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Module 4: Mortgage fraud, Red Flags Rule, anti-money laundering and Do Not Call

Unit 1: Mortgage fraud overview and the Red Flags Rule

MOD4-1_1MFRAUD: (3 MIN)

UNIT 1 LEARNING OBJECTIVES

This unit will teach the student to:

• identify common mortgage fraud schemes; • detect common loan features that may point to mortgage fraud; and • determine how the federal Red Flags Rule requires mortgage professionals to identify

and mitigate the risk of identity theft.

COMMON SCHEMES

Mortgage fraud falls into three main categories:

• fraud for property; • fraud for profit; and • fraud as part of more significant criminal acts.

FRAUD FOR PROPERTY

Fraud for property, also called fraud for housing, usually involves a borrower who falsifies information to qualify for and obtain a mortgage for a property they cannot afford without the falsification. The goal of the fraud is ownership of the subject property. As a result, the borrower typically intends to repay the loan and mortgage default is not an intended feature of this type of fraud.

Other hallmarks of fraud for property include:

• unsophisticated or simple planning; • the borrower’s involvement, sometimes with a mortgage loan originator (MLO) or

another inside participant; • participants are not explicitly paid for their part in the fraud; • loan-level misrepresentations such as falsification of employment, income or assets to

qualify for a mortgage; and

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• the acquisition of one mortgage, rather than multiple mortgages.

Inflated appraised values may be but are not typically a feature of fraud for property.

An example of fraud for property follows:

A mortgage applicant wants to purchase a home but does not believe they have enough income to qualify for a mortgage to purchase their desired property.

On the loan application, they significantly inflate their income. They falsify paystubs and bank statements to support their claim. They also enlist a friend at their work to corroborate the lie when the verification of employment is completed. As a result, they successfully obtain the mortgage and purchase the property. They live in the property and make mortgage payments.

Here, while the borrower/applicant intends to make good on their mortgage payments, their risk of default is higher than represented to the lender when the mortgage was obtained.

FRAUD FOR PROFIT

Fraud for profit typically involves several participants to a transaction colluding to unlawfully extract more fees or money, usually through several transactions. The aim of this type of fraud is increased profit for those engaging in it, rather than the acquisition of property.

Fraud-for-profit schemes involve multiple individuals and typically greater dollar amounts than fraud-for-property schemes. Thus, the Federal Bureau of Investigation (FBI) prioritizes fraud-for-profit cases over fraud-for-property cases.

Fraud-for-profit schemes commonly involve:

• multiple participants in the transaction; • multiple transactions; • multiple misrepresentations and omissions; • participants are compensated for their roles; • inflated appraisals or appraisals with multiple misrepresentations; • straw buyers; and • borrowers who are unaware of the fraud.

An example of a fraud-for-profit scheme follows:

Two individuals purchased property in the name of a general partnership. They then recruited straw buyers to stand in as buyers and purchase the properties held by the general partnership

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for higher prices than were originally paid for them. The straw buyers were told they would not be required to contribute money towards the purchase, upkeep or mortgage of the properties.

To accomplish the fraud, the individuals prepared loan applications using fake information, and manufactured real estate sales contracts, false statements and documents to support the information in the loan application.

Their scheme involved the cooperation of:

• a loan officer who was aware the borrowers were straw buyers, and the applications contained false information;

• an individual who obtained their real estate license for the express purpose of creating the real estate contracts for the straw buyers;

• a bank employee who provided falsified verifications of deposits; • a Certified Public Accountant to create false CPA letters, tax returns and financial

statements; and • settlement agents who knowingly disbursed loan funds to the individuals while knowing

the borrowers were straw buyers who were not contributing to the purchase of the property.

Once the loans funded, the individuals took the proceeds and let the mortgages default, causing millions of dollars of losses to banks, lenders and, in this case, the Federal Housing Administration (FHA). [FBI Press Release: Nine Sentenced in Multi-Million Dollar Mortgage Fraud Scheme]

FRAUD AS PART OF MORE SIGNIFICANT CRIMINAL ACTS

Fraud for profit takes on a more nefarious aspect when the crime is not pure profit, but the obfuscation of terrorism, drug or human trafficking. This type of mortgage fraud results from the need to mask significant profits from criminal activity. Using mortgages to legitimize illicit money, called money laundering, is the intent of this type of mortgage fraud.

Mortgage fraud to mask other criminal activity often involves:

• better planning and organization when compared to fraud for property or pure fraud for profit;

• participants who are members of criminal organizations; • the concealment of the identity or source of the money used to purchase property or

pay off mortgages; • large amounts of money; • property flipping; and

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• money laundering steps, including placement, layering and integration.

An example of this type of mortgage fraud involves a drug dealer who attempted to launder cocaine trafficking money by using the cash to invest in real estate. Using a mortgage broker, the drug trafficker delivered large amounts of cash to inject into mortgages to purchase real estate investments to launder the profits from his drug trafficking.

We’ll discuss this type of fraud and the required response to it in a later unit in this module.

Comprehension check

You must answer this question before you may proceed to the next page.

__________ involves a borrower who falsifies information to qualify for and obtain a mortgage for a property they cannot afford without the falsification.

• Human trafficking • Fraud for profit • Fraud for property

MOD4-1_2COMMONFRAUD: (5 MIN)

COMMON MORTGAGE FRAUD SCHEMES

Mortgage fraud comes in many forms. Common mortgage fraud schemes include:

• straw buyers; • air loans; • occupancy fraud; • reverse occupancy fraud; • income fraud; • buy and bail schemes; • appraisal fraud; • unlawful property flips; • employment fraud; • liability fraud; • debt elimination schemes; • foreclosure rescue schemes; • short sale fraud; • Social Security number fraud and identity theft; • house stealing;

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• multi-lien home equity fraud; • builder bailouts; • reverse fraud for property; • home equity conversion mortgage (HECM) fraud; and • affinity fraud.

Straw buyers are generally present in fraud-for-profit schemes. They are applicants paid for the use of their names, credit information and signatures. They mask the identities and intent of the primary fraud perpetrators. Common signs a straw buyer exists include:

• mortgage payments are made by someone other than the borrower; • the buyer is a first-time homebuyer who will be significantly increasing their housing

expense; • signs the borrower does not intend to occupy the property, e.g., the borrower will have

an unrealistic commute after the purchase; • no real estate agent is employed; • power of attorney is used; • a boilerplate sales contract with few or no provisions, indicating a lack of a true

negotiation; • inconsistent income, savings or credit patterns compared to the borrower’s history; • inconsistent signatures; • using gift funds for the down payment or closing costs; and • title to the property is transferred after the sales closes.

Air loans are loans to straw buyers on non-existent properties. Common signs of an air loan are:

• signs of a straw buyer; • no real estate agent involved; • mortgage payments made by someone other than the borrower; • inability to independently validate the chain of title; • the lender is experiencing financial distress; and • common payer and mailing address for multiple loans indicates a larger scheme.

Occupancy fraud occurs when applicants falsely claim they will occupy the property as their primary residence to obtain a mortgage on more favorable terms. An example of this takes place when applicants are obtaining a mortgage for a house their non-household family members will occupy.

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Reverse occupancy fraud occurs when a borrower buys a property as an investment and lists the rent from the investment as income to qualify for the mortgage, but instead occupies the property as their primary residence. Usually, this involves homebuyers whose verifiable income would not qualify for a mortgage, but who have significant liquid assets. This type of fraud is specific to certain regions of the country. Red flags for this type of fraud include:

• subject properties are sold as investments; • purchasers have little or no established credit; • low employment income relative to rental income expected; • low employment income relative to assets; and • larger than normal down payments.

Income fraud is when applicants either overstate their income to qualify for more favorable terms, or understate their income to qualify for concessions, modifications and other benefits.

Buy and bail schemes involve a homeowner with a property that has fallen in value. They apply for a new loan to purchase a new property. After the new property has been purchased with the mortgage funds, they allow the other home to go into foreclosure. Common hallmarks of this type of scheme include:

• the borrower defaulting on the original mortgage shortly after purchasing the replacement property;

• the borrower indicates they will be a first-time landlord on the original property; • the lease for the original property cannot be substantiated; • the purported tenant has a pre-existing relationship with the borrower; and • the borrower has minimal or no equity in the original property.

Appraisal fraud takes place when the value of the property is overstated so the borrower can obtain more money on the sale of the property or on a cash-out refinance, or understated so a property can be purchased at a discount to its fair market value.

