Shady practices plague commercial lending as well as residential lending, and require constant vigilance on behalf of brokers and lenders
Fraud is becoming more prevalent and more sophisticated in the lending. There are plenty of scams that plague both the residential and commercial sides of the mortgage industry.
Wire fraud is extremely prevalent, says Jeffrey Tesch, CEO of RCN Capital. It’s not new by any means, but the perpetrators are getting smarter when it comes to circumventing the wire transfer. Sometimes they will spoof or copy an email address in order to send their own account information in wire transfer instructions, so that the money lands directly in their account.
It’s not just consumers who are being hit, either.
Borrowers can lose their money if they’re wiring money to the title company, but the lender can also wire the entire loan amount to the fraudster’s account, and once it’s gone, it’s gone. It’s best practice to always confirm wire instructions by phone using the original name and number given at the beginning of the relationship.
This is one of the tips that came up at the American Association of Private Lenders (AAPL)’s recent conference, where Tesch sat on a panel on scams and fraud in the private lending space. Tesch said it was one of the best panels the organization has had, due to the energy from both the panelists and the audience, who provided a “tremendous” amount of questions and feedback.
From an asset-based lending perspective specifcally, there’s any number of ways that people like to commit fraud, and one tactic that has started to rear its ugly head again is a forged Power of Attorney, where an investor will say that they won’t be able to make it to closing but has an authorized representative who will sign on their behalf. RCN banned the practice years ago, and Tesch said it’s one of the easiest scams that lenders can avoid.
“Power of Attorney fraud is out there, it’s prevalent, and it’s not something that a lender should ever really get themselves involved with because they just tell the borrower no. It’s an easy no,” Tesch said.
Brokers see more fraud on the due diligence side, and lenders are constantly educating brokers on the things to look out for. The big one, Tesch said, is misrepresented ownership status. If an independent appraiser’s notes and photographs show the facts of the property and the property comes back occupied, they’ve been had. Brokers should take extra caution when looking for signs that an investor is purchasing an investment property that is currently occupied.
Brokers can also get caught up in fraud concerning everything from straw buyers and shell companies. Brokers are often passing documents from one place to the next and don’t dig as deep as they should.
“What we try to do with our brokers is say: we don’t want to waste your time, we don’t want to waste our time. We want to be doing deals that are good,” Tesch said. “So if the broker does just a little bit of due diligence . . . it can go a long, long way to figuring out some sort of fraudulent situation.”
Appraisal fraud is another type of activity that is as old as the hills and can be easily avoided by using an appraisal management company, but some lenders still choose to go with appraises that brokers have suggested.
“At the end of the day, all we have is the asset. Even if the borrower pulls a fast one over us on everything else, we’re still an asset-based lender, so if you don’t get that valuation of the asset right, you could be a world of hurt,” Tesch said.
Fraud is a moral crime, and as a member of the American Association of Private Lenders ethics committee, Tesch is working to on ways to help keep fraud out of the industry, as well as holding other private lenders to a high ethical standard.
“Things that you wouldn’t do in your private life, you can’t do in your business life just because it’s a business,” Tesch said. “I know it seems simple, but the Golden Rule goes a long way when it comes to your business life, whether you’re a lender or, for that matter, whatever business you’re in. Treat customers the way you want to be treated.”
By educating their members on best practices, and by sharing those best practices, everybody should be able to implement them in their own business.
