Fraud-Why We are Scared!

Written By: Jane Harford, FHA DE Underwriter

Did you hear about the settlement of a lawsuit that Lifelock was involved in? FTC was involved due to “overstated claims of how they would avoid ID fraud” for their customers. Here is a link to the story of the lawsuit being settled and what Lifelock has agreed to for the next 20 years that will result in a better, fairer and more accurate reflection of what Lifelock’s program actually does…..
http://www.informationweek.com/news/security/storage/showArticle.jhtml?articleID=223400055

This is part #1 of several installments that will be done to update you on the emphasis that lenders are placing on the huge problem of fraud in our business-both from a pre production and a post closing, servicing and REO point of view. Fraud schemes exist in all areas of the mortgage business. There are many different schemes that start with the taking of the initial 1003 through settlement and for up to 24 month after the loan closes. Although, there are now numerous tools and technologies that exist to help fraud investigations, often it is a combination of the technologies and human efforts

That closes the cases, document the schemes and get the folks that do this convicted and behind bars or banned from doing business. Real estate fraud is complicated, unique and often difficult to detect. As often as the rest of this business changes, so does the type of fraud and how it is conducted. Many lenders are now developing zero tolerance policies towards fraud. Fannie Mae, Freddie Mac, FHA/VA and the MI companies have had teams in place for years to audit REO loans after they go into default.

The emphasis that these agencies are now placing on this has resulted in huge changes in how these loans are audited, how many are done and how the results are used to make changes in current and future program changes. Each of these groups is looking at their own book of REO problems, looking hard at the details that come out of these audits and finally sharing their findings internally with production departments of these agencies. Hopefully, these agencies will also share their findings with each other as well.

We will take the time this week to briefly identify the initial areas in which fraud can start. Since most initial applications now take place over the phone or via the internet, most loan officers do not meet their loan applicants in person. Often, the loan officers have established their sources of business via phone or other methods. Thus, there is room for information and documentation to be provided that is false or changed in some fashion to support income, assets, credit and collateral that is not what it will be once good solid investigation uncovers the truth.

The simplest forms of fraud start with the following areas-
-Occupancy issues often happen when occupancy status is misstated. For instance, if an application is taken stating that the property will be owner occupied when the borrowers fully intend to rent it out is considered to be fraud. There are often small hints along the way that give clues as to the fact that this is not what it appears to be.

Something as simple as when parents jump and want to help out a child by buying them a home can turn into a fraudulent situation. If the child’s credit doesn’t qualify for a mortgage under stricter standards, that person is often removed from the application. Often these loans then do become investment properties and are considered to be fraudulent under the misstated occupancy intentions. The simplest changes to a mortgage loan application may not always be caught by the processor or underwriter when submitted for an initial underwrite. these loans often close without the corrections made by decreasing the loan amount, increasing an interest rate and accounting for the correct change in occupancy status. And since most loan business is now conducted by phone/via electronic means and not in person, it is not possible to meet, get to know and learn about the true intentions of the parties on this loan.

Another form of misstated occupancy intentions has happened in the past few years as family members attempt to help out other family or friends if they are about to lose their home to foreclosure. There has been a huge increase in the numbers of non arms length transaction-the technical term we use for family members purchasing property from another family member for less than fair market value.

Many times, the folks that are selling the property are getting a payoff from the person purchasing it in order to start a new life some place else. The intent is to help out the family member, but it can often turn into a potential misstated occupancy issue or a property flipping issue. The best advice that can be given to first line production folks is to get to know the clients as much as you can even by phone or email. Ask those good questions and get good answers to your detailed questions. If there is something that doesn’t sit well in your gut, let a manager now that you have concerns about the loan applicants, the sellers or the agents involved.

Agents can often dictate or sway how a transaction is handled. Alert, intelligent and wary loan officers and processors can often get an idea that the loan package they have is not the loan closing that will take place.

In the next several weeks, we will cover all aspects of the mortgage loan process. In every step of the process, technology and good detailed detective work can stop loan fraud. It is a huge problem and now is the time that we can learn the basics of what to do and how to stop it.

Have a good productive week-free of fraud.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Good Faith Estimate Changes - Part 3

Written By: Jane Harford, FHA DE Underwriter

In today’s blog we will see, how the changes to the RESPA laws have affected the GFE and the HUD1, we will quickly review the changes that have taken place so far and how these changes have affected the work flow, fees that can be charged and the timeframes required to maintain compliance.

