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WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS.

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Presentation on theme: "WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS."— Presentation transcript:

1 WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS

2 OVERVIEW OF PREDATORY LENDING James R. Brusselback Enforcement Chief Division of Consumer Services AARMR October 2005

3 DISCLAIMERS The comments and opinions expressed today are solely my comments and opinions and do not necessarily reflect those of the Department of Financial Institutions, its management, or anyone associated with the Department of Financial Institutions. DFI cannot give legal or financial advice, and we do not endorse or recommend any person, product or institution.

4 DISCLAIMERS The comments and opinions expressed today are solely my comments and opinions and do not necessarily reflect those of the Department of Financial Institutions, its management, or anyone associated with the Department of Financial Institutions. The Department cannot give legal or financial advice, and we do not endorse or recommend any person, product or institution.

5 OUTLINE 1.Predatory Lending What is it? Where is it? Who’s involved? How does it happen? How is it done? 2.Combating Predatory Lending Enforcement – Administrative & Criminal Research, Education and Outreach Lender Accountability? Impose agency?

6 WHAT IS PREDATORY LENDING?

7 Mortgage Fraud Practiced Against Consumers

8 The words “mortgage” and “fraud” may be too narrow. Lending and mortgage origination practices become “predatory” when the borrower is led into a transaction that is not what they expected.

9 Predatory Home Lending – Moving Toward Legal & Policy Decisions “Transactions specifically crafted to result in net-losses for the borrower.” Susan M. Wachter September 10, 2005 Chicago, Illinois

10 Chuck’s Definition Surreptitiously employing an artifice or subterfuge in a financial transaction such that the chicanery has the result of bamboozling the consumer into accepting a spurious deal.

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12 GENERAL BELIEFS: Products themselves are not predatory. However, certain products or volume of products may indicate bad practices. Certain types of lenders are more likely to employ predatory lending practices. Certain types of consumers are more likely to become victims of predatory lending practices.

13 WE ARE ALSO UNDERSTANDING THAT... Predatory servicing may be as big a harm as predatory lending. Enforcement is still the best deterrent. Prison sentences may be the silver bullet. Education must be targeted to be effective.

14 WHERE IS IT TAKING PLACE?

15 THE MAJORITY OF PREDATORY LENDING TAKES PLACE WITHIN THE SUBPRIME MORTGAGE REFINANCE MARKET

16 WHY REFINANCES? More equity to convert from the borrower. Less transaction overhead. Larger market of debt ridden borrowers. Fewer eyes on the deal.

17 WHO’S INVOLVED? Predatory lending practices may involve: Lenders, Mortgage Brokers, Real Estate Professionals, Appraisers, Attorneys, Escrow Agents, and Home Improvement Contractors. Schemes commonly target: People who have small incomes - but substantial equities in their homes and minority communities.

18 HOW DOES THIS HAPPEN? Consumers can be lured into dealing with predatory lenders by: aggressive mail, telephone, TV and door-to-door sales tactics. Advertisements promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer.

19 HOW IS IT DONE? 1.Equity Stripping 2.Bait and Switch 3.Loan Flipping 4.Property Flipping & Appraisal Fraud 5.Packing 6.Hidden Loan Terms 7.Discrimination 8.Home Improvement Scams 9.Discount Point Deception 10.Predatory Servicing

20 EQUITY STRIPPING

21 BAIT AND SWITCH

22 BAIT AND SWITCH EXAMPLES Loan Type Loan Amount Loan Fees Payment Amount

23 LOAN FLIPPING

24 PROPERTY FLIPPING AND APPRAISAL FRAUD

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26 PACKING

27 HIDING LOAN TERMS

28 DISCRIMINATION

29 HOME IMPROVEMENT SCAMS

30 DISCOUNT POINT DECEPTION

31 MORTGAGE BROKERS Should never charge discount points or a discount fee that is payable to themselves. Discount Point Deception

32 HOUSEHOLD FINANCE Disclosed ranges of discount points. For example: GFE disclosure of $0 to $10,000 with the HUD1 always charging the maximum. Discount Point Deception

33 EXAMPLE #2: “ABC” MORTGAGE COMPANY No par rate so that a borrower never knows the starting point the rate is bought down from. Also, discount points hold very different results for like borrowers. Discount Point Deception

34 EXAMPLE #3: Another “ABC” FINANCIAL COMPANY Disclosure of loan origination fees as discount points, thereby giving impression that rate has been bought down when it has not been bought down. Discount Point Deception

35 PREDATORY SERVICING

36 SOME HARMFUL SERVICING PRACTICES 1.Accounting Practices 2.Force Placed Insurance 3.Junk Fees 4.Loan Transfers 5.Customer Service Accountability 6.Customer Service Locations

37 ENFORCEMENT

38 FBI’s caseload for mortgage fraud is up 500% over 3 years ago “..loan frauds account for almost 40 percent of all financial institution losses.” “Mortgage fraud is becoming epidemic” As of Sept 2004 – 12,100 instances of suspicious activity have been reported to the FBI. (Chris Swecker, FBI assistant director for criminal investigations) (2004 – Associated Press) IS ENFORCEMENT NEEDED?

