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AMERICAN CONFERENCE INSTITUTE AMERICAN CONFERENCE INSTITUTE WORKSHOP ON MORTGAGE FRAUDWORKSHOP ON MORTGAGE FRAUD

Thursday, March 23, 2006, 3:30Thursday, March 23, 2006, 3:30--6:30 p.m.6:30 p.m.Frank A. Hirsch, Jr. (Raleigh, N.C.)Frank A. Hirsch, Jr. (Raleigh, N.C.) frank.hirsch@nelsonmullins.comfrank.hirsch@nelsonmullins.comWesley Few (Columbia, S.C.)Wesley Few (Columbia, S.C.) wesley.few@nelsonmullins.comwesley.few@nelsonmullins.comHolly A. Pierson (Atlanta, Ga.)Holly A. Pierson (Atlanta, Ga.) holly.pierson@nelsonmullins.comholly.pierson@nelsonmullins.com

BEST PRACTICES TO COMBAT BEST PRACTICES TO COMBAT MORTGAGE FRAUD AND LITIGATION MORTGAGE FRAUD AND LITIGATION

STRATEGIES TO MAXIMIZE RECOVERY: STRATEGIES TO MAXIMIZE RECOVERY: DEVELOPING A COMPREHENSIVE PLANDEVELOPING A COMPREHENSIVE PLAN

Answering 20 questions about Answering 20 questions about mortgage fraud mortgage fraud

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QUESTION 1: QUESTION 1:

What is the magnitude of mortgage What is the magnitude of mortgage fraud in the United States and why is fraud in the United States and why is it a big deal?it a big deal?

ANSWER 1:ANSWER 1:Mortgage fraud has been estimated to have risen Mortgage fraud has been estimated to have risen to more than $1 trillion dollars annually. The to more than $1 trillion dollars annually. The recent rise has been described as an epidemic. recent rise has been described as an epidemic. Despite the Despite the decreasedecrease in US mortgage origination in US mortgage origination volume by $1 trillion between 2003 and 2004, volume by $1 trillion between 2003 and 2004, the incidences of Mortgage Fraud the incidences of Mortgage Fraud increasedincreased by by 250%!250%!Mortgage fraud industry experts (TPG) state that Mortgage fraud industry experts (TPG) state that approximately 10% of all applications contain at approximately 10% of all applications contain at least one form of misrepresentation and least one form of misrepresentation and approximately 25% of all foreclosures are due to approximately 25% of all foreclosures are due to fraud.fraud.

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HR 1295HR 1295see see www.appraisalinstitute.org/govtaffairswww.appraisalinstitute.org/govtaffairs

Still pending before the House Financial Still pending before the House Financial Services Committee. Seeks to establish Services Committee. Seeks to establish new standards to curb predatory lending, new standards to curb predatory lending, register mortgage brokers, abate register mortgage brokers, abate appraiser intimidation, and improve appraiser intimidation, and improve accountability and enforcement practices accountability and enforcement practices of federal and state appraiser regulatorsof federal and state appraiser regulators

HR 1295 HR 1295 –– Status?Status?

Not expected to pass in 2006; two Not expected to pass in 2006; two committee hearings completed, but committee hearings completed, but no bill markno bill mark--up scheduled.up scheduled.

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New Bill: SNew Bill: S--22802280The Stop Fraud Act (Sen. The Stop Fraud Act (Sen. BarackBarackObamaObama, D, D--Ill.)Ill.)Stopping Transactions which Operate Stopping Transactions which Operate to Promote Fraud, Risk and to Promote Fraud, Risk and UnderDevelopmentUnderDevelopment ActActIntroduced 2Introduced 2--1414--0606

Key Provisions SKey Provisions S--228022801.1. Authorizes $10 million more for antiAuthorizes $10 million more for anti--fraud fraud

programs in HUD/DOJprograms in HUD/DOJ2.2. Enhances state appraisal board enforcement Enhances state appraisal board enforcement

activitiesactivities3.3. Requires the FBI to provide updates on Requires the FBI to provide updates on

fraudulent activities in a formal systematic wayfraudulent activities in a formal systematic way4.4. Establishes a national database of mortgage Establishes a national database of mortgage

professionals who have been sanctioned by professionals who have been sanctioned by state or federal regulatory agenciesstate or federal regulatory agencies

