14243388 mortgage fraud investigations

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Thursday, November 29, 2007

Mortgage Fraud

Investigations


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DUE DILIGENCE &MORTGAGE FRAUD

Jim Vaules, CEO

NFC Global LLCNovember 29, 2007


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Due

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In God We Trust,Everyone Else Bring

Data!!!!


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MORTGAGE FRAUD

Mortgage fraud is a material misstatement,misrepresentation, or omission relating tothe property or potential mortgage relied onby an underwriter or lender to fund,purchase or insure a loan FBI


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MORTGAGE DUE DILIGENCE

! Due diligence on individual loans is thetopic that we are all here to discuss. If

basic due diligence on individual loans isnot conducted properly, the loan canpotentially go bad and thus lead tosecuritization and regulatory issues for the

lender and/or the investor.


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U.S. Public Records

! Person Locators

! Marriage & Divorce

! Voter Registrations! Professional Licenses

! Real Property

! Personal Property

! Bankruptcy Petitions

! UCC filings

! Judgments & Liens

! Incorporationrecords

!Civil/Criminal Filings! Jury Verdicts &Settlements

! Drivers License! OFAC

! Sanctions lists! Foreign Corrupt

Practices Act


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INFORMATION NETWORK

INFORMATIONNETWORK


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FRAUD FOR PROPERTY

! Goal is to acquire and maintain ownership

of property under false pretenses! Illegal actions solely by the borrower

! Commons schemes include asset fraud,occupancy fraud, employment fraud,

income fraud, debt elimination fraud,identity theft and straw buyers


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BORROWER! Intra-family transactions! PO Box address!

Association to Appraiser or Broker! ID theft! Can the borrower afford the loan! Title History! Verify the borrower still works at the

employer! Verify work and home telephones! The main contact number is a cell phone


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FRAUD FOR PROFIT! Motive is to revolve equity, falsely inflate

property values, or issue loans on fictitiousproperties

! 80% of reported cases involve collusion byindustry insiders

! Committed by brokers, real estate agents,

appraisers, settlement agents.! SARs filed indicate common activitiesinclude, appraisal fraud, flipping, strawbuyers and identity theft


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BROKER FACTS

! The Broker has the best opportunity to stopfraud, and thus the best opportunity toconduct it.

! Pre-funding quality control of Brokersneeds to be in place and conducted

regularly! Brokers are key to developing information

submitted for loan underwriting


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APPRAISER

! Verify that Appraiser license is current withstate agencies

! If second Appraiser is used, that licenseneeds to be verified as well

! Make sure comparables are current andgeographically correct

! Confirm that Appraisal Report matchesphysical address of the loan


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ASSET RENTAL

PROVIDEROF ASSETS

HOLDINGCOMPANY

CONTRIBUTION

DEBENTURE 1%/ MONTH

OTC Stock

Ginnie Mae

Certificate of DepositMortgage

INSURANCECOMPANY


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Return on Fraudulent Assets

$1M

Bank

60%

Due DiligenceFBI

$600,000

Insurance Company

3-1 Ratio

State RegulatorsNo Law Enforcement

$3m

Off-Shore Insurance

Company

(ReInsurance)

8-1 RatioNo Regulations

No Law Enforcement$8m


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Top Con Artist Attributes

and Red Flags! 100% - Boast of international contacts

! 100% - Boast of ability to raise capital

!96% - Often have civil judgments pending

! 95% - Involved with shell companies

! 95% - Use PO Boxes or MBEs

! 82% - Involved in failed real estate deals

! 80% - Gaps of nonconfirmable employment! 78% - Abused Credit Cards

! 78% - Held Sales Jobs in early years


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RECENT EXAMPLE

! Les Tarrance Sr., Montgomery County business owner, pled guilty to conspiracy to commit mail andwire fraud after orchestrating an elaborate scam with two co-conspirators to defraud mortgagecompanies across the country out of more than $11 million. According to his plea agreement,Tarrance could avoid possible convictions for other crimes related to the scheme - including launderingof monetary instruments and aiding and abetting - and prison time, by cooperating with federalprosecutors.

! The scheme, as set forth in the indictment and confirmed in the plea agreement, occurred fromSeptember 2000- March 2006. Essentially, Goodson would locate and recruit straw borrowers topurchase homes from Tarrance with the assistance ofBooth.

! The Defendants included in the indictment are:Michael Goodson, Recruiter;Les Tarrance, Sr., owner ofUltra Classic Custom Homes, Inc., and Ultra Classic Custom HomesIII, Inc.; andNancy Booth, loan officer and loan processor.

