BusinessReport.com

Imagine learning your mortgage included nearly $25,000 in closing fees or your house note doubling from an adjustable-rate loan or someone offering a “foreclosure rescue loan” that leaves you renting your own house for more than your mortgage payment.

What used to be “what-if” stories are now about real people. And rising complaints and horror stories about mortgage fraud have state and federal officials intensifying enforcement, fortifying laws and educating the public. While Louisiana isn’t among top states for fraud, the state Office of Financial Institutions is joining the nation in proposing measures to stop fraud and its unnerving impact on the economy.

OFI could have a Mortgage Fraud Task Force in place to take a multi-agency approach to identify mortgage fraud and foreclosure scams as soon as January. Organizational meetings are being held with the Special Crimes Unit of the State Police, Attorney General’s Office, Louisiana District Attorneys Association, Louisiana Sheriffs Association and Louisiana Bankers Association.

OFI Chief Examiner Susan Jandle also wants to seek legislative funding to beef up the task force’s inner-agency communications, statistical analysis and case tracking. As its first agenda item, it will alert and educate the public that foreclosure rescue loans are actually predatory lending. It also will investigate fraud such as buyers misrepresenting an investment property as being owner-occupied or getting appraisers to inflate house values to boost equity in the property.

“I’m worried about fraud because of our vulnerable [hurricanes] Katrina and Rita affected consumers,” Jandle says. “I don’t want them to be victimized twice.”

Tracking scams

Marx Sterbcow, a New Orleans and Baton Rouge real estate attorney with the Sterbcow Law Group and recognized authority on the Real Estate Settlement Procedures Act, agrees a multiagency approach is what’s needed to track mortgage scams because they typically involve everyone—from buyer to seller to real estate agents and appraisers, mortgage companies or banks to title agents or attorneys.

With fraud equaling—or even surpassing—the savings and loan crisis of the 1980s, Sterbcow says the timing is right for tightened enforcement.

“It makes a lot of sense to engage those government regulatory agencies to help clean this up,” he says. “The government does an awesome job with the resources that are available, but the problem is so prevalent in the U.S. and it’s so large they need substantially more regulators involved in it.”

Sterbcow, who in addition to his law practice is president of Latter & Blum/C.J. Brown’s Essential Title company, has reported several attempted mortgage scams to government enforcement agencies. Making a case can be difficult, however, because they’re complex and the FBI lacks personnel to handle smaller investigations.

“The FBI and U.S. Attorney’s office typically only investigate after a real estate transaction is completed because, otherwise, they don’t have a totally consummated crime,” he says. “They’re, for the most part, looking to arrest people once the crime’s been committed and the loan closed. But the problem is once the buyer has completed this fraudulent transaction, they are left to sort out the mess by hiring someone to work them out of this morass from the closing.”

This is why, Jandle says, OFI also has joined other state mortgage regulators in developing a joint compliance exam [similar to an audit] to more stringently supervise multistate mortgage entities. The Conference of State Bank Supervisors is facilitating this effort, especially on how to apply the exam to larger companies.

State-level exams have already been revised to include mortgage fraud indicators, which OFI Commissioner John Ducrest says will better flag companies with suspicious activity. The new process also calls for a flagged company to be investigated as warranted rather than on a scheduled basis.

Ducrest says OFI also was a key player in establishing a national licensing system that will be launched Jan. 2 and implemented in Louisiana on July 2. OFI will use it to renew and license residential mortgage lenders and brokers. This licensing system is an important component of HB 3915, which the U.S. Senate is debating now.

“Its goal is to ensure that information on licensees is shared with all states to ensure that ‘bad players’ are not allowed to move from state to state to continue their fraudulent practices,” he says.

Bill of fare

HB 3915—the Mortgage Reform and Anti-Predatory Lending Act of 2007—was introduced in response to public outcry about record-setting foreclosures, which is increasingly being blamed on mortgage fraud.

Mike Anderson, president of the Louisiana Mortgage Lenders Association in Baton Rouge, has worked with the local delegation on the measure even though he believes Congress is overreacting with the bill. The association opposes eliminating yield-spread premiums, which he says would require more upfront cash for a loan, while it supports requiring background checks on loan originators [the licensing provision noted by Ducrest].

