Fraud in Real Estate Transactions

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Questions and Answers

What type of fraud involves individuals wanting a house for themselves or seeking profits from commissions?

  • Fraud for property (correct)
  • Consumer fraud
  • Criminal enterprise fraud
  • Fraud for profit

Which of the following is NOT typically associated with fraud for property?

  • False employment
  • Inflated property values (correct)
  • Undisclosed loans
  • False purchase contracts

Fraud for profit often involves a group of individuals within the industry. Which of the following is commonly included?

  • Real estate agents (correct)
  • Government officials
  • Homeowners
  • Home inspectors

What indicates potential Criminal Enterprise Fraud?

<p>Frequent changes in property ownership (A)</p> Signup and view all the answers

Which of the following best describes the motivations behind Fraud for Property?

<p>To obtain fraudulent loans or property deals (A)</p> Signup and view all the answers

Which scenario indicates a potential fraud concerning the seller's identity?

<p>The seller's signature is not the same as on the title. (A), The seller is the real estate broker managing the sale. (C)</p> Signup and view all the answers

What is a behavioral red flag when evaluating a loan application?

<p>The application includes a handwritten pay stub. (A)</p> Signup and view all the answers

What indicates a potential issue with documentation during the processing of a real estate deal?

<p>A letter from a private individual for verification. (A), Documents submitted on a weekend. (C)</p> Signup and view all the answers

Which condition represents a credit-related red flag during a loan application review?

<p>Multiple credit reports show different SSNs. (B)</p> Signup and view all the answers

What does excessive real estate commissions on a contract signify?

<p>Indication of potential fraud or manipulation. (D)</p> Signup and view all the answers

Which of these is a sign of a suspicious loan application?

<p>Inconsistent phone numbers for the borrower and employer. (A)</p> Signup and view all the answers

Which situation does NOT denote a probable red flag during a real estate transaction?

<p>The buyer has established credit over several years. (D)</p> Signup and view all the answers

What constitutes a concern regarding earnest money deposits?

<p>The amount is significantly larger than customary practices. (B)</p> Signup and view all the answers

Which scenario is a potential indicator of financial misrepresentation?

<p>Large cash deposits appear in the borrower's bank account. (C)</p> Signup and view all the answers

How does the presence of multiple deposit checks with varying dates impact the transaction?

<p>It may be a sign of potential fraud or manipulation. (D)</p> Signup and view all the answers

What can the use of a power of attorney imply in a sales transaction?

<p>It may indicate that the sale is not arm's length. (B)</p> Signup and view all the answers

What does the identification of several recent property transfers suggest?

<p>Potential illegal flipping or money laundering. (B)</p> Signup and view all the answers

Which factor does not align with a credit-related red flag in borrowing?

<p>Frequent contact with financial advisors. (B)</p> Signup and view all the answers

What implication does having no real estate agent involved in a sale carry?

<p>It suggests potential undisclosed arrangements or fraud. (A)</p> Signup and view all the answers

Flashcards

Fraud for Property

A type of real estate fraud where the perpetrator wants to own the property or profit from its sale.

Fraud for Profit

A type of real estate fraud committed by industry insiders who profit from fraudulent transactions.

Criminal Enterprise Fraud

A type of real estate fraud involving a network of people who commit fraud for financial gain.

Income or Asset Falsification

The act of falsifying income, assets, or other financial information to obtain a mortgage.

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Property Flipping

An illegal practice where a property is bought and sold quickly at inflated prices to generate profits.

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Non-Arm's Length Transaction

When the seller of a property is also the real estate broker, a relative of the buyer, or the buyer's employer, it raises concerns about the legitimacy of the transaction and potential conflicts of interest.

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Seller Name Discrepancy

If the seller's name on the sales contract doesn't match the name on the property's title, it could indicate fraud or a hidden ownership.

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Buyer Mismatch

When the buyer on the loan application is different from the buyer on the sales contract, it can be a sign of a straw buyer involved in fraudulent activities.

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No Real Estate Agent

Missing a real estate agent can point to a transaction that might lack transparency and proper legal procedures.

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Power of Attorney

If someone else is authorized to sell the property or apply for a loan on behalf of the owner, it could be a red flag for potential manipulation or fraud.

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Hidden Second Mortgage

A second mortgage not disclosed on the application is a serious red flag, suggesting a hidden debt that can impact the borrower's ability to repay.

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Excessive Commissions

Unusually high real estate commissions can indicate a potential scheme, especially if the seller or buyer is involved in fraudulent activities.

