Regulators Seek Lender Input on Fraud

It isn't rap. It's not rock. Perhaps it's the blues.

Whatever the tune, John Robbins says he's hearing something new from law enforcement officials these days. "I'm hearing a different tune," the chairman-elect of the Mortgage Bankers Association said at the group's National Fraud Issues Conference here earlier this month.

It used to be that when lenders asked the cops to investigate and prosecute instances of fraud, "they were pushed away" because the authorities "didn't have the resources," said Mr. Robbins, who is chief executive officer of the American Mortgage Network, San Diego. "So we developed a habit of dealing with fraud internally."

Now, though, law enforcement agencies "are asking you to come forward," he told the shoulder-to-shoulder crowd that numbered close to 200 and could have been nearly twice as large had the Palmer House Hotel had enough meeting space to accommodate them.

Keynote speaker Thurbert Baker, Georgia's attorney general, wants lenders in his state to step up. Ditto for the Department of Justice, which is working to build a data base so it can identify trends and try to stay at least one step behind the bad guys as opposed to three or four.

"Our ability to fight has not kept pace with the innovative schemes" being used to victimize not just lending institutions but also buyers, sellers and entire neighborhoods, Mr. Baker told the meeting.

"The bottom line is, businesses are being robbed - in some cases, robbed blind. And if left unchecked, mortgage fraud can undermine real estate values in entire communities," he said.

The Georgia crime fighter, who is in line to become chairman of the National Association of Attorneys General, said he is "urging" his counterparts in other states to follow Georgia's lead as the first in the Union to enact laws specifically making mortgage fraud a felony punishable by up to 20 years in prison.

"Most important," he said, "we don't have to wait until the money's taken. We can act as soon as the misrepresentation is made, and that allows us to get at the problem before [lenders] are bilked out of millions and entire neighborhoods are destroyed."

At least five other states - New Jersey, Utah, Colorado, Oklahoma and California - are considering similar legislation.

In Mr. Baker's state, more than 100 cases have either been opened or are waiting to be opened.

The year-old law "is serving as a catalyst to get everyone focused on the problem," he said, noting that in some places, turf wars have broken out as law enforcement departments fight over which one is going to take a case.

The law also is helping judges to better understand mortgage fraud, according to Peter Lubin of McCalla Raymer, an Atlanta law firm, which has represented lenders and title insurers in mortgage fraud litigation.

"Before, we weren't getting any attention. They wanted to know who Fannie Mae was and how could they reach her," Mr. Lubbin said. "Now they're better educated, and we're getting indictments. In one case, the [perp] was sentenced to 30 years."

Assistant Georgia AG David McGlaughlin is one who takes great delight in being able to lock up scam artists.

"Drug dealers live in fear that today is the day they are going to have their faces pushed into the concrete and handcuffed. Now mortgage fraudsters feel the same way. That's the beautiful thing for me as a prosecutor," Mr. McGlaughlin told the conference.

"Lenders in Georgia now realize it's OK to say, 'I'm a victim,' because they've got a guy who likes to put people in prison. That has never been done before."

Financial institution fraud in general and mortgage fraud in particular are "key enforcement priorities" at the federal level, too, John Arterberry of the Justice Department assured the meeting.

"Fraud is an important crime issue to those of us in law enforcement, but we can't do it alone," the executive deputy chief in criminal division's fraud section said. "We need the cooperation of the industry."

Mr. Arterberry called on mortgage lenders to file suspicious activity reports, even when the law does not require them to do so. Only federally insured financial institutions and their affiliates are compelled to file such reports, which the DoJ official called "a critical tool" that provides crime fighters with "a window into the threats" lenders face everyday.

The number of suspicious activity reports, or SARs, that have been filed with the Financial Crimes Enforcement Network, or FinCEN, has increased dramatically in recent years - from about 9,500 in fiscal 2003 to an estimated 23,000 in fiscal 2005.

But a good part of the gain is attributable to the rampant consolidation within the mortgage sector, the Mortgage Asset Research Institute pointed out in its latest mortgage fraud case report to the MBA.

"Commercial banks and thrifts which are required to make SAR reports acquired almost 150 independent mortgage bankers between 1997 and 2005," MARI said. "Therefore, some of the increased activity in mortgage-related SARs is due to the increased numbers of mortgage companies that submit SARs."

MARI also lays some of the increase suspicious activity reports to the length of time it takes many lenders to discover they've been hoodwinked. "By the time an incidence of fraud gets fully investigated and reported," the report to the MBA noted, "it may two to five years old."

Whatever the reason more SARs have been filed, Uncle Sam wants more of them.

"We've become extremely adept at taking SAR data and using it to target our scarce resources," Mr. Arterberry of the Justice Department said. "They make us more effective in assessing what's going on. They serve as a window into the underworld and the organized rings that use sophisticated and sometimes even violent tactics."

But reporting fraud won't solve the problem, at least not by itself, said Karen Spangenberg, chief of the FBI's Financial Crimes Section, who called for new legislation to combat the problem. "Fraud is an old crime that needs to be addressed in a new way," she told the conference.