CMFC cheat sheet

Mortgage fraud is a material misstatement, omission, or scheme used to obtain a mortgage loan or related proceeds to which the borrower or participant is not entitled; it is distinct from predatory lending, which concerns abusive loan terms rather than misrepresentation.

Fraud for housing (fraud for property) is committed by a borrower who intends to occupy and repay; fraud for profit is committed primarily to extract equity or fees, typically involves insiders, and causes higher average losses.

Occupancy fraud, income fraud, asset fraud, credit/identity fraud, appraisal fraud, and insider or industry-participant fraud are the standard fraud typology categories used in mortgage fraud investigations.

The primary and secondary mortgage markets divide roles: originators (lenders, brokers, correspondents) produce loans; Fannie Mae, Freddie Mac, and Ginnie Mae securitize or guarantee; investors bear credit risk; insurers such as FHA, VA, and USDA share risk.

Key federal statutes and bodies: 18 U.S.C. § 1014 (false statements to federally insured institutions), 18 U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), § 1344 (bank fraud), and 18 U.S.C. § 1028 (identity fraud); the FBI, HUD OIG, and U.S. Attorneys pursue cases.

Reportable fraud data flows through Suspicious Activity Reports (SARs, FinCEN), the Fraud Risk Management/loan-level reporting required by Fannie Mae and Freddie Mac, and HUD OIG referrals for FHA loans.

Industry fraud-reporting channels include the Mortgage Bankers Association (MBA) Fraud Alert System, the Mortgage Asset Research Institute (MARI), and lender-to-lender reporting through the Fraud Prevention Network.

The loan origination chain: borrower intake, prequalification, application (URLA/1003), processing, underwriting, appraisal, closing, and post-closing sale; each handoff is a control point where misrepresentation can enter undetected.

The Uniform Residential Loan Application (URLA/Form 1003) is the central fraud document: income, employment, assets, liabilities, occupancy intent, and identity all appear here and are the most common points of misrepresentation.

Loan origination system (LOS) and automated underwriting (AUS) data are compared against third-party verifications: tax transcripts (IRS Form 4506-C), employment verification, bank statements, and credit reports.

Red flags at origination include: income inconsistent with occupation or age, employer that cannot be verified, recent large deposits without source documentation, address history mismatched with credit file, and simultaneous loan applications.

The 'straw buyer' pattern: a nominal borrower with good credit is used to obtain a loan for a property the true beneficiary controls; indicators include a buyer who cannot explain the purchase, mismatched down payment source, and power-of-attorney use.

Appraisal ordering controls: appraiser independence (AIR rules under Regulation Z § 1026.42), appraisal management company (AMC) rotation, and prohibitions on loan officer selection of appraisers reduce coercion risk.

Closing vulnerabilities: settlement agents, title companies, and notaries are the last control point; forged signatures, altered settlement statements (HUD-1/Closing Disclosure), and undisclosed seller concessions are common at this stage.

Post-closing review (quality control, early payment default review) often surfaces fraud that underwriting missed; first-payment default is a strong fraud indicator for investor repurchase risk.

Loan file red flags: documents with inconsistent fonts or margins, photocopied documents presented as originals, altered pay stubs, and verification letters with generic contact information or no verifiable phone number.

Occupancy fraud: borrower represents intent to occupy as primary residence but actually purchases as an investment or for a straw buyer; red flags include distant property relative to employment, inconsistent utility records, and multiple primary-residence claims.

Income fraud: overstated or fabricated wages, self-employment income, or rental income; verification methods include IRS tax transcripts, W-2 matching, written or verbal VOE, and CPA letters.

Asset fraud: fabricated or inflated bank statements, undisclosed borrowed funds, or 'gift' funds that are actually loans; source-of-funds documentation and large-deposit sourcing are the controls.

Credit/identity fraud: use of another person's identity or credit profile, synthetic identities (combinations of real and fictitious data), and undisclosed debts; credit report reconciliation and identity verification are the controls.

Employment fraud: fictitious employers, shell companies, or 'verification mills' that answer verification calls; indicators include a phone number that routes to a generic answering service and a recently formed business.

Synthetic identity indicators: credit file with thin or no history, SSN not matching name/age, address history that is unusually short, and rapid credit building followed by a large mortgage application.

Document fraud detection: examine metadata, fonts, and alignment; verify pay stubs against tax transcripts; check that bank statement balances reconcile and that statement dates are consistent with the closing timeline.

Borrower interview red flags: reluctance to discuss employment, inconsistent answers about the property, and a stated intent to occupy that conflicts with the property's distance from work or family.

Appraisal fraud includes inflated value, fraudulent comparables, and 'flipping' schemes where a property is purchased, cosmetically improved, and resold at an artificially inflated price to a straw buyer.

Common valuation fraud indicators: value significantly above neighborhood norms, comparables outside the subject's market area or of a different property type, and adjustments that do not reconcile to market data.

'Shotgunning' or appraiser coercion: loan officers pressure appraisers to hit a target value; AIR rules prohibit lender influence and require appraiser independence.

Property fraud: undisclosed liens, undisclosed second mortgages, and 'house stealing' where a fraudster transfers title without the owner's knowledge using forged deeds.

