First Time Home-Buyer Tax Credit Fraud

The IRS has reported it has suffered nearly $25 million in fraudulent credits from the first time or move up home-buyer credit. Approximately $9 million in credits were issued to prison inmates. Other credits were issued to first time home-buyers who bought the property they already lived in from their relatives. No one moved in and no one moved out.

The original deadline to close and qualify for the credit was June 30, 2010, but at the eleventh hour, thanks to associations such as the National Association of REALTORS®, American Land Title Association® and the American Escrow Association the deadline was extended to September 30, 2010. Thank goodness, since some of our settlement agents were being asked to do things in the wrong order in an effort to meet the deadline.

Kelly Collier, Sr. Escrow Officer at Fidelity National Title Co. in Palm Desert, Calif. was one of these agents. On June 30, 2010, she received a request for an estimated HUD-1 at 3:30p.m. from a well known lending institution. She acknowledged the request, explained she would work on the estimate first thing Monday morning and continued with her month-end closings and reports. At 4:20p.m. that afternoon the lender contacted Kelly and asked if she planned to "close" the same day; the lender had just funded the loan in order to make the deadline for the New Home Buyer Tax Credit. The lender went on to explain some of the other title companies had been making exceptions to "close" for the same reason.

Kelly was baffled by the request since the loan documents had not yet been drawn, let alone signed. Additionally the HUD-1 had not been prepared, nor had she requested or received the buyer's closing funds. Kelly asked the lender to clarify what she was asking her to do, reiterating no documents had been signed, including their loan documents or funds received. The lender replied she wanted Kelly to accept the loan funds and consider this day, June 30, 2010, the close of escrow. The lender repeated several other title companies were closing in this manner. Kelly asked the lender to put the request in writing, on the lender's company letterhead, and have it signed by an individual authorized to bind the lender. Shortly after her request, the woman's manager called and explained he could not put the request in writing.

Kelly knew the request was not acceptable. The tax credit could only be applied if the file was closed. Kelly acts only upon the written, mutually executed instructions of the principals to her transaction. Because of this she knew the instructions given required her to have the documents properly executed, with all closing funds on deposit, and record of the documents before the file was closed. The Purchase and Sale Agreement defined the closing as: "The date of recordation of the Grant Deed." Per the Agreement, one of the conditions which must be met prior to closing was: "Buyer has deposited required funds with Escrow Holder."

The loan closing instructions said: "You may not close this loan unless you fully comply with all closing instructions." The instructions required Kelly to record their Deed of Trust in first lien position. Since she did not have the Deed of Trust, borrower's funds nor the Grant Deed, Kelly was in no position to represent this file as closed. Of course she advised the lender she would NOT be inserting June 30, 2010 as the settlement date.

Why is the settlement date so crucial?
The settlement date is crucial because it is what the IRS looks at to ensure the buyer did, in fact, meet the closing deadline necessary to receive the credit. The buyer must complete and remit IRS Form 5405, as well as a copy of the Purchase and Sale Agreement, and a copy of the HUD-1 to prove they qualify. Since the HUD-1 is prepared by the settlement agent and is a federal form, the IRS relies on the information on the form to be accurate and true. If it includes false or misleading information, the settlement agent faces financial penalties and even imprisonment.

Fortunately settlement agents know and understand the importance of their duties and rely on the Purchase and Sale Agreement to define the acts which constitute the closing. Kelly Collier did this and for her efforts has been rewarded $1,000.

Petty Threats

Most banks won't immediately cash a check presented, especially if you don't have an account with the bank. Fraudsters have figured out the best way to cash forged checks is to take the forged check to quick check cashing centers. Even though fraudsters have to pay the quick check cashing center a fee or a portion of the amount of the check, something is better than nothing, right?

Our Company is regularly the target of fraudsters. We are a large, reputable Company which clearly processes large amounts of money on a daily basis. This makes us – and especially our trust accounts – their main targets. Thanks to Positive Pay, we are regularly protected against losses from counterfeit checks drawn against our bank accounts.