5.5. Makes mortgage fraud a felony and Makes mortgage fraud a felony and independent federal crime with maximum independent federal crime with maximum penalties of 35 years plus $5 million finepenalties of 35 years plus $5 million fine

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Oklahoma introduced legislation that Oklahoma introduced legislation that would make mortgage fraud a would make mortgage fraud a distinct criminal actdistinct criminal actSee Oklahoma Residential Mortgage See Oklahoma Residential Mortgage Fraud Act (SBFraud Act (SB--1865)1865)

ANSWER 1 (continued):ANSWER 1 (continued):

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QUESTION 2:QUESTION 2:

Is Mortgage Fraud concentrated in Is Mortgage Fraud concentrated in certain geographic regions or certain geographic regions or metropolitan areas and, if so, then metropolitan areas and, if so, then where?where?

ANSWER 2:ANSWER 2:

Mortgage fraud occurrences are Mortgage fraud occurrences are concentrated in certain high growth concentrated in certain high growth geographic regions and in certain geographic regions and in certain MSAsMSAs, but the recent change is that , but the recent change is that middlemiddle--market cities are facing the market cities are facing the growing challenge.growing challenge.

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For the past four years (2001For the past four years (2001--2004), the five 2004), the five states with the highest reported incidence of states with the highest reported incidence of Mortgage Fraud are in the Southeast and Mortgage Fraud are in the Southeast and Midwest:Midwest:

MARI Fraud Index MARI Fraud Index RankRank StateState MFIMFI1 1 Georgia Georgia 2972972 2 South CarolinaSouth Carolina 2502503 3 FloridaFlorida 1941944 4 UtahUtah 1601605 5 North CarolinaNorth Carolina 159159

Source: Mortgage Asset Research Institute (MARI) May 2005Source: Mortgage Asset Research Institute (MARI) May 2005Mortgage Fraud Case Report to MBAAMortgage Fraud Case Report to MBAA

TPG reports that 41% of all TPG reports that 41% of all mortgage fraud claims come from mortgage fraud claims come from just 4 just 4 MSAsMSAs::1.1. Atlanta Atlanta –– 13%13%2.2. Chicago Chicago –– 12%12%3.3. Detroit Detroit -- 11%11%4.4. Houston Houston -- 5%5%

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Trends in Serious Early Defaults Trends in Serious Early Defaults ((SEDsSEDs))

SEDsSEDs are loans that become late by >90 days or go into are loans that become late by >90 days or go into foreclosure in the first 6foreclosure in the first 6--18 months. 18 months. SEDsSEDs are strong are strong indicators of loans made improvidently and correlate to indicators of loans made improvidently and correlate to some type of fraud in many instances. some type of fraud in many instances. SED trends have tended to predict by approximately SED trends have tended to predict by approximately oneone--year’s time where mortgage fraud will increase year’s time where mortgage fraud will increase as well. as well. Of the 13 MSA with the highest SED incidences over the Of the 13 MSA with the highest SED incidences over the past 4 years (prime loans) 2001past 4 years (prime loans) 2001--2004, the top 6 2004, the top 6 MSAsMSAshave increased have increased SEDsSEDs every yearevery year. Most alarmingly, the top . Most alarmingly, the top 5 SED 5 SED MSAsMSAs showed a marked jump in showed a marked jump in SEDsSEDs between between 20032003--2004 2004 despitedespite major initiatives to combat mortgage major initiatives to combat mortgage fraud.fraud.

SED ComparisonSED ComparisonLoan Performance, Inc. Loan Performance, Inc.

SED Data (Prime Loans), 2003SED Data (Prime Loans), 2003--20042004RankRank MSAMSA 20042004 20032003 ChangeChange11 AtlantaAtlanta 288288 218218 +70+7022 DallasDallas--Ft. Worth 269Ft. Worth 269 256256 +13+1333 Denver (tie)Denver (tie) 256256 206206 +50+5044 Orlando (tie)Orlando (tie) 256256 176176 +80+8055 CharlotteCharlotte 231231 200200 +31+31

Source: Loan Performance, Inc., MARI May 2005 ReportSource: Loan Performance, Inc., MARI May 2005 Report

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ConclusionsConclusionsWatch out for increased rates of Watch out for increased rates of mortgage fraud in Atlanta, Dallasmortgage fraud in Atlanta, Dallas--Ft. Ft. Worth, Denver, Orlando and Charlotte Worth, Denver, Orlando and Charlotte over the next year!over the next year!Increased vigilance against mortgage Increased vigilance against mortgage fraud is needed to stop the trend of fraud is needed to stop the trend of increased frequency. The scammers are increased frequency. The scammers are still on the increase in Georgia, South still on the increase in Georgia, South Carolina, Florida, Utah, North Carolina Carolina, Florida, Utah, North Carolina ––and elsewhere.and elsewhere.

