper checks and balances in place to know when a loan was originated in their brokerage's name. This would have allowed the owners to provide the settlement agent directly with written instructions for where to send the broker package and check. In both instances, these owners said they would make sure, in the future, that the settlement agent would know where to send the checks.

Although Our Company did not suffer any losses as a result of the wrongdoing of these loan officers, our customers were impacted. Fraud Insights is an industry publication designed to keep our settlement employees, agents and customers educated and up-to-date on the latest real estate schemes and scams. Hopefully this story motivates our customers to ensure they have proper procedures in place to protect themselves and their companies.

Live From Zanesville

Property owners are sometimes less than honest – not just in Zanesville, Ohio, but everywhere. In this story, a Zanesville property owner swore under oath she was not in bankruptcy, but the title agent suspected otherwise. He followed through with his suspicions and ended up saving the Company from a potential claim.

Jeremy McLendon from S.E.O. Title Agency in Zanesville, Ohio, shared a story about a closing he recently conducted. A local mortgage broker contacted his office and ordered title for a purchase that was closing within a month. The sale price was $126,900 and the buyer's new loan was in the amount of $124,601. There were no real estate agents involved and nothing appeared to be out of the ordinary. When Jeremy received the order information, he sent out the standard Seller Information Sheet requesting information about the seller and the property. Title to the property was held in the name of a father and his daughter. The father had a line of credit secured by the property and there were no other liens.

The father was extremely easy to work with and readily responded to requests for information. The daughter, however, would not complete the Seller Information Sheet and Preliminary Owner's Affidavit. She would not even return Jeremy's phone calls. When Jeremy spoke to the father, he assured him there were no problems and his daughter was just a very busy person and difficult to reach.

Closing day came and Jeremy received the money from the lender and borrower. The daughter was not able to attend the closing until after regular business hours, but Jeremy accommodated the late closing on a Friday night. During the closing, the father provided Jeremy with the necessary information and signed all his documentation, but the daughter was acting strangely and taking phone calls throughout the closing. When asked about the Preliminary Owner's Affidavit, she claimed she had never received it. Jeremy went over every question with her on the affidavit, particularly the one asking if she was a party to any bankruptcy proceedings. She claimed she filed for Chapter 13 in 2000, but was not in bankruptcy at the present time. It was the way she said "present time" that caused Jeremy concern, but she signed the Preliminary Owner's Affidavit.

Jeremy told the borrowers that since this was an after-hours closing, he could not disburse until funds had cleared and a funding authorization was obtained. When he returned to the office Monday morning he asked a colleague, an attorney, if he could look up bankruptcy filings. The attorney looked up bankruptcy filings in the daughter's name and found the daughter was currently in bankruptcy! She had filed for Chapter 7 in March 2010. The daughter had lied on the affidavit and failed to tell her father she was in bankruptcy.

Jeremy immediately contacted the attorney listed on the filing and inquired as to the status of the bankruptcy. He confirmed the daughter was, in fact, in bankruptcy. Even more interesting was the fact she failed to disclose to her attorney that she owned the property that was the subject of Jeremy's closing. Jeremy then contacted the father and daughter and told them he could not disburse the proceeds, then began the task of unwinding and cancelling the transaction. He sent the buyer's and lender's funds back to them, stating the transaction had been cancelled and, as a result, a title claim has been avoided.

The father and daughter's proceeds were going to be more than $85,000. Jeremy said he could only imagine what the bankruptcy court would have done had we disbursed based on the daughter's sworn affidavit.

Moral of the story
The U.S. Bankruptcy code prohibits the debtor and property owner from transferring property without the court's approval. This transfer, had it gone through, could have been invalidated by the bankruptcy court.

S.E.O. Title Agency is underwritten by Fidelity National Title Insurance Company. Had the deal closed and the court invalidated the transfer, the buyer would have had a claim under their owner's policy to protect their ownership rights. The buyer's new lender would have had a claim against their loan policy to protect their lien rights. The agent's instinct in this case saved the Company from a potential loss of $126,900.

As a result, Jeremy McLendon has received a letter of recognition from the Company and a $1,000 reward for following his instinct and halting the transaction.

Most Bizarre Claim Ever!?

Title insurance policies insure 100 percent against forgery. If the insured party can prove documents in the transaction were forged, they are entitled to reimbursement of their losses. The problem is how to prove a forgery. In this case, the lender had the documented support of a police investigation.

Liberty Title, a title agent for Lawyers Title Insurance Company, issued a loan policy on June 20, 2008 for $600,000 to JP Morgan Chase. Later, JP Morgan Chase was served with a Summons and Complaint: a Special Administrator had been appointed to the case (by the State of California) due to the suicide of the borrower who had no heirs to his estate. The Special Administrator filed a complaint with the courts to void the $600,000 mortgage, citing forgery.

The State of California determined the loan was a forgery based on a police investigation, which showed that on December 15, 2008, Hassan Ben-Ali committed suicide by shooting himself in the head. While the police were at the scene, the purported wife of Ben-Ali advised police that Ben-Ali was feeling guilty because four years ago (2004), Ben-Ali's son, Taruk, apparently overdosed and died in an Oakland motel room. Hassan retrieved his son's body, and took it back to the apartment building that was vested in his son's name. Ben-Ali wrapped his son's body in a clear plastic bag, then a blanket, then two tarps and placed it in a crypt. Ben-Ali then filled the crypt with dirt and sealed it by cementing a block wall around it in the apartment building's laundry room. Ben-Ali then assumed his son's identity, and on June 20, 2008 obtained a $600,000 mortgage against the apartment building. The proceeds of the loan were used to pay off an existing loan in the amount of $464,065.96 and the balance of the funds were given to Ben-Ali. Ben-Ali made the payments until he committed suicide and default occurred.

The Claims department agreed to permit JP Morgan Chase to enter into a settlement agreement with the Special Administrator while the claim was being processed. The settlement was to forfeit any claim over and above the $464,065.96 equitable subrogation figure.

In a nutshell, equitable subrogation occurs when the proceeds from one mortgagee's loan are utilized to satisfy the outstanding obligations under an earlier mortgage. Equitable subrogation affords the second mortgagee the right to be substituted into the position of the earlier mortgagee and afforded priority over subsequent liens and creditors – to the extent the loan satisfied the earlier debt. As a result, this claim cost the Company $135,934.04 (the difference between the prior mortgage and the new mortgage) – not the full amount of the new mortgage, which was $600,000.

While extremely bizarre, this claim provides our readers an inside look at how claims are negotiated to make the insured party whole without overcharging the Company.