Unlawful property flips occur in tandem with appraisal fraud when a property is purchased and resold quickly at an artificially inflated price. Unlawful flips typically involve:

• straw buyers; • unsophisticated or naïve purchasers; • a seller who very recently acquired title, or is acquiring title concurrent with the subject

transaction; • a sale without a real estate agent; • a property acquired as a distressed property;

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• the appraiser frequently using property flips as comparables; • the owner listed on the appraisal not being the same as the seller; and • a refinance transaction used to pay off private short-term financing.

Employment fraud occurs when an applicant misrepresents their employment information – whether they are employed, the duration of their employment, where they are employed and whether they are self-employed or business owners.

Liability fraud is when borrowers fail to disclose or attempt to obscure significant financial liabilities like mortgages, auto loans or student loans.

Debt elimination schemes are schemes which involve the use of fake legal documents, alternative payment methods or obfuscation tactics to argue existing mortgage debts are invalid or illegal, or to attempt to extinguish mortgage debt. Applicants are typically charged a fee for these debt elimination services.

Foreclosure rescue scams, also called equity stripping, involve scammers who search public records for homes in foreclosure and target these distressed homeowners in danger of foreclosure with services or advice aimed to stop or delay foreclosure. Often, these scams involve the payment of fees (known as “advance fee” scams), monthly payments to the scammer or the transfer of title to the scammer. Other common features include:

• the borrower is advised by the foreclosure specialist to avoid contact with the servicer; • the borrower has paid someone to negotiate on their behalf with the servicer; • the borrower informs the servicer they are making mortgage payments to a third party; • the borrower receives a purchase offer for more than the listing price, and then

indicates they will be renting the property back from the new owner; and • the borrower quitclaimed title to a third party on the advice of their foreclosure

specialist.

Editor’s note — The Mortgage Assistance Relief Services (MARS) Rule prohibits certain behavior related to these types of schemes. [16 Code of Federal Regulations §§322 et seq.]

Short sale fraud occurs when the owner conceals transactions or makes misrepresentations to lower the value of the property for the short sale approval. They then arrange the transaction so they can keep the property at the adjusted value. In other cases, a flip is involved wherein a related person purchases the property at the fraudulently low short sale price, and then immediately resells it for a profit, which is shared with the original owner. Other common features include:

• sudden default with no negotiations, and an immediate offer at the short sale price;

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• unclear or inconsistent reasons given for default; • the mortgage delinquency is inconsistent with the borrower’s spending patterns; • the short sale offer is from someone related to the borrower; • the short sale offer is for less than current market value; • cash back at closing goes to the borrower; • disbursements are made at closing which were not approved or revealed to the servicer,

sometimes masked as “repairs”; • the buyer and real estate agent may be related or the same person; • the purchaser has previous or current ownership of the property; and • the purchaser has a similar name to the current owner of the property.

Social Security number fraud and identity theft takes places when an individual obtains the Social Security number or government ID of another and uses it to obtain a mortgage on their own behalf. Identity theft may go a step beyond the mortgage to include the use of the stolen identity for other types of fraud for profit. A more in-depth discussion of required vigilance for identity theft is discussed in the Red Flags Rule later in the module.

House stealing involves the identity theft of a home owner. The scammers then use fake IDs and forge the owner’s signature on forms transferring ownership to the property.

Multi-lien home equity frauds involve multiple home equity mortgage applications within a short time period – before each lender can be aware of the existence of the other applications. The fraudster then extracts as much money as they can on the multiple lines.

Builder bailouts involve a cash-strapped developer who needs to meet their obligations on short-term construction loans. To do so, they manufacture sales to a straw or extremely unqualified buyer. They inflate the sales price by offering financial incentives to the buyer which are not disclosed or explained to the lender. These schemes often involve:

• a distressed housing market; • excessive financial incentives to the buyer; • new construction or condo conversions; • marketing materials which advertise a rent credit or payment credit; • unexplained payouts or inflated commissions on the Closing Disclosure; and • all comparables being in the same development as the subject property.

Reverse fraud for property occurs when investors use straw buyers or lie to get rid of otherwise unsaleable properties.

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HECM fraud targets seniors, who are coerced into obtaining a property or a reverse mortgage so the scammer can steal the funds acquired through the HECM. HECM fraud often involves other types of frauds, like appraisal fraud to increase the value of the property, investment fraud to acquire funds advertised as future investment profits for the senior and identity theft when the HECM is obtained without the knowledge of the senior owner of the property. Often, HECM fraud involves:

• a caregiver or family member coaching the senior on the acquisition of the HECM; • someone with power of attorney acting on behalf of the senior; • the power of attorney is held by a caregiver, but the senior has relatives; • communication with the loan officer only through the person holding power of

attorney; • the senior’s credit report being inconsistent with the information on the loan

application; • the monthly mortgage statements sent somewhere other than the senior’s address; • the senior borrower withdrawing large amount of cash or displaying unusual spending

activity; and • the senior obtaining a reverse mortgage but depositing few or no funds into their

account.

Affinity fraud is fraud which relies on exploiting common bonds such as friendship, family, ethnicity, professional relationships or age-related groups. This type of fraud is a means by which other types of fraud are accomplished, e.g., the fraudster asks their family members to play certain roles in a fraud-for-profit scheme. Common indicators of affinity fraud include:

• parties to the transaction (loan officer, escrow officer, real estate agent, borrowers, appraiser) have a common bond;

• several parties to the transaction have the same surname; • the borrower has excessive assets in relation to their employment income; • large gifts from group members as a source of the down payment; • the borrower works for a member of the group; and • straw buyers, falsified gift funds and altered employment and asset information.

Comprehension check

You must answer this question before you may proceed to the next page.

This type of fraud involves the applicant indicating the property will be a rental, when it is in fact going to be their personal residence.

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• Reverse occupancy fraud. • Straw buyer. • Multi-lien home equity fraud.

MOD4-1_3MORTGAGEFILE: (5 MIN)

MORTGAGE FILE INDICATORS

Mortgage fraud leaves a trail, but it often requires careful review to find it. Individual anomalies in mortgage files may exist because every borrower and every mortgage are different. However, similar to the idea of risk layering in underwriting, the more elements of potential fraud, the greater the need for careful review.

Fannie Mae publishes a list of common indicators that fraud may be present in loan files.

High-level indicators of mortgage fraud

• Social Security number discrepancies within the loan file; • address discrepancies within the loan file; • verifications addressed to a specific party’s attention; • verifications completed on the same day they were ordered; • verifications completed on a weekend or holiday; • documentation that includes deletions, correction fluid or other alterations; • numbers on the documentation that appear to be “squeezed” due to alteration; • different handwriting or type style within a document; and • excessive number of automated underwriting system submissions.

Mortgage Application

• significant or contradictory changes from handwritten to typed application; • unsigned or undated application; • employer’s address shown only as a post office box; • loan purpose is cash-out refinance on a recently acquired property; • buyer currently resides in subject property; • same telephone number for applicant and employer; • extreme payment shock (may signal straw buyer and/or or inflated income); and • purchaser of investment property does not own residence.

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Sales Contract

• non-arm’s length transaction, e.g., the seller is real estate broker, relative, employer, etc.;

• seller is not currently reflected on title; • purchaser is not the applicant; • purchaser(s) deleted from/added to sales contract; • no real estate agent is involved; • power of attorney is used; • second mortgage is indicated, but not disclosed on the application; • earnest money deposit equals the entire down payment, or is an odd amount for the

local market; • multiple deposit checks have inconsistent dates, e.g., #303 dated 10/1, #299 dated

11/1; • name and/or address on earnest money deposit check differ from buyer’s; • real estate commission is excessive; • contract dated after credit documents; and • contract is “boiler plate” with limited fill-in-the-blank terms, not reflective of a true

negotiation.

Credit Report

• no credit history or “thin” credit files; • invalid Social Security number or variance from that on other documents; • duplicate Social Security number or additional user of Social Security number; • recently issued Social Security number; • liabilities shown on credit report that are not on mortgage application; • length of established credit is not consistent with applicant’s age; • credit patterns are inconsistent with income and lifestyle; • all tradelines opened at the same time; • authorized user accounts have superior payment histories; • significant differences between original and new or supplemental credit reports; • “also known as” (AKA) or “doing business as” (DBA) indicated; • numerous recent inquiries; • missing pages and/or supplements; • employment discrepancies; and • Social Security number, death, or fraud alerts.