QUESTION 3: QUESTION 3:

What investigation should lenders What investigation should lenders undertake before making a decision undertake before making a decision whether to prosecute mortgage whether to prosecute mortgage fraud? fraud?

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ANSWER 3: ANSWER 3: Quality Control System AuditQuality Control System AuditInternal Loss Analysis and Market Loss ValuationInternal Loss Analysis and Market Loss ValuationInvestigation of Internal Employees/Agents of Investigation of Internal Employees/Agents of Fraud ComplicityFraud ComplicityBroker Complaint History at Banking CommissionBroker Complaint History at Banking CommissionAppraiser Complaint History at Appraisal BoardAppraiser Complaint History at Appraisal BoardCriminal Records CheckCriminal Records CheckFraud Alert ListsFraud Alert ListsLitigation Filings/Judgments of Record ResearchLitigation Filings/Judgments of Record ResearchClosing Attorney History at State Bar Closing Attorney History at State Bar AssocationAssocation

QUESTION 4: QUESTION 4:

Who are the main players combating Who are the main players combating mortgage fraud and what are they mortgage fraud and what are they doing to attack the problem?doing to attack the problem?

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ANSWER 4: ANSWER 4: 1. Federal Level 1. Federal Level

Congress Congress –– HR 1295HR 1295Regulators Regulators -- FTC, DOJ, HUD, FRB, OTS, FTC, DOJ, HUD, FRB, OTS, OCC, FDICOCC, FDICGSEsGSEs –– Fannie Mae/Freddie MacFannie Mae/Freddie Mac

ANSWER 4 (continued): ANSWER 4 (continued): 2. State Level2. State Level

Legislatures Legislatures –– e.g. Georgia Mortgage e.g. Georgia Mortgage Fraud LawFraud LawRegulators Regulators –– Attorney GeneralsAttorney Generals

Banking CommissionsBanking Commissions(broker licensing)(broker licensing)

State Bar AssociationsState Bar AssociationsAppraisal BoardsAppraisal Boards

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ANSWER 4 (continued):ANSWER 4 (continued):

3. Local Level3. Local LevelPolice officersPolice officersDAsDAsTask forcesTask forces

ANSWER 4 (continued):ANSWER 4 (continued):

4. Professional Associations4. Professional AssociationsNAMB.orgNAMB.orgMBAA.orgMBAA.orgNHEMA.orgNHEMA.orgFinancialServicesRoundtable.orgFinancialServicesRoundtable.org

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QUESTION 5:QUESTION 5:

Who are the typical players in a Who are the typical players in a mortgage fraud scheme and who mortgage fraud scheme and who needs to be investigated if suspicious needs to be investigated if suspicious loans are detected?loans are detected?

ANSWER 5: ANSWER 5: BorrowersBorrowersSellersSellersBrokersBrokersBroker CompaniesBroker CompaniesReal Estate AgentsReal Estate AgentsAppraisersAppraisersAppraisal Appraisal CompaniesCompanies

Title InsurersTitle InsurersClosing Closing Attorneys/AgentsAttorneys/AgentsNotariesNotariesLoan Officers/Loan Officers/UWsUWsRecording Recording Personnel Personnel

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QUESTION 6: QUESTION 6:

What are some of the most common What are some of the most common fraud schemes and how do they fraud schemes and how do they work?work?

ANSWER 6: ANSWER 6: FlippingFlippingLoan Application Loan Application FalsificationFalsificationIdentity Theft and Identity Theft and Appraiser Identity Appraiser Identity TheftTheftTitle Gap FraudTitle Gap FraudStraw BuyersStraw BuyersDebt EliminationDebt EliminationRedemption Redemption SchemesSchemes

Mortgage Broker Mortgage Broker Multiple Sales Multiple Sales ––“Chunking”“Chunking”Nonexistent Property Nonexistent Property FraudFraudChurningChurningAdmiralty ClaimAdmiralty ClaimAssignment Fee Fraud Assignment Fee Fraud –– hidden fees for hidden fees for scammersscammers

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QUESTION 7:QUESTION 7:

What civil claims might be What civil claims might be considered for the prosecution of considered for the prosecution of Mortgage Fraud?Mortgage Fraud?

