FinCEN: Bankruptcy Fraud, Mortgage Loan Fraud Increasingly Intertwine

Mortgage loan fraud was cited in 54% of suspicious activity reports (SARs) referencing bankruptcy fraud in 2010, up from 42% in 2009, the Financial Crimes Enforcement Network reported Monday. The division of the U.S. Treasury Department also noted growth in reports of real estate “flopping” over the course of 2010, possibly spurred by the agency’s warning about the growing practice in its report for the first quarter of the year.


The report also contains data on state, county, and metropolitan statistical area (MSA) by total number and per capita filings of MLF SARs. More detailed reports and publications on mortgage fraud are available at FinCEN’s Mortgage and Real Estate Fraud page.


FinCEN’s latest Mortgage Loan Fraud Update, which contains full-year 2010 data for SARs involving mortgage loan fraud (MLF), said MLF SARs increased 4% in 2010 to 70,472, compared with 67,507 filings in 2009. The report also noted, however, that the growth rate for all MLF SARs began to slow over the last two to three years. Filings for the fourth quarter of 2010 alone decreased 1% compared with the same period in 2009.


References to bankruptcy have steadily increased as a share of total MLF SAR filings. In 2010, 6% of all MLF SARs contained a key term related to bankruptcy in the SAR narrative, compared with 1% in 2006 and 2007. Some MLF SARs specified the type of bankruptcy filing, most frequently Chapter 7, which was cited in 27% of 2010 reports citing both bankruptcy and MLF.


The report said that SAR filers over the course of 2010 explicitly referenced “flopping” in 112 reports. In its summary of SAR MLF filings in the first quarter of 2010, FinCEN warned of the technique, which it said is “a new type of flipping scheme used in the context of short sales.” FinCEN said flopping occurs when a foreclosed property is sold at an artificially low price to a straw buyer, who quickly sells the property at a higher price and pockets the difference.


Only two SAR filings referenced the term “flopping” in the first quarter, but that total rose to 112 by the end of 2010. FinCEN said filers referenced the related terms “short sale” in 827 MLF SAR narratives and “broker price opinion” or its abbreviation “BPO” in 41 narratives in the first quarter of 2010. While reports of flopping ballooned over the course of the year after FinCEN’s first quarter report, the agency said full-year SARs involving broker price opinions (228) and short sales (3,191) were relatively stable. FinCEN posited in its report that anecdotal feedback on flopping from law enforcement and industry sources suggests that the volume of related MLF SARs is much lower than the actual number of suspected incidents.


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