by Amy Kleinschmit, Director of Compliance

FinCEN recently issued advisory FIN-2012-A009 on the topic of suspicious activity related to mortgage loan fraud.  This guidance provides examples of common fraud schemes and possible red flags related to loan fraud.  This advisory can be found here: http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2012-A009.pdf

The examples of mortgage loan fraud schemes and scams come from those frequently reported and/or described in SARs or identified by law enforcement and regulatory entities that partner with FinCEN. There are several examples provided in the guidance, some of which include:

Occupancy fraud: Occurs when borrowers, to obtain favorable loan terms, claim that subject properties will be their primary residences instead of vacation homes or investment properties. It also occurs when subjects apply for loans for properties that others, such as family members, will actually occupy.

Income fraud: Includes both overstating income to qualify for larger mortgages and understating income to qualify for hardship concessions and modifications.

Appraisal fraud: Includes both overstating home value to obtain more money from a sale of property or cash-out refinancing, and understating home value in connection with a plan to purchase a property at a discount to market value.

“Red Flags” are indicators of possible fraudulent activity. It is important to look at “red flags” in the context of the surrounding facts and other indicators. If a credit union observes a “red flag” in a given transaction or business arrangement, it may indicate the need for further due diligence and a decision whether or not to file a SAR. Some of the examples provides in the FinCEN advisory include:

• Borrower/buyer submits invalid documents in order to cancel his or her mortgage obligations or to pay off his or her loan balance(s).

• Same notary public and/or other “authorized representative” preparing, signing, and sending packages of nearly identical debt elimination documents for multiple borrowers with outstanding mortgage balances.

• Same notary public and/or other “authorized representative” working with and/or receiving payments from unusually large numbers of borrowers.

• Falsification of certified checks, cashier’s checks or “non-cash item checks” drawn against a borrower/buyer’s account, rather than from the account of a financial institution.

Remember that “If a financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or an attempt to disguise funds derived from illegal activity, is designed to evade regulations promulgated under the Bank Secrecy Act, or lacks a business or apparent lawful purpose, the financial institution may be required to file a SAR.” FIN-2012-A009

The advisory directs that when completing the SAR, a financial institution should indicate the type of mortgage loan fraud and provide a detailed description in the SAR narrative. FinCEN also requests that, “where available, to include in the narrative portion, the Conference of State Bank Supervisors’ (CSBS) National Mortgage Licensing System and Registry (NMLS) assigned “NMLS Unique Identifier.” Id.

Should you have any questions or concerns on this or any other compliance or regulatory issue, please do not hesitate to contact Amy Kleinschmit at akleinschmit@cuad.coop or 701.214.9721.