theinnerauditor

The recent troubles at Deutsche Bank and Wells Fargo and the many
come-ons on television targeting senior citizens attest to the fact that the traditional scams and schemes among conventional and shadow lenders are as alive and well as ever.   If you thought sub-prime loans and equity stripping were financial ghosts of the past, think again.

It generally takes years for any borrower to build equity in a home. Fraud examiners should help consumers be aware that fraudsters employ several common ways to take that equity away. The most common technique used by fraudsters to steal consumers’ equity is known as equity stripping.  In equity stripping schemes, lenders promote ways consumers, especially the elderly and recent immigrants, can obtain cash by borrowing against the equity established in their home. The fraudulent lender is not concerned about whether the payments can be made once the loan is granted, and may even encourage consumers to fudge on their loan application to obtain the loan. If monthly payments cannot be met on the loan, consumers are subject to foreclosure on, and the subsequent loss of, their home, including all their equity.

Subprime loans have recently become a significant and growing part of the auto financing market and have never completely dried up in the home equity market. Subprime lending refers to the extension of credit to higher risk borrowers or to those with non-existent credit histories at interest rates and fees higher than conventional loans. Some companies make auto and home equity loans to minorities, the elderly, and low-income borrowers at interest rates as high as 20 to 24 percent in states without usury statutes.  As the ACFE tells us, as a rule, loans made to individuals who do not have the income to repay them are intentionally designed to fail; they typically result in the lender acquiring the borrower’s financed property. In the case of a home, the borrower is likely to default on the loan and ultimately lose his home through foreclosure or by the signing over of the house deed to the lender in lieu of such foreclosure.

Another frequent lender scam to separate home owners from their equity is credit churning. Churning, or loan flipping, is directed toward consumers who own a home and have been making mortgage payments for years. A lender calls to talk about refinancing a loan, and using the availability of extra cash as bait, claims it’s time the equity in the consumer’s home started working for him or her. When the consumer agrees to refinance his loan, the borrower’s troubles begin.  After the consumer has made a few payments on the loan, the lender calls to offer a bigger loan for, say, a family vacation to Disney World. If the consumer accepts the offer, the lender refinances the original loan and then lends the consumer additional money. In this practice, often called flipping, the lender charges the homeowner high points and fees each time s/he refinances, and may increase the interest rate as well. If the loan has a prepayment penalty, which is often the case, the consumer must pay that penalty as well each time a new loan is taken out.  The bottom line is that now the consumer has some extra money and a lot more debt, stretched out over a longer payment period. With each refinancing, the consumer has increased her debt and should she get in over her head and not be able to make the mortgage payments, she risks losing her home and all the equity in it.

Who hasn’t seen the kindly-looking, aging celebrity shilling on TV for his employer- lender’s reverse mortgage product?  Reverse mortgages are aggressively pitched to older individuals who are seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for health care expenses. A typical reverse mortgage allows older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. In a regular mortgage, the homeowner makes payments to the lender. But in a reverse mortgage, the homeowner receives money from the lender and generally does not have to pay it back for as long as he lives in his home. Instead, the loan must be repaid when the homeowner dies, sells the home, or no longer lives there as his principal residence.

The amount of such a loan depends upon the consumer’s age (s/he must be at least 62), the equity in the home, and the interest rate the lender is charging. Among the facts for your clients to consider before applying for a reverse mortgage are:

• Reverse mortgages are rising-debt loans. This means that interest is added to the loan’s principal balance each month because interest is not paid on a current basis. Therefore, as the interest compounds over time, the amount owed increases.
• Reverse mortgages and their associated expenses use up some or all the equity in the home, leaving fewer assets for the homeowner and his heirs.
• Lenders are providing the loan as an investment, which they aim to collect on at a profit, not out of goodwill or charity.

Another lender initiated scam against borrowers is credit insurance packing which occurs during the process of obtaining a mortgage or other loan, whereby the lender includes charges for credit insurance or other “benefits” that the borrower did not request or does not desire, and requests that the borrower sign the documents to close the deal. The fraudulent lender hopes that the borrower will not notice the additional charges that are listed or that s/he will believe that they are part of the loan terms that were originally agreed upon. Thus, the lender can imply that this “benefit” is provided at no extra charge. The lender does not explain in detail the additional cost or obligations. If the borrower agrees to the charge, s/he will be paying for additional fees that may not be required or desired. If the borrower questions the charge and does not want the credit insurance, the lender may attempt to intimidate the borrower; the lender may indicate that to obtain the loan, the loan documents must be rewritten, which may take several days, and that the possibility even exists that the loan may not be approved without the insurance.

Consumers who have financial difficulties and are unable to maintain their monthly mortgage or other loan payments may be faced with lenders who begin threatening foreclosure or repossession. Fraudulent lenders may then approach the consumer with offers to assist in refinancing. The new financing, however, never comes to fruition. To “help,” the fraudulent lender may offer the consumer a temporary solution to prevent foreclosure. In an act of desperation, consumers are lured into deeding their property over to the fraudulent lender with claims that it is only temporary. However, the consumer should be aware that, in the case of a mortgage or automobile, once the lender has the deed or title, the lender owns the property, may borrow against it, and may even sell it. The consumer’s monthly payments become rent payments that come with the possibility of eviction by the lender, as the consumer becomes the fraudulent lender’s tenant.

Finally, a word about balloon payments and title loans.  Lenders offer consumers balloon payment loans, which require low, interest-only payments during the life of the loan, and payment of the entire principal in one lump sum at the end of the loan term.  Consumers are enticed by fraudulent lenders to refinance their loans with a balloon payment loan so that their monthly payments will be low, allowing extra funds for other debts. A fraudulent lender may not explain the loan in its entirety or the hidden terms in the agreement. Without a thorough understanding of this type of agreement, consumers face the possibility of foreclosure at the end of the loan term if the lump-sum repayment of the principle proves to be more than they can afford.

A title loan enables a consumer to borrow against the equity in her motor vehicle. A lender determines the amount eligible to be borrowed based on the market value of the motor vehicle. The lender retains tide to the motor vehicle, as well as a set of keys. If monthly loan payments are not made, the motor vehicle can be repossessed. Consumers must understand the contract terms of the loan to avoid any misunderstanding regarding delinquency and repossession.

As practicing CFE’s we have a responsibility to educate our clients and the general public about fraud schemes in general and about emerging threats in particular.  As the ACFE tells us, an educated public is the best defense we have against all lender frauds both old and new.