ANSWER 7: ANSWER 7: There are multiple potential avenues to seek civil recovery There are multiple potential avenues to seek civil recovery for mortgage fraud (plus for mortgage fraud (plus restitutionaryrestitutionary remedies in the remedies in the criminal context.) Among the civil claims to consider:criminal context.) Among the civil claims to consider:

Professional negligenceProfessional negligenceNegligent misrepresentationNegligent misrepresentationNegligent hiring/oversightNegligent hiring/oversightBreach of contractBreach of contractUnfair/deceptive trade practices (UDTPA)Unfair/deceptive trade practices (UDTPA)Civil conspiracyCivil conspiracyFraudFraudTortious interference with contractTortious interference with contractCivil RICO Civil RICO –– racketeeringracketeering

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QUESTION 8:QUESTION 8:

What does a lender What does a lender –– fraud victim fraud victim ––need to consider/do before making need to consider/do before making the decision to pursue civil recovery?the decision to pursue civil recovery?

ANSWER 8:ANSWER 8:Multiple levels of coordinated planning:Multiple levels of coordinated planning:

1. Identify all fraudulent actors and stop the 1. Identify all fraudulent actors and stop the conduct/terminate fraudconduct/terminate fraud--facilitating insidersfacilitating insidersQC AuditQC Audit-- fraud investigationfraud investigationBroker termination/repurchasesBroker termination/repurchasesExclusionary listsExclusionary listsAppraisal reviewsAppraisal reviewsComplaints/searches Complaints/searches –– lawsuits, attorneys, appraisers, lawsuits, attorneys, appraisers, notariesnotariesSummary Report of Findings (sample at Tab 8 in Summary Report of Findings (sample at Tab 8 in handouts)handouts)

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ANSWER 8 (continued):ANSWER 8 (continued):Multiple levels of coordinated planning:Multiple levels of coordinated planning:

2. File 2. File SARsSARs –– and cooperate with criminal and cooperate with criminal enforcement authoritiesenforcement authorities

3. Assess available assets of perpetrators and 3. Assess available assets of perpetrators and determine where to file, what to pursuedetermine where to file, what to pursue

4. Estimate costs, downside risks, time to pursue, 4. Estimate costs, downside risks, time to pursue, and develop budgetsand develop budgets

5. Hire experienced counsel and move 5. Hire experienced counsel and move quickly/aggressively to recoverquickly/aggressively to recover

QUESTION 9:QUESTION 9:

What special considerations arise if What special considerations arise if the fraud is discovered by virtue of a the fraud is discovered by virtue of a separate legal dispute with a separate legal dispute with a borrower, related/subordinate lien borrower, related/subordinate lien holder, etc.?holder, etc.?

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ANSWER 9:ANSWER 9:Examples:Examples:

Foreclosure action vs. borrowers in default Foreclosure action vs. borrowers in default and fraud is the excuseand fraud is the excuseRelated lien foreclosure actions Related lien foreclosure actions ––competing lien holderscompeting lien holdersCollateral proceedings by regulators Collateral proceedings by regulators –– egeg. . HUD fair housing, banking commission HUD fair housing, banking commission inquiries, AG investigationsinquiries, AG investigations

ANSWER 9 (continued):ANSWER 9 (continued):

Concerns:Concerns:Coordinated effortCoordinated effortPreservation of privilegePreservation of privilegeContributory/comparative negligenceContributory/comparative negligenceCost controlCost controlDirty laundry/Dirty laundry/reputationalreputational riskrisk

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QUESTION 10:QUESTION 10:

What are a lender’s choices for the What are a lender’s choices for the venue or forum to pursue mortgage venue or forum to pursue mortgage fraud?fraud?

