Industry Letters

Mortgage Fraud

May 28, 1996


RE: Mortgage Fraud

The purpose of this bulletin is to alert the mortgage lending industry to the Banking Department's concern over incidents of residential mortgage lending fraud. The Mortgage Banking Division and Criminal Investigation Bureau have been notified by industry participants, other law enforcement agents, and through the investigation of consumer complaints, of varied and increasingly sophisticated scams which defraud both customers and lenders.

The following are some of the identified fraudulent practices currently in use: (1) Fraudulent documents - Technology has permitted the production and submission of high quality authentic looking but fraudulent documents such as W-2s, tax returns, financial statements, verification of deposits and employment forms, attorney's letters and credit reports. (2) Targeting of Applicants - The identification and recruitment of difficult to qualify applicants, who feel desperate enough to go along with the fraud. (3) Use of Insiders - Employees are pressured to participate in the fraud by threat of job loss or the withholding of compensation. (4) Straw Buyers - The production of fraudulent paper to obtain loans in excess of what is supportable by the underlying property and the use of "straw buyers".

The industry can help protect itself and the broader public by creating a climate and culture that places a premium on quality control. Mortgage companies with effective quality control environments start with the full support and commitment of senior management. The desire to control quality should be reflected in your company's policies and procedures, compensation schemes and marketing efforts. Originators that neglect or downplay quality control do so at their own peril.

The consequences of the discovery of mortgage fraud in a portfolio can have a devastating affect on a licensee, registrant, and exempt organization, even if the company is a victim of fraud. Some of the common consequences are: sudden withdrawal of investor support; loss of servicing portfolios following unfavorable audit findings by HUD/Fannie/Freddie; unanticipated demands of investors to repurchase mortgages; direct write offs; sudden loss of top personnel; and ultimately suspension or loss of licenses.

Deliberate participation by a licensee/registrant/exempt organization in any fraudulent scheme or gross negligence which facilitates such schemes, will not be tolerated. In such instances, the Department will not hesitate to use the full force of its authority, including criminal prosecution.

The Department fully recognizes that the great majority of registrants/licensees/exempt organizations are committed to the honest and fair operation of the residential real estate market. With this view, I ask that you contact me at (212) 618-6677, Supervising Examiner John Nodalny at (212) 618-6681 or Principal Examiner II, Mildred Freel-Mackin at (212) 618-6688, if you become aware of instances of suspected fraud.

This letter is an official communication of the State of New York Banking Department. It is to be kept in a separate file available for our review at all times.

Peter L. Zanko
Deputy Superintendent of Banks
Mortgage Banking Division