Lenders Required to File Suspicious Activity Reports

A government publication provides some guidance about when to file a Suspicious Activity Report. In the fiscal-year ended Sept. 30, 2011, U.S. financial institutions filed 93,508 SARs related to residential loan fraud, according to data from the Federal Bureau of Investigation. Filings jumped from 70,533 in fiscal-year 2010. SARs filed by federally insured financial institutions that suspect mortgage fraud involve lenders that are deceived into approving a loan, foreclosure rescue schemes and loan modification schemes — among other crimes. An advisory was issued Thursday by the Financial Crimes Enforcement Network to help financial institutions better assist law enforcement when filing SARs.

The advisory discussed several types of fraud involving lender deceit including occupancy fraud, income fraud, appraisal fraud and employment fraud. Identity theft, debt-elimination schemes and fraud involving reverse mortgages were also listed. SARs filings should include in the narrative section the Conference of State Bank Supervisors’ National Mortgage Licensing System and Registry unique identifier as required by Section 1503 of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. Branch, company and control person identifiers should also be included. FinCEN outlined a number of red flags that could indicate the need to for further due diligence and a decision whether to file a SAR–

  • Mortgage lenders should be concerned when a younger borrower is purchasing a primary residence in a senior citizen residential development.
  • Short-sale documents with language that says the property could be promptly resold could indicate an illegal flip. Lenders should also be wary of non-arms length relationships between short-sale buyers and sellers or previous fraudulent sale attempts in short-sale transactions. Low appraisal values in these situations should also be suspect.
  • Unlicensed real estate agents used in sales transactions are a red flag.
  • If a borrower or buyer has previously made misrepresentations to secure a loan or short sale, then the lender should be suspicious. In addition, if a previously rejected borrower resubmits an application with key details changed or modified from an individual to a company, fraud could be involved.
  • “This activity may identify the same person attempting to secure a loan fraudulently through a straw-borrower or non-existent person,” the guidance said.
  • Lenders should be concerned when borrowers or buyers provide incomplete file information and are reluctant or fail to provide more information.
  • Borrowers who claim to live in a property even though someone else resides there is a red flag.
  • Falsified certified checks, cashier’s check or non-cash check items that are drawn against a borrower’s account instead of from the account of a financial institution are a reason for concern.
  • One red flag is when a borrower submits invalid documents in order to cancel a mortgage obligation or pay off the balance. Lenders should also be wary when a single notary public or authorized representative prepares, signs and sends packages of nearly identical debt-elimination documents for multiple borrowers who have outstanding loan balances. In addition, suspicion should be aroused when the same notary public or authorized representative is either working with or receiving payments from an unusually high numbers of borrowers.
  • Borrowers who try to hide true asset values or structure currency deposits or withdrawals for modification applications could signal possible fraud.
  • Third parties that solicit distressed borrowers for foreclosure-prevention servicers, especially if the third parties claim to be affiliated with the government, raise the possibility of fraud. A request for advance fees from third-party affiliates for foreclosure-prevention services is also a red flag.

“These only indicate possible signs of fraudulent activity; they do not constitute an exhaustive list of common fraud schemes,” FinCEN stated. “No single red flag will be definitive proof of such activity and many apply to multiple fraud schemes.

“Instead, it is important to view any red flag(s) in the context of other indicators and facts, such as the specific role of the financial institution within mortgage loan-related transaction(s), as well as the institution’s knowledge of any associated fraud schemes.”

Sources: Mortgage Daily and FinCen

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