39 Sept, Department of Justice “Operation Continued Action” - The largest operation in FBI history, directed against financial fraud 5,000 cases targeting financial institution fraud Action against 205 individuals 2000 – 2004: –11,466 indictments –11,362 convictions –$ 8.1 Billion in restitution orders In 45 days during August/September: –Identified 245 subjects –158 investigations –151 indictments –144 arrests –Potential loss of $3 Billion dollars

40 5 Bloomberg News – 12\2004 FNMA required First Beneficial Mortgage to buy back Millions in fraudulent loans from the Charlotte area FNMA - Fails to notify the “Feds” Later, GNMA “unknowingly” buys the loans from First Beneficial Mortgage Loans go into default $38 Million loss to date

41 ENFORCEMENT TOOLS Administrative authorities. Civil actions. Criminal prosecution.

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45 It’s possible that more than 1,000 fraudulent appraisals were created between Spokane Population - 195, Foreclosures in a single month Same foreclosure rate for multiple months All from the same mortgage company and three appraisers Original sales: 1997 – 2001 Foreclosures: today Same ratio in Seattle would result in 300 foreclosures a month from a single mortgage company

46 On July 29, 2004: Owner Dale Gibbons was found guilty of 15 separate counts of conspiracy and wire fraud. Gibbons testifies that: “[He] didn’t intentionally break the law, but was only doing what he was told by the lenders.”

47 Ronald Burger Banned from working in the mortgage industry for 25 years Fine: $17, Restitution to victims: $14, Dale Sage Gibbons Banned from working in the mortgage industry for 25 years Fine: $17, Restitution to victims: $14, ADMINISTRATIVE ACTION

48 Agent - Sally Gibson Defended herself in the state licensing action, she blamed [lender] WMC for promoting predatory lending practices. Agent Sally Gibson, trying to act as her own attorney, was found guilty of 11 separate counts of conspiracy and wire fraud.

49 Sentencing ProfessionNamePrisonRestitution AgentSally Gibson3 Years$264,406 AppraiserJohn T Hanson18 mo.$287,796 BrokerDale Gibbons5 Years$449,953 BrokerRon Burger3 Years$423,011 EscrowC. Patrick2 months$148,340

50 In court documents and interviews, 32 former employees…witnessed or participated in improper practices, mostly in 2003 and This behavior was said to have included: deceiving borrowers about the terms of their loans, forging documents, falsifying appraisals, fabricating borrowers' income to qualify them for loans they couldn't afford (LA Times Feb 2005)

51 “Iowa Attorney General Tom Miller... is leading the investigation into Ameriquest. [H]e said the group would either settle with Ameriquest ‘soon’ or sue it.” “Chuck Cross, a division director at Washington’s Department of Financial Insitutions, said the allegations in the Times article... were consistent with what he and other regulators have seen across the country.”

52 The Allegations 1.Deceptive and aggressive sales practices. 2.Discount points that aren’t. 3.Belittling the significance of GFEs. 4.Fraudulent appraisals. 5.Fraudulent employment and income.

53 MORTGAGE LENDING FRAUD PROSECUTION ACCOUNT 2003 WASHINGTON LEGISLATURE

54 WHAT THE LAW DOES Provides funding to prosecutors Allows DFI to determine which cases will be prosecuted by putting us in control of the funds

55 HOW DOES IT DO THIS? Every real estate recording in WA is assessed a $1 surcharge The county auditor forwards these funds to DFI DFI “retains” prosecutorial agencies DFI approves case applications for funding

56 WHAT CAN BE ACHIEVED Develop criminal experts in the area of mortgage fraud Target mortgage fraud specifically Prosecute cases, such as misdemeanors that never got prosecuted before A more direct link between DFI and prosecutors

57 CONVICTIONS Craig Warberg – guilty 2 counts of theft (Trust Account) Micki Green – guilty 10 felonies identity theft and theft Elizabeth Coan- guilty 10 Felonies identity theft Damien Sims – guilty Attempted Theft Devon Hughes – guilty Theft, Money Laundering, Identity Theft.

58 REFERRED CASES As of July cases pending – Big and Small CASES UNDER DEVELOPMENT About 20 cases involving flipping, mortgage rescue, mortgage elimination, loan application fraud

59 Mortgage Rescue Scam

60 Principal(s) of Shell Company All money passes through them via HUD-1 (“Devlopement” fee, “remodeling” fee, “Consulting” fee) Recruits investors Locates victims Refers victims to mortgage broker Refers victims to escrow company Handles all aspects of investors and victims transactions Often religious affiliation with victim and investor (sales pitch)

61 Victim Property Owner 1 Elderly Low/fixed income High equity in property/flip potential Financial need (rising property taxes, medical issues, etc.) Church affiliation Told lease payments would be set aside

62 Victim Property Owner 3 Close to retirement Looking to invest equity – told some of the equity going somewhere productive Unsophisticated

