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Thursday, November 29, 2007

Mortgage Fraud Investigations

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DUE DILIGENCE & MORTGAGE FRAUD

Jim Vaules, CEONFC Global LLC

November 29, 2007

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In God We Trust,Everyone Else Bring

Data!!!!

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MORTGAGE FRAUD

“Mortgage fraud is a material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase or insure a loan” FBI

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MORTGAGE DUE DILIGENCE

Due diligence on individual loans is the topic that we are all here to discuss. If basic due diligence on individual loans is not conducted properly, the loan can potentially go bad and thus lead to securitization and regulatory issues for the lender and/or the investor.

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Data Sources Used byNFC Global

LexisNexisAccurintChoicepointLocatePlusCounty RecordsInternetSubscription databases

World ComplianceState Licensing Regulatory ActionsBBBDun & BradstreetCredit BureausMedia sources

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U.S. Public Records

Person LocatorsMarriage & Divorce Voter RegistrationsProfessional LicensesReal PropertyPersonal PropertyBankruptcy PetitionsUCC filingsJudgments & Liens

Incorporation recordsCivil/Criminal FilingsJury Verdicts & SettlementsDriver’s LicenseOFAC Sanctions listsForeign Corrupt Practices Act

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INFORMATION NETWORK

INFORMATION NETWORK

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FRAUD FOR PROPERTY

Goal is to acquire and maintain ownership of property under false pretensesIllegal actions solely by the borrowerCommons schemes include asset fraud, occupancy fraud, employment fraud, income fraud, debt elimination fraud, identity theft and straw buyers

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BORROWER

Intra-family transactionsPO Box addressAssociation to Appraiser or BrokerID theftCan the borrower afford the loanTitle HistoryVerify the borrower still works at the employerVerify work and home telephonesThe main contact number is a cell phone

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FRAUD FOR PROFITMotive is to revolve equity, falsely inflate property values, or issue loans on fictitious properties 80% of reported cases involve collusion by industry insidersCommitted by brokers, real estate agents, appraisers, settlement agents.SAR’s filed indicate common activities include, appraisal fraud, flipping, straw buyers and identity theft

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BROKER FACTS

The Broker has the best opportunity to stop fraud, and thus the best opportunity to conduct it.Pre-funding quality control of Brokers needs to be in place and conducted regularly Brokers are key to developing information submitted for loan underwriting

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APPRAISER

Verify that Appraiser license is current with state agenciesIf second Appraiser is used, that license needs to be verified as wellMake sure comparables are current and geographically correctConfirm that Appraisal Report matches physical address of the loan

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ASSET RENTAL

PROVIDER OF ASSETS

HOLDING COMPANY

CONTRIBUTION

DEBENTURE 1%/ MONTH

OTC Stock

Ginnie Mae

Certificate of Deposit

MortgageINSURANCE COMPANY

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Return on Fraudulent Assets

$1M

Bank

60%Due Diligence

FBI$600,000

Insurance Company

3-1 RatioState Regulators

No Law Enforcement$3m

Off-Shore Insurance Company

(ReInsurance)8-1 Ratio

No RegulationsNo Law Enforcement

$8m

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Top Con Artist Attributes and Red Flags

100% - Boast of international contacts100% - Boast of ability to raise “capital”96% - Often have civil judgments pending95% - Involved with shell companies95% - Use PO Boxes or MBE’s82% - Involved in failed real estate deals80% - Gaps of nonconfirmable employment78% - Abused Credit Cards78% - Held Sales Jobs in early years

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RECENT EXAMPLELes Tarrance Sr., Montgomery County business owner, pled guilty to conspiracy to commit mail and wire fraud after orchestrating an elaborate scam with two co-conspirators to defraud mortgage companies across the country out of more than $11 million. According to his plea agreement, Tarrance could avoid possible convictions for other crimes related to the scheme - including laundering of monetary instruments and aiding and abetting - and prison time, by cooperating with federal prosecutors.

The scheme, as set forth in the indictment and confirmed in the plea agreement, occurred from September 2000- March 2006. Essentially, Goodson would locate and recruit straw borrowers to purchase homes from Tarrance with the assistance of Booth.

The Defendants included in the indictment are: Michael Goodson, Recruiter; Les Tarrance, Sr., owner of Ultra Classic Custom Homes, Inc., and Ultra Classic Custom Homes III, Inc.; and Nancy Booth, loan officer and loan processor.

