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Superintendent of Banks, Richard H. Neiman, Testifies Before the New York State Senate on Residential Mortgage Fraud in the State of New York


On behalf of
Before the

October 28, 2009

Good morning. Chairman Foley, Chairman Schneiderman, Ranking Member Farley, Ranking Member Volker and distinguished members of the Committees: on behalf of the New York State Banking Department, I appreciate this opportunity to provide details on the Department’s initiatives in combating residential mortgage fraud.

The Banking Department is the nation’s oldest bank regulatory agency, responsible for the licensing, regulation and supervision of domestic state-chartered banks; foreign agencies, branches and representative offices; savings institutions, trust companies, credit unions and other financial institutions operating within New York, including mortgage bankers, brokers and loan originators, check cashers, money transmitters and licensed lenders.  Further, as of July 1, 2009, all mortgage loan servicers are required to register with the Department.  In total, the Department has nearly $2.4 trillion in depository assets under its supervision.

In addition to our regulatory authority, the Banking Department has broad authority to investigate criminal matters.  In 1992, the State legislature passed the Financial Frauds Prevention Act (the Act) which provided a statutory framework for the Department’s Criminal Investigations Bureau (CIB).  The Act mandates that CIB carry out numerous law enforcement functions, including the detection and deterrence of illegal activities involving New York’s financial institutions, as well as investigating criminal violations of the State’s Banking and Penal Laws, and any related violations of law. And, as I will describe later in my testimony, it is because of this unique combination of law enforcement and regulatory authority, that the Department has become a resource for expertise that is widely recognized at both the state and federal level.  I am proud of CIB’s work, and believe it is making a difference in the lives of New Yorkers.

The Department has made the prevention and investigation of mortgage fraud a top priority.  I was faced with the subprime crisis from early on in my tenure as Superintendent, and the contribution of mortgage fraud to the housing meltdown was readily apparent. Therefore, one of my first actions in April 2007 was to create the Mortgage Fraud Unit (the Unit) within CIB. The Unit is at the center of the Department’s effort to combat mortgage fraud.

The Unit has a threefold mission:

  1. To investigate mortgage fraud cases throughout the state;
  2. To assist local, state, and federal regulatory and law enforcement agencies in the investigation and prosecution of these cases; and,
  3. To educate law enforcement in identifying, investigating, and prosecuting mortgage fraud.

The need for the Unit and for an aggressive response to mortgage fraud is compelling. Mortgage fraud is a state-wide epidemic. According to the FBI, New York ranks among the top ten states in the nation for mortgage fraud. All New Yorkers are affected- this is not just a downstate problem, as the statistics attached to this testimony indicate.

Before I get into some of the many accomplishments and initiatives my Department has been involved in, I would like to first discuss the scope of the mortgage fraud problem, including identifying and explaining the numerous schemes being perpetrated.  I will then explain what the Department is doing in response, from both a law enforcement and regulatory perspective, and share our recommendations, some of which are legislative in nature.  I believe that these changes would assist the current efforts in combating mortgage fraud and would aid in the detection and prevention of this problem going forward.

Part I: The Scope and Inventiveness of Mortgage Fraud

We often speak of mortgage fraud as if it was one activity. In fact, there are multiple forms of mortgage fraud, which often overlap.

The two main categories of mortgage fraud are fraud for housing and fraud for profit.

The inventiveness of mortgage fraud for profit schemes is staggering. I will now provide descriptions of some of the frauds that we are regularly seeing.

  1. Loan documentation fraud. This has many forms and may include the broker or loan officer altering loan application documents such as income statements without the borrower’s knowledge.
  2. Appraisal fraud. This is actually one form of documentation fraud, but due to its prevalence and importance in facilitating the entire scheme, it merits a separate category.  Appraisal fraud involves the falsely inflating of a property’s value in order to obtain a high mortgage on the property.  The artificial equity that is created by an inflated appraisal is a necessary part of many fraud schemes.
  3. Property flipping. While not always fraudulent, this behavior of serial refinancing may occur simultaneously with inflated appraisals and loan documentation fraud to create a cycle for repeated equity stripping.
  4. Strawbuyer.  A borrower with good credit qualifications, who has no intention to occupy the property or pay the loan, may be recruited to defraud the lenders, with the loan proceeds being shared among the co-conspirators.
  5. Deed theft. This may involve a forged deed, with the fraudulently transferred property being sold or refinanced to the benefit of the scam artists. Another example is one in which the borrower is induced to sign documents that are purportedly loan documents or a contract for debt counseling services but, in fact, are deeds conveying the property to the scam artists.
  6. Foreclosure rescue scams. Criminals look to take advantage of the increased vulnerability of homeowners at risk of foreclosure. This type of fraud covers a range of activities, from charging upfront fees for services, such as loan modification assistance, that are not performed, to forms of deed theft. While this type of scam is not new, because of the dramatic increase in foreclosures, this type of fraud has become more prevalent and New Yorkers are in even greater risk of being defrauded.

