New Indictment

By Lisa A. Tyler
National Escrow Administrator

The story entitled "New Indictment" contains the details of a scam pulled off by a ring of fraudsters not once, not twice, but more than 18 times! The details of the scam required some incredibly bold actions on the part of the fraudsters and some incredibly stupid acts on the part of the settlement agent. One of the many stupid acts included diverting seller proceeds from the seller to a third party – the fraudster!

"Pearl Grace on the Case!" is a story of how one of our finest escrow officers stalled a transaction just long enough for Adult Protective Services to step in and have the courts appoint a guardian for an elderly buyer. Pearl was nervous about disclosing private information to an agent from Adult Protective Services to stall the closing for fear of infuriating the seller – a repeat customer. In addition, she was curious as to whether the accusations she heard about the buyer were really true. Read the story to find out the actions Pearl took to protect the Company and the elderly buyer from a possible scam.

The last story in this edition is entitled "Careless Whispers" and features a perceptive closer from Illinois. While conducting a signing ceremony for a short sale transaction, the closer overheard attorneys and real estate agents in the very same room whispering to each other about why no one wanted to sign an arm's length affidavit. As they whispered back and forth, she figured out the scam they were trying to pull and decided she had heard enough. She removed herself from the signing and notified her title underwriter who, in turn, directed her to halt the transaction.

Looking for stories to share at your next lunch and learn, association meeting or customer presentation? Fraud Insights is an excellent resource to share inside and outside the Company. Multiple stories on the same topic can be found using the Intranet search tool found at under Business Tools, then Internal Publications. For example, if your next meeting is centered on the topic of short sales, type the words "short sale" in the search tool, select the "all keywords" option and the system will display more than a dozen stories on this topic. Then print them, e-mail them, share them at your next internal or external meeting.




New Indictment

In March 2011, seven people were arrested and indicted in a mortgage fraud scheme. For approximately two years the defendants had perpetuated their scheme in more than 18 transactions. The indictment says they "knowingly and willfully devised, and intended to devise, a scheme and artifice to defraud lenders … to obtain money from lenders by means of material facts and fraudulent pretenses, representations, and promises, and by intentional concealment and omission of material facts."

Here's an example of how the scam worked. The loan officer lured in a straw buyer by telling him he would be paid $10,000 for every house he purchased without having to put any money down, along with additional money when the homes were resold. Sounds great, right? The ring leader would remodel the house and rent it out. After two years, the house would be resold to the renter. The rent payments were applied toward the mortgage payments.

The straw buyer agreed to lend his name and credit to a transaction. The parties closed on the purchase of one property on a Wednesday for $550,000. The straw buyer obtained a mortgage for $495,000. The loan application contained the following material false statements:

  • Inflated monthly income
  • Inflated bank account balances
  • Inflated assets

The lender wired $502,041.34 to the escrow/title company. The escrow/ title company issued a check in the amount of $144,861.78 to a shell company the ring leader owned. This disbursement was not disclosed to the lender on the HUD-1. The straw buyer was given $9,700 cash in a paper bag by the loan officer after closing.

On Thursday the ring leader withdrew $66,500 from her bank account and converted it to a cashier's check. The cashier's check was provided to the escrow/title company as the down payment and closing costs purporting to be from the straw buyer and not third party funds.

Did you notice the timeline? The file closed before all the funds were in. This is what facilitated the scheme. The $144,861.78 is released to the ring leader who deposits the funds into her account so she can turn around and provide the down payment check on behalf of the buyer. No one is out any cash up front.

The perpetrators were indicted on 14 different charges. Their scheme qualified them for almost $13.5 million in fraudulent loans and received over $2,907,452 in ill-gotten gain from the proceeds of these loans and real estate transactions.

Here are some of the other details from the indictment:

 A "cash back" scheme is one variation of mortgage fraud. In a "cash back" scheme, the perpetrator of the scheme offers to purchase a property for more than the seller's asking price and submits a contract to the seller for the inflated price. The seller agrees to the sale because they are generally receiving the full asking price.
 Often a "straw buyer" is used to facilitate the "cash back" scheme. Generally, a straw buyer is someone recruited by the perpetrator to take out a mortgage and purchase a house in their name. The straw buyer normally does not live in the house or have the intent to reside at the house.
 A Uniform Loan Application, also known as Form 1003, is prepared for the straw buyer. A lender uses this form to record relevant financial information about the applicant who applies for a mortgage. Misrepresentations are made to qualify the straw buyer for a mortgage. In signing the loan application, the straw buyer acknowledges that "the information provided in the application is true and correct."