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Employment and Income Documentation • applicant’s job title is generic, e.g., “manager,” “vice president”; • employer’s address is a post office box, the property address, or applicant’s current

residence; • applicant’s residence is (will be) in location remote from employer; • employer name is similar to a party to the transaction, e.g., uses the applicant’s initials; • employer unable to be contacted; • year-to-date or past-year earnings are even dollar amounts; • withholding not calculated correctly (check FICA tables); • withholding totals vary significantly from pay period to pay period; • pay period dates overlap and/or do not correspond with other documentation; • abnormalities in paycheck numbering; • handwritten VOE, pay stubs, or W-2 forms; • W-2 form presented is not the employee’s copy; • employer’s identification number has a format other than 12-3456789; • income appears to be out of line with type of employment; • self-employed applicant does not make estimated tax payments; • real estate taxes or mortgage interest claimed, but no ownership of real property

disclosed; • tax returns not signed or dated; • high-income applicant without paid preparer; • paid preparer signs taxpayer’s copy of tax returns; • interest and dividend income do not align with assets; • applicant reports substantial income but has no cash in bank; • large increase in housing expense; and • reasonableness test: income appears to be out of line with type of employment,

applicant age, education, and/or lifestyle.

Asset Documentation

• down payment source is other than deposits (gift, sale of personal property); • applicant’s salary does not support savings on deposit; • applicant does not use traditional banking institutions; • pattern of loyalty to financial institutions other than the subject lender; • balances are greater than the FDIC or SIPC insured limits; • high-asset applicant’s investments are not diversified; • excessive balance maintained in checking account;

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• dates of bank statements are unusual or out of sequence; • recently deposited funds without a plausible paper-trail or explanation; • bank account ownership includes unknown parties; • balances verified as even dollar amounts; • two-month average balance is equal to present balance; • source of earnest money is not apparent; • earnest money is not reflected in account withdrawals; • earnest money is from a bank or account with no relationship to the applicant; • bank statements do not reflect deposits consistent with income; and • reasonableness test: assets appear to be out of line with type of employment, applicant

age, education, and/or lifestyle.

Appraisal

• appraisal ordered by a party to the transaction; • occupant shown to be tenant or unknown; • owner is someone other than seller shown on sales contract; • appraisal indicates transaction is a refinance, but other documentation reflects a

purchase; • purchase price is substantially higher than predominant market value; • purchase price is substantially lower than predominant market value; • subject property obsolescence is minimized; • large positive adjustments made to comparable properties; • comparables’ sales prices do not bracket the subject’s adjusted value; • comparable sales are not similar in style, size, and amenity; • dated sales used as comparable sales; • new construction/condo conversion: all comparable sales located in subject

development; • comparable properties are a significant distance from the subject, or located across

neighborhood boundaries (main arteries, waterways, etc.); • map scale distorts distance of comparable properties; • “For Rent” sign appears in photographs; • photos appear to be taken from an awkward or unusual standpoint; • address reflected in photos does not match property address; • weather conditions in photos inconsistent with date of appraisal; • appraisal dated before sales contract; • significant appreciation in short period of time; and • prior sales are listed for subject and/or comparables without adequate explanation.

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Title

• prepared for and/or mailed to a party other than the lender; • evidence of financial strain may indicate a compromised sale transaction (flip,

foreclosure rescue, straw buyer refinance, etc.), or might suggest undisclosed credit problems in the case of a refinance; some indicators of financial strain may include:

• income tax, judgements, or similar liens recorded; • delinquent property taxes; • notice of default or modification agreement recorded; • seller not on title; • seller owned property for short time; • buyer has pre-existing financial interest in the property; • date and amount of existing encumbrances do not make sense; • chain of title includes an interested party such as realtor or appraiser; and • buyer and seller have similar names (if concealed non-arm’s length).

Purchase Transactions

• real estate listed on application, yet applicant is a renter; • applicant intends to lease current residence; • significant or unrealistic commute distance; • applicant is downgrading from a larger or more expensive house; • sales contract is subject to an existing lease; • occupancy affidavits reflect applicant does not intend to occupy; and • new homeowner’s insurance is a rental policy (declarations page).

Refinance Transactions • rental property listed on application is more expensive than subject property; • different mailing address on applicant’s bank statements, pay advices, etc.; • different address reported on credit report; • significant or unrealistic commute distance; • appraisal reflects vacant or tenant occupancy; • occupancy affidavits reflect applicant does not intend to occupy; • homeowner’s insurance is a rental policy (declarations page); and • reverse directory does not disclose subject property address.

Closing Disclosure

• borrower or seller names are different than sales contract and title; • sales price is inconsistent with contract, loan approval, and/or appraisal;

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• excessive earnest money or builder deposit; • earnest money deposit is inconsistent with sales contract and/or application; • payouts to unknown parties; • refinance pays off previously undisclosed liens; • excessive sales commissions; • excessive fees and/or points; • seller-paid closing costs, especially for purchaser with sufficient assets for down

payment; and • cash proceeds to borrower are inconsistent with final application and loan approval.

[Fannie Mae — Common Red Flags]

Editor’s note — To download the original Fannie Mae PDF file, visit https://www.fanniemae.com/singlefamily/mortgage-fraud-prevention.

OTHER SIGNS OF FRAUD

Examples of activity that may denote mortgage fraud include:

• the borrower/buyer submits invalid documents in order to cancel their mortgage obligations or to pay off their loan balance;

• the same notary public or “authorized representative” prepares, signs and sends packages of nearly identical debt elimination documents for multiple borrowers with outstanding loan balances;

• the same notary public or “authorized representative” working with or receiving payments from unusually large numbers of borrowers;

• falsified certified checks, cashier’s checks or “non-cash item checks” drawn against the borrower/buyer’s account, rather than from the account of a financial institution;

• the borrower/buyer applies for a loan for a primary residence, but does not occupy the property as their primary residence, instead using it as a second home or income-producing rental;

• the borrower/buyer of a younger age purchases their “primary residence” in a senior citizen residential development;

• the borrower/buyer requests refinancing for their primary residence when public and personal documents indicates they reside somewhere other than the address on the loan application;

• language in a short sale contract indicates the property could be resold promptly; • low appraisal values, non-arms-length relationships between short sales buyers and

sellers, or previous fraudulent sale attempts in short-sale transactions; • the agents/brokers of the buyer or seller in the mortgage transaction are unlicensed;

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• past misrepresentations made by the borrower/buyer when attempting to secure funding, property, refinancing or short sales;

• improper/incomplete file documentation, including the borrower/buyer’s reluctance to provide more information or unfulfilled promises to provide more information;

• apparent resubmission of a previously rejected loan application with key borrower/buyer details changed or modified from individual borrower to company or corporation, indicating fraud through the use of a possible straw-borrower or non-existent person;

• borrower attempts to structure deposits/withdrawals or otherwise hide the true value of assets in order to qualify for a loan modification intended for homeowners in financial distress;

• requests from third-party affiliates on behalf of distressed homeowners to pay fees in advance of the homeowner receiving mortgage counseling, foreclosure avoidance, loan modification or other related services; and

• third-party solicitation of distressed homeowners for mortgage counseling, foreclosure avoidance, loan modification or related services. [FinCEN Advisory: Suspicious Activity Related to Mortgage Loan Fraud]

Comprehension check

You must answer this question before you may proceed to the next page.

A(n) _____________ credit file may be an indication fraud is present.

• excellent • thin • full

MOD4-1_4REDFLAGS1: (4 MIN)

RED FLAGS RULE AND IDENTITY THEFT PREVENTION

As part of their professional duties, mortgage loan originators (MLOs) work with loan applications and credit reports on a regular basis.

This personal information is collected from applicants as a crucial part of arranging any mortgage. The information ensures that mortgage funds are disbursed to the correct person and actually secured by the subject property, all part of a mortgage lender’s risk management. Prudent processing of a mortgage origination requires a complete profile on the borrower and their ownership of the real estate which will be security for the mortgage debt.

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However, identity theft poses a threat to the integrity of all mortgage originations.

As the first point of contact with a borrower, MLOs are in perfect position to reduce these risks.

FEDERAL REGULATIONS STEP IN TO REDUCE THE RISK

The Red Flags Rule was developed by the Federal Trade Commission (FTC) to mitigate identity theft risks borrowers of mortgages are exposed to when a mortgage is made or arranged by MLOs.

