Fake Short Pay Letters Plague The Industry

By Lisa A. Tyler
National Escrow Administrator

The article entitled "Fake Short Pay Letters Plague The Industry" describes the purpose and benefits of following Company policy and procedure. The incident detailed in the story continues to happen to our direct and agency operations. It is important we are all aware of the crime being perpetrated and do what we can to prevent it.

Then, take the "Fraud Awareness Quiz" to test your retention of the information shared in previous editions of this newsletter and educate yourself on the ever-changing fraud in the real estate industry.

In our December 2009 issue of Fraud Insights we warned you about the latest type of advanced fee scam targeting settlement agents. Since then we have published three articles describing the characteristics of these scams: a buyer purchases a property sight-unseen off the Internet, and remits a check representing the earnest money deposit and down payment. The checks are usually drawn off an international bank, although a few have come in from a U.S. bank or credit union. Shortly after we receive the check the buyer requests the amount over and above the required earnest money deposit be sent back to them because, "an urgent business transaction just came up." These checks are always counterfeit.

Since the first article we published on this topic, the Company's National Escrow Administrators have been notified by settlement agents nationwide on nearly a weekly basis of transactions just like this. Times are tough, sellers and real estate agents want to believe they have an all-cash buyer. When they discover the transaction is bogus they admit all the signs were there from the beginning.

Recently one of our offices forwarded the funniest response yet. The buyer sent a check in the amount of $885,000. The bank immediately identified the check as counterfeit and the settlement agent notified the real estate agents. In the meantime, the buyer sent a request to the settlement agent to send him back $400,000 because, "an urgent business transaction just came up," but promised to send replacement funds in time for closing. The settlement agent forwarded the request to the buyer's real estate agent who responded with this e-mail:

  • Dear Ivo,
     
  • I am so sorry to inform you the bank teller who took the deposit of your cashier's check, literally took the check, cashed it and then fled the country with the entire $885,000.
     
  • But I have good news on how I can make it up to you. I was just informed by e-mail a king from the Congo needs to get several million dollars out of his country and has chosen me to help him. He will be sending me a cashier's check for $10 million dollars and he will let me keep half as long as I send him back $5 million dollars. As soon as the funds are in my account, I will send you back $400,000 and deposit the $485,000 lost into your escrow account.
     
  • If that doesn't work out, I have also won the Nigerian lottery worth $2.5 million and will be able to reimburse you from those winnings.

Hilarious! Remember, if you are asked to process a transaction with these characteristics we do not accept checks drawn off foreign banks only wires. If you receive a check from a U.S. bank or credit union do not hesitate to contact the issuing institution to verify the legitimacy of the check. The faster you reveal the transaction is fraudulent the better.

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Fake Short Pay Letters Plague The Industry

The FNF Family of Companies is the leader in the industry. Being the leader is not always easy. Many times we are the first ones who uncover the latest schemes and, as a result, issue a new policy and procedure. It is our settlement agents who are on the front lines implementing the new policy and often hear, "No other company makes us do this!"

This story illustrates just how important it is for us to follow the Company policies and procedures even if no one else requires them. They are put in place to protect the settlement agent and Company. Read on to hear how verifying the short sale approval letter directly with the short sale lender saved the Company from a claim.

Joy Turner, senior escrow officer for Chicago Title Company in Nev., opened a sale transaction. The seller was in the process of negotiating a short sale with his lender, Bank of America, through the services of a third-party short sale negotiation company. There were no real estate agents involved. The buyer was purchasing the property using a private lender and the sales price was $200,000, pending approval from the existing lender.

On June 10, 2011, Bank of America issued their short pay letter approving the sale for $200,000. Per the letter, the closing was to take place no later than June 27, 2011. As the 27th approached, it was clear the buyer and seller were not going to meet this deadline. It did appear the transaction was going to close, but they just needed an extension of a few days. Joy told the seller she would need a revised letter extending the closing deadline.

The new lender's funds came in on June 28, 2011 and so did the extension letter from Bank of America. The new deadline for closing on the short pay letter was July 1, 2011. On the morning of June 29, 2011 Joy worked to get everything together for recordation and disbursement. Per Company policy, Joy knew she needed to contact the loss mitigator at Bank of America to confirm the terms and amount shown on the short pay letter.