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Unusual Earnest Money Deposit

An earnest money deposit that matches the down payment, exceeds typical amounts, or is an unusual sum, might be used to mask fraudulent activities.

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Inconsistent Deposit Checks

Multiple deposit checks with inconsistent dates can raise suspicions of fabricated transactions or attempts to hide the true source of funds.

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Discrepancies in Deposit Check

A discrepancy between the name or address on the deposit check and the borrower's information points to a potential attempt to conceal the true identity or source of funds.

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Contract Dated After Loan Documents

A sales contract dated after the loan documents suggests a possible attempt to manipulate dates and fabricate evidence for a transaction.

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Boilerplate Contract

Using generic, online forms for the sales contract can create vulnerabilities and make it easier to manipulate the terms, increasing the risk of fraud.

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Significant Changes to Application

Significant changes to the loan application after the initial submission can indicate attempts to conceal information or misrepresent the borrower's financial situation.

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Unsigned Application

An unsigned or updated loan application raises red flags, suggesting a possible lack of honesty or attempts to avoid accountability.

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Suspicious Employer Address

If the employer's address is a PO box or looks like a residential address, it could indicate a fake employer or attempt to conceal the nature of the employment.

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Study Notes

Fraud in Real Estate Transactions

  • Fraud is criminal deception for personal or financial gain, common in real estate & mortgage lending.
  • Mortgage loan originators have a duty to be aware of, deter, and detect fraud.
  • Fraud motivations aid in identification of the act and perpetrator.

Fraud for Property

  • Motivations include acquiring the property, or the commissions/sale proceeds.
  • Perpetrators can be applicants, real estate agents, or lenders (with seller complicity).
  • Common tactics include falsifying income/assets, false contracts, false employment, undisclosed loans, and false application statements (e.g., intent to occupy).

Fraud for Profit

  • Perpetrators are often industry insiders (e.g., real estate agent, loan officer, appraiser).
  • Involves multiple transactions with a pattern, profiting from property sales & mortgage loans.
  • Tactics include property flipping, inflated property values, deceptive title transfers, equity skimming.

Criminal Enterprise Fraud

  • Often linked to money laundering.
  • Characteristics include frequent/flipping transactions (sometimes at a loss), requests for cash payments, unconcerned parties.

Red Flags in Sales Contracts

  • Non-arm's-length transactions (seller is also broker, relative, etc.).
  • Seller not reflected on title.
  • Purchaser not the loan applicant or added/deleted.
  • No real estate agent involved.
  • Power of attorney used for sale/loan application.
  • Unlisted second mortgage on title/credit report.
  • Excessive real estate commissions.
  • Earnest money = downpayment, unusually large or odd amount.
  • Multiple deposit checks with inconsistent dates.
  • Deposit check name/address discrepancy.
  • Contract dated after credit documents.
  • Online/generic boilerplate contract.

Application Red Flags

  • Significant changes in applicant information post-application.
  • Unsigned or updated application.
  • Employer's address is a PO Box or residential.
  • Cash-out refinance on recently purchased property.
  • Applicant currently resides in purchased property.
  • Borrower and employer have same phone number.
  • Extreme payment shock (possible straw buyer).
  • Investment property purchaser without a residence.
  • Unreasonable property location vs. employment.

General Red Flags (Any Stage)

  • Credit-related: No credit history, invalid/discrepant SSN, altered personal data, social security discrepancies, excessive credit inquiries.
  • Income-related: Employer PO Box address, handwritten paystubs/W-2s, round numbers on income verification, income inconsistencies with employment, sequential paystub numbers.
  • Assets-related: New bank accounts, round numbers on bank statements, large deposits without explanation, private letters for asset sales/loan repayment, bank statement inconsistencies, missing customer or account details, inconsistent dates or account opening dates.

Closing Red Flags

  • Seller is an entity (LLC, trust) instead of individual.

  • Real estate commissions exceed 7%.

  • Sales concessions not stated in contract.

  • Numerous/recent title transfers.

  • Payments to third parties on seller's CD.

  • General: Altered documents (altered fonts, handwriting), unclear/fuzzy copies, illegible signatures, "squeezed" numbers, falsified verifications, specific addressed document completions, weekend/holiday completions, address discrepancies, third-party verification (VOD, VOE).

  • Overall Note: A single red flag may not be enough to deny an application. Multiple red flags are a strong indicator of fraud.

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