Proprietary and corporate brokers who engage in MLO activities need to implement written procedures and checklists for screening mortgage applications, known as an Identity Theft Prevention Program (ITPP). The procedures are required to help MLOs adequately detect suspicious activity and indications of potential fraud, called “red flags,” in mortgage applications and other documents provided by an applicant. [15 United States Code §1681 et seq.]

Implementation of written procedures for detecting suspicious activity requires the MLO business operation to:

• screen mortgage applications and related documents for typical signs of fraud and identity theft; and

• protect the personal information of applicants and, if servicing mortgages, current borrowers, from identity theft.

APPLYING THE RULE TO MLO BUSINESSES

MLOs are subject to the Red Flags Rule when, in their course of making or arranging mortgages, they also:

• obtain or review credit reports relating to any type of mortgage origination; • provide information to credit reporting agencies; or • advance mortgage funds themselves — whether from their own funds or under a

warehouse line of credit — or on behalf of a lender. [15 USC §1681m(e)(4)]

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The rule initially targets MLOs who make, arrange or service mortgage which fund primarily personal, family or household purposes, called consumer mortgages. However, those who also make or arrange business mortgages are also required to create procedures to prevent fraud when the mortgages they make present a reasonably foreseeable risk of identity theft, such as those that may result from data accessible by telephone or the internet. [16 CFR §681.1(b)(3)]

Nonetheless, as good business practice and risk management, all MLOs are advised to implement procedures for reviewing mortgage applications and detecting suspicious activity, regardless of the level of risk they determine exists.

In addition to following their own written procedures, MLOs acting as service providers for a lender also need to follow any procedures imposed by the lender as part of its security requirements for detecting mortgage fraud. [16 CFR §681, Appendix A(VI)(c)]

Further, all MLOs are uniformly required to have policies for verifying a borrower’s identity upon receiving an address discrepancy alert from a credit reporting agency. [16 CFR §641.1]

WRITTEN PROCEDURE BASICS

Compliance with the Red Flags Rule requires MLO companies to develop procedures by MLOs to review mortgage applications and documents for activity that may indicate fraud or identity

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theft. Thus, individual MLOs need to be familiar with their company’s written program and understand how to recognize risk factors.

Typically, this requires:

• an understanding of what constitutes suspicious activity; • how to spot discrepancies in information provided by an applicant; and • how to properly screen all mortgage applications and related documents.

To help individual MLOs to implement these requirements for their employing broker, the written documentation of a company’s checklists and procedures need to:

• identify activities, errors, discrepancies and documents that indicate fraud or identity theft;

• outline the process for detecting suspicious activity when reviewing applications and documents;

• clarify how to respond to indications of fraud when discovered; and • explain how to update the procedures periodically to reflect changes in risks to

borrowers or the company (e.g., by adding any new activities deemed indicative of fraud or identity theft). [16 CFR §681.1(d)(2)]

Comprehension check

You must answer this question before you may proceed to the next page.

The written procedures and checklists for screening mortgage applications for identity theft are known as a(n):

• Identity Theft Prevention Program (ITPP). • underwriting guide. • mortgage origination. • call screening.

MOD4-1_5REDFLAGS2: (4 MIN)

IDENTIFYING AND DETECTING SUSPICIOUS ACTIVITY

To determine what type of activity is suspicious and may indicate fraud, MLOs are required to gauge the risk factors present in the mortgages they originate, including:

• the types of mortgages offered;

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• methods used to make and access mortgages; and • their previous experience with identity theft and fraud. [16 CFR §681 Appendix A(II)(a)]

They may draw from past incidents of identity theft, any changes in identify theft risks they have identified, supervisory guidance given about what type of activity is suspicious or new methods used by fraudulent applicants.

The use of a checklist containing activity identified as suspicious is required to determine whether an applicant’s information indicates fraud. However, the content of the list will vary by company and is to be set out in writing by each MLO company.

Activity that may be added to the checklist as indications of fraud include:

• alerts or warnings from credit reporting agencies or service providers, such as fraud detection services;

• suspicious documents that appear to be altered or forged; • suspicious personal identifying information, such as a peculiar address change; • unusual activity related to a mortgage; and • notice from borrowers, victims of identity theft, law enforcement or other persons

regarding potential identity theft related to a mortgage. [16 CFR §681, Appendix A(II)(c)]

MLOs are to further screen mortgage applications by:

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• obtaining and verifying personal information about a mortgage applicant; and • monitoring transactions and verifying the validity of any change of address requests for

existing mortgages they service. [16 CFR §681, Appendix A(III)]

RESPONDING TO SUSPICIOUS ACTIVITY OBSERVED

Once suspicious information is detected in an application or other related document, MLOs need to have a process for responding to indicators of identity theft by:

• monitoring for errors and suspicious activity when servicing the mortgage; • contacting the applicant or borrower; • changing passwords, security codes or other security devices that allow access to the

mortgage or application; • reopening a mortgage with a new account number; • closing an existing mortgage; • withholding collections on a mortgage and not selling it to a debt collector; • notifying law enforcement; or • determining no response is needed under the circumstances at hand. [16 CFR §681,

Appendix A(IV)]

To determine which response is the most appropriate, MLO companies need to assess each mortgage on a case-by-case basis. Responses will depend on the procedures presented in the company’s Red Flags fraud detection manual.

For example, if an MLO observes a fraud alert situation on a credit report, they need to take extra care to compare identification documents and photos provided by the applicant with other documents on file. If multiple addresses on the credit report are different from the address of the applicant’s property, the MLO may use the county’s assessor, appraiser or tax collector web site to verify the ownership of the property located at the common address given to them.

In addition to the requirements of the Red Flags Rule, some common actions to take when evidence of identity theft is discovered include:

• filing a Suspicious Activity Report (SAR) (e.g., in the case of suspected mortgage fraud or money laundering) [31 USC §5318(g)];

• confirming the identity of the person applying for the mortgage when a fraud alert is included on a credit report [15 USC §1681c-1(h)];

• abiding by requirements for furnishing accurate information to credit reporting agencies [15 USC §1681s-2]; and

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• complying with the prohibitions on the sale, transfer and placement for collection of certain debts resulting from identity theft. [15 USC §1681m]

OVERSIGHT AND PROCEDURE UPDATES

As part of the administration requirements, the MLO company needs to:

• obtain written approval of the procedures from either a board of directors or designated officer/employee in senior management;

• include the board of directors or designated officer/employee in oversight, development and implementation of procedures; and

• provide oversight of any service providers by requiring them to also follow risk management procedures. [16 CFR §681.1(e)]

Proper administration of the written program requires the board of directors, committee of the board or a designated officer/employee in senior management to establish annual reports for their review of suspicious activity and staff responses. [16 CFR §681, Appendix A(VI)]

The annual reports are evaluated for the effectiveness of the company’s procedures in addressing identity theft risks. Material changes may need to be recommended, such as how MLOs review applications or what types of activities and documents are deemed suspicious by their written checklists. [16 CFR §681, Appendix A(VI)(b)]

To assess whether changes are needed, an MLO is encouraged to consider:

• their experiences with identity theft; • changes in methods of identity theft and its detection, prevention and mitigation; • changes in the types of mortgages the MLO offers or maintains; and • changes in the business arrangements of the credit, including mergers, acquisitions,

joint ventures and service provider arrangements (e.g. transitioning the credit to a warehouse line). [16 CFR §681, Appendix A(V)]

Further, management of the written program requires oversight of service providers used to perform activities in connection with a mortgage to ensure they are also compliant with the Red Flags Rule. This includes credit-checking services, contract processors, notaries and document storage companies. [16 CFR §681, Appendix A(VI)(c)]

For example, an MLO may require a service provider, by contract, to implement policies for detecting signs of fraud encountered during the service provider’s activities and reporting them to the MLO or mitigating identity theft themselves.

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PENALTIES FOR NONCOMPLIANCE

When an MLO company fails to comply with the Red Flags Rule, the FTC has the authority to:

• investigate the person or business in violation; • enforce compliance through issuing procedural rules for detecting suspicious activity;

and • require the filing of reports, the production of documents and the appearance of

witnesses. [15 USC §1681s(a)(a)]

Further, the FTC may commence a civil action against those in violation to recover civil penalties of up to $2,500 per violation. [15 USC §1681s(a)(2)(A)]

In determining the amount of a civil penalty, the court considers the degree of the violation, any history of similar prior conduct, ability to pay and effects on the ability to continue to do business. [15 USC §1681s(a)(2)(B)]

Comprehension check

You must answer this question before you may proceed to the next page.