In practice, a typical fraud fact pattern will involve several of these schemes simultaneously. The following hypothetical case history demonstrates how these schemes interrelate:

Lisa Smith, an 83 year old widow with extensive medical bills from her husband’s recent illness, is now facing foreclosure because she cannot repay her $200,000 mortgage.  Ms. Smith receives a call from a company that promises to help her keep her home.  Company X tells Ms. Smith that they are “foreclosure specialists” and have various ways to re-finance her home so that her payments will be reduced. 

Ms. Smith is asked to sign papers “as a formality” so that they can start the re-finance process.  In actuality, Company X has tricked Ms. Smith into signing the deed to her house over to another individual, a strawbuyer.  Company X, in assisting the strawbuyer in obtaining a mortgage, acquires an inflated appraisal and falsifies the strawbuyer’s mortgage application in order to obtain a $400,000 mortgage.  Ms. Smith does not get any of the proceeds and the strawbuyer is paid a nominal sum for the use of his name and credit rating.  The strawbuyer does not make any payments.  Ms. Smith has now learned that she no longer owns her home, the property is in foreclosure, she is facing eviction and the mortgage on the property has doubled.

Tragically, cases like the example set forth above are becoming increasingly common. Many factors have contributed to the increase in mortgage fraud, including the change in origination patterns away from community banking, demand from the secondary market, lax underwriting, the failure of the gatekeepers – including mortgage brokers and attorneys who abused their positions to steal from the very system they were supposed to protect, and sheer greed - there is plenty of blame to go around. What is clear is that mortgage fraud cases are on the rise.

Statistics bear this out. The primary data for tracking mortgage fraud is Suspicious Activity Reports or SARs, which are filed by depository institutions with the Financial Crimes Enforcement Network known as FinCEN.  The data relates to addresses in New York, but the depository institution making the filing may be located outside the state. We appreciate the assistance and resources of the Financial Crimes Enforcement Network in providing this data. This federal agency helps us leverage our state and local information to compare and share with other investigators on a nationwide scale.

Mortgage fraud-related filings have increased steadily over the past few years, with a large spike occurring in 2006 at the height of the housing boom, which was also a period with particularly weak underwriting standards. From 2006 to 2007, the number of mortgage-fraud related SARs subjects with New York addresses increased a staggering 84%.

Mortgage Fraud SARs: Number of Subjects with New York Addresses


% Change from 2004 to 2005


% Change from 2005 to 2006


% Change from 2006 to 2007


% Change from 2007 to 2008























Twenty counties account for 96% of the SARs filings for subject addresses from 2004 through 2008.

Mortgage Fraud SARs: Number of Subjects with County Addresses



Total for 2004-2008














New York
















































Top 20 Counties



Other 42 Counties



Grand Total



Part II: The Department’s Actions to Combat Mortgage Fraud

In light of our broad range of authority, which includes both law enforcement and regulatory action, the Department has taken a proactive and aggressive response on multiple fronts - through legislation, increased law enforcement efforts, training and outreach, and regulatory actions.

A. Legislation

First, I would like to begin by discussing the Department’s role in the new mortgage fraud legislation passed last year. CIB, with the assistance of the Department, initiated the drafting of Penal Law Section 187, which was part of the Governor’s mortgage reform legislation.  This was the most comprehensive mortgage reform package in the country. It is also a key tool in our law enforcement arsenal and I want to acknowledge the legislature’s leadership and vision in passing this law.

Penal Law Section 187 provided critical improvements to the State’s criminal laws.  First, it created the specific crime of Residential Mortgage Fraud.  Prior to the creation of this law, district attorneys were forced to bring these types of cases under a disparate array of penal laws.  Creating a specific crime solely to address residential mortgage fraud brings clarity to this fraud, and it is expected that it will enhance a prosecutors’ ability to effectively prosecute these cases.  Second, Penal Law Section 187 created tiered penalty provisions, including the possibility of mandatory jail time for the highest level offense.  Lastly, it allows prosecutors to aggregate multiple thefts of proceeds. 

Since the law has been in effect for just under a year and is not retroactive, it is too early to have statistics to quantify the positive effect it has had on criminal prosecutions.  We are aware, however, of at least one county that has charged defendants under this law.  In December 2008, the Suffolk County District Attorney’s Office charged defendants involved in a mortgage fraud ring that defrauded lenders out of approximately $2.5 million dollars, with multiple counts of Residential Mortgage Fraud.

B. CIB’s Law Enforcement Successes

I would like to provide recent examples of our law enforcement successes.  In each investigation, the Unit played a key role in partnering with federal, state, and local law enforcement.  Set forth below, are just a few examples of the types of cases presently under investigation by CIB and its law enforcement partners.  Mortgage fraud comprises over 50% of the cases under review by CIB. We are using these examples because they have recently been made public.

I am proud that the Department contributed in bringing these crimes to light, but these recent investigations merely scratch the surface - over the past decade, CIB has been involved in numerous similar investigations. In the area of residential mortgage fraud, since its founding in 2007, the Unit alone has investigated potential losses exceeding $350 million dollars.   Each time one of these cases is made public, the message is clear -- that criminals that engage in this type of fraud will be caught and brought to justice.  The greatest value lies in the priceless deterrent effect of these criminal prosecutions.

