Even the most astute real estate professionals can find themselves embroiled in lender fraud scams. Here’s what you need to know and steps you can take to protect your real estate business.
What is Lender Fraud?
Lender fraud occurs when a person tries to take advantage of a bank or mortgage lender in a fraudulent way. This includes misrepresenting their eligibility for a home loan. In some cases, buyers also attempt to illegally make money from the real estate transaction
The reasons people commit lender fraud vary. However, it typically occurs when a home buyer doesn’t “fit” a lender’s criteria, and they’re looking for shortcuts to get what they want (to purchase a property).
Common Lender Fraud Scams
The main ways a property buyer could be fraudulent towards their lender are:
1. Lying on their mortgage application
A potential borrower might commit lender fraud by lying on their application. Lies about income, type of employment (full-time vs. part-time), length of time in employment, or savings history are common examples. There have even been cases of false identities to obtain mortgage loans.
2. Forging documents
Lies in mortgage applications are often backed up by forged documents. This could include falsified employment, income or debt records, forged bank statements and tax records. Forged signatures could indicate another person is a ‘partner’ to the loan, therefore minimizing the risk to the lender.
3. Omissions
If a borrower fails to disclose certain information, this can also be deemed fraudulent. For example, hiding a prior bankruptcy or poor credit history.
4. Over-ask offers with post-transaction credits
Some borrowers who don’t meet lending criteria try to negotiate deals with the seller to circumvent their lender’s rules. For example, making an offer that is over the asking price and trying to get a credit refunded to the buyers at closing. Why do they do this? Mostly because the borrower does not have the required deposit and may be looking for illegal ways to get around this.
Over-Ask Offers and Lender Fraud
Whenever and wherever the residential real estate market cools off a little, there’s an opportunity for those inclined to defraud their lenders. We have seen buyers making offers that exceed the listing price and then requesting a credit to be refunded back to the buyers. The credit is usually equal to or slightly more than the difference between the offer and the list price. For example, a buyer might make an $800,000 offer on a house listed at $750,000 and then ask for a credit payable from the sellers’ proceeds in the amount of $60,000. In this scenario, the sellers’ net is $10,000 below the list price. The credit is typically memorialized in an addendum rather than as a term in the offer or counteroffer.
An addendum is used because most lenders will not approve a loan where credits exceeding 3% of the purchase price are either given or paid by the seller for the benefit of the buyer. If this type of arrangement was placed in the purchase agreement, the lender would see it and deny the loan. As lenders rarely ask for addendums, there is no practical way for the lender to know that a large credit is being paid to the buyer if such a term is placed in an addendum.
If a buyer defaults on a loan, the lender could conceivably sue the real estate licensees involved in the transaction. Because lenders do not typically see addenda, a lender would have little difficulty proving that the real estate licensees conspired with the buyer to defraud the lender by withholding information critical to the loan application process. As the seller also executed the addendum, an aggressive lender could pursue the seller as a party to the conspiracy to commit lender fraud.
If confronted with one of these schemes, a real estate licensee should refuse to participate and should advise his or her clients about the risks of participating.
There may be times when a large credit legitimately should be paid by the seller to the buyer. In this situation, the licensees should demand a letter from the buyer’s lender acknowledging that they are aware of and approve the credit. The licensees should verify that such a letter actually originates from the lender and not from a mortgage broker who may be part of the scheme.
More about Avoiding Legal Trouble with a Real Estate Contract.
Risks for Real Estate Licensees
A major risk for real estate licensees is being drawn into these lender fraud schemes, especially if the lender believes the real estate licensee was aware of the lender fraud.
Lender fraud is illegal and those implicated in lending fraud schemes can face criminal charges and jail time. Whether a licensee was or was not aware, they will have to defend the lawsuit, which can be both costly and time-consuming.
For schemes that involve over-ask offers and post-transaction credits, it’s much more difficult to defend. Of course, a real estate licensee is aware of what is in the contract and what payments will be made as part of the transaction. Real estate licensees should avoid involvement in any of these schemes at all costs, as they put you at an increased risk of legal troubles in the future.
Tips for Licensees to Minimize Risks
- If a real estate licensee overhears a buyer saying they lied on their mortgage application, you know and can be sued if things go awry. You must disclose that information and step away from the transaction, so you cannot be implicated in the future.
- If asked to include credits in the transaction to accommodate an over-ask offer, do not agree to this.
- If a client (seller) wishes to accept an offer that includes an illegitimate credit to the buyer on closing against your advice, the best option is to either convince them otherwise due to the risks or step away from the transaction.
- If there is a legitimate credit owed to the buyer (for example a repair credit or a seller concession), real estate licensees should request prior approval from the lender in writing to minimize any future liability.
Protect Your Real Estate Business
As a real estate licensee, be sure you have real estate E&O insurance to protect your business and help defend a lawsuit if you find yourself facing a claim. CRES E&O + ClaimPrevent® insurance offers extensive protection for licensees. You will also have access to expert real estate attorneys pre-claim to help you resolve issues before they escalate.
As part of one of the largest insurance brokers in the world, CRES has access to more E&O options for real estate than just about anyone. Get a quote and buy online, or contact the CRES team at 800-880-2747 for a confidential discussion today.
