Everyone wants to be on the list for a good party. But with increasing incidents being reported of settlement agent or closing fraud, lenders need to ensure all participants in the real estate transaction, including closing participants, are not on any exclusionary lists.
Over the past several years, there has been an increased focus on determining risk associated with the participants facilitating a loan transaction.
Red flags associated with settlement agent fraud are often overlooked by lenders when reviewing and signing off on the HUD-1 Settlement Statement. The HUD-1 details all the disbursements associated with the transaction, including any liens, payments to third parties, and money to the buyer or seller.
The itemized statement may seem legitimate to an untrained eye, however lenders need to be aware of three common red flags seen with settlement agent fraud:
• Payout to a third party or an entity that has not been disclosed in the transaction. For example, if there is a payout listed to an individual or company for property repairs and there is nothing documented within the loan file regarding the repairs or the payee, then this could potentially be a fraudulent transaction.
• Excessive fees charged for an appraiser, real estate agent or other participant in the loan transaction is another red flag.
• Payout to a related party, such as a family member or friend, should always be a red flag. There may be a completely legitimate reason for a related party to be listed in the HUD-1, but it is to the lender’s benefit to verify payment.
In many fraud schemes, the settlement and closing participants are often involved or have some part to play. Without their assistance, some fraud schemes would be difficult or impossible to pull off. For this reason, the same due diligence that is performed for the loan origination participants must be done for the settlement and closing participants.
If any of the insiders have done a fraudulent activity once, then they have probably done it at least twice and in other parts of the state or country. Regulations in place require lenders to verify that settlement agents and all entities related to the transaction are licensed properly and are not on government exclusionary or watch lists. Best practices for verifying settlement agents should include a check with the title insurer to make sure the agent is in good standing.
The Bank Secrecy Act mandates financial institutions check The Office of Foreign Assets watch list for companies and people that U.S. citizens and companies are forbidden to do business with. Lenders realize the benefits of checking this and other exclusionary lists. By checking watch lists, lenders comply with the BSA, avoid extremely large fines and possible jail time, and prevent potential losses from conducting business with parties known for illegal activity.
Screening entities through government and industry watch lists can be a cumbersome task when done manually. As a result, settlement and closing participants are not typically verified through the lists prior to loan closing because the time given for closing is usually very short and rushed. Fortunately there are automated tools that can be used to assist with watch list verification, such as the Watchlist Review Module by Interthinx. Lenders are finding this automated solution very useful and easy to use. It takes just seconds to check multiple lists and by judiciously screening all entities, lenders can rest easy knowing they did their due diligence and are in compliance with regulations.
Once you know that everyone at the closing is not on any industry or watch list, you can relax and enjoy the party.
Gayle Shank is the vice president of product management at Interthinx.