C. Training and Coordination

Another way in which we extend our reach is through training and coordination with other law enforcement bodies. The Unit is an acknowledged leader in educating local, state, and federal law enforcement agencies in identifying, investigating, and prosecuting mortgage fraud.

D. Regulatory and Other Actions

The Department tackles the problem of mortgage fraud both through law enforcement efforts set forth above, as well as through our regulatory actions. While I am primarily focusing on the law enforcement aspect in this testimony today, I would like to briefly highlight some on the important initiatives on the regulatory side which complements our criminal investigations work.

  1. HALT Task Force. In addition to the partnerships with other law enforcement agencies, I serve as the Chair of the Governor’s HALT Task Force.  HALT stands for “Halt Abusive Lending Transactions.” The HALT Task Force includes the heads of all state agencies that relate to the mortgage market, and enables us to coordinate our regulatory and consumer outreach activities.  We have held borrower outreach events across the state, and administered state grants to housing counselors in excess of $25 million. A copy of the most recent HALT report with more details on these and other initiatives is available on the Banking Department’s website.
  2. One-Stop Shops. The Banking Department’s Mortgage Banking Division is also partnering with the New York State Department of State to review the operations of “one-stop-shop” real estate firms, that provide bundled real estate and mortgage-related services. The joint initiative was designed to identify whether consumers were being steered into particular mortgage brokers and/or attorneys by these real estate firms.  The initial phase of the project disclosed failures of these one-stop-shops to clearly inform consumers of their role as a dual agent or to properly disclose broker compensation. To date, these reviews have led to the recoupment of over $250,000 in consumer restitution for victims.
  3. Licensing of Mortgage Loan Originators. A major component of the anti-fraud campaign includes New York’s role in enacting a law in 2006 that mandated that mortgage loan originators be registered with the Department.  This law, which became effective in January 2008, made New York ahead of the national government in mandating such requirements.  We now also participate in the National Mortgage Licensing System (NMLS), which is a nationwide project to register individual loan originators. This system includes extensive security measures and educational requirements.  The system will also curb fraud by making it more difficult for scam artists to evade enforcement simply by migrating across state lines and reincarnating themselves.  New York was one of the first states to launch the new system, and is committed to maintaining its proactive approach in heightening standards for the mortgage banking industry. 

Part III: Recommendations

The Department is looking to expand mortgage fraud prevention initiatives, although funding and staffing remain a practical constraint.  I would like to recommend five specific tools that would extend the impact of our existing resources, and would aid in generating leads and conducting investigations.

  1. Mandate the Filing of Deeds and Mortgages in a Timely Manner. The filing of deeds and mortgages is not currently required, and this potentially creates breaks in the chain of title and other defects in land records.  Mandating the filing of land records would not place an undue burden on consumers, the state, or the real estate industry.
  2. Require Notifications of Deed and Mortgage Filings to be Sent to the Prior Owner of Record. Victims of deed theft may be unaware that their property has been sold or mortgaged, and the sooner this crime is uncovered the more likely it is that the perpetrators will be apprehended and the homeowners made whole. Any costs associated with such notifications would be minimal and recouped by additional filing fees.
  3. Create a State-Wide Database for Land Records. Data on property records is currently fractured among the 62 counties, and in some cases is only available in hard copy.  The current foreclosure and fraud crisis has created a new imperative for the State to create a central data repository and/or interoperability with remote access between existing county data systems. New York City has such an electronic system, the Automated City Register Information System, known as ACRIS and available on the New York City Department of Finance’s website.  The lack of a similar system state-wide, therefore, is disproportionately hampering law enforcement efforts upstate. 
  4. The Regulation of Title Abstract Companies. Title abstract companies have been either complicit or intricately involved in the illegal activity, but they are presently unregulated in New York.   These companies should be regulated by the Insurance Department. The Insurance Department has proposed legislation to that effect which is currently under review by my Department.
  5. Industry-Related Database/Bulletin Board Regarding Land Records. Lenders are being defrauded by individuals that obtain multiple mortgages on the same property with multiple lenders over a relatively short period of time.  We understand that some efforts by industry are underway to establish a database/bulletin board that could immediately notify fellow lenders when a commitment to fund a loan has been made on a particular property, identified by its tax lot. We applaud these efforts and encourage the industry to move forward with this project.


The Banking Department’s experiences combating mortgage fraud over the last decade has shown us that mortgage fraud schemes are continuously evolving and the need to stay ahead of these criminals is of the utmost importance.  I believe that the Banking Department’s recent proactive and aggressive measures, both on a law enforcement and regulatory side have made serious strides in combating this problem.  I further believe that our recommendations set forth herein will greatly enhance these efforts and help prevent future problems before they rise to the magnitudes that we are facing today. 

I look forward to continuing this dialogue with the Committees, to keep you apprised of the Department’s work and to explore new solutions to safeguard all New Yorkers.




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