As you will remember from the previous blog posts, the purpose of the new forms is to have borrowers better understand and shop for mortgages. This will ultimately result in more stable more products, lower rates and lower settlement charges for borrowers.

Page #1 of the revised GFE gives greater detail of the loan terms, including the initial rate and monthly payment, details on rate and if principal balance can increase( showing the maximums) and if there is a balloon payment or prepayment penalty.

YSP to brokers is shown as part of the Loan Origination fee in Block A on page #2. The GFE also consolidates settlement charges into various categories in Block B to simplify disclosure of charges. Total estimated settlement charges carried from page #2 to bottom of page #1 become the closing costs for a particular loan that the borrower can compare to other GFE’s that the borrower may obtain.

There have also been major changes to the HUD 1 settlement statement. The itemized final settlement charges on page #2 reference the HUD 1 lines so that the borrower can track closing costs fees from one document to the other.

As an example, lines #801, #802, #803 and #1203 from the GFE move directly to the HUD1. These fees are not allowed to change from the GFE to the HUD1.

There is a new page #3 of the HUD1. Top portion of the page compares costs in each of the sections “cannot change”, “total cannot increase more than 10%” and the “can change” sections of the GFE. These fees are reviewed and borrowers can then determine if tolerances have been violated. The loan officer is required under the new RESPA rule to provide the info necessary to complete page #3 of the HUD 1 to the closing officer.

In order to keep the fees from the GFE the same when transitioning to the HUD! Loan officers are working very closely with title companies to ensure the compliance of these fees. Many title companies are offering new online services to loan officers to provide accurate and correct title/closing fees.

If a lender uses this system to prepare a GFE for a borrower and the title company winds up needing to adjust the fees after the initial costs are provided, the title company will pay the difference between initial quote and final HUD 1 costs. This covers sections #1100 and #1200 costs-title charges and government recording/transfer charges. This section does not allow for any tolerances from the GFE to the HUD1.

When the request for an initial GFE comes to the loan officer, they are now using title estimates that come from title company’s web sites. The title company’s staff must be able to provide the correct estimates based on the preliminary information provided by the loan officer at the beginning of the process. In most cases, the sensible thing to do is to overestimate the costs.

But, this then defeats the purpose of the new RESPA law. Loan officers/processors are providing a copy of their GFE when ordering the title work. This gives the title company a heads up as to what the borrower has already accepted in the way of fees.

When estimating these fees at a higher cost, the loan officer does take a risk in dealing with competition from other lenders. RESPA does not regulate lenders from underestimating fees and then re-stating them later. (Only if there are changed circumstances). It does seem that the new RESPA regulations place a greater emphasis on the settlement costs over the APR annual percentage rate, which was the comparison that was required by RESPA to be reviewed carefully in the past.

These new changes do require that loan officers complete a very accurate GFE at the initial application. In the thought patterns that were used to make these historic changes to GFE regulations, there are two very basic things that are no longer considered when completing and reviewing a GFE. 1) With all origination costs appearing in a single box, this increases the amount that the borrower can consider deducting on his tax returns when filing 1040’s with the IRS. Previously, only origination fees could be deducted on Schedule A when borrowers filed their 1040’s.

The other issue is that the revised GFE does not provide for a borrower’s signature line on the form. It is often difficult to determine that the borrower has accepted these costs when no signature line on the form. When underwriting these files, an underwriter cannot determine if the borrowers have acknowledged the costs and total cash to close. No final cash to close figures appear on the new GFE. There is no spot on the form to show bottom line details of the cash to close, less any fees already paid by the borrower, seller/lender credits etc.

Many lenders feel that they must provide this documentation to their borrowers to show that they have provided full disclosure including the cash to close for the borrower’s edification. This has forced lenders to invent “cash to close worksheets”. Using these worksheets, the loan officer is then able to clearly document all costs to close by breaking out the closing costs, escrows, any credits provided by seller/lender and the bottom line figure of cash needed to close. This is the rest of the information that used to appear on the bottom of the old GFE form. For full disclosure, lenders feel that the borrowers do need to be provided all of this information.

Lastly, the 180 day leniency period recognized by HUD ends on 4/30/2010. Lenders may or may not recognize this leniency period based on their own underwriting/closing policies. It is important to determine what the lender’s policies are when processing/submitting a loan to the lender’s office. Each office/branch may interpret the policies a bit differently. For purposes of compliance and clarity, it recommended that you check these policies in advance when working with new clients. This will come in handy, especially when the cash to close is very tight. There may be changes in the overall loan package that will need to be revised upon approval of the loan. Upfront and open discussion will ensure a smooth process from the initial GFE being issued to the closing papers being signed by the buyers/sellers.