Despite mixed feelings about the bill, Anderson concedes the lending industry’s weak oversight invited fraud.

It had become common to hear a borrower give a $500 good-faith estimate on loan fees only to see that figure balloon to $1,500 at closing, he says. This has occurred despite Louisiana law only allowing fees for actual appraisal cost (typically $300), a credit report (typically $12 to $15) and a Fannie Mae or Freddie Mac automated underwriting flat fee of $20. There is currently no governmental penalty if a lender increases loan costs at a closing.

Anderson says he recently observed a Texas lender trying to collect a $595 application fee, which is illegal in Louisiana and alerted the borrower. “We see it all the time, especially on fees,” he says, which is why the association backed “brick-and-mortar legislation” last year to require these companies have a physical office in Louisiana in order to do business in the state.

The bill was especially aimed at making large Internet lenders like California-based Ameriquest Mortgage Co. (once a leading U.S. wholesale subprime lender) more accountable. Although he says “big-lender lobbyists” killed the bill, Anderson says he’ll push it again next year.

“Absolutely it’s a loophole,” Sterbcow says. “The out-of-state lenders and mortgage originators that OFI has full authority to regulate are a major problem, but OFI has turned a blind eye to them. They have nice folks and do a good job on some things, but on this issue they have really dropped the ball.”

Jandle says the “loophole” would substantially close if Congress adopts HB 3915 with the licensing provision for all loan officers.

Court ruling

In April, the U.S. Supreme Court ruled that mortgage lenders owned and operated by nationally or federally chartered banks went from oversight by the state to the federal Office of the Comptroller of the Currency. OFI pursues consumer complaints against these lenders, but they can decline to respond in lieu of dealing with the OCC.

OFI Deputy Chief Examiner Darin Domingue says companies operating as a financial institution or subsidiary of a financial institution—such as a bank or credit union with a mortgage subsidiary—do not come under OFI jurisdiction. Accordingly, they’re not typically subject to the office’s compliance exams even though they do a significant amount of business in the Louisiana. As of last year, 211 of 840 state-licensed lenders didn’t have a physical office in the state.

With dozens of Ameriquest cases sitting on Sterbcow’s desk that slipped through the loophole, he strongly supports Anderson’s move for more accountability with these lenders.

“Ameriquest’s culture is corruption,” he says, maintaining the company doctored borrowers’ income numbers to get a loan. Both Anderson and Sterbcow cited Ameriquest’s $295 million settlement in 2005 in response to attorney general investigations in 30 states.

Sterbcow says he’s also sent at least 25 complaints about “out-of-state lenders” to the OFI and then was told by state legislators they had not received them.

However, he maintains, these complaints represent only a fraction of a much bigger mortgage fraud problem.

“You’d be absolutely amazed,” he says. “It’s not just unscrupulous lenders, but also a few bad apple title companies, appraisers and real estate agents.”

Predatory cases

With nearly 200 corporate clients already, Sterbcow’s own RESPA caseload is rising locally and nationally, with most common violations including kickbacks and illegal referrals. In one of the worst predatory lending cases Sterbcow has observed, a title company and mortgage company charged $45,000 in loan fees. In another case, he found nearly $25,000 in closing costs charged on a $114,000 loan.

“People are blaming the brokerages while the banks were involved just as much, but the real culprit was Wall Street,” he says. “Also the fastest growing segment of predatory lending or loan fraud is not residential, it’s commercial—and those numbers are skyrocketing.”

Domingue also has seen falsified incomes on loan documents, especially with stated-income loans. While they were intended for the self-employed or those with seasonal income, lenders abused them to qualify a borrower for loan despite their debt-to income ratio.

Some borrowers unknowingly signed loan documents containing fraudulent information, such as their overstated income, because they didn’t read them, Domingue says.

“Buyers were unaware their loans to purchase the property were actually refinances,” he says. “Their settlement statements listed creditors which never had lent the borrower money nor did they have a lien on the property.

“In several instances, the settlement statement reveals these entities and individuals [who were associated with the mortgage broker and title company] actually received significant amounts of money from proceeds of the loan with the lender under the impression that the money was being used to pay off a creditor to remove a lien from the property which did not exist.”