Documentation between a lender and other transaction parties, such as mortgage brokers, appraisers and closing agents, determines the level of recovery for a lender that has become a victim of fraud. Because there has not been much case law in most states that provides definition, documents such as the mortgage broker agreement and the appraisal form 439 are the primary documents that establish the duties and responsibilities of those parties.
Mortgage Brokers
Many broker agreements have language that reads like there are no material inaccuracies in the loan documents. While some brokers won’t sign a more specific legal document or undertake the responsibilities involved with repurchase or with brokering loans that they affirm to be accurate, the moderator — Jacqueline Dryer — suggested that these are brokers “that the lender doesn’t want to continue doing loans with.”
Appraisers
Requiring proof of an errors and omissions (E&O) insurance policy from an appraiser is a good idea, although not necessarily always practical. But obtaining a statement of the appraiser’s E&O policy is one way to verify that the appraiser takes his position seriously and is financially able to respond if the appraisal isn’t correct. Appraisers participating in fraud generally have little in assets and would not carry this type of insurance.
One of the participants in the teleconference asked how to verify an appraiser’s E&O coverage. Ms. Dryer, who is also the co-author of Mortgage Fraud: The Impact of Mortgage Fraud on Your Company’s Bottom Line, suggested getting a copy of the declarations page.
In addition, Form 439 should be an underwriting condition that is required to be attached to every appraisal. This is one of the documents that helps to clarify ‘privity’ issues and issues with regards to the relationship between the lender and the appraiser and the duties that the appraiser has to the lender.
Closing Agents
Some states maintain laws about the fiduciary duties of a settlement agent, but others don’t. These are the parties that tend to be the most financially responsible parties in fraud schemes, but are usually the most difficult parties to attach liability to. This shield is mainly due to the fact that documentation used in escrows and with settlement agents tends to inadequately define what is expected from the escrow or settlement agent by the lender.
In an actual Houston condo fraud case, closing agents probably could have stopped the scheme in its very early stages. They were closing three, four, five, six loans a day for a single borrower with different lenders. Had they informed the lender on day two that they had closed six loans for this borrower on day one, it’s likely that lender number two wouldn’t have funded those loans.
Civil courts in most states tend to hold the settlement agent specifically to the closing instructions. A good condition on closing instructions is a disclosure of whether the settlement agent has closed other loans for this particular borrower in the last 90 or 180 days. This type of condition would have averted much of the Houston condo fraud issues.
One call participant asked if it is a good idea to send a loan to the fraud unit if the FICO score has dropped significantly over a six month period. Ms Dryer advised the caller that the fraud unit is a good prevention tool if there is a significant change in a borrower’s credit score or multiple loans to a single borrower.
A caller with Finance America, who commented that the FBI and mortgage bank examiners have been unresponsive, said “we can’t get anybody interested in even investigating these.” Jacqueline Dryer responded with the recommendation to continue notifying law enforcement agencies. Rachel Dollar — who is lead counsel on fraud litigation with Lanihan & Reilly — commented that additional evidence gathered subsequently may cause the case to get more attention. Ms. Dryer added that utilizing a national mortgage fraud law firm may help link multple victims and make a bigger case.
Todd Miller, who was calling from Fannie Mae, asked “are you advising lenders to focus particularly their prefunding fraud detection efforts on certain market areas or certain mortgage product types?” Ms. Dryer’s response was, “that’s going to be individual to each company,” but added, “yes, focus on the areas that have the higher incidence of fraud.”
Some fraud hot spots she noted were New Jersey, New York, Atlanta, Houston, Seattle, Southern California, South Florida, St. Louis and Detroit.
