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NOV 29, 2012

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Compliance Matters

Sample CFPB/FTC Letter

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FTC AND CFPB SENDS WARNING LETTERS ABOUT MISLEADING ADVERTISING

FACTS

A sample of the warning letter you may have received or may receive in the near future is:

To: Company XYZ

Re: Your Mortgage Credit Product Advertisements

Date: November 19, 2012

This letter is to advise you that you may have advertised a mortgage credit product or service in a misleading manner in violation of federal law.

The CFPB enforces federal consumer financial laws, including laws that prohibit material misrepresentations in advertisements for mortgage credit products. The Mortgage Acts and Practices – Advertising rule,1 or “MAP Rule,” provides that it is a violation of federal law for any person to make a “material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product.”2 A mortgage credit product is “any form of credit that is secured by real property or a dwelling and that is offered or extended to a consumer primarily for personal, family, or household purposes.”3 The CFPB also enforces 12 U.S.C. § 5536(a)(1), which prohibits unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services, including in the marketing or sale of mortgage credit products.

1 See 12 C.F.R. Part 1014.

2 Id. at § 1014.3.

3 Id. at § 1014.2.

We have reviewed one or more of your mortgage advertisements and it appears that they may violate federal law to the extent that they: (1) suggest, through the use of a logo very similar to that of the United States Department of Veterans Affairs, the prominent display of a website address that includes the acronym “VA,” and the use of language stating “the VA is offering you” the advertised product, that your company is affiliated with a government agency or government-sponsored program; (2) indicate that a specific “fixed” rate is available for a “30 year” loan when, in fact, the stated rate is for an adjustable rate loan; and (3) suggest that the rate being offered is part of an “economic stimulus plan” that will expire shortly, notwithstanding that the Department of Veterans Affairs’ loan guarantee programs do not have an expiration date. Copies of the advertisements referred to in this letter are attached hereto for your reference. While this letter refers specifically only to the attached advertisements, you should also consider whether other advertising you disseminate in any form, including internet advertisements, may require modification in order to comply with federal laws.

While we have not made a determination at this time regarding whether your advertisements violate the law, we urge you to review your marketing materials to ensure that you comply with the laws identified above. To assist you in this process, you may find it helpful to review the full text of the MAP Rule, available at http://www.gpo.gov/fdsys/pkg/CFR-2012-title12-vol8/pdf/CFR-2012-title12-vol8-part1014.pdf.

BY SENDING YOU THIS NOTICE, THE CFPB DOES NOT WAIVE ITS RIGHT TO TAKE ANY ACTION AGAINST YOU BASED ON PAST OR FUTURE VIOLATIONS OF FEDERAL LAW, including violations contained in, or relating to, the attached advertisement(s). Please direct any questions concerning this letter to [CFPB Enforcement attorney name] at [phone number].

Sincerely,

Kent Markus

Enforcement Director

Attachment(s)

MORAL

Did you get the letter? Have you reviewed your advertising in Facebook? Website? Direct mail? Newspapers? Have you had us review it for compliance with Regulation N? It probably is less expensive to have us do it then it would be to respond to one of these letters.  Think about it.

THE 12 DISCLOSURES THAT THE CFPB HAS EXEMPTED TEMPORARILY FROM IMPLEMENTATION

FACTS

The temporary exemption applies to the following disclosures (the first is under RESPA and the remaining ones are under TILA):

1-Appraisal management fee optional disclosure

2-Negative amortization feature warning

3-State anti-deficiency protection disclosure

4-Partial payment acceptance policy disclosure

5-Mandatory escrow account disclosure

6-Waiver of escrow at consummation disclosure

7-Monthly payment disclosure for a variable rate loan with an escrow account

8-Repayment analysis disclosure of monthly payment (with escrow payment)

9-Settlement charges disclosure

10-Mortgage originator fees disclosure

11-Wholesale rate disclosure

12-Total interest as a percentage of principal disclosure

The disclosures are reflected in the proposed Loan Estimate and/or proposed Closing Disclosure that are the main part of the integrated mortgage disclosure proposal. Based on consumer testing, however, the CFPB is considering not adopting the last two of the listed disclosures, and it requested comment on this consideration.

MORAL

What used to be a loan package of about 60 pages is now about 600 pages and that is without considering the 12 disclosures discussed above nor the state disclosures that are required notwithstanding the CFPB proposal. Does Mr. Cordray seriously expect a consumer to read 600 pages about 50 of which are disclosures? To read the 600 pages is like reading a novel in one day! But at least the consumer enjoys the novel. I am very curious as to what statistics the CFPB has that indicate any one consumer has read everything signed and every disclosure put before him and/or her. I actually defy him to produce statistics to prove at least one consumer has read all the data in the loan file, let alone 10 of the thousands of loans funded.

WHY CALIFORNIA EXECUTIVES OF MORTGAGE COMPANIES ARE AT RISK WHEN THEY CHOOSE TO BE INDEPENDENT CONTRACTORS

FACTS

 

On Nov. 16, Brian E. Fox, who worked as an account executive for several Orange County mortgage companies, pled guilty to one count of tax fraud and faces as much as five years in federal prison.  Fox entered his guilty plea in federal court in Santa Ana in front of United States District Judge Josephine Stanton Tucker.