ANSWER 10:ANSWER 10:General Rule General Rule –– you can sue in any of several you can sue in any of several

jurisdictions:jurisdictions:1.1. where plaintiff resides;where plaintiff resides;2.2. where defendant resides; orwhere defendant resides; or3.3. where the claim “arose” (where injury to where the claim “arose” (where injury to

the lender occurred or where the center the lender occurred or where the center of gravity was for the fraudulent of gravity was for the fraudulent operations)operations)

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ANSWER 10 (continued):ANSWER 10 (continued):Considerations:Considerations:1.1. convenienceconvenience2.2. costcost3.3. time to trialtime to trial4.4. experience of judicial system in processing experience of judicial system in processing

mortgage fraud/ case precedentsmortgage fraud/ case precedents5.5. Prejudgment attachment procedures/ Prejudgment attachment procedures/

protections (protections (lislis pendenspendens, fleeing assets), fleeing assets)6.6. defendant’s assets in the forum statedefendant’s assets in the forum state7.7. execution or judgment remediesexecution or judgment remedies8.8. domestication procedures for awards from other domestication procedures for awards from other

statesstates

QUESTION 11:QUESTION 11:

What types of assets might be What types of assets might be pursued from fraudulent actors?pursued from fraudulent actors?

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ANSWER 11:ANSWER 11:Pursue any and all possible assets. Seek early attachment Pursue any and all possible assets. Seek early attachment and restraining orders against dissipation/relocation. and restraining orders against dissipation/relocation. Coordinate with criminal enforcement authorities to utilize Coordinate with criminal enforcement authorities to utilize enhanced procedures for asset seizure/preservation.enhanced procedures for asset seizure/preservation.Search for:Search for:

setset--offs from business pipeline operationsoffs from business pipeline operationsbank accountsbank accountsreal propertyreal propertyinvestmentsinvestmentsRVs, boats, planes, automobilesRVs, boats, planes, automobilestime shares, partial ownership intereststime shares, partial ownership interests

QUESTION 12:QUESTION 12:

Is insurance coverage available for Is insurance coverage available for mortgage fraud schemes? mortgage fraud schemes?

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ANSWER 12:ANSWER 12:It all depends upon the type of legal It all depends upon the type of legal claim and the policy provisions.claim and the policy provisions.YESYES

NowackiNowacki v. Federated Realty Groupv. Federated Realty Group, 36 F. Supp. 2d , 36 F. Supp. 2d 1099 (E.D. Wis. 1999) (E&O Policy which covered 1099 (E.D. Wis. 1999) (E&O Policy which covered “negligent acts, errors, or omissions in the rendering “negligent acts, errors, or omissions in the rendering of or failure to render professional services,” but of or failure to render professional services,” but excluded any dishonest, fraudulent, criminal or excluded any dishonest, fraudulent, criminal or malicious acts or omissions, required insurer to malicious acts or omissions, required insurer to defend against both negligent and intentional claims; defend against both negligent and intentional claims; however coverage may exist only for negligence.)however coverage may exist only for negligence.)

ANSWER 12 (continued):ANSWER 12 (continued):NONO

Mortgage Associates, Inc. v. Fidelity and Deposit Co. Mortgage Associates, Inc. v. Fidelity and Deposit Co. of Marylandof Maryland, 105 Cal. App. 4th 28 (2002) (no , 105 Cal. App. 4th 28 (2002) (no coverage under financial institution bond because coverage under financial institution bond because specific policy exclusion required lender to prove its specific policy exclusion required lender to prove its employees received at least $2,500 or more from the employees received at least $2,500 or more from the fraud. No title policy coverage because the mere fraud. No title policy coverage because the mere existence of fraud in the chain of title is not a “defect” existence of fraud in the chain of title is not a “defect” in title but a mere impairment of value.)in title but a mere impairment of value.)MonslerMonsler v. Cincinnati Casualty Co.v. Cincinnati Casualty Co., 74 Ohio App. 3d , 74 Ohio App. 3d 321 (1991) (real estate broker’s E&O policy did not 321 (1991) (real estate broker’s E&O policy did not obligate insurer to defend complaint alleging obligate insurer to defend complaint alleging intentional racial discrimination.)intentional racial discrimination.)

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QUESTION 13:QUESTION 13:

Can lenders sue for treble damages Can lenders sue for treble damages and attorneys fees under a UDTPA and attorneys fees under a UDTPA statute/ Little FTC Act claim?statute/ Little FTC Act claim?

ANSWER 13:ANSWER 13:State by state analysis is required. In some State by state analysis is required. In some

states, courts have held that lenders have states, courts have held that lenders have no standing to sue under UDTPA statutes no standing to sue under UDTPA statutes because they do not qualify as because they do not qualify as “consumers” entitled to the special “consumers” entitled to the special protections.protections.

Other problems for UDTPA claims can Other problems for UDTPA claims can involve categories exempted from involve categories exempted from enforcement enforcement ---- such as the professional such as the professional services exclusion.services exclusion.