The Federal Trade Commission (FTC) may commence a civil action against Red Flags Rules violators and recover civil penalties of up to _________ per violation.

• $10,000 • $2,500 • $2,000 • $1,000,000

Unit 2: The Bank Secrecy Act and anti-money laundering

MOD4-2_1AML1: (4 MIN)

UNIT 2 LEARNING OBJECTIVES

This unit will teach the student to understand a mortgage company’s responsibilities in detecting the use of illicit funds under the anti-money laundering rules.

THE BANK SECRECY ACT

The Currency and Foreign Transactions Reporting Act of 1970, known as the Bank Secrecy Act (BSA), requires U.S. financial institutions to maintain records and file reports with government

24

agencies to combat money laundering and terrorist financing. [31 United States Code §5311 et seq.]

The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, oversees and promulgates regulations controlling anti-money laundering rules and suspicious activity report filings.[31 CFR §§1029 et seq.]Other laws which also assist the government in fighting money laundering include:

• the Money Laundering Control Act of 1986, which established money laundering as a federal crime, prohibited structured transactions to evade required filings, introduced civil and criminal penalties for BSA violations and directed banks to establish procedures to monitor compliance with the BSA;

• the Anti-Drug Abuse Act of 1988, which expanded the BSA large currency transaction reporting requirements to car dealers and real estate closing personnel and required the verification of identity for the purchase of monetary instruments over $3,000;

• the Annunzio-Wylie Anti-Money Laundering Act (1992), which strengthened sanctions for BSA violations, established the use of Suspicious Activity Reports (SARs), required verification and recordkeeping for wire transfers and established the BSA Advisory Group;

• the Money Laundering Suppression Act (1994), which required banks to review and enhance training and referrals to enforcement agencies, streamlined currency transaction reporting exemptions and required registration of money service businesses and associated authorized businesses;

• the Money Laundering and Financial Crimes Strategy Act (1998) required the Department of the Treasury to develop a National Money Laundering Strategy and created task forces to direct law enforcement efforts in areas where money laundering is prevalent;

• the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) which criminalized the financing of terrorism, prohibited doing business with foreign shell banks, required government-institution information sharing and voluntary information sharing among financial institutions, increased the penalties for money laundering and facilitated faster records access; and

• the Intelligence Reform & Terrorism Prevention Act of 2004 which amended the BSA to require some financial institutions to report cross-border electronic transmittals of funds where reasonably necessary.

The efforts to curb terrorism and crime require the effort of thousands of specially trained professionals in task forces and government agencies. It also requires the diligence and care of

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finance and mortgage professionals who are on the front lines, tasked with reporting suspicious activities and providing information crucial to the protection of the nation’s security.

WHAT IS MONEY LAUNDERING

Money laundering is the process of making illegally-gained profits appear legitimate. It facilitates access to funds for criminals engaged in crimes like drug trafficking or terrorism.

The three steps of money laundering are:

• placement; • layering; and • integration.

Placement is the process of placing the profits into the legitimate financial system. Usually this is accomplished by depositing money into banks and/or smuggling currency into the country to deposit. For example, a drug trafficker would open several shell companies, and funnel money through them towards significant down payments on several high-end real estate properties.

Layering is the process of further concealing the money’s illegal source by completing multiple complex transactions. This makes following the money more difficult. For instance, laying might involve purchasing traveler’s checks, bank drafts, securities, bonds, etc. with other types of monetary instruments or transferring funds between accounts.

Finally, integration is the re-entry of the funds into the legitimate economy. For instance, the mortgage on the high-end property bought with drug money would be sold is paid down in large monthly payments, or completely, and the property sold. The profits are then legitimized as income from the sale of the property.

ANTI-MONEY LAUNDERING AND SUSPICIOUS ACTIVITY REPORTS

Non-bank residential mortgage lenders, brokers and mortgage loan originators are required to establish anti-money laundering programs to prevent or detect fraudulent or unlawful transactions and prevent the financing of terrorist activities.

In residential mortgage transactions, money laundering most often involves the fraudulent use of money, obtained from criminal enterprises, to purchase residential real estate.

In 2002, FinCEN issued temporary regulations exempting residential mortgage lenders, brokers and mortgage loan originators from the anti-money laundering program requirement. However, after additional analysis and investigation, FinCEN determined the residential mortgage lending channel was indeed a significant target for fraudulent transactions.

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Subsequently, in 2012, FinCEN established anti-money laundering rules for residential mortgage lenders, brokers and mortgage loan originators.

Editor’s note — Banks and other depository institutions were subject to FinCEN anti-money laundering rules when the rules were initially established, in 1970. [31 CFR §§1010 et seq.]

WHO IS TO COMPLY

Application of the anti-money laundering rules is broad. All residential mortgage companies, including sole proprietorships, that perform residential mortgage activities are required to establish a program to detect and report suspected money laundering schemes. [31 CFR §1010.100(lll)]

Individual MLOs are required to comply with the anti-money laundering rules established by their employing companies (including sole proprietorships). FinCEN identified MLOs as an important first level of protection against fraud, since they have the most contact with borrowers and borrower information. Thus, they have a greater exposure to information which may indicate fraud is present, or impending.

Residential mortgage activities which trigger compliance with the anti-money laundering rules include:

• the acceptance of an application for a residential mortgage; or • the offering or negotiating of the terms of a residential mortgage for itself, or on behalf

of a lender or borrower. [31 CFR §1010.100(lll)(1)(ii)]

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A residential mortgage under the anti-money laundering rules is a mortgage secured by a one-to-four unit residential property, condo, co-op, mobilehome or trailer. This includes purchases, refinances and loan modifications, if they involve a residential mortgage application or offering or negotiating the terms of a residential mortgage. [31 CFR §1010.100(lll)(1)(iii); 77 FR 8152]

Unlike the definition of a residential mortgage lender under the Secure and Fair Enforcement Act (SAFE Act), the anti-money laundering rules are triggered even if the lender or mortgage loan originator does not expect or receive compensation for the residential mortgage activity. [77 FR 8152; 31 CFR §1010.100(lll)(1)]

REQUIREMENTS

Anti-money laundering rules require non-bank residential mortgage companies to:

• establish a written internal policy to prevent the company from being used to launder money or facilitate other unlawful financial activity;

• designate a compliance officer responsible for implementing and policing compliance with the policy;

• establish anti-money laundering education programs for the company’s employees, whether completed in-house or through a third-party educator; and

• arrange an independent audit of the effectiveness of the established anti-money laundering policy and program. [31 CFR §1029.210]

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Programs are to be commensurate with the size, location and activities undertaken by the non-bank residential mortgage lender. The requirements of the anti-money laundering program can be integrated into existing risk management, anti-fraud, consumer protection and compliance guides used by the company to detect business risks.

Comprehension check

You must answer this question before you may proceed to the next page.

The ____________ oversees anti-money laundering and suspicious activity report filings.

• Consumer Financial Protection Bureau (CFPB) • White House • Financial Crimes Enforcement Network (FinCEN) • California Department of Business Oversight (DBO)

MOD4-2_2AML2: (3 MIN)

SUSPICIOUS ACTIVITY REPORTS

A residential mortgage company must file a suspicious activity report (SAR) with FinCEN if it knows or suspects a transaction involving funds or assets in aggregate of at least $5,000:

• involves funds derived from unlawful activities; • is intended to hide or disguise funds or assets derived from unlawful activities; • is otherwise designed to evade the BSA; • has no apparent business or lawful purpose, and for which no reasonable explanation

exists; or • involves the use of the mortgage funds to facilitate criminal activity. [31 CFR

§1029.320(a)(2)]

Editor’s note — Although the anti-money laundering rules compel the identification and reporting of suspected money laundering schemes, a mortgage company may voluntarily use a SAR to file a report about a suspected violation of any law or regulation. [31 CFR §1029.320(a)]

Often in mortgage and real estate fraud schemes, the perpetrator’s goal is to gain access to the equity or mortgage funds and abscond. With money laundering schemes, the goal is to obscure and legitimize illicit funds. Thus, these transactions often involve seemingly legitimate transactions: the mortgages involved are performing, and/or paid off quickly.