Something about the extension letter and HUD-1 approval Joy received from Bank of America didn't look right. First, the communication did not come through www.equator.com. This was unusual since approval letters were delivered using this online system for every Bank of America short sale Joy had closed recently. Joy picked up the phone and called the person named on the HUD-1 approval. His name was Vitto Pastor. Joy found it odd his title shown on the approval letter said senior operations analyst, Business Operations, since it is usually a loss mitigator who issues short pay approvals. She left him a message.

Shortly thereafter Joy received a returned phone call but it wasn't from Pastor. It was Kenneth Teele, senior investigator at Bank of America. Kenneth advised her Pastor did work for Bank of America - but not in their Loss Mitigation Department and Pastor did not issue the HUD-1 approval letter. Kenneth went on to explain the HUD-1 approval and short pay letter she received were fraudulent and, according to their records, the seller had never applied for a short sale. He also revealed the outstanding loan balance for this loan exceeded one million dollars.

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Joy left a message for the seller to call her, stating there was a problem with the short pay approval. Instead of returning her call, the seller e-mailed Joy asking her to send him copies of everything he signed, including the short pay letter. Joy again asked him to call her, but he responded by saying he was in a meeting and would call later. He never did.

The buyer called to find out if his file had closed. Joy was in another closing so she asked one of her colleagues to tell him we would not be closing as the short pay letters were invalid. The buyer's only response was, "Oh really?" Joy also attempted to contact the third-party negotiation company who never answered the phone or responded to her calls or e-mails.

The buyer's lender contacted Joy on July 1, 2011, asking her to return the loan funds to them. Joy verified with her Operational Accounting Department the funds were being sent back to the same account they came from. She also reported the incident to her manager, Lisa Engelman.

Lisa shared the details with all the escrow officers in her operation and notified National Escrow Administration. Turns out, this was the 15th time our Company had been the target of this scheme. The bad news is, 14 of these closed and our claims department is currently working on them. The good news is Joy Turner prevented us from falling prey a 15th time.

As you know, in a real estate transaction we often act only as the title insurer. This might occur because one of our title agents is the settlement agent or an independent escrow company is handling the closing. Our Technical Memoranda are issued only to our direct settlement agents. Agents and independent escrow companies are not always privy to them. Fortunately Joy is, and followed the requirements to confirm the short pay approval terms and amount directly with the loss mitigator.

This procedure was implemented in 2009 when Tech Memo 102-2009 Short Payoffs was issued. Unfortunately the memo was issued as a direct result of other fraudulent and altered short pay letters we received. It was then we realized the importance of ensuring our settlement agents communicate directly with the loss mitigator. Not all escrow or title companies have implemented such policies. The 14 claims in process, which closely resemble Joy's transaction, were closed by either an independent escrow company or title agent we underwrite.

Moral Of The Story
Joy's transaction involved a $200,000 short sale on a loan with a balance of more than one million dollars. Had Joy accepted the short pay letter and closed, Bank of America would have rejected the nearly $200,000 short pay. The Company would have had to either unwind the deal or face a potential loss of more than $800,000 to obtain a lien release, and deliver both free and clear title to the insured buyer, and a first lien position to their new lender. Following Company policy can seem cumbersome, but this story proves it is well worth the extra effort. For Joy's efforts she is being rewarded $1,000.

 

Fraud Awareness Quiz

Mortgage fraud is a material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan. It continues to evolve as lenders and fraudsters alike adapt to changing economic conditions and government regulations. How much do you know about it? Take the quiz to find out.

  • A title policy insures against:
    • Fraud and forgery
    • Principal and interest
    • Madness and mayhem
    • Metes and bounds
       
  • A straw buyer is:
    • Someone who purchases straws in bulk
    • Someone with good credit who agrees to help someone with bad credit obtain a loan
    • A first time home buyer
    • Someone who is over 65
       
  • Which of the following items are commonly fabricated in order to induce a lender to approve a loan:
    • Employment verifications
    • Mortgage loan applications
    • Bank statements
    • All of the above
       
  • What document is the most forged document in a real estate transaction:
    • Deed
    • Power of Attorney
    • Mortgage
    • Purchase Contract
       
  • Flopping occurs in what type of transaction:
    • Refinance
    • Deed in Lieu
    • Bulk Sale
    • Short Sale
       
