Fraud

Fraud is especially troublesome in the reverse mortgage context given the vulnerability of senior borrowers. Victims of reverse mortgage fraud are at risk of losing their home and may have few other financial resources.

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6.8.1 RISKS TO CONSUMERS

Reverse mortgage fraud includes bad actors who target reverse mortgage consumers.⁴⁴⁶ Unsuspecting consumers are at risk of losing their home equity in several ways. A trusted adviser or imposter can take out a reverse mortgage without their knowledge, or the borrower can be drawn into a property-flipping scheme. Reverse mortgage borrowers are further at risk of losing their home equity to fraud perpetrators who manipulate the loan application and closing process to inflate appraisals and siphon off the borrower’s funds.

6.8.1a Power of attorney and third-party imposters

Some scams involve taking out a HECM without the borrower’s knowledge.

Individuals could use power of attorney to close the HECM loan, or third parties may target senior homeowners and take out a HECM in their name. Some borrowers reported to CFPB that they never intended to take out a reverse mortgage themselves, or reported a “cash-out theft” by a family member or other person with power of attorney who took out the reverse mortgage in their names and then absconded with the proceeds.⁴⁴⁷ In a recent Brooklyn, New York case, the victim responded to a television advertisement for debt assistance.⁴⁴⁸ The defendant worked for the

marketing company and collected the victim’s information. The defendant had another individual pose as the borrower during closing and took out a HECM in the victim’s name. Age is a protected status in New York, and this case is being charged as a hate crime.

6.8.1b Property flipping

Another common type of reverse mortgage fraud targeting unsuspecting consumers involves straw buyers and property flipping.⁴⁴⁹ Fraud perpetrators convince a borrower to take out a reverse mortgage to buy a lower-cost, often uninhabitable home. After introduction of the HECM for Purchase program, schemes using fake down payments appeared. For example, a group of fraud perpetrators in Georgia gave a conspiring attorney down payments so that borrowers would qualify to buy a new home through HECM for Purchase.⁴⁵⁰ Seniors were often led to believe that they were getting the new properties for free through a government program. The borrowers were sold low-value properties at up to 16 times the true acquisition costs. The fake down payments were then returned to the fraud participants along with the reverse mortgage proceeds.

6.8.1c Inflated appraisals

Inflated appraisals allow fraud perpetrators to increase the amount of funds available to the deceived reverse mortgage borrower, ultimately allowing more money to be stolen. They also create a false appearance of high equity, allowing borrowers to obtain HECMs who otherwise would not qualify. An organized group in Florida falsified the

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amount of equity borrowers had in a property.⁴⁵¹ Two participants worked as loan officers in order to solicit borrowers, while another altered the appraisals to reflect inflated property values. This appearance of increased equity qualified the borrowers for HECMs. The group then submitted these HECMs to the unknowing lender and FHA, resulting in over $2.5 million in fraudulent reverse mortgage loans. The group took the money on the loans without paying off the borrowers’ first mortgages, and provided borrowers with false statements that those mortgages had been paid off.

6.8.1d Cash-out theft and investment scams

Fraud perpetrators may target borrowers who take all of their HECM proceeds out at closing. A borrower may give the proceeds check to a family member or loan officer, who co-endorses the payment and places it in a personal account.⁴⁵² The borrower then must rely on this individual in order to receive payments. After receiving several payments, the borrower may be told that all funds have been exhausted. The

perpetrator keeps the remaining HECM funds. In a Michigan case, a loan officer was accused of directing a closing agent to write one check for $42,667 to himself, and another for $61,325 to the borrower.⁴⁵³ The loan officer allegedly cashed the $42,667 check and kept the money, while the borrower was left with a loan balance of over

$131,000.⁴⁵⁴ Other perpetrators may convince borrowers to invest their HECM proceeds in scam investments. These schemes involve the borrower turning over the loan proceeds to fraudulent investment pools promising sweepstakes “winnings,”

partnership in property developments, and investments in gold and silver.⁴⁵⁵

6.8.2 POLICY RESPONSE

A number of enforcement initiatives and regulatory changes have improved reverse mortgage fraud prevention and prosecution. These changes include new state and federal laws that have broadened enforcement abilities, mortgage fraud task forces that include several federal agencies, and collaborations among federal and state

enforcement agencies.

6.8.2a Federal and state legislation

Fraud involving reverse mortgages may be prosecuted at the federal level under 18 USC § 2314, which prohibits the transfer of something worth $5,000 or more that is known to have been taken by fraud, or from fraudulently obtaining or attempting to obtain a value of $5,000 or more through fraud.⁴⁵⁶

Reverse mortgage cases may also qualify as federal bank fraud.⁴⁵⁷ On May 20, 2009, President Obama signed the Fraud Enforcement and Recovery Act of 2009 (FERA).

FERA changed the definition of “financial institution” to including “mortgage lending business.”⁴⁵⁸ This broader definition allows the Department of Justice (DOJ) to prosecute mortgage fraud cases as bank fraud, which allows severe penalties in

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addition to a longer statute of limitations.⁴⁵⁹ FERA also expands the definition of false statements in a mortgage application that can be prosecuted as fraud. Previously, false statements could only be prosecuted by DOJ if they were intended to influence federal agencies, banks, or credit associations. FERA applies to false statements that are intended to influence action by a mortgage lending business.

