New Law Could Bring New Fraud Focus
More funding, oversight in fraud cases means brokers should step up verification efforts
By Richard Smith, retail manager, American Acceptance Mortgage Inc.
This past May, President Barack Obama signed the Fraud Enforcement and Recovery Act of
2009 (FERA). The law, which received bipartisan as well as industry support and passed
quickly through Congress, is part of a set of
comprehensive measures the government is
taking to address the issues that led to the
country’s widespread financial collapse.
FERA’s focus is on mortgage fraud, and
it expands federal oversight and funding for
fraud cases. In fact, the bill reflects a congressional perception that rampant mortgage fraud is a fundamental cause of the
mortgage crisis. Further, the perception is
that mortgage brokers and non-federally
regulated lenders purposefully participated
in lending practices that were predatory in
nature and that all parties involved intentionally put borrowers into loans they could
not afford and could not refinance.
Mortgage fraud in the prevailing view
seems to include:
1. Blatant falsification of mortgage-
application information and documenta-
tion; and
2. Abuse of reduced-documentation
programs that previously were avail-
able in prime, Alt-A and subprime (aka,
nonprime) lending.
This new law likely will have little direct
impact on the activities of most lenders and
brokers, who are honest and who did not
take part in predatory-lending practices.
Brokers, however, would be wise to understand what this new legislation entails
On the Web
■ Full text of Fraud Enforcement and
Recovery Act of 2009 (Senate bill
No. 386)
opencongress.org/bill/111-s386/text
and what steps they should take to ensure
that they return to the basics of underwriting and verifying everything in their clients’ loan applications.
What FERA does
In fighting mortgage fraud, this legislation targets stated-income loans — aka,
“liar loans” — in particular. These loans
generally were offered to the secondary
market in instruments that were outside
of federal regulation.
With the mortgage crisis, the federal
government found itself in the position of
bailing out Fannie Mae and Freddie Mac
largely because of the companies’ exposure to Alt-A and subprime investments.
Bailouts also were offered to some of the
larger companies that had no government
oversight.
This new legislation gives federal agencies more-direct and clearer oversight of
the wholesale mortgage industry’s lending
and servicing practices. It directly targets
mortgage fraud in the form of reduced-documentation abuses and of falsification
of documentation.
In addition, the act increases federal authority to prosecute mortgage-fraud crime,
increases funding for enforcement and creates a commission to investigate the causes
of the economic crisis, with a view to prevent repetition.
It also:
■ Expands the definition of financial
institution in the criminal code to in-
clude private mortgage brokers and nonbank
lenders.
■ Expands the law that criminalizes
making “a materially false statement”
or “willfully overvalu[ing] a property”
to influence a mortgage lender’s actions
so that it covers non-federally regulated
institutions.
■ Amends major fraud statutes to protect funds disbursed with the Troubled
Asset Relief Program (T.A.R.P.) and the
economic-stimulus package. This is especially timely given the FBI’s concerns
regarding potential fraud with billions of
dollars disbursed in T.A.R.P. and stimulus
funds.
■ Starts to address fraud problems in the
commodity-futures market. Some types
of trades in this market have been cited as
contributing to the financial collapse.
■ Strengthens funding for fraud enforcement and investigation and for regulatory
capacity in the financial industry. Annual
funding for fraud investigation will be increased to $165 million, and more than $330
million will be spread over numerous federal
agencies to increase regulatory capacity.
■ Establishes a Financial Crisis Inquiry
Commission, which is tasked with examining the causes of the current financial crisis
and identifying steps needed to prevent it
from happening again.
The commission will have subpoena
authority and access to federal and state
attorneys general to report any possible
criminal activity that is uncovered. It also
will review a wide range of concerns in investigating the causes of the current financial and economic crisis, including, among
other things:
■ Fraud;
■ Regulation;
Richard Smith is the retail manager with American Acceptance Mortgage
Inc. in Chattanooga, Tenn. He has originated government, conventional and
jumbo loans since the company opened in 1994. He supervises an origination
staff of more than 15 loan officers in two offices. The company lends in Tennessee, Georgia and Alabama. Reach Smith at (423) 899-6898, (888) 474-
9920 or rsmith@aamonline.com. Visit www.RichardSmithHomeLoans.com
for more information.
28 Scotsman Guide | Residential |
scotsmanguide.com | August 2009
“This new legislation gives federal agencies more-
direct and clearer oversight of the wholesale
mortgage industry’s lending and servicing
practices. It directly targets mortgage fraud
in the form of reduced-documentation abuses
and of falsification of documentation.”
■ Monetary policy and credit access;
■ Accounting practices, such as off-
balance-sheet vehicles;
■ Tax treatment of certain financial
products;
■ Capital requirements;
■ Credit-risk retention;
■ The concept of too-big-to-fail
institutions;
■ Compensation structures;
■ Derivatives and credit-default swaps;
■ Short selling; and
■ The role of financial institutions and
government-sponsored enterprises now
under conservatorship.
The commission also will examine the
cause of the collapse of each major financial institution that failed.
What brokers can do
It is hard to deny that some mortgage brokers and lenders took part in fraudulent
practices. But the idea that the mortgage-broker and wholesale-lending industries as
a whole intentionally practiced predatory
lending is inaccurate.
Blatant misrepresentation and falsification of customer information documentation have always been federal offenses. This
new legislation gives more federal agencies
jurisdiction to investigate and prosecute
non-federally regulated institutions. It will
raise the bar on mortgage fraud for brokers
who may skimp on quality control of their
borrowers’ documentation.
This expanded federal oversight also
extends to appraisals, specifically making
it an offense to overstate property values.
This particular law should not impact legitimate mortgage brokers’ and appraisers’
daily practices in the near future, however.
Should reduced-documentation loans
ever return — which would require a
law change — this law may work to curb
abuses involving gross exaggeration of undocumented or nonexistent income.
In the meantime, to protect against
running afoul of the increased and better-funded federal oversight, mortgage brokers
must return to the basics of file documentation. That is, everything should be verified. With this in mind, you should:
■ Conduct verbal verifications;
■ Have third-party verification of bor-
rowers’ employer-contact information;
■ Consider processing your own 4506-T
forms, which request clients’ tax-return
transcripts;
■ Review file documents for consistency
of clients’ names, addresses and income
information;
■ Source funds closely;
■ Check recent credit inquiries on bor-
rowers’ credit reports; and
■ Document real estate owned properties.
Taking these steps will help you guard
yourself against consumer fraud. Also,
develop zero tolerance for originator and
processor shortcuts. These things are necessary to protect your license and to avoid
criminal allegations.
Illustration: Dennis Wunsch