  • Which of the following steps can a settlement agent follow to assist in preventing fraud from occurring in one of their transactions:
    • Disclose all receipts and disbursements on the HUD-1 Settlement Statement
    • Make sure the funding lender has everything the settlement agent has
    • Trust their escrow gut
    • All of the above
       
  • Proper identification should be issued by a governmental entity and include a physical description and (select all that apply):
    • Include the bearer's signature
    • Include the expiration date
    • Include the bearer's weight
    • Include the bearer's photograph
       
  • Which of the following is a red-flag warning of a possible fraudulent transaction (select all that apply):
    • Purchase offer is more than the list price
    • Unusual expenses paid by the seller
    • Silent second mortgages
    • Transactions not recorded on the HUD-1 Settlement Statement
       
  • What are the two classifications mortgage fraud schemes are put into:
    • Fraud for profit and fraud for housing
    • Tit for tat
    • Civil and criminal charges
    • Tax evasion and wire fraud
       
  • Who are usually the perpetrators in a fraud for housing scheme:
    • Cops
    • Industry professionals
    • Drug dealers
    • Ex-cons

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Quiz Answers:

  • A title policy insures against:
    Answer: Fraud and forgery
    The Covered Risks section of both an Owner's and Lender's title policy state the insured is covered for, "a defect in the title caused by...forgery, fraud…" Since this coverage is offered in all of the title polices available, fraud and forgery is of major concern to the title industry as well as our Company.
     
  • A straw buyer is:
    Answer: Someone with good credit who agrees to help someone with bad credit obtain a loan
    Generally, a straw buyer is someone recruited by a 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. They often receive cash in exchange for the use of their credit and name.
     
  • Which of the following items are commonly fabricated in order to induce a lender to approve a loan:
    Answer: All of the above
    Mortgage fraud schemes involve falsifying a borrower's financial status by including material misstatements on documents the lender's underwriter relies on, when evaluating the eligibility of a borrower. This is done by supplying fictitious employment verifications, mortgage loan applications and bank statements
     
  • What document is the most forged document in a real estate transaction?
    Answer: Power of Attorney
    A Power of Attorney is written authorization to represent or act on another's behalf in private affairs, business or some other legal matter. As a result, perpetrators sometimes forge the names of property owners in order to sell a property out from under the rightful owner or use the Power of Attorney to get a loan to strip all the equity from a property unbeknownst to the property owner.
     
  • Flopping occurs in what type of transaction:
    Answer: Short Sale
    A flopping scheme requires the perpetrator to conceal or provide falsified information to the loan servicer. This is information the servicer needs to make informed short sale decisions. These concealments might include hiding the true parties to transaction, any contingent transactions or the true value of property.
     
  • Which of the following steps can a settlement agent follow to assist in preventing fraud from occurring in one of their transactions:
    Answer: All of the above
    The settlement agent is often the best defense against mortgage fraud. Without them, the fraud might never be prevented. It is important the settlement agent fully disclose all receipts and disbursements on the HUD-1 Settlement Statement and material facts to the funding lender.
     
  • Proper identification should be issued by a governmental entity and include a physical description and:
    Answer: Include the bearer's signature and photograph
    Forged documents are often one of the many elements included in a mortgage fraud scheme. It is important to the lender and title company the borrower is property identified. Although the identification requirements for the purpose of notarizing vary from one state to the next, it is often the lender who requires the borrower present identification which contains all of these elements.
     
  • Which of the following is a red-flag warning of a possible fraudulent transaction:
    Answer: A, B, C and D
    Although any one of these items alone might not be an indicator - combined they definitely have the makings of a scheme.
     
  • What are the two classifications mortgage fraud schemes are put into:
    Answer: Fraud for profit and fraud for housing
    The FBI defines these two classifications. They state fraud for housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Fraud for profit often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales.
     
  • Who are usually the perpetrators in a fraud for housing scheme:
    Answer: Industry professionals
    Industry professionals are the ones most familiar with the ins and outs of the loan process - and most often the perpetrators involved in a fraud for housing scheme. The scheme could never occur without the cooperation of the real estate agents, loan officers, appraiser and settlement agent assisting in all the material misrepresentations which must be provided.

How did you do? To stay informed about the latest and greatest schemes and scams keep reading Fraud Insights.