Over the last few years we have just witnessed an unprecedented “meltdown” of our industry, where many “systems” broke down that were designed to keep companies and our industry healthy. One of those systems that broke down was the quality control system in many mortgage companies.
Fraud often starts small. A fudged figure here, an incomplete loan application there, an over-generous appraisal, but little do employees know that these “little lies” are actually fraudulent information and, in fact, possibly criminal.
Are lenders performing the level of quality control and pre-funding audits needed, if done right and done often, they can prevent the reason for the mortgage investigation in the first place.
A new era started in 2012, for the first time, the Financial Crimes Enforcement Network (FinCEN) require nonbank mortgage lenders and originators to implement an Anti-Money Laundering program (AML Program) and file Suspicious Activity Reports (SARs) for certain loan transactions.
Residential mortgage lenders and originators, the RMLOs, are considered to be the primary providers of mortgage finance, and have a unique position with respect to direct contact with the consumer. Thus, they are presumably able to assess and identify money laundering risks and fraud.
As part of the AML program, non-bank residential mortgage lenders must also implement programs to report potential money laundering, fraud, and other criminal activity to the government in the form of a SAR (suspicious activity report). The penalties for non-compliance are severe, ranging from cease-and-desist orders, civil money penalties, stiff fines and other criminal penalties.
Residential mortgage lenders and originators, the RMLOs, are required to establish an AML Program that includes, at a minimum:
1. Development of internal policies, procedures, and controls.
2. Designation of a compliance officer.
3. Ongoing employee training program.
4. Independent audit function to test for compliance.
The AML Program, also includes a form that must be filed with FinCEN and is called the Suspicious Activity Report, known as a SAR. Completing the SAR correctly is essential to compliance with the FinCEN’s rule, the SAR form’s preparation and filing, it can be conducted by the RMLO’s employees, although requires independent auditors to determine and report on the enforcement of the AML Program and the accuracy, completeness, and timeliness of the SAR filings.
-It is too late to prevent fraud after closing: The damage is already done and you can’t go back and implement them after the fact;
-The civil and criminal penalties… for non-compliance of not reporting fraud could come back to haunt you if you don’t take proper steps to prevent, report and stop fraud;
-The internal cost of a fraudulent mortgage: this is an area that most lenders have trouble calculating but consider that the rehiring cost, reputation cost, lost loans from HUD cost, etc., are much more devastating than insignificant costs of reproducing materials for audits and reviews;
-The external cost of a fraudulent mortgage… is directly related to the actual money lost associated with a fraudulent loan, such as repurchase, foreclosure, etc.
The following mortgage and real estate fraud investigations, including money laundering charges which are written from public record documents on file in the court records in the judicial district in which the cases were prosecuted in 2012.
Former Attorney Sentenced for Mortgage Fraud
On December 20, 2012, in Boston, Mass., Marc D. Foley, a former attorney who operated a real estate practice in Needham, was sentenced to 72 months in prison and three years of supervised release. In September 2012, Foley was convicted by a jury of 33 counts of wire fraud and five counts of money laundering.
According to evidence presented at trial, in December 2006 and January 2007, Foley participated in a scheme to defraud six mortgage lenders in connection with $4.9 million in real estate loans for the purchases of 24 condominium units in Dorchester.
When Foley and an associate, acting under his direction, closed the loans, documents sent to the mortgage lenders falsely represented that funds ranging from $9,300 to $39,000 had been collected at the closings from the borrowers, when in fact the borrowers made no down payments and paid no funds at the closings. Furthermore,
Foley entered into an undisclosed agreement with the seller to subtract from the seller’s proceeds all the funds that were reported to the lenders as coming from the borrowers. Foley also used various other means to conceal from the lenders that the borrowers had not provided funds for the purchases.
Kansas Man Sentenced for Mortgage Fraud
On December 17, 2012, in Kansas City, Kan., Brian D. Jaimes, of Overland, Kan., was sentenced to 24 months in prison for mortgage fraud. Jaimes pleaded guilty to one count of conspiracy to commit wire fraud and money laundering.
According to his plea agreement, Jaimes conspired with co-defendant Paul Hartfield to fraudulently obtain more than $1 million worth of mortgage loans. Hartfield owned Hart Investments, Inc., a company that purchased depressed properties in order to rehabilitate them and sell them at a profit.