Examples of suspicious activities which have triggered past SARs include:

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• A company reported that one of its loan officers supplied false references for borrowers in connection with dozens of mortgages. The company found that all the borrowers were using the same real estate agent and real estate appraiser, and suspected the property values had been inflated. Further, it suspected the loan officer was the actual owner of the properties. Despite the company’s fears that it was facing multiple loan defaults based on overinflated values and unqualified straw buyers, all the mortgages were current. While not alleged by the company, money launderers commonly use straw buyers to obtain multiple mortgages. They then funnel illicit funds towards mortgage payments, thereby “legitimizing” the money in the form of equity.

• A company reported it funded several residential mortgage refinances through a mortgage company totaling upwards of six million dollars. In each of the suspicious transactions, each borrower requested a rescission of the mortgage after funding, and, when denied, immediately paid off the mortgage. While not alleged by the company, FinCEN noted that the activity may have been part of a money laundering scheme.

• A bank reported that, in a short span of time, a customer made a very large cash deposit in $50 bills, and requested a bank check for the same amount payable to a mortgage company. While not alleged in the SAR, FinCEN identifies this pattern as a potential means of converting cash income to evade income taxes. [FinCEN Report: Money Laundering in the Residential Real Estate Industry]

If more than one mortgage company observes the suspicious activity, companies may choose to jointly file one SAR. All mortgage companies party to an SAR have a duty to keep records of the filing, and any supporting documentation. [31 CFR §1029.320(a)(3)]

SAR FILING

Within 30 days of becoming aware of a suspicious transaction, mortgage companies are required to complete and file a SAR with FinCEN. The SAR is filed electronically on FinCEN’s website. [31 CFR§1029.320(b)]

For violations which involve ongoing money laundering or suspected ties to the financing of terrorism, mortgages companies must also immediately notify law enforcement officials. [31 CFR§1029.320(b)(4)]

The SAR consists of:

• an identification of the person or company under suspicion; • details regarding the suspicious activity, including the type of fraud or illicit activity

suspected; • identification of the company where the suspicious activity took place;

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• contact information of the SAR filer; and • a narrative account of the activities under suspicion.

RECORDKEEPING REQUIREMENTS

SAR filings and supporting documentation are to be kept on file for five years from the date of the filing. [31 CFR §1029.320(c)]

The existence of a SAR filing and its contents are to be kept confidential. A company filing a SAR is only able to release information about the SAR to law enforcement officials to comply with the BSA. It may also release SAR information with a co-filer if filing a joint SAR. However, the company is not required to disclose the existence of a SAR or its contents in response to a subpoena. [31 CFR §1029.320(d)]

PENALTIES FOR VIOLATIONS

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Penalties for failing to file a SAR or otherwise violate the BSA include civil and criminal penalties, depending on the nature and seriousness of the violation. [31 CFR §1029.320(f); 31 USC §§5321, 5322]

Comprehension check

You must answer this question before you may proceed to the next page.

Within _______ of becoming aware of a suspicious transaction, mortgage companies are required to complete and file a SAR with FinCEN.

• 3 days • 10 days • 30 days

Unit 3: Do Not Call – Telemarketing and Consumer Fraud and Abuse Prevention Act

MOD4-3_1DNC1: (3 MIN)

UNIT 3 LEARNING OBJECTIVES

This unit will teach the student to:

• identify when mortgage loan originators (MLOs) are considered telemarketers; • understand the prohibitions imposed on telemarketing by the Telemarketing and

Consumer Fraud and Abuse Prevention Act (TCFAPA); and • determine how to comply with telemarketing call rules.

THE TELEMARKETING AND CONSUMER FRAUD AND ABUSE PREVENTION ACT (TCFAPA)

Mortgage loan originators (MLOs) are subject to the Telemarketing and Consumer Fraud and Abuse Prevention Act (TCFAPA) and its associated regulation, the Telemarketing Sales Rule. [15 United States Code §§6101 et seq.; 16 Code of Federal Regulations §§310 et seq.]

The TCFAPA, originally signed into law in 1994, required the Federal Trade Commission (FTC) to introduce a series of rules and prohibitions for companies which engage in telemarketing. The aim of the TCFAPA is to curb the unethical or fraudulent practices of some businesses hoping to market their products and services (such as mortgages) to new customers by phone.

Congress initially enacted the TCFAPA based on findings that:

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• telemarketing has extreme mobility, and may be carried out across state lines without any consumer contact;

• the FTC did not have adequate resources to handle the frequency of telemarketing fraud;

• telemarketing fraud costs consumers and others an estimated $40 billion a year; and • consumers are frequently targeted by other forms of telemarketing abuse such as

deceptive marketing. [15 USC §6101]

Thus, the TCFAPA gives the FTC authority to impose rules prohibiting or restricting unethical and abusive telemarketing practices. These rules:

• prohibit a pattern of unsolicited calls “which the reasonable consumer would consider coercive or abusive” of a right to privacy;

• prohibit making telemarketing calls at unreasonable hours; and • require telemarketers (including telemarketers who solicit charitable contributions) to

promptly and clearly disclose the intention of the call, along with other FTC-mandated disclosures. [15 USC §6102(a)(3)]

The TCFAPA has been substantially altered a number of times, first in 2001 as part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act, which updated the provisions of the TCFAPA to include protections for consumers who might be susceptible to solicitations for charitable contributions.

The TCFAPA was further changed in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to give more authority to the FTC to create and enforce telemarketing rules in the aftermath of the Great Recession, when deception and abuse by mortgage lenders was rampant.

With the guidelines set forth by the TCFAPA and the Telemarketing Sales Rule, the FTC imposed a series of more specific rules to govern telemarketing practices which may be considered deceptive or abusive.

WHEN ARE MLOS CONSIDERED TELEMARKETERS?

A telemarketer is defined as any person who initiates or receives telephone calls to or from a customer or donor in relation to telemarketing. Telemarketing includes a plan or campaign to induce the purchase of goods or services — such as marketing mortgage services and other sales calls — by use of one or more telephones and involves two or more out-of-state phone calls. [16 CFR §310.2(ff), (gg)]

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Does this mean MLOs who only make in-state phone calls are exempt from the TCFAPA?

No. In-state phone calls are covered under the Telephone Consumer Protection Act. The Telephone Consumer Protection Act contains provisions similar to the TCFAPA, but is instead regulated by the Federal Communications Commission (FCC). [47 USC §227 et seq.]

So, what do MLOs need to know about following the TCFAPA? Read on for more information.

Comprehension check

You must answer this question before you may proceed to the next page.

The _____________ prohibits abuse and coercion in telemarketing.

• Bank Secrecy Act • Telemarketing and Consumer Fraud and Abuse Prevention Act (TCFAPA) • Red Flags Rule

MOD4-3_2DNC2: (5 MIN)

VIOLATION BY DECEPTION

No telemarketer may misrepresent or fail to disclose:

• the cost and quantity of the offered goods or services; • all limitations and conditions regarding the offer; • any policy concerning refunds, cancellations, exchanges or repurchases; • in a prize promotion, the odds of winning the prize, and that no purchase is necessary to

participate; • any conditions regarding receiving a prize; • for credit card protection services, the limits of the consumer’s liability for unauthorized

use of a credit card; • the terms and conditions of a “negative option feature,” i.e., when a customer will be

charged unless they take action to avoid the charge; and • for debt relief services, the conditions and limitations of that service, including time

necessary to achieve the results of the service. [16 CFR §310.3(a)(1)-(2)]

A telemarketer also may not misrepresent:

• any aspect of the performance, efficacy, nature or central characteristics of the subject of the offer;

• material aspects of an investment opportunity;

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• the telemarketer’s affiliation with any person or entity; and • whether a consumer already has protections provided by the offer. [16 CFR

§310.3(a)(2)]

Further, no billing information may be submitted for payment without the customer’s explicit written or recorded oral authorization. [16 CFR §310.3(a)(3)]

Also, no telemarketer may make any false or misleading statement in order to induce a person to accept the telemarketer’s offer. [16 CFR §310.3(a)(4)]

ACCESSORY TO A VIOLATION

But it is not enough to simply abide by the rules set forth by the FTC for ethical telemarketing practices — any person who knowingly supports or facilitates a violation of these rules is also considered in violation. [16 CFR §310.3(b)]

Consider a company which makes telemarketing calls to solicit donations on behalf of charitable organizations. Some telemarketers working for this company, at the outset of their calls, claim they are not seeking donations from the consumers they are calling.

