I Swear Your Honor, I Didn’t Know It Was Loan Fraud!

How would you feel if you found out you had committed mortgage loan fraud and now faced serious consequences?

A frequent scenario.

Let’s imagine that you want to buy a home but have no money for a down payment or closing costs. Let’s also imagine that you have some credit card debt you’d like to “roll into the loan” and the house you want to buy needs a little sprucing up.

Your agent suggests a wonderfully creative solution. Write the offer for $50,000 more than the asking price, secure 100% financing, and the seller will give you back the $50k after the close. You’ll be able to pay off those bills, fix the place up, and pocket a little emergency cash. And, the agent assures you, it’s not loan fraud. It’s alright; it’s spelled out right there in the Purchase Agreement.

Only it’s not alright. Because without you knowing, the agent doesn’t show the lender the Contract Addendum where the $50k credit is spelled out, and he arranges for the cash to come directly from the seller “outside escrow”, so the escrow company doesn’t know either. Or, the money gets paid out of escrow to a contractor to be ultimately routed back to you. You have just committed loan fraud, and whether you knew it or not, you may be liable for stiff civil and criminal penalties.

Virtually every real estate agent I know has seen an offer like this lately. On November 3, the Financial Crimes Enforcement Network (US Treasury Dept) released a report showing a jump of 35% in suspected mortgage loan fraud in the last year. And California leads the way by a mile. With mortgage applications down from prior years levels, lenders have plenty of extra eyes with which to scrutinize transactions for loan fraud. Assume they’re watching.

The good news is that it’s easy to steer clear of problems. Look at the deal and just ask yourself honestly: If it were my money at risk, would I make this loan?

Share This