This scheme could have never been pulled off without the escrow/title company. The indictment goes on to identify the role of an escrow/ title company in a real estate transaction:

 A title or escrow company is used in which the subject property is deposited for safekeeping under the trust of a neutral third party (escrow agent) pending satisfaction of a contractual contingency or condition. Once the conditions are met, the escrow agent will deliver the property to the party by the contract.
 After receiving the loan documents facilitating the buyer and seller signing, escrow agents prepare a final HUD-1 wherein details of the actual receipt of lender funds and fund disbursements are listed for the records of the lender, seller and purchaser. The escrow agent is required to disburse funds according to what has been indicated in the HUD-1 settlement statement.

The escrow agent received the down payment from the ring leader in transaction after transaction and never disclosed them as third party funds. The disbursements were also hidden since the ring leader was paid out of the escrow file without being disclosed to the lender on the HUD-1. The escrow/title company who handled these closings is now closed.

All of this information was crucial to the lender because a "cash back scheme puts the loan at a greater risk as the loan originates with negative equity in the property." To summarize, "the co-conspirators artificially inflated the sales contract prices … the defendants concealed from the lending institutions by intentionally withholding from the lender that payments were made to unrelated third parties to the transactions or omitting on the HUD-1 that at the close of each sale a portion of the loan was paid to an unrelated third party to the transaction. Additionally, in some transactions, the parties failed to disclose to the lender that the straw buyer or purchaser of the property received cash back from other members of this conspiracy for the use of straw buyer's credit to purchase the property."

Moral Of The Story
All receipts and disbursements must be completely and accurately disclosed on the HUD-1 and to the lender. Making disbursements to individuals or entities who are not a party to the transaction is completely unacceptable. Seller proceeds should be disbursed to the seller only and not their LLC or members of their LLC.



Pearl Grace on the Case!

An agent from the Adult Protective Services notifies one of our escrow officers the buyer in two transactions has dementia and should not be allowed to complete her purchases. Our officer is reluctant to provide information to the agent since our files are completely confidential. At the same time, she doesn't want to close with a buyer whose mental capacity might be compromised.

Pearl Grace, an escrow officer from Fidelity's Oakland office, was handling two sale transactions; one for $299K and the other for $170K. Both transactions had the same elderly buyer. The buyer was acquiring the properties as part of a 1031 tax deferred exchange and was not represented by a real estate agent. Pearl's office had worked with the seller before, but always through a real estate agent. This time he was selling properties as FSBOs. The contracts had a quickly approaching close date and the seller was rushing Pearl to close both transactions as soon as possible.

The seller brought the elderly buyer in to sign the closing documents. She executed the documents as trustee of her family trust and the funds to close were wired in by her exchange accommodator. The very next day Pearl got a call from an agent at Adult Protective Services indicating the buyer might have dementia. Pearl thought the elderly lady had seemed fine during the signing appointment, but knew she needed to investigate further and somehow stall the transaction. Pearl saw the seller had not provided the natural hazard reports as required under the purchase contract. She told the seller she could not close until he ordered the reports. The seller said he would not be ordering the reports as the buyer agreed to sign an addendum waiving them as a condition to close.

Pearl contacted the elderly buyer to come in and sign the addendum for each property waiving the natural hazard reports. When the elderly lady came in, Pearl had a conversation with her about the transaction in front of others in the office in order to confirm or deny the buyer had signs of dementia. In discussing the transactions Pearl could tell the buyer was confused. Despite the fact the properties were not in a good area and being sold "as is," the buyer had only seen pictures. Pearl read to her the addendums she was supposed to sign. The elderly lady stated she just wanted to get the properties closed so she could start collecting rent. Pearl asked if there were renters in the properties at the time and confirmed there were currently no tenants.

