Loan fraud is being committed each and every day in mortgage lending. That is a fact. Period.
Below, I will discuss the areas of fraud typically seen in home mortgage transactions.
In almost 99% of all mortgage transactions, one of the key areas of your financial picture that the lender is required to verify in writing and with documentation from your own records is a two-year-or-more period of annual and monthly gross income and employment history. If a borrower is salaried or receives hourly, W-2-type fixed income, one would think it would be pretty difficult to commit fraud.
That used to be the case. Now, with technology—color and laser printers—lenders are seeing "manufactured" employment pay stubs and W-2 forms. Sometimes the fraud is obvious and blatant, while at other times it is nearly impossible to tell. Added to that, borrowers then have their "friends" (co-conspirators) perform the verbal verifications or write the verifications of employment for them. Yes, this does happen.
These types of income- or employment-verification fraud are most often committed by the borrower, and the lender doesn't know. When business is booming and lenders are extremely busy, many of the details and red flags go undetected. When there is a more normal business pace, the lender has more time to dig deeper into the transaction and documentation and look for possible fraud. The sad thing is that it is a rising problem with seemingly declining honesty and morals... but that is for another discussion at a later time.
The other types of fraud regarding income and employment are more often seen in the arena of the self-employed borrower and/or the executive who has a percentage of ownership in a company he or she works for. It is unbelievable how often we find completely "made-up" tax returns and income documentation for self-employed and executive borrowers.
There is one set of tax returns that goes to the IRS, of course, to show as little income as possible to save taxes, and there is a completely separate set of returns for banks and mortgage companies that show as much income as possible to help qualify for lending needs.
Then there is divulging ownership in a company. If a borrower has more than 10% ownership in a company, he or she is considered self-employed and must not only divulge the ownership but also submit additional documentation and tax returns for the company itself to show stability and the ability to continue to pay income to the borrower. Whether it is not disclosed because the borrower does not want to or does not have to supply the information or simply because the borrower does not realize the requirement, the borrower has committed fraud. More often than not, this occurs because the borrower wants to appear to be a salaried, W-2 employee.
Next, we will discuss the other areas of income and employment fraud committed in mortgage lending that are much more prevalent and often committed by the loan officer as well as the borrower.
Now, aside from the typical, average, W-2 employee, we have income that can be more difficult to predict, document, and prove. This would be income from commissions, overtime, and bonuses, as well as, of course, income earned by the self-employed borrower, whose income is a combination of salary and/or profits and cash flow.
If the loan officer and borrower are unable to or unwilling to document income in the manner required by standard lending guidelines (two-year tax analysis, year-to-date profit and loss statement, etc.), they often choose one of the many more exotic or creative loan programs that have reduced requirements for documentation.
These are known by such terms as "stated-income," "no-income," "no-ratio," and "no-doc," among others. And it is here where we see the greatest potential for fraud. Let me first state what the actual guidelines intend in these types of loans.
In reality, these programs exist simply to make it easier for the borrower who would rather not give his or her personal information or who, due to time constraints, cannot gather all of the information in time for a full-documentation loan. These originally targeted only those borrowers with very high credit scores but have been extended to borrowers with scores in the lower ranges.
That said, they were never intended to allow borrowers to misrepresent their income, exaggerate their numbers, and, by doing so, commit fraud to be able to qualify for more house than they can actually afford. This, unfortunately, is the area where the lender (loan officer) is guilty of committing fraud just as often as the borrower; in fact, the lender often does so without the borrower realizing it. Loan officers get paid to close loans. If they don't see the documentation needed to qualify according to standard underwriting guidelines, they simply change programs to a reduced-income-documentation loan and either in agreement or in secret exaggerate the income just enough to qualify. That is fraud.
Now, if the borrower truly believes he or she makes that income and, either due to very creative accounting or unavailable documentation, chooses not to provide the documentation and go with a reduced-document-type program, that is within the true intent of these programs. There may even be times when borrowers have income sources they cannot document (side jobs they do for cash, income they get from roommates, or some other non-wage income), and that is still within the guidelines and intent of these programs. All of these circumstances are okay.
In closing, just remember...if you are flat-out lying about the income, it is fraud, PERIOD. I would estimate that half the time the borrower knows it is fraud and goes along with it, and the other half of the time the borrower doesn't realize it at all. Programs exist that allow borrowers to exaggerate and commit fraud, and as long as they exist, they will be exploited—fraudulently so.
Be careful, because if you ever go late or delinquent on your mortgage payments, the first thing the lender will do is look for fraud and any reason it can to support a foreclosure action.
Ron Cahalan can be contacted at roncahalan@mac.com. His press kit can be found at roncahalan.presskit247.com.