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ANSWER 13:ANSWER 13:POTENTIALLY LIABLE DEFENDANTSPOTENTIALLY LIABLE DEFENDANTS

Real estate brokersReal estate brokersborrowersborrowersappraisersappraiserstitle insurerstitle insurers

GosaiGosai v. v. AbeersAbeers Realty and Development Realty and Development Marketing, Inc.Marketing, Inc., 605 S.E. 2d5 (N.C. App. , 605 S.E. 2d5 (N.C. App. Oct. 19, 2004)Oct. 19, 2004)

ANSWER 13 (continued):ANSWER 13 (continued):YOU CANNOT SUEYOU CANNOT SUE

Attorneys rendering professional legal Attorneys rendering professional legal services: services: Sharp v. Sharp v. GailorGailor, 132 N.C. App. , 132 N.C. App. 213, 510 S.E. 2d 701 (1999) (the learned 213, 510 S.E. 2d 701 (1999) (the learned profession exception to UDTPA liability profession exception to UDTPA liability applies to attorneys.)applies to attorneys.)Ohio and Virginia: state UDTPA statues do Ohio and Virginia: state UDTPA statues do not allow suits against the lender for not allow suits against the lender for mortgage fraud mortgage fraud –– only against brokers.only against brokers.

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QUESTION 14:QUESTION 14:

Can you dual track criminal Can you dual track criminal enforcement proceedings with civil enforcement proceedings with civil proceedings, and if so, what is the proceedings, and if so, what is the legal effect of the dual enforcement?legal effect of the dual enforcement?

ANSWER 14:ANSWER 14:YESYES. Dual tracking is common and . Dual tracking is common and

encouraged.encouraged.

General Rules:General Rules:1.1. A criminal conviction does not bar a civil suit for recovery A criminal conviction does not bar a civil suit for recovery

of damages.of damages.2.2. Restitution may be ordered in the criminal proceedings, Restitution may be ordered in the criminal proceedings,

and witness cooperation becomes assured.and witness cooperation becomes assured.3.3. Monies collected as restitution would diminish recoverable Monies collected as restitution would diminish recoverable

damages damages –– compensated losses, so no double dipping.compensated losses, so no double dipping.4.4. Criminal conviction almost certain to be admissible into Criminal conviction almost certain to be admissible into

evidence at a civil trial (FRE 609).evidence at a civil trial (FRE 609).

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ANSWER 14 (continued):ANSWER 14 (continued):

Caveat:Caveat:Do not threaten criminal prosecution Do not threaten criminal prosecution in order to coerce a civil settlement. in order to coerce a civil settlement. This might be an abuse of process This might be an abuse of process tort and an unfair/deceptive trade tort and an unfair/deceptive trade practice. It may also violate ethics practice. It may also violate ethics rules for attorneys.rules for attorneys.

QUESTION 15:QUESTION 15:

What kinds of sample/example What kinds of sample/example cases are out there for me to cases are out there for me to determine how/whether it makes determine how/whether it makes sense to sue/prosecute mortgage sense to sue/prosecute mortgage fraud perpetrators? fraud perpetrators?

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ANSWER 15:ANSWER 15:In the civil context, reported cases are In the civil context, reported cases are less numerous (but the number is less numerous (but the number is growing.) (see sample case listing in growing.) (see sample case listing in handout at Tab 3)handout at Tab 3)Many cases are never “reported” and the Many cases are never “reported” and the expertise resides within fraud recovery expertise resides within fraud recovery litigation firms. (See sample complaints litigation firms. (See sample complaints for mortgage fraud handled in GA, SC, NC for mortgage fraud handled in GA, SC, NC and sample orders at handouts in Tabs 5 and sample orders at handouts in Tabs 5 through 7.)through 7.)

QUESTION 16: QUESTION 16:

Hasn’t criminal prosecution of Hasn’t criminal prosecution of mortgage fraud been on the steady mortgage fraud been on the steady increase and what lessons are increase and what lessons are evident from these criminal cases?evident from these criminal cases?

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ANSWER 16: ANSWER 16: Yes. Criminal prosecution of mortgage fraud has Yes. Criminal prosecution of mortgage fraud has increased significantly in the past five years. increased significantly in the past five years. (See digest of reported criminal cases in handout (See digest of reported criminal cases in handout Tab 3)Tab 3)The FBI, DOJ, the federal financial institution The FBI, DOJ, the federal financial institution regulators, regulators, GSEsGSEs, , AUSAsAUSAs, state banking , state banking authorities, AGs, DAs, local police, industry trade authorities, AGs, DAs, local police, industry trade associations and private coalition groups associations and private coalition groups –– like like GREFPAC GREFPAC –– have been active (but the increases have been active (but the increases in fraud continues.)in fraud continues.)