Hartfield also owned Diamond Mortgage, a company that acted as a mortgage broker for individuals. Jaimes was president of Diamond Mortgage from 2003 to 2006. According to court documents, Hartfield recruited friends and family to purchase some properties. In most cases, the borrowers would not have qualified for a loan to purchase the properties.
Hartfield used Diamond Mortgage as the mortgage broker with Brian Jaimes falsifying loan applications and other supporting documents by inflating the borrower’s income and assets to secure loan approval. Jaimes was the loan officer on 11 fraudulently obtained mortgages for properties. The loans totaled more than $1 million.
Florida Defendants Sentenced in Multi-Million Mortgage Fraud Scheme
On December 7, 2012, in Miami, Fla., Lilia Casal-Diaz, the sixth defendant in a multi-million dollar mortgage fraud scheme, was sentenced to 12 months and one day in prison, one year of home confinement and three years of supervised release.
Casal-Diaz, a real estate attorney, also was ordered to pay $509,543 in restitution to the IRS. According to court documents, the defendant engaged in a multi-million dollar mortgage fraud scheme using straw buyers to purchase residential properties at an apartment complex in Miami.
The scheme resulted in more than $5.6 million in mortgage proceeds that were fraudulently obtained from various lending institutions, as well as tax-related offenses involving willful failure to declare to the IRS proceeds from such transactions. The other defendants sentenced in connection with this scheme include:
• Andres Mendez, Sr., aka Andy Mendez, Sr. - 60 months in prison, five years of supervised release and ordered to pay $4,232,542 in restitution,
• Andy Mendez, Jr. - 12 months and one day in prison,18 months home confinement, five years of supervised release and ordered to pay $4,232,542 in restitution,
• Josephine Santana - 21 months in prison, five years of supervised release and ordered to pay $1,202,861 in restitution,
• Jose Rafael Martinez - 18 months in prison, five years of supervised release and ordered to pay $1,202,861 in restitution,
• Basilio Gomez - 15 months in prison, five years of supervised release and ordered to pay $1,202,861 in restitution.
Ohio Woman Sentenced for Mortgage Fraud
On November 29, 2012, in Cleveland, Ohio, Antoinette Payne was sentenced to 27 months in prison and ordered to pay more than $1.3 million in restitution. Payne pleaded guilty to one count each of conspiracy to commit wire fraud and conspiracy to commit money laundering.
According to court documents, Payne worked as a mortgage broker and loan officer for Supreme Funding, a mortgage broker in Euclid, Ohio. She was also the owner of TLC Properties and Designer Loan Properties, which were simply sham companies which she used to receive kickbacks and reimbursements for undisclosed down payment assistance she was providing to purchasers from the various loans’ closings she was handling.
These funds were in addition to the fees paid to Payne as a mortgage broker and loan officer in handling these transactions. Payne recruited purchasers for properties and promised to pay them money for filling out the paperwork for mortgage loans where the price of the properties had been greatly inflated. She also provided any down payments as necessary.
Payne also falsified the income and asset on the loan documents of the purchasers she recruited to ensure their approval. She provided phony lists of improvements to the lender to support the inflated price of the real estate. Once the purchasers stopped making payments on the mortgage loans, the properties went into default, resulting in a loss to lenders in the amount of approximately $1 million.
Former Mortgage Broker Sentenced Role in Mortgage Fraud Scheme
On November 26, 2012, in Phoenix, Ariz., Michele Marie Mitchell, was sentenced to 30 months in prison, three years of supervised release, and ordered to pay $110,490 in restitution. Mitchell pleaded guilty in April 2012 to conspiracy to commit wire fraud.
According to court records, Mitchell held herself out to be a mortgage broker, loan officer and real estate investor. Mitchell and an associate, Jeremy West Pratt, recruited people with good credit scores to act as straw buyers to purchase one or more properties as investments. Mitchell and Pratt enticed the straw buyers by offering to pay a kickback of up to $15,000 per property or to make the mortgage payments until the property could be resold for a profit, or both.