After making this claim, the telemarketers ask the consumers to deliver materials requesting donations to their friends and family. Then telemarketers then ask the consumers if they would themselves like to donate.

Is this company in violation of the FTC telemarketing rules, and by extension the TCFAPA?

Yes! Current FTC regulations explicitly state telemarketers may not fail to promptly disclose the purpose of their call. Had the company not known about specific telemarketers engaging in this practice, they would still be in violation of the rule for facilitating deceptive telemarketing practices. [United States v. Infocision FTC File Number 162 3021]

While this case specifically concerns a solicitation for charitable donations, the same principle applies to all unsolicited calls — including for real estate or mortgage services. When cold calling a consumer to solicit them to make any purchase or donation, the telemarketer needs to promptly and explicitly state their intention. Doing otherwise may result in a violation of the FTC’s regulations.

DECEPTION IN PRACTICE

Now, consider a mortgage broker who makes calls to consumers and places advertisements online and in newspapers claiming they can offer fixed rate mortgages (FRMs) to refinance

35

existing mortgages at the lowest possible rates and no cost. The broker also claims the loan amount cannot and will not increase.

The broker then informs consumers they will need to apply for more than one mortgage, one at a competitive interest rate and one at much higher rate. They claim the mortgage broker will receive a premium from the mortgage holder on the higher-than-market rate mortgage to pay the fees for the low-rate mortgage.

The broker then claims the low-interest mortgage then will be used to pay off the higher-interest mortgage, leaving the consumer with no fees and low interest.

However, in practice, the mortgage broker leaves consumers with just the high-interest mortgages, often at much higher interest rates than the mortgages the consumers wanted to refinance in the first place. Some consumers, believing they did not have to pay interest on the high-interest mortgages, found their credit reports severely impacted.

Is this a violation of the FTC’s telemarketing sales rules, and thus the TCFAPA?

Yes! The broker misrepresented both the effectiveness of the refinancing they offered, as well as the real interest rates of the mortgages consumers were actually responsible for. The broker also failed to disclose that the consumers would, in fact, be responsible for paying all of the loans for which they applied, not just the promised low-interest mortgages. [FTC v. Ranney Civil Action Number 04-f-1065 (MJW)]

But this case is not only deceptive, it is abusive — the broker requests fees up front, without demonstrating the efficacy of their offer.

WHO’S ON THE NATIONAL DO NOT CALL REGISTRY

The FTC maintains a registry of numbers for consumers who have elected to be placed on a registry inaccessible to sales calls. Telemarketers are prohibited from calling any number on the Do Not Call Registry for sales purposes.

Agents and MLOs who telemarket need to check the Do Not Call Registry before making any telemarketing calls. [16 CFR §310.8(a)]

Telemarketers need to pay an annual fee to access the Do Not Call Registry. The fee is $62 per area code, beyond the first five area codes accessed. Thus, when a telemarketer needs to call potential clients within a single area code (or up to five), they won’t need to pay a fee. But when they cold call clients spanning six area codes, they need to pay $62 for the sixth area code and each area code following, up to a maximum of $17,021. [16 CFR §310.8(c)]

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Those who pay for access to the Do Not Call Registry may not share their access to this registry with any other person. [16 CFR §310.8(c)]

Exceptions exist. Telemarketers do not need to check the Do Not Call Registry when:

• the prospective applicant has given them express, signed permission to call a specified telephone number; or

• the MLO can demonstrate an established business relationship with the prospective applicant and the prospective applicant has not indicated they do not wish to receive telephone calls from the MLO. [16 CFR §310.4(b)(1)]

Consider a company which offers credit card debt reduction services. The company places calls to consumers — some of whom are on the Do Not Call Registry — with a prerecorded message verifying that the consumers are interested in debt relief services.

When a consumer confirms they are interested, they are transferred to a telemarketer promising very low interest rates on the consumer’s credit cards. Telemarketers representing the company often imply they are representatives of government agencies. The company also charges up-front fees for their services.

The company does not follow through on its promises, often refusing to refund its customers, citing a “no cancellation” policy.

The company’s conduct is in violation of FTC regulations and the TCFAPA on multiple levels, including:

• contacting consumers with prerecorded messages; • contacting consumers on the Do Not Call Registry; • misrepresenting the company’s affiliation with government agencies; • charging fees before actually providing any debt relief services; and • failing to disclose the company’s “no cancellation” policy. [FTC v. Ambrosia Web Design

Civil Action Number CV-12-2248-PHX-FJM]

Thus, the company qualifies under the TCFAPA and the FTC telemarketing sales rules as both abusive and deceptive — all behaviors the TCFAPA was designed to curb.

Comprehension check

You must answer this question before you may proceed to the next page.

Which of these acts is prohibited by the TCFAPA?

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• Misrepresenting the telemarketer’s affiliation with any person or entity. • Calling individuals who have done business with the telemarketer in the past. • Calling senior citizens.

MOD4-3_3DNC3: (4 MIN)

CALL RULES

Whether or not a phone number is listed in the Do Not Call Registry, the Telemarketing Sales Rule regulates certain aspects of the phone call.

MLOs need to:

• restrict calls to between 8am and 9pm local time unless the prospective applicant has given permission to call at other times;

• allow the phone to ring at least four times or 15 seconds before disconnecting; • avoid abusive telephone conduct, like:

o repeatedly or continuously calling a prospective applicant with the intent to harass or annoy; and

o using profanity or threatening language; • respect requests to not call back without requiring persons to:

o listen to a sales pitch; o pay a fee; o call a different number to honor the request; or o identify the MLO making the call;

• disclose truthfully and promptly the: o identity of the caller; o purpose of the call, which is to sell a good or service; and o the nature of the good or service. [16 CFR §§310.4 et seq.]

MLOs may not request or receive money in advance of arranging a loan or any other extension of credit when they have guaranteed or given a high likelihood of success in obtaining or arranging a loan for the person being called. [16 CFR §310.4(a)(4)]

Further, MLOs may not receive a fee for any debt relief service until and unless:

• the MLO has renegotiated, settled or altered the terms of at least one debt of the prospective applicant called;

• the prospective applicant has made at least one payment pursuant to that debt relief service; and

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• the fee is either: o of a proportional relationship to the total fee required to alter the prospective

applicant’s debt; or o is a consistent percentage of the amount saved through the debt relief services.

[16 CFR §310.4(a)(5)]

MLOs need to receive express and informed permission to charge a person for a good or service. When the MLO is using pre-acquired account information, before using this account to charge the person, the MLO needs to:

• obtain the last four digits of the account number to be charged; • obtain the person’s express agreement to be charged the identified amount using the

identified account; and • make and keep an audio recording of the entire transaction. [16 CFR §310.4(a)(7)]

VIOLATION BY ABUSE

Other acts the FTC prohibits as abusive include:

• requesting or receiving payment for recovering money or other valuables a person acquired in a previous transaction until seven business days after that person has received the money or other item;

• disclosing or receiving account numbers for telemarketing purposes (not including receiving billing information for payment);

• submitting billing information for payment without explicit consent of the consumer; • restricting the number of the telemarketing service from displaying on a caller ID; • creating a remotely created payment order as payment for goods or services; • accepting a cash-to-cash money transfer or cash reload mechanism as payment for

goods or services; • interfering with a person’s right to not receive calls from the seller or to be placed on

the FTC’s Do Not Call Registry; • calling anyone who has elected not to receive calls from the seller or who is on the FTC’s

Do Not Call Registry; and • initiating outbound calls with a prerecorded message, unless the consumer has explicitly

agreed to receive prerecorded calls from the seller. [16 CFR §310.4(a)-(c)]

Consider a mortgage broker who makes cold calls to homeowners who are behind on their mortgage payments. The broker claims they can stave off foreclosure, promising to attain loan

39

modifications to make the homeowners’ mortgages more affordable. This claim includes the promise of a full refund if the broker fails in achieving the desired loan modification.

The broker even makes these promises to homeowners who have already failed to receive modifications, or are currently facing immediate foreclosure. The broker leads the homeowners to believe that the broker is affiliated with the homeowners’ mortgage holders.

The broker demands a fee up front, and after being paid, tells the homeowners not to contact their mortgage holders or make any more mortgage payments. The broker then leaves homeowners in the lurch, typically rendering them in default on their mortgages.