Lesson=criminals are moving to smaller markets. Lesson=criminals are moving to smaller markets.

QUESTION 17:QUESTION 17:

If I need to learn more about If I need to learn more about Mortgage Fraud and do further Mortgage Fraud and do further research, what legal reference research, what legal reference sources can I look to?sources can I look to?

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ANSWER 17:ANSWER 17:The sources are numerous and growing The sources are numerous and growing ––although, most of the most current although, most of the most current learningslearnings are from consultants, legal are from consultants, legal practitioners, industry trade associations practitioners, industry trade associations and seminars. (See the bibliography of and seminars. (See the bibliography of mortgage fraud reference materials in the mortgage fraud reference materials in the handout at Tabs 1 and 2.)handout at Tabs 1 and 2.)

QUESTION 18:QUESTION 18:Where do I look if I want nonWhere do I look if I want non--legal type legal type data on Mortgage Fraud and which online data on Mortgage Fraud and which online resources are available to help me resources are available to help me combat the problem?combat the problem?

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ANSWER 18:ANSWER 18:There are multiple webThere are multiple web--based based

resources where information is resources where information is gathered and disseminated as to the gathered and disseminated as to the latest mortgage fraud latest mortgage fraud news/developments. The number of news/developments. The number of active players in the interdiction active players in the interdiction arena is growing. Three examples arena is growing. Three examples are:are:

ANSWER 18 (continued):ANSWER 18 (continued):The Mortgage Fraud The Mortgage Fraud BlogBlog((www.mortgagefraudblog.comwww.mortgagefraudblog.com););The The MBAA’sMBAA’s Mortgage Fraud Against Mortgage Fraud Against Lenders’ Resource Center Lenders’ Resource Center ((http://http://www.mortgagebankers.org/MBAFiwww.mortgagebankers.org/MBAFightsFraudghtsFraud); and); andThe Mortgage Servicing Fraud website The Mortgage Servicing Fraud website ((www.msfraud.orgwww.msfraud.org).).

(See the handout at Tab 4 for a suggested (See the handout at Tab 4 for a suggested list of sites.)list of sites.)

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QUESTION 19:QUESTION 19:Why should I spend “good money” Why should I spend “good money” chasing mortgage fraud perpetrators when chasing mortgage fraud perpetrators when I have limited chances of ultimate I have limited chances of ultimate recovery and when it takes attention away recovery and when it takes attention away from core business operations; and, if I from core business operations; and, if I decide to pursue civil remedies, then what decide to pursue civil remedies, then what type of budget reserve do I need to type of budget reserve do I need to establish?establish?

ANSWER 19: ANSWER 19: There is no other way to stop the increasing There is no other way to stop the increasing

fraud trends than to prosecute and seek fraud trends than to prosecute and seek recovery.recovery.The economies of lending fraud are scary The economies of lending fraud are scary and justify large expenditures of resources and justify large expenditures of resources to stop the growth in cost to the industry.to stop the growth in cost to the industry.•• 37% of the loan amount is the average loss 37% of the loan amount is the average loss

(per TPG)(per TPG)•• $200,000 loan = $74,000 loss$200,000 loan = $74,000 loss•• 100 fraudulent loans = $7.4 million100 fraudulent loans = $7.4 million

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ANSWER 19 (continued):ANSWER 19 (continued):Asset recoveries will deter fraudulent actors Asset recoveries will deter fraudulent actors ––and will help pay for the civil enforcement costsand will help pay for the civil enforcement costsKeys to interdiction are education, procedural Keys to interdiction are education, procedural controls, diligence and resource commitmentcontrols, diligence and resource commitmentBe creative Be creative –– attorneys, consultants may work on attorneys, consultants may work on a budgeted basis and/or contingenciesa budgeted basis and/or contingenciesBudgets for fraud recovery litigation can be tiered Budgets for fraud recovery litigation can be tiered but can run between $100,000but can run between $100,000--$250,000 $250,000 depending upon facts/scope, etc.depending upon facts/scope, etc.