Fox will be sentenced by Tucker on Feb. 15, 2013 and faces a statutory maximum sentence of five years. Fox also faces a fine of at least $100,000.  Fox admitted to one tax fraud count that resulted in a loss of $350,000 to the government.

The alleged fraud covered the 2006 tax year. However, according to the plea agreement, Fox failed to report income he earned while working in the mortgage industry during 2005, 2006 and 2007. He failed to report at least $1.3 million in income for those three years, including $712,133 for 2006 alone, according to the statement. The guilty plea entered by Fox was limited to his tax actions and was not directly connected to the mortgage firms he worked for.  (prsent112012)

MORAL

For those of you not familiar with federal income tax law, the statute of limitations for IRS to file a complaint questioning deductions is three years, for certain cases of fraud it is six years, but when you fail to declare the income there is no statute of limitations and the IRS can chase you forever as they did here six years after the event. Is there a cure to avoid criminal prosecution? The answer is yes, if you know what to do. You can consult with us or your tax advisor but if you did not declare a substantial amount of income I suggest you do it now.

CALIFORNIA MAN CONVICTED OF MORTGAGE FRAUD

FACTS

On Nov 21, Brandon Hanly was found guilty by a federal jury of wire and mail fraud, as well as money laundering, following a six-day mortgage fraud trial.

Hanly, was a principal at the Paramount Grou,p faces a maximum of 30 years in prison and $500,000 in fines when he's sentenced on Feb. 11, 2013.

Hanly and two co-defendants, Douglas Heald and Jerald Maggi, participated in a scheme to defraud mortgage lenders from September 2005 to April 2006, prosecutors said. Both Maggi and Heald pleaded guilty before trial and are awaiting sentencing.

The case against the trio stemmed from the successful prosecution of Redding mortgage broker Joshua Gervolstad, who got three years in prison and ordered to pay $1.4 million in restituton in July 2010.

The indictment against the trio alleged that Hanly, Maggi and Heald altered appraisal documents and title reports in order to obtain $5 million in mortgage loans with $1.5 million in "cash out" loans to which they were not entitled.

Prosecutors said the object of the scheme was to get cash out of a house beyond its equity while still appearing to be a "rate and term" refinancing.

It is typically easier to obtain than a cash-out loan and the trio were able to get large loans because they provided the lender with altered appraisals, inflated by up to $350,000, the spokeswoman said.  The title reports were altered to place a fake lien on the title in the name of a shell company, TPG Investments Inc., prosecutors said.

The defendants then gave the lender and escrow officer instructions to pay off the lien to TPG, they said.

Gervolstad controlled TPG and used it to direct the cash to himself, Hanly, and the other participants in the scheme. Although Hanly testified at trial that he was a victim of the scheme, the evidence showed that he personally received more than $300,000 as a result of his participation, prosecutors said.

Maggi and Heald are scheduled to be sentenced on Dec. 10.  (recordschlt112112)

MORAL

Notice again how the fraudulent loans go back to 2005. I keep repeating myself when I say the federal prosecutors are not giving up and have 10 years from the date the last act was done in the loan to file criminal charges. Believe me.

FORMER PRESIDENT OF IOWA ASSOCIATION OF MORTGAGE BROKERS CONVICTED ON 18 COUNTS OF MORTGAGE FRAUD

FACTS

On Nov. 12, Paul Kramer, the former president of the Iowa Association of Mortgage Brokers, was found guilty by a federal jury of 18 counts of wire fraud and bank fraud in connection with multi-million-dollar mortgage fraud schemes that resulted in innocent homeowners, including a refugee from Iraq and his family, nearly losing their homes to foreclosure.

He owned a mortgage brokerage, Kramer Mortgage Co., and a closing company, Iowa Closing & Escrow, at the time of the fraud. The jury did not acquit Kramer on any counts.

The same jury convicted Lane Anderson of two counts of conspiring with Kramer to commit bank and wire fraud. The wire fraud conspiracy involved Kramer and Anderson working together to obtain nearly $1.5 million in mortgage loans using the name and credit score of a contractor who did not actually qualify for the loans and who, in fact, had earned only about $2,000 per month the year prior to the loans. Anderson was not acquitted on any counts.

Anderson opened a development company in 2006 that planned to purchase, renovate, and re-sell homes. Kramer provided short-term loans to Anderson’s company to purchase the homes and pay for the renovation work. However, by late 2006, Anderson’s company was unable to find buyers for the homes and thus unable to repay the loans from Kramer. Anderson and Kramer therefore had one of Anderson’s business partners, a contractor, take out 13 long-term mortgage loans in his name from eight different lenders totaling nearly $1.5 million. The loan applications for the 13 homes contained false statements regarding the contractor’s income, assets, liabilities, source of down payment, source of income, and other matters. Anderson and Kramer obtained the loans in rapid succession and used many different lenders so that no single lender would be aware of all the other loans being taken out at the same time. Kramer then had his closing company close the loans despite false notarizations and false closing documents.

