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Keeping fraud cases from falling through the cracks

July 30, 2006|Tom Kelly | Special to The Times

Last year, a mortgage broker in the Tacoma, Wash., area filed a false second lien against a property as it was headed to closing. The man planned to take advantage of an unsuspecting couple and quietly pocket $24,000 into his own account when the loan eventually funded.

Until recently, county prosecutors -- already deluged with other cases of wrongdoing -- faced a difficult decision: Should they place other compelling cases on the back burner and go after a mortgage fraud case?

The Tacoma case was investigated and prosecuted, thanks to a special pool of funds earmarked for mortgage fraud. Other states, including California, also have adopted a Mortgage Lending Fraud Prosecution Account funded by a $1 or $2 surcharge tacked onto every recorded deed of trust in the state.

According to the Washington state attorney general's office, this cash -- about $1 million annually -- allows authorities to more readily field complaints and scrutinize every step made by players in the mortgage lending process. Mortgage fraud investigations often involve recovery of files stored on computers and detailed analysis of voluminous loan documents and financial records. These processes can be quite costly and take several months to complete.

Prosecutions also are rather lengthy because mortgage fraud schemes typically involve multiple layers of transactions and large volumes of data, all of which must be presented through numerous witnesses.

Chuck Cross, director of consumer services for the Washington State Department of Financial Institutions, said the fund made possible eight mortgage fraud convictions in 2005, and another 35 cases are ready to go.

The number of mortgage fraud cases that prosecutors had to ignore was growing, Cross said.

Cross said the plan to create the fund was supported by reputable members of the mortgage industry upset with the number of mortgage fraud schemes in the state. Not only were more consumers getting fleeced but the home-loan industry also was getting a collective black eye.

The Department of Financial Institutions can use the Mortgage Lending Fraud Prosecution Account to reimburse county prosecutors for a variety of costs related to the investigation and prosecution of mortgage fraud cases. Reimbursable items include training costs for investigators and prosecutors and expenses related to investigation and litigation.

County prosecutors may even seek recovery of salaries for members of their staff who were assigned to the prosecution of a particular case.

Loan officers who submit false information about a buyer's qualifications to push through a deal may be guilty of theft by deception as well as other crimes, such as forgery, according to Rebecca Jacobsen of the Washington attorney general's office.

When consumers think of forgery, they often visualize the signing of someone else's name on a check. However, it is forgery to create a false document, or materially alter a written document, with the intent to perpetrate a fraud. It is also forgery to offer or pass off as true a document known to be forged with the intent to carry out a fraud. For example, documents that are regularly created or altered in mortgage fraud schemes include "gift" letters that purport to explain the origin of down-payment funds, employment histories, income verifications and citizenship records.

If a loan representative does not create or alter the documents but is aware that the documents are false, the representative still commits forgery by forwarding the false documents to a lender for use in making a financing decision. That includes a $24,000 fake lien that would have gone directly into a loan officer's pocket.

Tom Kelly's newest book is "Real Estate for Boomers and Beyond."

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