QUESTION 20:QUESTION 20:

What are some of the hottest issues What are some of the hottest issues on the horizon and what do I need on the horizon and what do I need to look out for in the future?to look out for in the future?

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ANSWER 20:ANSWER 20:More states like Georgia with criminal More states like Georgia with criminal mortgage fraud statutes/penaltiesmortgage fraud statutes/penaltiesIncreasing criminal enforcement initiatives Increasing criminal enforcement initiatives by AGs, states and local authorities by AGs, states and local authorities (because foreclosure blight is a local (because foreclosure blight is a local concern)concern)Initiatives by appraisers to reInitiatives by appraisers to re--establish establish independence/credentialing and safe independence/credentialing and safe harbor standardsharbor standards

ANSWER 20 (continued):ANSWER 20 (continued):Increasing role of Increasing role of GSEsGSEs in detecting and reporting in detecting and reporting mortgage fraud.mortgage fraud.Increased state regulation/registration/oversight Increased state regulation/registration/oversight of mortgage brokers, appraisers and the title of mortgage brokers, appraisers and the title registration processregistration processFederal standards to combat mortgage fraud (see Federal standards to combat mortgage fraud (see HR 1295)HR 1295)Business practices which include fraud recovery Business practices which include fraud recovery efforts as a necessary part of the core operations efforts as a necessary part of the core operations with increased resource commitmentswith increased resource commitments

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Mortgage Fraud in the NewsMortgage Fraud in the News10/19/05: Ohio AG Announces RICO 10/19/05: Ohio AG Announces RICO

Indictments in Mortgage Fraudster Case Indictments in Mortgage Fraudster Case ––KnabKnab Mortgage Principals pocketed more Mortgage Principals pocketed more than $2 million from forged earnings and than $2 million from forged earnings and bank statements, falsified loan bank statements, falsified loan applications and inflated property applications and inflated property appraisals on 30 properties between appraisals on 30 properties between March 2002March 2002--September 2005.September 2005.

Mortgage Fraud in the NewsMortgage Fraud in the News

8/25/05: Federal Judge in Atlanta 8/25/05: Federal Judge in Atlanta Belts Loan Fraud Belts Loan Fraud –– disbarred Stone disbarred Stone Mountain attorney Mountain attorney ChalanaChalanaMcFarland receives longest sentence McFarland receives longest sentence ever handed down for mortgage ever handed down for mortgage fraud fraud –– 30 years in prison and $11.5 30 years in prison and $11.5 million restitution for skimming $20 million restitution for skimming $20 million via inflated mortgages.million via inflated mortgages.

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Mortgage Fraud in the NewsMortgage Fraud in the News7/21/05: Colorado AG Establishes Mortgage 7/21/05: Colorado AG Establishes Mortgage

and Foreclosure Fraud Task Force and Foreclosure Fraud Task Force ––designed to prevent Colorado consumers designed to prevent Colorado consumers from falling victim to a growing wave of from falling victim to a growing wave of consumer fraud via 3 initiatives: consumer fraud via 3 initiatives:

(1)(1)educational outreach; educational outreach; (2)(2)multimulti--jurisdictional cooperation; and jurisdictional cooperation; and (3)(3)legislative proposals.legislative proposals.

Mortgage Fraud in the NewsMortgage Fraud in the News

6/1/05: GA AG Announces First Arrests 6/1/05: GA AG Announces First Arrests Under GA’s New Criminal Mortgage Under GA’s New Criminal Mortgage Fraud Statute Fraud Statute –– signed into law May signed into law May 5, 2005, it is the first law in the 5, 2005, it is the first law in the country that specifically defines country that specifically defines mortgage fraud as a crime. mortgage fraud as a crime.

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Mortgage Fraud in the NewsMortgage Fraud in the News11/23/04: Texas AG Sues Fraudulent 11/23/04: Texas AG Sues Fraudulent

Mortgage Services Company Targeting Mortgage Services Company Targeting Hispanic Homeowners Hispanic Homeowners –– “City Mortgage “City Mortgage Services” [no affiliation to Services” [no affiliation to CitiBankCitiBank or to or to CitiMortgageCitiMortgage] seeks injunction and asset ] seeks injunction and asset freeze against Dallasfreeze against Dallas--HoustonHouston--Austin Austin business for defrauding over 150 Hispanic business for defrauding over 150 Hispanic homeowners via teams of doorhomeowners via teams of door--toto--door door salespeople touting “debt reduction” salespeople touting “debt reduction” service. service.