Thursday, November 29, 2007

Mortgage Fraud Investigations

DUE DILIGENCE & MORTGAGE FRAUD

Jim Vaules, CEO NFC Global LLC November 29, 2007

Due Diligence, Investigations and Risk Consulting

In God We Trust, Everyone Else Bring Data!!!!

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

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.

U.S. Public Records

! ! ! ! ! ! ! ! ! Person Locators Marriage & Divorce Voter Registrations Professional Licenses Real Property Personal Property Bankruptcy Petitions UCC filings Judgments & Liens ! Incorporation records ! Civil/Criminal Filings ! Jury Verdicts & Settlements ! Drivers License ! OFAC ! Sanctions lists ! Foreign Corrupt Practices Act
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INFORMATION NETWORK

INFORMATION NETWORK

FRAUD FOR PROPERTY

! Goal is to acquire and maintain ownership of property under false pretenses ! Illegal actions solely by the borrower ! Commons 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 transactions PO Box address Association to Appraiser or Broker ID theft Can the borrower afford the loan Title History Verify the borrower still works at the employer ! Verify work and home telephones ! The main contact number is a cell phone ! ! ! ! ! ! !
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FRAUD FOR PROFIT

! Motive is to revolve equity, falsely inflate property values, or issue loans on fictitious properties ! 80% of reported cases involve collusion by industry insiders ! Committed by brokers, real estate agents, appraisers, settlement agents. ! SARs 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 agencies ! If second Appraiser is used, that license needs to be verified as well ! Make sure comparables are current and geographically correct ! Confirm that Appraisal Report matches physical address of the loan
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ASSET RENTAL
PROVIDER OF ASSETS
CONTRIBUTION

HOLDING COMPANY
DEBENTURE 1%/ MONTH

OTC Stock Ginnie Mae Certificate of Deposit Mortgage

INSURANCE COMPANY
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Return on Fraudulent Assets

$1M

Bank 60% Due Diligence FBI $600,000

Insurance Company 3-1 Ratio State Regulators No Law Enforcement $3m

Off-Shore Insurance Company (ReInsurance) 8-1 Ratio No Regulations No Law Enforcement $8m
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Top Con Artist Attributes and Red Flags

! ! ! ! ! ! ! ! ! 100% - Boast of international contacts 100% - Boast of ability to raise capital 96% - Often have civil judgments pending 95% - Involved with shell companies 95% - Use PO Boxes or MBEs 82% - Involved in failed real estate deals 80% - Gaps of nonconfirmable employment 78% - Abused Credit Cards 78% - Held Sales Jobs in early years
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RECENT EXAMPLE
! Les 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 Mortgage Decision One Mortgage First Magnus IndyMac Long Beach Mortgage
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CONTACT INFORMATION

JAMES H. VAULES NFC GLOBAL, LLC www.nfcglobal.com 215-657-0800 Extension 272 EMAIL: jvaules@nfcglobal.com

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Mortgage Fraud Investigations

Rich Devine SMART Business Advisory and Consulting, LLC
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www.smartgrp.com 866-334-7700

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 after underwriting many troubled CDOs last year The business model that will return XXX to profitability 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 impaired Whether that impairment is other than temporary Measurement and timing of an impairment loss

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What is mortgage fraud?

" " " Material inaccuracy in the financial information disclosed by or on behalf of the borrower during the origination of the loan Fraud for housing-borrower fraud Fraud for profit/commission-insider fraud

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Who gets hurt?

" " " " " " " Borrower caught in a fraud for profit overpays for their house New buyers impacted by over-inflated pricing Originators who are subject to fraud clauses in repurchase agreements Securitizers deal with higher credit support levels due to expected fraud losses Investors who absorb the losses Rating agencies Mortgage insurers

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How does someone commit fraud?

" " " Pressures and Incentives Attitudes and Rationalizations Opportunity

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Types of Mortgage Schemes and Fraud

" " " " " " " " "
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Collusion Document misrepresentation Identity theft Negligence Appraiser Builder bailout Equity skimming False down payment Straw borrower

How do I build a system of internal control?

" " " " " " " " Understand entrance points, process flows and your systems Applications Appraisals Credit report Escrow/closing Mortgage brokers Title insurance Verification of information such as employment and deposit

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Accounting Guidance
" " " " Committee of Sponsoring Organizations of the Treadway Commission (COSO) Integrated framework of internal control involving management and the Audit Committee PCAOB Auditing Standard No. 2 An 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 behavior Establish anti-fraud programs and controls Consider risk of material misstatement Design and implement programs to handle pervasive and specific risks Operating effectiveness of anti-fraud programs and controls Communicate deficiencies found in antifraud programs and controls Address deficiencies

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What are the regulators looking for?

" " " " " " " " Establish homework list expectations Establish timing expectations Have sub ledgers and accounts reconciled Expect a lower level of materiality on unreconciled differences Timely resolution of reconciling items Make sure third party audits are up to date Make sure documentation is complete Establish 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 Borrowers 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 borrowers 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 borrowers 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?

For more information, visit www.pepperlaw.com

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Thursday, November 29, 2007

Thank you.

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