Fraud / Banking

  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 (FinCEN) reported. 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 on FinCEN’s “Mortgage and Real Estate Fraud” page at fincen.gov/news_room/rp/mortgagefraud.html.

FinCEN’s latest Mortgage Loan Fraud Update (tinyurl.com/6bzxpma), 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 (available at tinyurl.com/4c2kzfl), 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.

  Reported incidences of suspicious activity in commercial real estate (CRE) financing almost tripled between 2007 and 2010, according to FinCEN. The analysis of suspicious activity reports (SARs) from depository institutions said a key concern in this area is the fact that an estimated $1.4 trillion in CRE loans will reach the end of their terms between 2010 and 2014.

The report, Commercial Real Estate Financing Fraud Suspicious Activity Reports by Depository Institutions (tinyurl.com/4pzlou2), said that falling commercial rents and occupancy rates along with a rise in commercial loan defaults over the last several years have prompted growing concerns about the CRE market and its potential effects on the nation’s economy. The CRE market includes brokerage and lending services for the industrial, retail, office, hotel and multifamily housing sectors. SARs related to the CRE market involve a variety of transactions and activities related to the purchase and development of raw land as well as the acquisition, development, construction and improvement of commercial buildings.

FinCEN simultaneously released Advisory FIN-2011-A007 (tinyurl.com/4n666b4), which provides examples of common commercial real estate fraud schemes, and suggests a key word for financial institutions to use when completing SARs involving potential commercial real estate fraud. The advisory lists several examples of common types of reported suspicious activity, including:

• Misrepresentations. Subjects make false statements and/or submit falsified documents including rent rolls, tax documentation, appraisals, draw requests, lien waivers and financial statements to bolster loan applications. Subjects may also make fraudulent disbursement requests, including fraudulent invoices and receipts, to receive loan proceeds. This activity may occur across multiple banks using multiple accounts.
• Misappropriation of funds. Borrowers misappropriate funds by diverting those funds to other projects for which loans or payments were not directed. This activity may be discovered during site inspections of customers’ property.
• Bank insider collusion. Bank insiders facilitate loan approval processes and disbursement of funds for accomplices. Bank insiders’ suspicious client bases may move with them from employer to employer.
• Flipping and straw-buyer schemes. Subjects may use straw buyers who “flip” the property to generate equity for another purchase, for profit, or to improve borrowers’ creditworthiness.
• Collateral transfer. Borrowers sell collateral without disclosure to the lender or fail to forward proceeds of collateral sales to the lender, hide or convey the collateral to associates, or quit-claim deed the collateral to another entity. This may involve transferring ownership to family members or trust accounts, diverting funds for collateral improvements to other projects, or inflating collateral values, any of which would negatively affect the banks’ financial positions.
• Advance fee schemes. Subjects engaging in advance fee schemes target borrowers, lenders and companies unable to obtain commercial real estate financing. These schemes may involve fraudulent business proposals and financial instruments.

FinCEN’s report said that as the $1.4 trillion in loans referenced above become due, analysts anticipate a delinquency rate of 10% because some borrowers will be unable to refinance due either to stricter underwriting standards or because the loan amounts outstanding exceed property values. The report said the valuation of the overall CRE market has fallen approximately 42% since it peaked in October 2007, with future fluctuation in CRE prices expected.

The analysis said 73% of the 2010 SARs originated from different financial institutions, indicating that CRE fraud affects a wide range of institutions of varying sizes and locations. Likewise, between 2007 and 2009, 71% of SARs originated from different financial institutions. For all these years, the top filer submitted 6% of SARs.

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