Mortgage loan originators are often the first people to see a fraudulent application. The Financial Crimes Enforcement Network (FinCEN) has published mortgage fraud advisories describing the most common schemes and their warning signs, and non-bank lenders and originators have their own anti-money laundering duties. Both topics connect to the ethics content on the SAFE MLO Test.
The common schemes
FinCEN's 2012 advisory on mortgage fraud describes these schemes, among others:
- Occupancy fraud: claiming a property will be a primary residence to get better terms, when it's really a vacation home or investment property, or will be occupied by someone else.
- Income fraud: overstating income to qualify, or understating it to qualify for hardship relief such as a modification.
- Employment fraud: misrepresenting employment status, length or type.
- Liability fraud: failing to disclose debts, such as other mortgages.
- Appraisal fraud: misrepresenting a property's value.
- Identity theft: using another person's identity or Social Security number.
- Foreclosure rescue scams and debt elimination schemes that target distressed homeowners.
- Reverse mortgage (HECM) fraud, often targeting seniors.
Related: What to Expect on the NMLS SAFE MLO Exam
Red flags to watch for
- a rejected application resubmitted with key details changed, such as the borrower changed from an individual to a company
- signs of a straw buyer: someone who appears to be lending their name and credit to the real buyer
- occupancy claims that don't match the rest of the file, such as a primary residence far from the borrower's job
- appraisal values that don't fit recent sales, or rapid resales at sharply higher prices (property flipping)
- involvement of unlicensed individuals
- third parties asking distressed homeowners to pay fees in advance
FinCEN cautions that no single red flag proves fraud. Each one should be weighed alongside the rest of the facts.
Anti-money laundering programs
FinCEN's rules treat non-bank residential mortgage lenders and originators as "loan or finance companies." Each must have a written anti-money laundering program, approved by senior management, that is based on the company's own risk assessment.
Suspicious activity reports (SARs)
- A SAR is required for a suspicious transaction involving at least $5,000 that the company knows, suspects or has reason to suspect involves illegal funds, is designed to evade reporting rules, has no apparent lawful purpose, or uses the company to facilitate crime.
- It must be filed within 30 calendar days of first detecting the facts. If no suspect has been identified, filing can be delayed another 30 days, but never more than 60 days from detection.
- SARs are confidential: no one at the company may disclose a SAR or anything that would reveal one exists, including to the customer.
- A copy of each SAR and its supporting documentation must be kept for five years from filing.
The MLO's role
Never help a borrower misstate anything on an application, even to "make the numbers work." Take red flags to your compliance officer, and never tip off a customer that a report may be filed.