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How Real Estate Licensees Can Avoid Lender Fraud Scams

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

  1. 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.

  1. 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. 

  1. 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. A borrower may not have the required percentage deposit and be looking for illegal ways to get around this. 

Risks for Real Estate Licensees

A major risk for real estate licensees is being drawn into these lender fraud schemes. If a borrower defaults on a loan, the lender could potentially sue a real estate licensee if they believe they were 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, you must 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 superior coverage for licensees. You will have access to qualified real estate attorneys to help you prevent claims. CRES insurance policies can be customized to suit your real estate business. Contact the CRES team at 800-880-2747 for a confidential discussion today.

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