DEC 6, 2012
Compliance Matters

Originators Must Comply With Red Flags Rule

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FTC AMENDS “RED FLAGS” IDENTITY THEFT RULES AND ORIGINATORS MUST COMPLY

FACTS

On Nov. 30, the Federal Trade Commission announced publication of an Interim Final Rule on identity theft “red flags” that narrows the circumstances under which creditors are covered by the Rule. Congress directed the FTC, along with several banking agencies to develop regulations requiring “financial institutions” and “creditors” to develop and implement a written identity theft prevention program. By identifying “red flags” for identity theft in advance, businesses can be better equipped to spot suspicious patterns that may arise−and take steps to prevent potential problems from escalating into a costly episode of identity theft.

Under the Rule, red flag programs must have four parts:

First, the program must include reasonable policies and procedures to identify signs–or “red flags”– of identity theft in the day-to-day operations of the business.

Second, the program must be designed to detect the red flags of identity theft identified by the business.

Third, the program must set out the actions the business will take upon detecting red flags.

Fourth, because identity theft is an ever-changing threat, a business must re-evaluate its Program periodically to reflect new risks from this crime.

The agencies promulgated the Red Flags Rule in 2007. In December 2010, Congress enacted legislation narrowing the definition of “creditors” covered by the Rule. The amended Red Flags Rule now provides that a creditor is covered only, if, in the ordinary course of business it regularly obtains or uses consumer reports in connection with a credit transaction (This applies to lenders, mortgage brokers and mortgage loan originators); furnishes information to consumer reporting agencies in connection with a credit transaction; or advances funds to or on behalf of a person, in certain cases.

FTC is seeking comment on the Interim Final Rule for 60 days. After the expiration of the 60-day comment period and a review of the comments received, the Interim Final Rule will become final. The interim rule is effective Feb. 13, 2013.

MORAL

This means by Jan. 31, 2013 the rule becomes final.  It should not affect anyone that has a Red Flags Identity Theft Manual in place because all the rule does is clarify the definition of creditor to avoid confusion.

ARIZONA WOMAN GETS 30 MONTHS IN FEDERAL PRISON FOR MORTGAGE FRAUD

FACTS

On Nov. 26, Michelle Marie Mitchell was sentenced by U.S District Court Judge James A. Teilborg to 30 months in prison, restitution of $110,490, and three years of supervised release.

Mitchell and an associate, Jeremy West Pratt, were indicted by a federal grand jury. Pratt pled guilty to conspiracy to commit wire fraud and got six months in jail and three years of supervised release.

Mitchell held herself out to be a mortgage broker, loan officer, and real estate investor. She did business at an office on East Vista Bonita Drive in Scottsdale. Pratt was president of Arizona Cooling Control Plus Inc. and involved in construction and remodeling work. Mitchell and Pratt recruited people with good credit scores to act as straw buyers to ostensibly purchase one or more properties as investments. Mitchell and Pratt enticed the straw buyers by offering to pay a kickback of up to $15,000 per property or to make the mortgage payments until the property could be resold for a profit or both. In addition, the defendants submitted false loan applications and supporting documents to induce lenders to fund loans and at the close of escrow enriched themselves by directing a portion of the loan proceeds, or “cash back,” to a company which one of them controlled.

Between October 2005 and February 2007, Mitchell obtained mortgage financing for 17 properties and induced lenders to fund approximately $17 million dollars in loans. Pratt aided Mitchell’s efforts in eight of the 17 properties that are located in Glendale, Scottsdale, Surprise, Peoria, Goodyear, and Phoenix. The defendants failed to make the mortgage payments as promised, and each of the 17 properties went into foreclosure.  (usattyaz112812)

MORAL

First guess who cooperated with the federal prosecutors? Second, notice that the fraud loans were from 2005, over seven years ago!

IN CALIFORNIA A NEW WAY TO SUE FOR A DEFICIENCY JUDGMENT ON A

SECOND MORTGAGE AFTER THE FIRST MORTGAGE FORECLOSES

FACTS

The California Court of Appeal (4th District) considered whether Code of Civil Procedure Section 580d prohibited the assignee of a junior lien on a property from seeking a money judgment when the assignee of a senior lien had already conducted a nonjudicial foreclosure sale of the property. The court ruled that although Section 580D precludes a deficiency judgment by the junior lienholder when the same lender is both senior and junior lien holder, it does not preclude such a judgment when both loans are subsequently assigned to different entities soon after loan origination.

Although the loans both originated with one lender, the loan originator and various assignees of the senior and junior liens were independent entities who were not acting in concert to avoid the Section 580’s prohibition. (Cadlerock Joint Venture, L.P. v. Lobel, 206 Cal.App. 4th 1531 (2012); 143 Cal. Rptr. 3d 96)

MORAL

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