Every evening a list of all checks written is electronically transmitted to the bank where our trust accounts are set up. Thereafter the banking system matches any checks presented for collection against the transmitted checks issued data. If a check does not match the data it shows up on an exception list. Every morning our Operational Accounting Centers (OAC) review the list of exceptions and report to the respective banks which items should be dishonored and returned to the depositor. During this process, if a counterfeit check is presented, it is caught and denied payment. As a result, fraudsters take their counterfeit checks to quick check cashing centers.

Unfortunately, most of these quick check cashing centers do not have the necessary checks and balances in place to protect them from counterfeit checks. As a result, by the time the quick check cashing center's bank notifies it the check it cashed was returned without collection, it has been several days or even weeks. When this happens, the check cashing company is out the entire amount of the check, not just its percentage. It is up to the quick check cashing center to try to recoup its losses with the person who presented the counterfeit check. Sometimes the quick check cashing center contacts us to re-pay it by sending us a letter threatening to sue. Here is an example:

The check cashing center tries to claim it has a right to pursue a small claims action against our Company under statute which says:

Apparently the quick check cashing center completely missed the fact the check was a forgery! Our office did not issue the check at all. Although its claim has no basis whatsoever, we cannot simply ignore the letter. In the above example, William H. Umland, A.V.P. of Chicago Title Company promptly responded. Here's what his response said:

Moral of the Story:
Our Company does not just give in to petty threats. These quick check cashing centers need to put better checks and balances in place within their operations to prevent such losses. We will not be held responsible for their lack of procedure. If a bank or quick check cashing center ever contacts you to verify a check, ask them to fax it over. A fraudulent check is very easy to identify upon receipt. Had they contacted us when Johnson presented the check to them we could have immediately confirmed the check was, in fact, a forgery. The check in this story is missing our logo and has only one signature, plus the person who signed it is not a signer on our account – and does not work for us.

Grand Larceny

Tami L. Demers, 41, owns Johns and Lee Real Estate Services, a title insurance agency which handled mortgage closings, mainly refinances. A New York State police investigation revealed Demers stole $520,066.85 from various mortgage closings and, in three instances, never paid off the original mortgage.

Johns and Lee Real Estate Services, located in New York state, was an agency for FNTIC. In October, the New York State Police notified our Company that they were investigating a complaint of a homeowner whose refinance had been handled by this agency.

The Police stated a borrower had refinanced her home mortgage on April 23, 2010. Johns and Lee Real Estate Services was to have paid off two prior mortgages through that transaction. From the HUD, it appeared there was a second mortgage held by EverHome Mortgage Co., on which $223,880.46 was to have been paid. In August, the borrower received a new book of mortgage coupons from EverHome. The borrower called the mortgage company to inquire about the coupons, since she thought the loan was paid off four months ago. EverHome confirmed the loan was not paid and still had a balance of more than $220,000. The borrower contacted the police.

The police investigation revealed that Johns and Lee Real Estate Services simply continued to receive monthly payments on that loan, never paying it off!

Our claims and litigation department worked diligently with the New York State Police to uncover two additional unsuspecting victims who were left with two mortgages on their property. Also, during the joint investigation, a number of missing title indemnity holdback escrows, as well as holdback escrows for future tax payments in limbo, were discovered. The money for those transactions was siphoned off and used by Demers.

As a result, Demers was charged with three counts of second-degree grand larceny – all felonies. She is currently being held in a Saratoga County Jail without bail.

Moral of the Story:
Look out fraudsters! Law enforcement authorities are aggressively investigating and prosecuting real estate fraud. In the New York State market, agents are not licensed, and are not authorized to conduct any settlement activities on behalf of their underwriters. Most closings in New York are conducted by attorneys engaged by the lender and paid for by the borrower. In this story Johns and Lee Real Estate Services is not a law firm and Demers is not an attorney. Her actions were illegal on many levels. Our Company takes a hard-line on helping law enforcement bring indictments against those who use real estate fraud to harm consumers.