In April 2007, Anderson and Kramer began a check-kiting conspiracy in which they would trade checks of up to $75,000 from accounts that had less than $10,000 in real funds. One of the accounts had only $20.17 in it at the time a $75,000 check was written. However, by circling checks among numerous different accounts, Anderson and Kramer were able to falsely inflate the balances of the accounts, thus allowing checks from Kramer to third parties to clear. In May 2007, a West Bank security officer noticed the check activity and closed Anderson’s account.

Following the closing of Anderson’s bank account, Kramer began to take funds from the trust account of the closing company he owned, Iowa Closing & Escrow, to use for business expenses of his mortgage brokerage, Kramer Mortgage Co. The funds in the trust account belonged to lenders and homeowners and should have been used to pay off mortgages in connection with real estate transactions. However, on numerous occasions from 2007 to 2009, Kramer transferred money to his brokerage from the trust account, sometimes in amounts of more than $250,000 in a single month.

At first, Kramer repaid the amounts he took out of the trust account relatively quickly. Over time, however, the repayments became less frequent and thus a large deficit developed in the trust account. This put unwitting homeowners who used Kramer’s closing company at risk of having old mortgages on their properties not paid off. Kramer tried to fill the deficit in the trust account with mortgage payoff money he was supposed to give to U.S. Bank in connection with a line of credit. Those actions created a new set of problems, however, as the mortgage payoffs related to homes on which U.S. Bank held liens. By putting money into the trust account instead of paying off U.S. Bank, Kramer put the families who owned those homes at risk of foreclosure from U.S. Bank.

Kramer’s scheme culminated in September 2009 when Mohamed Rheem used Kramer’s closing company for the closing of his purchase of a home in West Des Moines. Rheem and his family lived in Baghdad, Iraq, until 2008 but left the country because of violence and threats from insurgents who were angry that Rheem had assisted the United States Army. The family arrived in Iowa in March 2008 as refugees, and Rheem quickly found employment with a dry cleaning company. Over the next year-and-a-half, he saved enough money to make a down payment on the purchase of the home—the first and only house he has ever purchased in the United States.

Kramer’s closing company was used to close Rheem’s purchase of the house. Due to the shortfall in the trust account, however, Kramer used the proceeds of Rheem’s new mortgage loan to pay off other mortgages that should have been paid off earlier in connection with other closings. The old mortgage on Rheem’s home was ultimately never paid off, resulting in Rheem spending approximately two years in foreclosure proceedings.

Kramer paid himself large sums of money from his brokerage throughout the year 2009, including a $50,000 payment to himself the day before the Rheem closing. In total, Kramer misapplied millions of dollars in mortgage payoffs over the course of the scheme and his actions resulted in at least five families not having clean title to their homes.

Kramer and Anderson will be sentenced in March 2013. Each count of wire fraud, conspiracy to commit wire fraud, bank fraud, and conspiracy to commit bank fraud is punishable by a term of imprisonment of up to 30 years and a fine of up to $1 million. In addition, Kramer and Anderson will have to make restitution to the victims of their crimes.  (usattysdia111412)

MORAL

Even a president can be a crook. It is a shame that the Iowa Association of Mortgage Brokers will suffer for his crimes because he was a past president.

VIRGINIA LOAN OFFICER GETS FOUR YEARS IN FEDERAL PRISON FOR MORTGAGE FRAUD

FACTS

On Nov. 16, Pervaiz Arshad was sentenced to 48 months in prison, followed by three years of supervised release, for his role in fraudulent mortgage loan transactions involving nine homes in northern Virginia and nearly $1.7 million in losses to lenders and for his role in attempting to obtain a fraudulent passport for a co-conspirator fleeing to Canada. Arshad was also ordered to pay restitution to the victim lenders and to forfeit the proceeds of his crimes.

Arshad was a loan officer for Annandale-based Estar Lending and recruited an individual to serve as a straw buyer in fraudulent real estate transactions designed to enrich himself and others. The properties, owned by co-conspirators, were sold to the straw buyer at a profit. Arshad ensured the straw buyer would qualify for the 100% financing used to buy the properties by reporting false employment and income information on the loan applications. Conspirators set up fake companies to verify the false employment information and further deceive the lenders. No payments were made on the loans, and Arshad intended for the straw buyer to flee to Canada before the fraud was discovered.

Arshad was indicted in this case in 2010 after he fled to Pakistan to avoid prosecution. He was arrested in July 2012 when authorities discovered him on a flight into Dulles International Airport. He is the sixth individual involved with Estar to be convicted.  (usattedva111612)

MORAL

As I have been repeatedly saying, the federal prosecutors are still at it and going strong and in this attorney’s opinion will continue to go strong until at least the end of 2013.

 

THE INFORMATION CONTAINED HEREIN IS NOT LEGAL ADVICE.

AN ATTORNEY SHOULD BE CONSULTED IF YOU DESIRE LEGAL ADVICE

 

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