As always, please be sure that your forms are signed and dated by all parties. The smallest details are often the ones that will hold up a smooth transition from loan application to loan closing.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Good Faith Estimate Changes - Part 2

Written By: Jane Harford, FHA DE Underwriter

Today’s blog post will deal with more details on the new GFE and the issues that are being raised. Due to the numerous laws and system changes the lenders, brokers and correspondents have to complete to remain in compliance with the new RESPA laws.

In this post, we will cover the details of “changed circumstances” and how lenders are allowed to make fee changes to the initial GFE provided. To recap, loan officers are required to provide a detailed and accurate cost estimate to their client within three days of taking a loan application. Many changes have been made to the GFE form; several areas of cost estimates are subject to absolutely no tolerance if changed. Loan officers or the brokers must absorb these cost changes. If a revised GFE is issued, HUD detailed the reasons that a change would be allowed. This is the term known as “changed circumstances”.

A “changed circumstance” is defined by HUD as follows: 1) Acts of God, war, disaster or other emergency 2) changed situation or inaccurate information provided by borrowers after issuance of the GFE. Only those fees impacted by the changed circumstances can be changed (note-this is just for increases in fees). Any decreased changes in fees are acceptable and not subject to the RESPA regs.

If pricing changes due to a changed circumstance or a borrower requested pricing change, only the interest rate related charges and terms may change. Lenders are requesting very strictly signed and dated disclosures from the borrowers stating that they have requested and accept these changes. If the loan is locked from a float status, only the rate related charges and terms can change. In either case, Block #1 fees cannot be changed-even with a documented “changed circumstance”. Also, the important dates section must be updated to reflect final lock dates, etc.

The auditors and investors are following the HUD guidelines very strictly, even though HUD stated that there would be a 120 day grace period. There are several documented stories from the various industry blogs, websites and industry forums that report stories similar to this one……

“A loan closed initiated on the new GFE. Seller’s county transfer taxes were not disclosed to buyer on the GFE. Seller typically pays the transfer tax. The subject property was located in a city with no city transfer tax. GFE issued did not have these Costs disclosed to buyer. Prelim HUD1 also did not show these costs.

The closing was scheduled on the loan. Lender docs and title work done for closing. The investor is not accepting the 120 day leniency policy. $737 was the cost for a tolerance cure. This credit went back to seller, not the buyer. There was no opportunity to redisclose (had no affect on borrower’s bottom line cash to close). The lender had to cough up the tolerance cure and the seller got the benefit of that credit.”

Other stories talk about investors not allowing for a third party credit report to be charged or for guarantee of an appraisal fee (when the appraisal was not yet ordered-due to the four day rule)…….

My initial reaction is –how does this strict enforcement benefit the borrower if these charges are unknown or if the seller is benefiting from the tolerance cure…..these are just some of the many pondering questions that will be dealt with as the industry gets further and further into understanding HUD’s full intent of these changes and investor’s policies in following them.

The following is a list of the “Top Errors of GFE’s” which came out in a recent posting from the Mortgage Daily News-this list was provided by U. S. Bank’s wholesale division….some food for thought….

1) Adjusted origination charges need to be completed correctly-Page #2 and box #1 should reflect all income broker/lender expects to receive, except for discount points. This includes origination fees, broker fees, broker comp(typically earned from YSP) and investor commitment fee.
Only 1 box may be checked and only 1 dollar amount may appear in block #2.

2) Block #11-hazard insurance must be completed-purchases require it.

3) The important dates section must be completed correctly. Many times this is not completed.

4) Owner title insurance must be completed.

5) Trade off table must be completed. Many times it is left blank.

6) Lender information must be completed.

7) Escrow account information must be completed accurately.

8) Upfront MIP/VA FF must be listed correctly.

9) GFE completion date must appear on the disclosure.

10) Originator’s email address must be completely provided.

These are basic items, but do require completion. Consider them when you are reviewing a GFE and need to determine if the GFE is truly compliant. In my next blog, we will review the transition of the GFE to the new HUD1 and the HUD1A. Also, we will cover some of the ways that lenders are dealing with the fact that the GFE does not disclose total cash needed to close-like the old GFE did.

Please stay warm and dry wherever you are. All areas of the country are having some funky weather this winter.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)