The defendants submitted false loan applications and supporting documents to induce lenders to fund loans. At the close of escrow they enriched themselves by directing a portion of the loan proceeds, or “cash back,” to a company which one of them controlled. Between October 2005 and February 2007, Mitchell obtained mortgage financing for 17 properties and induced lenders to fund approximately $17 million dollars in loans.
Pratt aided Mitchell’s efforts in eight of the 17 properties. The defendants failed to make the mortgage payments as promised and each of the 17 properties went into foreclosure. Pratt was sentenced on July 30, 2012 to six months in prison and three years of supervised release.
Texas Couple Sentenced on Wire Fraud and Money Laundering Charges
On November 26, 2012, in Houston, Texas, Derwin Frazier and his wife, Veronica, both of Pearland, Texas, were sentenced for their roles in the sham sales of condominiums.
Derwin pleaded guilty to money laundering and was sentenced to 85 months in prison and ordered to pay $16,316,102 in restitution. Veronica pleaded guilty to wire fraud and was sentenced to 12 months and one day in prison and ordered to pay $321,742 in restitution.
According to court documents, from December 2004 to October 2006, the Frazier’s defrauded residential lenders using straw borrowers. Co-conspirator, Brenda East, assisted these straw borrowers by providing false information and documents, including bogus tax letters and false verifications of bank balances and employment. The Frazier’s submitted invoices for payment from loan proceeds and used the money to pay themselves and the straw borrowers.
East pleaded guilty to conspiracy to commit wire fraud and was sentenced to 57 months in prison. A fifth defendant, Duane Wardell, of Palestine, also pleaded guilty to conspiracy to commit wire fraud and is awaiting sentencing.
New Jersey Woman Sentenced in Mortgage Loan Fraud Scheme
On November 9, 2012, in Trenton, N.J., Crystal Paling, of Sussex, N.J., was sentenced to 37 months in prison, three years of supervised release, and ordered to pay $532,497 in restitution. Paling was convicted by a jury in March 2012 on conspiracy to commit wire fraud and conspiracy to commit money laundering.
According to documents and trial evidence, Paling acted as the closing agent for fraudulent mortgage loans orchestrated by her co-conspirators, Daniel Verdia, of Mahwah, N.J., Jaye Miller, of Pocono Lake, Pa., and Sandra Mainardi, of Wayne, N.J. The co-conspirators put together buyers and sellers in real estate transactions that they could control, and then filed false and fraudulent loan applications containing inflated income figures for the borrowers.
Specifically, Paling wired loan proceeds due to the sellers from a trust account that she controlled to an account in the name of Capital Investment Strategies, a shell company owned by Verdia and Miller. She concealed illicit payments to Capital Investment Strategies by failing to disclose them on the settlement statements. She collected a portion of the disclosed closing fees that appeared on the settlement statements.
She also received undisclosed kickbacks paid from Capital Investment Strategies to her own shell company, XL Partnership. Verdia and Miller were sentenced to 30 months and six months in prison, respectively. Mainardi was sentenced to 46 months in prison. Two additional defendants were sentenced in this scheme: Donald Apolito, of Elmwood Park, N.J., received five years of probation and Robert Gorman, of Long Valley, N.J., received two years of probation.
Couple Sentenced for Orchestrating Million Dollar Mortgage Fraud Scheme
On November 8, 2012, in Minneapolis, Minn., James Warren Hoffman was sentenced to 78 months in prison and ordered to pay $344,409 in restitution. Teresa Gay Hoffman was sentenced to 12 months and one day in prison.
The Hoffman’s pleaded guilty on February 3, 2012 to one count of tax evasion. In addition, James Hoffman pleaded guilty to one count of engaging in a monetary transaction in criminally derived property.
According to court documents, the Hoffman’s recruited straw buyers to purchase real estate in both Minnesota and Wisconsin with the proceeds of fraudulent mortgage loans.
From August 2001 through 2008, the couple lived in a Hastings home without ever owning it.
James Hoffman arranged for a series of straw purchasers to buy the property entirely with the proceeds of fraudulent loans. From June 2001 through 2008, the couple used a Spicer Lake property as their vacation home without ever owning it by also arranging fraudulent mortgage loans for a series of straw buyers. Starting in June 2006, the couple, through three businesses, purchased apartment buildings in Rochester, Sauk Rapids, and Spicer.