This is a clearly abusive violation of the FTC’s telemarketing sales rules — the broker not only misrepresented their affiliation with the homeowners’ mortgage holders, but also misrepresented their ability and intention to assist homeowners with their mortgages.

In addition, the broker also demanded and received a fee prior to actually performing any services — an obvious violation of the FTC’s regulations. [FTC v. US Mortgage Funding Civil Action Number 11-Civ-80155]

RECORDKEEPING REQUIREMENTS

Any individual or entity engaging in telemarketing needs to keep records of the following subjects for at least 2 years from the date the record is produced:

• advertising materials such as brochures, telemarketing scripts and promotional materials;

• the name and address of every consumer who purchased anything from the telemarketer, and all records related to that transaction;

• the name, address, and phone number of all current and former employees; and • all records of consumer consent or agreement required by FTC regulations. [16 CFR

§310.5]

PENALTIES

When an MLO does not follow the TCFAPA, they put themselves at risk of legal action from the FTC.

To date, the FTC has brought legal action against over 100 telemarketers and companies for violating the TCFAPA. The largest penalty was paid by Mortgage Investors Corporation for repeated violations of the Telemarketing Sales Rule, the subject of this module’s case study.

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Comprehension check

You must answer this question before you may proceed to the next page.

A telemarketer has to wait allow the phone to ring at least four times or _________before disconnecting.

• 15 seconds • 30 seconds • 90 seconds

Unit 4: Mortgage Fraud Case Study

MOD4-CS: (3 MIN)

CASE STUDY 1: MORTGAGE BROKER TARGETING U.S. SERVICEMEMBERS WILL PAY RECORD $7.5 MILLION TO SETTLE ALLEGED TELEMARKETING VIOLATIONS – JUNE 27, 2013 FEDERAL TRADE COMMISSION PRESS RELEASE

Mortgage Investors Corporation was a national lender specializing in home loans to veterans. At the time of the Federal Trade Commission (FTC)’s complaint, it claimed to be the largest provider of home loan refinancing services to veterans and did business in 42 states. At the time of the complaint, it claimed to have refinanced more than $30 billion in VA home loans to over 300,000 veterans over the last 15 years.

To obtain clients, Mortgage Investors Corporation made unsolicited outbound calls to consumers, and responded to inbound calls generated through its direct mail campaign and its website.

The company employed hundreds of telemarketers to make cold calls. These telemarketers used written scripts to solicit clients to schedule in-home sales appointments with its licensed mortgage loan originators.

This script included the following script/questions:

Telemarketer: So, if you can give me an idea of what your original loan amount was, I can tell you what your savings will be?

Telemarketer: It looks like we can save you approximately $XX a month, which is a substantial amount of money, ISN’T IT? Now most people tell me they can find a better use for this money than to give it to their current mortgage company. I imagine you could too, COULDN’T YOU?

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When providing this quote of savings to consumers, the telemarketers implied the savings would last for the entire 30-year loan term. However, Mortgage Investors Corporation only offered adjustable rate mortgages (ARMs), on which payments could rise with rising interest rates. Thus, the consumers were misled about the potential savings available to them through refinances.

In addition, the telemarketers told consumers they offered a fixed-rate, low interest home at no cost to them. The telemarketers used the following script to describe their product:

Consumer: How much is it going to cost me?

Telemarketer: One of the best parts is that with our programs, there is no money out of your pocket…

In fact, the loans were not “no-cost” loans as advertised in the script.

Consumers reported they received dozens of unwanted calls, even after repeated requests to remove their telephone numbers from the call list. When confronted by consumers who complained they had requested their telephone numbers be removed, or who were on the National Do Not Call Registry, Mortgage Investors Corporation telemarketers would respond by saying they were not selling anything, merely trying to save veterans money.

According to Mortgage Investors Corporation training manuals, telemarketers were not authorized to remove telephone numbers from company call lists. Instead, telemarketers were told these “irate” customers should be transferred to a manager. Instead of removing consumers from call lists, managers often tried to convince the consumer to schedule an appointment with an MLO.

Between February 2, 2009 and July 30, 2012, Mortgage Investors Corporation placed more than 5.4 million calls to telephone numbers on the National Do Not Call Registry. Thousands of consumers filed complaints with the FTC regarding Mortgage Investors Corporation’s telemarketing calls, including those consumers who did agree to in-home sales presentations but decided not to pursue the product.

In its complaint, the FTC identified the Mortgage Investors Corporation as a telemarketer engaging in activities that fall under the control of the Telemarketing and Consumer Fraud and Abuse Prevention Act (TCFAPA) and the Telemarketing Sales Rule. The FTC alleged several violations of the TCFAPA and the Telemarketing Sales Rule:

• Mortgage Investors Corporation engaged in denying and interfering with a consumer’s right to be placed on an entity-specific Do Not Call list;

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• Mortgage Investors Corporation initiated telephone calls to consumers who previously stated they did not wish to be receive a call from a seller whose services were being offered; and

• Mortgage Investors Corporation initiated outbound telemarketing calls to consumers who were registered on the national Do Not Call Registry.

The FTC believed Mortgage Investors Corporation harmed consumers through their actions and was unjustly enriched by their disregard for TCFAPA rules and violations of another consumer protection rule, the Mortgage Acts and Practices Advertising (MAP) Rule. For all the alleged violations, the FTC sought:

• to permanently forbid Mortgage Investors Corporation from further violations of the TCFAPA and the MAP Rule; and

• $7.5 million in civil penalties for their violations.

Comprehension check

You must answer this question before you may proceed to the next page.

Which of the following violations of the TCFAPA was Mortgage Investors Corporation fined for?

• Failing to offer a fixed-rate mortgage option. • Making telemarketing calls for mortgage refinances. • Calling consumers on the national Do Not Call Registry.

CASE STUDY 2: FROM JULY 2014 FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN) ENFORCEMENT POST, BANK SECRECY ACT ASSISTS IN MORTGAGE FRAUD INVESTIGATION RESULTING IN GUILTY PLEA

This case illustrates how Suspicious Activity Reports filed under the Bank Secrecy Act not only helps investigators root out unlawful money laundering activities, but are a source of information helping to fight mortgage fraud.

Consider this scenario: for three years, a mortgage broker and their associates earned profits by selling residential real estate to "straw buyers". The mortgage broker helped straw buyers obtain 100% financing to purchase properties.

Frequently, the mortgage applications were rife with false information about the applicants' employment, income, immigration status and intent to occupy the properties as their primary residences. One of the straw buyers reported a monthly income of $13,200 on the loan application, but the last full-time job they held was years prior at a convenience store and the

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only current source of income was singing at parties and weddings for $200-$500 per performance.

Additionally, straw buyers were promised rents for the properties, which the mortgage broker and their associates never delivered.

Unsurprisingly, after purchasing the properties with these fraudulently obtained mortgages, the straw buyers would default.

Federal authorities learned of the fraud from an informant. Using information collected under the Bank Secrecy Act, including Suspicious Activity Reports filed by the mortgage broker's banks, investigators began researching the allegations of mortgage fraud. Specifically, one of the mortgage broker's banks reported that the defendant's transactions were "inconsistent and excessive" for the purpose the mortgage broker opened the account: rental income from properties.

Other SARs from different banks indicated other unusual patterns. One SAR indicated the pattern of the mortgage broker's withdrawals and check cashing was consistent with transactions designed to avoid triggering notice, called structured transactions by federal regulators. One SAR specifically called out the possibility of mortgage fraud on a company associated with the mortgage broker.

In response to the SARs, investigators contacted the reporting banks for more information on the mortgage broker and their associates. This, in turn, triggered the banks to closely monitor the accounts and file additional SARs. This new round of SARs included reports of more checks being issued for no apparent reason (recall from the module that this is a hallmark of money laundering), and unusual checks and wires to the mortgage broker's personal account from title companies.

In a storage unit owned by the mortgage broker, investigators found paperwork with the names, addresses and phone numbers of the "employers" of the straw borrowers. Along with this information, investigators found documents indicating the mortgage broker and their associates would return calls to lenders who were attempting to verify the straw buyers' employment.

The Financial Crimes Enforcement Network (FinCen) estimates that an excess of $2.5 million in losses were attributed to the actions of the mortgage broker.

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As a result of the SARs and ensuing investigation, the mortgage broker pled guilty to mail and wire fraud in connection with a mortgage fraud scheme. The mortgage broker was ordered to pay $3 million dollars and imprisoned for more than five years.