Appraisal review techniques: compare the appraisal's effective date and market conditions to the contract date, verify comparable sales against public records, and check that the appraiser's license is active.

Flip indicators: short holding period, large price increase with minimal documented improvements, and a buyer who is a straw purchaser or related party.

Property condition red flags: appraisal describes a property inconsistent with the loan purpose (e.g., investment property described as primary residence) or with the borrower's stated occupancy.

Valuation fraud detection tools: automated valuation models (AVMs), multiple listing service (MLS) history, and county recorder records for prior sales and liens.

Loan officer and broker schemes: falsifying borrower income or assets to qualify a loan, 'no-doc' or 'stated income' abuses, and steering borrowers to higher-cost products to increase compensation.

Builder schemes: inflating the sales price to cover concessions or upgrades, using affiliated lenders without disclosure, and 'phantom' upgrades that are not actually built.

Settlement agent and title company schemes: altering the Closing Disclosure, failing to pay off prior liens, and diverting escrow or payoff funds.

Appraiser and loan officer collusion: appraiser provides inflated value in exchange for continued referrals; AIR rules and AMC rotation are the controls.

Straw buyer and 'investor' schemes: an industry participant recruits a straw buyer, controls the property, and extracts equity through inflated appraisals or undisclosed second liens.

Insider fraud indicators: loan officer or processor with unusually high volume of loans that default early, repeated use of the same appraiser or title agent, and documents that consistently pass through one employee.

Builder and developer red flags: new construction with prices above comparable resales, undisclosed builder-paid closing costs, and a buyer who is an employee or relative of the builder.

Reporting obligations: lenders must file SARs for suspected fraud, and participants may be referred to state licensing boards (NMLS) and to HUD OIG for FHA loans.

Document red flags: altered or inconsistent fonts, mismatched dates, photocopies presented as originals, and verification letters with no verifiable contact information.

Behavioral red flags during interview: evasiveness, inconsistent answers, over-explaining, and reluctance to provide original documents.

Data-driven detection: compare loan application data to third-party data (credit, tax transcripts, property records), and use analytics to flag loans with high risk scores or unusual patterns.

The 'red flag' is not proof; it is an indicator requiring corroboration through independent verification.

Interview techniques: open-ended questions first, then specific; document the interview contemporaneously; avoid leading questions; and use the 'funnel' approach from general to specific.

Interview documentation: record date, time, participants, questions asked, and verbatim responses; have the interviewee sign or acknowledge the statement when appropriate.

Detection at the portfolio level: early payment default review, post-closing QC sampling, and trend analysis of originators, appraisers, and title agents.

Whistleblower and tip channels: internal ethics hotlines, HUD OIG hotline, and the FBI tip line are sources of fraud referrals.

Investigation phases: intake and triage, preliminary inquiry, full investigation, resolution (recovery, repurchase, or referral), and reporting.

Evidence handling: maintain chain of custody, document collection date and collector, preserve original documents, and store electronic evidence with hash values to prove integrity.

Evidence types: loan file documents, tax transcripts, bank statements, credit reports, appraisals, closing documents, email and phone records, and interview statements.

Reporting: SAR filing (FinCEN) is required for suspected fraud; internal fraud reports and investor notifications are separate obligations.

Referral thresholds: refer to law enforcement when there is evidence of a federal crime (false statements, wire fraud, identity theft); refer to HUD OIG for FHA loans.

Repurchase and indemnification: investors may require repurchase of fraudulent loans; the investigation file supports repurchase demands and recovery.

Documentation standards: every conclusion should be supported by a cited document or interview; avoid conclusory statements without evidentiary support.

Confidentiality: investigations are confidential; share information on a need-to-know basis and comply with privacy laws (GLBA, FCRA) when handling consumer data.

Federal criminal statutes: 18 U.S.C. § 1014 (false statements to a financial institution), § 1341 (mail fraud), § 1343 (wire fraud), § 1344 (bank fraud), and § 1028 (identity fraud).

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) allows civil penalties for violations of mail, wire, and bank fraud statutes affecting federally insured institutions.

SAR requirements: the Bank Secrecy Act (31 U.S.C. § 5318(g)) and FinCEN regulations require reporting of suspicious transactions; SAR confidentiality is protected.

Consumer protection: the Real Estate Settlement Procedures Act (RESPA) prohibits kickbacks and unearned fees; the Truth in Lending Act (TILA) and Regulation Z require disclosure of loan terms and prohibit appraisal coercion (§ 1026.42).

Fair lending: the Equal Credit Opportunity Act (ECOA) and Fair Housing Act prohibit discrimination in lending; fraud investigations must not target protected classes.

State licensing: loan originators and mortgage brokers are licensed through the Nationwide Multistate Licensing System (NMLS); state regulators can suspend or revoke licenses.

FHA and HUD requirements: lenders must comply with HUD handbooks, and HUD OIG investigates fraud in FHA-insured loans; lenders may be subject to indemnification or debarment.

Privacy: the Gramm-Leach-Bliley Act (GLBA) and the Fair Credit Reporting Act (FCRA) govern handling of consumer financial data during investigations.