States have also enacted new fraud laws for mortgage lending activity. Georgia passed the Georgia Residential Mortgage Fraud Act in 2010, which prohibits individuals from making any “misstatement, misrepresentation, or omission during the mortgage lending process” with the intent to defraud the mortgage lender, borrower, or any other affiliated party.⁴⁶⁰ Michigan made mortgage fraud a crime in 2012, punishable with up to 20 years in prison and a $500,000 fine.⁴⁶¹ Other state initiatives include the establishment of a “mortgage lending fraud prosecution account” in Washington State.

This account is funded by a surcharge on deed-of-trust recordings.⁴⁶² 6.8.2b Initiatives

The federal government has several ongoing initiatives to centralize enforcement and monitoring of mortgage fraud. The Financial Crimes Enforcement Network

(FinCEN) is a bureau of the U.S. Department of Treasury that seeks to detect and deter financial crime.⁴⁶³ FinCEN collects information on suspicious mortgage activity by requiring lenders to submit Suspicious Activity Reports (SARs). Realizing the threat that reverse mortgage fraud poses to borrowers, FinCEN has reached out to lenders with guidance on identifying and reporting HECM fraud.⁴⁶⁴

Improved reporting may help enforcement agencies identify fraudulent activity before the perpetrator disappears with HECM proceeds and may help target repeat players.

FinCEN recently published a final rule that requires nonbank mortgage lenders and originators to create anti-money laundering programs and file SARs.⁴⁶⁵ Bank mortgage lenders are already required to file SARs with FinCEN under the Bank Secrecy Act.⁴⁶⁶ This expansion will help improve fraud reporting and will contribute to the centralized database of fraudulent activity. The effective date of the rule is April 16, 2012, and the nonbank lenders must comply by August 13, 2012.⁴⁶⁷

FinCEN issued proposed regulations in November 2011 that would also require Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to file SARs directly with FinCEN.⁴⁶⁸ These government-sponsored enterprises already file SARs with the Federal Housing Finance Agency, which passes the reports along to FinCEN. Direct reporting will allow FinCEN to access the data more quickly and allow it to

immediately track any fraudulent activity within the network.

Other initiatives include the FBI/ HUD-Office of Inspector General National Mortgage Fraud Team, the Financial Fraud Enforcement Task Force (FFETF), and a

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Mortgage Fraud Working Group within FFETF. Operation Stolen Dreams was a 2010 multi-agency effort to combat mortgage fraud that resulted in more than 500 arrests.⁴⁶⁹ 6.8.2c Enforcement actions

State and federal reverse mortgage fraud investigations may stem from victims and their relatives, prosecutors, self-reporting by lenders and originators, the Federal Housing Administration, HUD Office of the Inspector General audits and data mining, community liaison offices, and adult protective services.⁴⁷⁰ Although there is limited data on the national prevalence of HECM fraud, instances appear to be significant. In 2010, the FBI/ HUD Mortgage Fraud Team spent approximately 25 percent of their time on reverse mortgage fraud investigations.⁴⁷¹ The team has approximately 1,500 ongoing mortgage fraud investigations nationwide.⁴⁷² Between 2011 and March 2012, Region 2 of the HUD Office of Inspector General presented 45 cases involving reverse mortgage fraud in the New York and New Jersey area.⁴⁷³

6.8.3 EMERGING CONCERNS

The shift toward fixed-rate, lump-sum HECMs places more borrowers at risk of losing their loan proceeds shortly after closing. Borrowers holding a large amount of funds may attract fraudsters simply because they are more lucrative targets. In a Houston case, a caretaker was accused of having the borrower sign what appeared to be checks for bill payments.⁴⁷⁴ She allegedly made these checks out to herself in order take over

$18,000 in the borrower’s lump sum reverse mortgage proceeds.⁴⁷⁵ A caretaker in Miami was accused of making ATM withdrawals to take more than $35,000 from the victim, including $26,000 in reverse mortgage proceeds.⁴⁷⁶

Reverse mortgage counselors need to be aware that lump-sum payments increase the vulnerability of a borrower to fraud. They should consider asking who has access to the borrower’s financial accounts. Counselors may be able to identify vulnerabilities in the borrower’s financial security. They could refuse to issue a HECM counseling completion certificate when they have concerns that the borrower plans to provide funds to a fraud perpetrator.⁴⁷⁷

6.8.4 CONCLUSIONS

Vigorous enforcement is necessary to ensure that older homeowners are not defrauded of a lifetime of home equity. Federal and state working groups may consider focusing on state prosecutions in some HECM fraud cases. Given strict financial harm

requirements and limited resources at the federal level, state enforcement actions often may be more effective.⁴⁷⁸ The recent hate crime charge in New York demonstrates how state laws allow more flexibility in reverse mortgage fraud prosecutions. The shift to fixed-rate products and the heightened risks these products pose is an important

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consideration in the development of additional reverse mortgage consumer protections.