Mortgage Fraud and Predatory Lending in Real Estate
The Mortgage fraud in real estate is a crime in which the intent is to materially misrepresent or omit information on a mortgage loan application to get a loan or to get a larger loan than could have been obtained had the lender or borrower known the truth, while predatory lending is the unfair, deceptive, or fraudulent practices of some lenders during the loan origination process.
We don’t have to confuse mortgage fraud with predatory mortgage lending, which occurs when a consumer is misled or deceived by agents of the lender. However, predatory lending practices often coexist with mortgage fraud. Although predatory lenders are most likely to target the less educated, the poor, racial minorities, and the elderly, victims of predatory lending are represented across all demographics.
Predatory lending typically occurs on loans backed by a collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed the property. Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower’s ability to pay is greater than it actually is. The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral.
Type of Mortgage Fraud
Appraisal Fraud: This occurs when a home’s appraised value is deliberately overstated or understated. When overstated, more money can be obtained by the borrower in the form of a cash-out refinance, by the seller in a purchase transaction, or by the organizers of a for-profit mortgage fraud scheme. Appraisal fraud also includes cases where the home’s value is deliberately understated to get a lower price on a foreclosed home, or in a fraudulent attempt to induce a lender to decrease the amount owed on the mortgage in a loan change.
Income Fraud: This is the type of mortgage fraud that occurs when a borrower overstates his/her income to qualify for a mortgage or for a larger loan amount. This was most often seen with so-called stated income mortgage loans where the borrower, or a loan officer acting for a borrower with or without the borrower’s knowledge, stated without verification the income needed to qualify for the loan.
Because mortgage lenders today do not have stated income loans, income fraud is seen in traditional full-documentation loans where the borrower forges or alters an employer-issued Form W-2, tax returns and/or bank account records to offer support for the inflated income.
Occupancy Fraud: This can occur where the borrower wishes to get a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinquency rates, the lender receives an insufficient return on capital and is over-exposed to lose on what was expected in the transaction.
Fraud for Profit: This is a complex scheme involving multiple parties, including mortgage lending professionals, in a financially motivated attempt to defraud the lender of large sums of money. Fraud for profit schemes often includes a straw borrower whose credit report is used, a dishonest appraiser who intentionally and much overstates the value of the subject property.
A dishonest settlement agent who might prepare two sets of HUD settlement statements or makes disbursements from loan proceeds which are not disclosed on the settlement statement, and a property owner, all in a coördinated attempt to get an inappropriately large loan. The parties involved share the ill-gotten gains and the mortgage eventually goes into default. Read more
Types of Predatory Lending
Single-premium credit insurance. This is the purchase of insurance which will pay off the loan if the home buyer dies. It is more expensive than other forms of insurance because it does not involve any medical checkups, but customers almost always are not shown their choices because usually the lender is not licensed to sell other forms of insurance. In addition, this insurance is usually financed into the loan which causes the loan to be more expensive,
Short-term loans with disproportionally high fees, such as payday loans, credit card late fees, checking account overdraft fees, and Tax Refund Anticipation Loans, where the fee paid for advancing the money for a short period works out to an annual interest rate much in excess of the market rate for high-risk loans. The originators of such loans dispute that the fees are interesting.
Servicing agent and securitization abuses. The mortgage servicing agent is the entity that receives the mortgage payment, maintains the payment records, provides borrowers with account statements, imposes late charges when the payment is late and pursues delinquent borrowers. A securitization is a financial transaction in which assets, especially debt instruments, are pooled and securities representing interests in the pool are issued. Most loans are subject to being bundled and sold, and the rights to act as servicing agent sold, without the consent of the borrower.
A federal statute requires notice to the borrower of a change in servicing agent, but does not protect the borrower from being held delinquent on the note for payments made to the servicing agent who fails to send the payments to the owner of the note, especially if that servicing agent goes bankrupt, and borrowers who have made all payments on time can find themselves being foreclosed on and becoming unsecured creditors of the servicing agent.
Unjustified risk-based pricing. This is the practice of charging more (in the form of higher interest rates and fees) for extending credit to borrowers identified by the lender as posing a greater credit risk. The lending industry argues that risk-based pricing is a legitimate practice; since a greater percentage of loans made to less creditworthy borrowers can be expected to go into default, higher prices are necessary to get the same yield on the portfolio. Some consumer groups argue that higher prices paid by more vulnerable consumers cannot always be justified by increased credit risk. Read more
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