They converted the apartments into condominiums and sold them to straw buyers, who paid for them with proceeds of fraudulent mortgage loans arranged by the defendants. In total, the estimated loss to mortgage lenders is approximately $5 million.
Arizona Man Sentenced for Role in Fraud Scheme
On November 7, 2012, in Phoenix, Ariz., Shannon Robert Kato was sentenced to 24 months in prison, three years of supervised release and ordered to pay $225,000 in restitution. Kato pleaded guilty on October 11, 2012 to conspiracy.
According to his plea agreement, from February 2006 through May 2007, Kato and others submitted mortgage loan applications and related documents to banks and lending institutions containing false information. They also induced those institutions to fund residential real estate purchases. In addition, they created a "straw man" double escrow transaction to obtain "cash back" from the financing for the benefit of the purchasers and concealed from the lending institutions the methods and means by which "cash back" flowed to the ultimate purchasers instead of the "straw" buyer/seller.
To accomplish this, Kato and others submitted simultaneous loan applications for multiple real estate purchases without fully disclosing other pending applications, provided false information on the loan applications to obtain mortgage loans, inflated the sales price, and directed portions of the lending proceeds to some of the defendants through the use of entities.
At least 15 homes were purchased through this process and $2.5 million in "cash back" was obtained. Kato's role was to act as the "straw buyer" using his own name, his company's name, or a fictitious family trust, so that it would appear that he had purchased the property from the seller. Kato then turned around and sold it at a higher price to one of the other defendants. The lending institutions would fund at the higher price and the profit would be diverted to a controlled entity of one of the other defendants.
Florida Man Sentenced for Participating in Mortgage Fraud Scheme
On October 17, 2012, in Miami, Fla., Juan Carlos Rodriguez, a real estate agent and mortgage broker from Weston, Florida, was sentenced to 42 months in prison and three years of supervised release. On May 11, 2012,
Rodriguez pleaded guilty to conspiracy to commit mail fraud, wire fraud, financial institution fraud, and
conspiracy to commit money laundering. According to court documents, Rodriguez and others used “straw buyers” to submit false documentation to various mortgage lenders substantially inflating the purchase price of the properties.
The fraudulent loan proceeds were laundered through multiple accounts to conceal the source and distribution of the money and were ultimately used for the benefit of the co-conspirators. Other individuals sentenced in mortgage fraud schemes include:
• David Lam was sentenced to 42 months in prison, two years of supervised release, and ordered to pay $7,117,000 in restitution.
• Pamela Higgins was sentenced to 36 months in prison, two years of supervised release, and ordered to pay $2,141,536 in restitution.
• Carl Alexander was sentenced to 48 months in prison, three years of supervised release, and ordered to pay $3,576,724 in restitution.
• Carol Asbury was sentenced to 30 months in prison, three years of supervised release, and ordered to pay $6,510,291 in restitution.
• Patrick Brinson was sentenced to 78 months in prison, three years of supervised release, and ordered to pay $1,602,250 in restitution.
One of the most difficult aspects of dealing with mortgage fraud is that it’s hard to know the scope of the problem. The human element that’s involved makes would-be fraudsters hard to spot, and those already committing fraud even harder to identify.
Because these people are white-collar criminals, they look, dress, act, and talk just like the rest of us. They won’t look like criminals; they’ll look like loan officers, real estate agents, members of management and loan processors or closers.
Management also share in some of these responsibilities for their employees, preferred partners, and borrowers, and need to set up pre-funding audit procedures to establish that they want to both protect the innocent and scrutinize a random percentage of the mortgage loans prior to the closing and funding to prevent fraud.
A quick buck here, a few grand there, and soon you and your company are committing fraud, the company in most cases are unknowingly participating. It’s blunt, but it’s true. Changing information yourself, or even letting someone knowingly change information; is fraud. If you’re doing it’ it’s fraud. If you’re letting someone do it; it’s fraud. If you even suspect someone’s doing it; it’s fraud.
You must resist.
You must identify.
You must prevent.
You must report.
IT’S JUST THAT SIMPLE…
By Michael S. Richardson