The defrauded Lenders included in the indictment are: Aames Home Loan New Century Mortgage Corp.Argent Mortgage BNC Mortgage Inc. Wells Fargo Home MortgageDecision One Mortgage First Magnus IndyMac Long Beach Mortgage

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CONTACT INFORMATION

JAMES H. VAULESNFC GLOBAL, LLCwww.nfcglobal.com

215-657-0800 Extension 272EMAIL: jvaules@nfcglobal.com

www.smartgrp.com

866-334-7700

Mortgage Fraud Investigations

Rich DevineSMART Business Advisory and Consulting, LLC

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What is happening in the current subprime mortgage market?

“Housing and capital market disruptions”“Falling housing prices and rising interest rates”“XXX is the biggest casualty of the downturn afterunderwriting many troubled CDOs last year”“The business model that will return XXX toprofitability is unclear”

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FASB Staff Position FAS 115-1/124-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

When an investment is considered impairedWhether that impairment is other than temporaryMeasurement and timing of an impairment loss

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What is mortgage fraud?

Material inaccuracy in the financial information disclosed byor on behalf of the borrower during the origination of the loanFraud for housing-borrower fraudFraud for profit/commission-insider fraud

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Who gets hurt?

Borrower caught in a fraud for profit overpays for their houseNew buyers impacted by over-inflated pricingOriginators who are subject to fraud clauses in repurchaseagreementsSecuritizers deal with higher credit support levels due to expected fraud lossesInvestors who absorb the lossesRating agenciesMortgage insurers

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How does someone commit fraud?

Pressures and IncentivesAttitudes and RationalizationsOpportunity

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Types of Mortgage Schemes and Fraud

CollusionDocument misrepresentationIdentity theftNegligenceAppraiserBuilder bailoutEquity skimmingFalse down paymentStraw borrower

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How do I build a system of internal control?

Understand entrance points, process flows and your systemsApplicationsAppraisalsCredit reportEscrow/closingMortgage brokersTitle insuranceVerification of information such as employment and deposit

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Accounting Guidance

Committee of Sponsoring Organizations of the TreadwayCommission (COSO)Integrated framework of internal control involvingmanagement and the Audit CommitteePCAOB Auditing Standard No. 2An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements

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Internal Control Program

Culture of integrity and ethical behaviorEstablish anti-fraud programs and controlsConsider risk of material misstatementDesign and implement programs to handle pervasive andspecific risksOperating effectiveness of anti-fraud programs and controlsCommunicate deficiencies found in antifraud programs and controlsAddress deficiencies

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What are the regulators looking for?

Establish homework list expectationsEstablish timing expectationsHave sub ledgers and accounts reconciledExpect a lower level of materiality on unreconciled differencesTimely resolution of reconciling itemsMake sure third party audits are up to dateMake sure documentation is completeEstablish understanding of controllable vs. uncontrollable

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Questions?

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Mortgage Fraud at Financial Institutions:

Prevention and Response

Timothy R. McTaggart

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FFIEC Report for Banking Industry on Red Flags and Best Practices

– The application is unsigned or undated

– Signatures on credit documents are illegible and no supporting identification exists

– Borrower has high income with little or no personal property

– Borrower’s age is not consistent with the number of years of employment

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FFIEC Report for Banking Industry on Red Flags and Best Practices

– Borrower has an unreasonable accumulation of assets compared to income or has a large amount of unsubstantiated assets

– Borrower claims to have no debt

– Borrower owns an excessive amount of real estate

– A post office box is the only indicated address for the borrower

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FFIEC Report for Banking Industry on Red Flags and Best Practices

– The same telephone number is used for the borrower’s home and business

– Patterns or similarities are apparent from applications received from other borrowers

– Borrower does not guarantee the loan or will not sign in an individual capacity

– Business income is not consistent with business type

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FFIEC Report for Banking Industry on Red Flags and Best Practices

– Years of education is not consistent with borrower’s profession

– Borrower is buying investment properties with no primary residence

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SAR Regulation

• The following points should be considered when handling and processing SAR reports:

– Institutions should designate one individual or department to be responsible for completing and filing SAR reports.

– SAR reports should be consistent.

– Responding to requests for SAR reports.

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Questions?Questions?

For more information, visit www.pepperlaw.com

For more information, visit www.pepperlaw.com

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Thank you.

Thursday, November 29, 2007