! The defrauded Lenders included in the indictment are:Aames Home Loan New Century Mortgage Corp.Argent MortgageBNC Mortgage Inc. Wells Fargo Home MortgageDecision One MortgageFirst MagnusIndyMacLong Beach Mortgage


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CONTACT INFORMATION

JAMES H. VAULES

NFC GLOBAL, LLC

www.nfcglobal.com

215-657-0800 Extension 272

EMAIL: [email protected]


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www.smartgrp.com

866-334-7700

Mortgage Fraud Investigations

Rich DevineSMART Business Advisory and Consulting, LLC

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What is happening in the currentsubprime mortgage market?

" Housing and capital market disruptions

" Falling housing prices and rising interest rates

" XXX is the biggest casualty of the downturn afterunderwriting many troubled CDOs last year

" The business model that will return XXX to

profitability is unclear

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FASB Staff Position FAS 115-1/124-1The Meaning of Other-Than-Temporary

Impairment and Its Application to CertainInvestments

" When an investment is considered impaired

" Whether that impairment is other than temporary

" Measurement and timing of an impairment loss

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What is mortgage fraud?

" Material inaccuracy in the financial information disclosed by

or on behalf of the borrower during the origination of the loan

" Fraud for housing-borrower fraud

" Fraud for profit/commission-insider fraud

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Who gets hurt?

" Borrower caught in a fraud for profit overpays for their house

" New buyers impacted by over-inflated pricing

" Originators who are subject to fraud clauses in repurchase

agreements

" Securitizers deal with higher credit support levels due to

expected fraud losses

" Investors who absorb the losses

" Rating agencies

" Mortgage insurers

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How does someone commit fraud?

" Pressures and Incentives

" Attitudes and Rationalizations

" Opportunity

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Types of Mortgage Schemes and Fraud

" Collusion

" Document misrepresentation

" Identity theft

" Negligence" Appraiser

" Builder bailout

" Equity skimming

" False down payment" Straw borrower

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How do I build a system of internalcontrol?

" Understand entrance points, process flows and your systems

" Applications

" Appraisals

" Credit report" Escrow/closing

" Mortgage brokers

" Title insurance

" Verification of information such as employment and deposit

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Accounting Guidance

" Committee of Sponsoring Organizations of the Treadway

Commission (COSO)

" Integrated framework of internal control involving

management and the Audit Committee" PCAOB Auditing Standard No. 2

" An Audit of Internal Control over Financial Reporting

Performed in Conjunction with an Audit of Financial

Statements

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Internal Control Program

" Culture of integrity and ethical behavior

" Establish anti-fraud programs and controls

" Consider risk of material misstatement

"Design and implement programs to handle pervasive andspecific risks

" Operating effectiveness of anti-fraud programs and controls

" Communicate deficiencies found in antifraud programs and

controls

" Address deficiencies

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What are the regulators looking for?

" Establish homework list expectations

" Establish timing expectations

" Have sub ledgers and accounts reconciled

" Expect a lower level of materiality on unreconciled differences" Timely resolution of reconciling items

" Make sure third party audits are up to date

" Make sure documentation is complete

" Establish understanding of controllable vs. uncontrollable

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Questions?

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Mortgage Fraud atFinancial Institutions:

Prevention and Response

Timothy R. McTaggart

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FFIEC Report for Banking Industry onRed Flags and Best Practices

The application is unsigned or undated

Signatures on credit documents are illegible and no

supporting identification exists

Borrower has high income with little or no personalproperty

Borrowers age is not consistent with the number ofyears of employment

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Borrower has an unreasonable accumulation of assetscompared to income or has a large amount ofunsubstantiated assets

Borrower claims to have no debt

Borrower owns an excessive amount of real estate

A post office box is the only indicated address for theborrower

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The same telephone number is used for theborrowers home and business

Patterns or similarities are apparent from applications

received from other borrowers

Borrower does not guarantee the loan or will not signin an individual capacity

Business income is not consistent with business type

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Years of education is not consistent with borrowersprofession

Borrower is buying investment properties with noprimary residence

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SAR Regulation

The following points should be considered whenhandling and processing SAR reports:

Institutions should designate one individual ordepartment to be responsible for completingand filing SAR reports.

SAR reports should be consistent.

Responding to requests for SAR reports.

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Questions?Questions?

For more information,visit www.pepperlaw.com

For more information,visit www.pepperlaw.com

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Thank you.

Thursday, November 29, 2007

14243388 mortgage fraud investigations

Documents