Mortgage loan fraud, and attempts at it, have become all too common. Our colleagues in other states report the same thing in their jurisdictions. We are getting way too many calls from brokers, who are very concerned about what they are seeing.  Based on what I am hearing, they should be concerned.

Let’s go over the law first. The law under which you could lose your real estate license is Section 34-27-36(a)(21) Ala. Code. It says you are subject to disciplinary action for misrepresenting or failing to disclose to any lender, guaranteeing agency, or any other interested party, the true terms of a sale of real estate.” That means you have a duty to tell the whole truth about what happens on a sale, especially on the financial end. It is also a criminal offense, a federal felony, to have a similar failure in connection with a mortgage loan. These criminal laws apply to those engaged in the activity, and to those who participate or conspire to fraud the lender. We have seen lots of federal indictments for loan fraud. Usually, they simply say that somebody gave a false statement to a bank or other lender in connection with the loan. It is just that easy to face doing some time in a federal lock-up. I can tell you for a fact that federal law enforcement is active right here in our state. The Alabama State Banking Department is also active.

There are plenty of creative ways to cheat. Here are some common ways to engage in mortgage loan fraud. Arrange to falsify income and or employment verification documentation You know, that red tape required in the mortgage application process can keep some buyers from getting financing. If you or a helpful friend could just bogus-up some needed documents of any kind, it might help. A demanding seller will sometimes want money “under the table.” He or she will not want it to show on the contract, or on the settlement statement or HUD-1. You or the buyer could leave the closing and make that under the table payment. Buyers can make similar demands.  A buyer really would like to get an 80/20 (20% down with 80% financed) loan, but does not have enough down payment money. You know that the mortgage lender will not approve a gift, loan, or a second mortgage for the needed down payment. You or the seller could make an undisclosed gift or loan to the buyer to make the deal happen.

You do not have to be a member of the Supreme Court to know that this kind of stuff is not honest or legal. All the terms of the contract must be shown on the face of the contract so that lenders and other parties can see them. All the terms of the contract must be approved by the mortgage lender. All money payments must be shown on the HUD-1 or settlement statement.

There is one other twist. It is not just real estate licensees who are tempted to cheat. Mortgage brokers, appraisers, and closing attorneys or settlement agents can become involved, too. Because their respective roles are important in the process, they are particularly useful if they will help. Unfortunately, it appears some mortgage lending personnel are the ones inviting the improper conduct. If anyone suggests doing something that does not seem right to you, first consult with the mortgage lender and/or the closing attorney about your concerns. If you are still not satisfied, it is time to get your own legal advice.

This is so unnecessary. There are plenty of hard-working, honest people in the mortgage lending industry. They are constantly working to earn your business and confidence.  If you heard a fraction of the stories I have, you would appreciate them more.

Again, it should be noted that the information presented in the preceding article relates ONLY to people buying & selling houses in the state of ALABAMA and their agents.