The Straw Buyer and the Real Estate Agent
You are a mortgage loan originator (MLO) at a retail lender. A real estate agent, Bob, refers a borrower, Lisa, to you for a pre-approval. Lisa is a first-time homebuyer with a modest income. She wants to buy a $300,000 house. Her income and credit qualify her for a $200,000 loan. Bob tells you that Lisa's boyfriend, who has a high income, will be 'helping out' by providing the down payment and will be on the title, but not on the loan. Bob suggests that Lisa apply for the loan as a single borrower and that the boyfriend's funds be treated as a gift. He provides a gift letter signed by the boyfriend. You notice that the gift letter is dated the same day as the application and the funds are already in Lisa's account. Bob is eager to close quickly. You also see that the purchase contract lists both Lisa and the boyfriend as buyers. What are the red flags, and what should you do?
1. Identify the potential fraud indicators in this scenario.
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Red flags indicating potential mortgage fraud:
- Straw buyer scheme: Lisa may be a straw buyer if she is purchasing a home she cannot afford, with the boyfriend providing funds and being on title but not on the loan. This is a classic straw buyer arrangement where the true buyer (boyfriend) uses another person's credit to obtain financing.
- Gift letter inconsistencies: The gift letter is dated the same day as the application, and the funds are already in Lisa's account. Legitimate gifts often have documentation showing transfer from the donor's account. Same-day gift letters can be a red flag for fabricated gifts.
- Undisclosed interested party: The boyfriend is on the purchase contract but not on the loan. This means he has an ownership interest but no loan obligation. Lenders require all borrowers on title to be on the loan, or the loan must be structured with proper disclosures.
- Real estate agent involvement: Bob is pushing the arrangement and may be coordinating the fraud. He has a financial interest in closing the sale.
- Occupancy fraud: If Lisa claims she will occupy the home but the boyfriend also lives there, it may be okay, but if the boyfriend is the true occupant and Lisa is not, it could be occupancy fraud.
- Income mismatch: Lisa's income only qualifies for $200,000, but she is buying a $300,000 home. The gift covers the down payment, but she still needs to qualify for the larger loan? Actually, she is applying for a $200,000 loan? Wait, the scenario says she qualifies for a $200,000 loan, but the house is $300,000. So she needs a $100,000 down payment. The boyfriend is providing that. But if she qualifies for $200,000, the loan amount would be $200,000, and the down payment is $100,000. That could be legitimate if the gift is verified. However, the boyfriend being on title but not on loan is problematic because he has an interest but no obligation. Lenders typically require all individuals on title to be borrowers, or the non-borrower must sign a disclaimer. But if the boyfriend is on title, he is an owner, and the lender may require him to be on the loan or to be a non-occupant co-borrower. This could be a way to circumvent income requirements.
Overall, the scenario suggests a straw buyer arrangement to help the boyfriend purchase the home using Lisa's credit.
2. What actions should you take to comply with fraud prevention and consumer protection laws?
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Actions:
- Do not proceed with the loan as presented. The red flags must be resolved before continuing.
- Verify the gift: Require a copy of the donor's bank statement showing the funds leaving the account, and verify the relationship between Lisa and the boyfriend. If the gift is not from a relative, it may not be acceptable. Also, check if the gift letter is legitimate.
- Address the boyfriend's interest: Since the boyfriend is on the purchase contract, he must be either a co-borrower or provide a written statement that he will not be on title? Actually, if he is on the contract, he is a buyer. The lender must include him as a borrower if he is on title. Alternatively, the purchase contract could be amended to remove him, but that may be problematic. The loan officer should require that all individuals on title be borrowers, or the loan must be structured as a joint loan with both incomes considered. If Lisa cannot qualify on her own, the loan should not be approved.
- Report suspicious activity: As an MLO, you are required to report suspected fraud to your company's compliance department and possibly to the authorities. Under the Bank Secrecy Act, you may need to file a Suspicious Activity Report (SAR) if the lender is a financial institution.
- Document everything: Keep records of the red flags, your inquiries, and the resolution. If the parties refuse to provide documentation, decline the loan.
- Educate the borrower: Explain that misrepresenting the transaction could constitute fraud and have legal consequences.
- Consider the real estate agent's role: If Bob is involved in fraud, report him to his broker and possibly to the state real estate commission.
Proceed only if the transaction is legitimate and all parties are properly disclosed. Otherwise, decline the loan and report the suspicious activity.