63 Victim Property Owner 2 Middle aged Some equity/property has potential for a flip (hot neighborhood, rehab, land value) High Mortgage Financial set back Religious affiliation

64 Escrow Company Close relationship with Principals Knows something is up May or may not be directly involved

65 Mortgage Broker Knows Principals Knows something is up Loan application fraud (owner occupancy issues) Typically high fees and ysp referrals

66 Investor(s) Essentially a straw buyer Lease and repurchase agreement with the victim Compassionate investment (sales pitch from Principals) May be ignorant of the scam Lease/repurchase designed to fail and result in eviction

67 ESCROW OFFICER

68 Escrow Officer's Shell Company Used to Acquire Properties Used to Sell Properties “Assigns” = steps in last minute Very short sales

69 Bank Short Term Loans Suspect Commercial Accts. IOLTA Accts. Suspect Personal Accts.

70 Mortgage Broker 2 Loan Officer A –straw buyer Loan Officer B –straw buyer "Partner" –scouting –recruiting –managing High fees, high ysp’s

71 Real Estate Agent May have knowledge (buyers agent/front end) Paid through fees, referrals or possible kick backs May be scouting properties May be recruiting straw buyers Almost never used on second half of the flip

72 Lender's Account Exec. May have knowledge Paid through fees (esp. due to high ysp’s)and possible kick backs

73 Appraiser Has knowledge Paid in fees (“rush jobs” & referrals) and kick backs Look at P&S used = knowledge Look at rep. as to who holds title/History of prior sales = knowledge

74 Mortgage Broker 1 Loan Officer A –straw buyer is a friend –straw buyer is a relative –straw buyer is a customer Loan Officer B –straw buyer is a friend –straw buyer is a relative –straw buyer is a customer "Partner" –Scouting for properties, tying them with P&S –Recruiting straw buyers –Managing flipped properties Loan Fraud –VOE –VOD –VOI –Stated, partial doc, full doc (W-2’s, paystubs, 1040’s, etc.) –Exam issues – look single consumers with multiple loans (sudden acquisition of properties)

75 Escrow Company Lenders Conditions =Need to forged and are evidence of intent Straw buyer’s earnest money deposits forged Straw buyer’s closing costs (deposit slips or cashier’s checks) forged Straw buyers signatures forged ten notarized IOLTA funds for purchase money Manipulated closing dates (pre-funding or pass throughs) Closing instructions ignored (preferential payoffs) Flat out theft of funds (liens not paid off)

76 Attorney IOLTA Account –Source of Shell Company $ –Back filled by proceeds of flips

77 Notaries Straw buyers not present at closing Forged signatures

78 WHY WILL PRISON TIME FOR LENDING CRIME WORK?

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80 RESEARCH EDUCATION OUTREACH

81 WASHINGTON STATE UNIVERSITY SOCIAL AND ECONOMICS RESEARCH CENTER SURVEY OF FINANCIAL LITERACY IN WA STATE: Knowledge, Behavior, Attitudes and Experiences

82 FINDINGS OF THE STUDY 1.Higher degrees of education are a factor. 2.Victims of predatory lending had been repeatedly turned down for financing. 3.The general population is more likely to invest and save for the future. 4.The victim pool exhibited certain “risky” financial behaviors.

83 RISKY BEHAVIORS Home refinancings were primarily to pay off credit card debt. Being behind in debt payments. Multiple liens on their home. Cash advances on credit cards. Much less likely to pay off credit cards each month. Significant use of payday lenders (24%).

84 CONCLUSIONS No understanding or concept of compound interest. Scarce access to credit creates desperation. Desperate borrowers fall for bait and switch and other predatory practices. The degree to which victims pursue risky behaviors indicates that they are not responding to the consequences of their actions. Primarily reactionary rather than planning.

85 “This means that they may not be aware of their own personal vulnerabilities and lack the knowledge needed to keep from being susceptible to loans with disadvantageous terms.”

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87 Guide To Home Loans CD ROM Includes such topics as: What consumers need to know about home loans Questions to ask a lender Examples of disclosure forms Tips to avoid predatory loans A glossary of terms Worksheets

88 1-877-RING-DFI WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS

89 LENDER ACCOUNTABILITY?

90 IF THE LENDER HOLDS DETAILED INFORMATION ABOUT THE CONSUMER’S CREDIT AND PAYMENT HISTORY...

91 IF THEY KNOW THAT CERTAIN CONSUMERS LACK THE KNOWLEDGE TO FULLY UNDERSTAND THE TRANSACTION...

92 AND THEY HAVE DIRECT ACCESS TO THIS TYPE OF CONSUMER...

93 AND THEY UNDERSTAND THE MARKETING VALUE OF DESPERATION...

94 WHAT EXACTLY IS THEIR RESPONSIBILITY?

95 WHAT ABOUT CREATING AN AGENCY RELATIONSHIP BETWEEN THE BORROWER AND THE MORTGAGE BROKER?


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