Georgia on Their Minds as States Fight Mortgage Fraud
Arthur Prieston, chairman of The Prieston Group, predicts that the fall legislative session will bring the addition of many more states to adopt standardized language for anti-fraud laws.
"We have many state legislatures recognizing fraud and its seriousness," said Mr. Prieston, who has worked on resolving mortgage fraud for more than 20 years. "A lot of laws are modeled after the Georgia bill and the federal Obama bill to curb mortgage fraud. The Georgia law has become the blueprint for other state legislation. Other laws based on the Georgia model were introduced in New Jersey, Oklahoma and Utah."
Specifically, the Georgia law and the other similar proposed laws basically all make mortgage fraud a crime, according to Mr. Prieston. This means fraud can occur anytime when someone knowingly makes or includes any misstatement or misrepresentation during the mortgage lending process. It happens when proceeds or funds are received with a residential mortgage closing that this person knew resulted from a violation. It also occurs through the filing if deeds or any document that may contain deliberate statements or omissions with the official registrar.
Effective July 1, Colorado amended its theft statute to provide that if a person committed "theft by deception" and the underlying factual basis included the "mortgage lending process," the minimum fine must include the amount of money resulting from the theft. The court can only accept a plea for an offense involving the mortgage lending process if the agreement includes restitution to the victim, said Mr. Prieston. The new law also includes private right of action against the perpetrator, regardless of whether the perpetrator is convicted.
"In this Colorado law, mortgage lending process adds 'perfecting and releasing the mortgage' to the Georgia definition," he said. "Other states have pending legislation that are more properly anti-predatory lending-type laws, rather than anti-mortgage fraud laws. These laws, such as pending legislation in Michigan, are against the lenders rather than those who obtain loans from lenders by fraud."
The Prieston Group, which provides pre-funding quality control, due diligence, lender training and ongoing education in best practices, is boosting its educators, training and quality lending advisors fivefold over the next five months and working on its detection system. The company also provides lender representation and warranty insurance. TPG clients include banks, thrift institutions, mortgage companies, secondary market investors, securities issuers and financial companies. The Prieston Group is working to see which lenders are at risk based on their product types, geographic dispersion, number of purchases they have had, how they are internally structured and how much core capital they have maintained. "We will look at lenders we believe to be at risk. It takes time and energy to continue to produce quality loans."
Uniform licensing and tracking employees is crucial to preventing fraud and catching it before the problem gets out of hand, he said. "Unformed licensing is a positive move. Many frauds are perpetrated under false pretenses using a mortgage broker's license that was borrowed or paid for and unbeknownst to that broker of record, defrauding them. In one instance, a mortgage broker in St. Louis used his father's broker license and was convicted for $5 million, and he borrowed it under false pretense."
While cases of fraud seem to be getting worse, the industry is getting better at identifying warning signs early on. "There is a more sophisticated means of doing business as mortgage bankers, which is a doubled-edged sword. There are very intelligent fraudsters who perpetrate fraud-using technology to their advantage. Classically we are seeing more identity theft as advances in technology occur," said Mr. Prieston. He also said with interest rates rising and the need for financing, underwriting is stricter and qualification needs to be more of an issue.
Quality lending and good practices are the call of the day now. All investors buying loans are deeply invested in maintaining profit margins. As a result, there is an increase in quality that is necessary to maintain those profit margins, he said. There is significant upgrading in staff and processes. "We must continue to monitor the lenders we approve for assurance. We need to be familiar with each lender's practice and production performance - to make sure they have a good book of business and that they are following the steps that make them qualified for our insurance program."
The industry must allow lenders to prosecute mortgage fraud cases. Mortgage fraud is something the industry can self-monitor, especially when it comes to monitoring best practices, Mr. Prieston said.
Through the boom, the mortgage industry saw business drop and it lost half its net worth over the last year. There were only a handful of repurchases a year ago, and now mid-and large-level companies are being exposed to potential risk and thinning margins. The industry is seeing low cost loans and razor-thin profit margins.
"Many investors use repurchase pools as a risk management tool to maintain their margins," he said. "Lenders have to maintain volume. A lot of times they are attracting loans they normally wouldn't have funded. They need to balance good lending practices and the need for high volume." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com