Pearl asked the elderly buyer if anyone had reviewed the transactions with her. She said "no" and stated she had no husband or living relatives, but mentioned she had an attorney. Pearl suggested she review the details of each transaction carefully with her attorney. The elderly buyer then left our offices with copies of her closing documents to review with her attorney.

Pearl contacted the seller to let him know the buyer had not signed the addendum for each property waiving the natural hazard report, but instead had taken the closing documents to her attorney for review. Pearl then called National Escrow Administration for further direction. The escrow administrator and Pearl decided that until they received approval from the attorney, the transactions could not move forward.

Meanwhile the agent from Adult Protective Services called again to confirm that the elderly lady did, in fact, have dementia. The agent stated an action had been filed in court to request the appointment of a public guardian to act on behalf of the elderly buyer. Pearl informed the agent from Adult Protective Services the elderly lady was consulting with her attorney.

The attorney called Pearl's office to let her know he was not aware of the creation of the elderly lady's trust. He felt the transaction was a conflict of interest and told her not to close, because the trust agreement named the seller as the elderly woman's successor trustee!

Pearl contacted the seller to let him know she could not close as it appeared the buyer did not seem to understand the transaction completely. The seller argued that she did and commented even if she didn't sign he would use a Durable Power of Attorney she'd given him to close the deals. Pearl informed him he wouldn't be able to use the power of attorney when the title is being held in a trust.

Pearl returned the closing funds to the exchange accommodator and the transactions were not closed. As a result of Pearl's decision to stall the transaction while gathering additional facts and information, the Company has rewarded her $1,000. Had she caved to the pressures of the seller and closed the transaction, the Company could have been dragged into a lawsuit by the local courts, the beneficiaries of the trust and heirs to the buyer's estate.

Moral Of The Story
Although confidential information cannot be released from an escrow transaction to an outside party, any report of a principal lacking competency has to be treated seriously.



Careless Whispers

Kishona Brown, a closer with Chicago Title's Skokie, Ill. office, was conducting a signing without the buyer or seller in the room. To set the stage, the signing ceremony was being conducted with both the buyer and seller's attorneys and real estate agents.

The attorneys were actively reviewing the documents and signing on behalf of their principals, when all of a sudden the signing came to a screeching halt. The attorneys started whispering and Kishona strained to hear what they were discussing. Apparently neither one of them wanted to sign the short sale lender's document entitled Affidavit of Arm's Length Transaction. They instead were insisting the real estate agents sign the form for their clients. This is what the affidavit said in part:

Affidavit of Arm's Length Transaction

  • The purchase and sale transaction reflected in the agreement is an "Arm's Length Transaction" … the transaction has been negotiated by unrelated parties, each of whom is acting in his or her own self-interest, and that the sale price is based on the fair market value of the property with respect to those persons signing this affidavit as an agent for either Seller(s), Buyer(s), or both, those agents are acting in the best interest of their respective principal(s).
  • No buyer or agent of the buyer is a family member or business associate of the seller or the borrower or the mortgagee.

The real estate agents didn't want to sign the Affidavit either. And through the quiet bickering between the attorneys and agents Kishona learned the seller and buyer were actually married to one another! They did not share the same last name, so Kishona would never have suspected had it not been for the careless whispers among the attorneys and real estate agents.

Kishona promptly excused herself from the signing and escalated the situation to her head title underwriter who told her to halt the closing. She did so and excused the parties from the signing. The seller's attorney quipped to Kishona before he left, "Better luck next time!"

The buyer then called Kishona the next day yelling and screaming at her for stopping the closing and demanded her money back. Thank goodness Kishona halted the transaction! If the short pay lender had later discovered the relationship between the buyer and seller, they may have elected to rescind their short pay agreement and keep their lien in full force and effect. Luckily, the only policy our Company was issuing in the transaction was an owner's policy to the wife/buyer. The policy would not have afforded her protection against the lender's lien rights, if her attorney followed through with the signing of the Affidavit – since he would have perjured himself on her behalf. The Company would have been stuck with the money and forced to participate in unwinding the transaction, which would have cost our offices more time, money and complete frustration!

For Kishona's keen sense of hearing and for having the guts to escalate what she knew was clearly wrong, the Company has rewarded her $1,000 as well as a letter of recognition.