Loan Applications – Beware

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
Feb. 2000

I have touched on this subject before in a past column, however this subject is so important that I am revisiting it.  If you are or will be a real estate buyer, real estate seller, real estate broker, agent or appraiser, or if you are a CPA or attorney assisting in real estate matters, please take this warning seriously.  I don’t mean to make a Federal offense about this, but unfortunately it is.

At least once a week I get a notice or hear about various mortgage brokers or loan officers that get charged with or convicted of or plead guilty to “felonies” in Federal court.  Approximately two weeks ago I saw an internal industry announcement about a Glendale mortgage broker.  On February 3rd I received an announcement about “a Los Angeles loan officer and mortgage broker who pleaded guilty to four felony charges of defrauding the U.S. Department of Housing and Urban Development (HUD).”  I will quote further, “he faces a maximum sentence of up to 20 years in a Federal penitentiary and fines up to $1 million.”  Housing fraud has always been a problem, but there never was enough money for aggressive criminal investigations.  That has now changed.  Recently 41 people have been charged with criminal fraud by the U.S. Attorney’s office in less than a two-month period.  In December, HUD announced the filing of another 35 cases.

It is unfortunate that any industry has its “corner cutters” and the real estate industry has more than its share of charlatans because of the large amounts of money involved.  If you are one of the FEW real estate professionals who customarily assists clients in doctoring up loan applications or help them submit phony verification of employment or verification of deposits, think for a moment about the possible consequences.  Losing one’s professional license is nothing compared to the financial ruin involved with hiring a criminal defense attorney.  Criminal defense attorneys are not cheap and the mere defense can easily bankrupt you.  Of course, one has to pay for this expensive defense to avoid years in prison and large fines.  The normal result is loss of license, one to five years in prison, large fines AND the aforesaid expensive defense.  Compare this to the extra profits made by preparing phony loan applications.

If you are a real estate buyer applying for a loan, do not provide false information on a loan application or provide false supporting paperwork.  For the last few years, sophisticated lenders have ROUTINELY compared the information on the application to information received from the IRS.  Yes, the IRS information is received AFTER the loan is funded, however falsified information usually results in the immediate acceleration of your loan and a referral of the information to the U.S. Attorney.

So far, I have warned buyers and brokers.  What does all this have to do with a real estate seller?

SELLERS BEWARE!  A very good friend of mine called the other day.  She has a potential sale on her rental house and wished to know if it was okay to refund money to the buyer after close of escrow.  She was theoretically asking about the mechanics of the transaction.  The unfortunate part of this is that she is VERY real estate savvy and didn’t realize what I am about to tell you.

It was immediately obvious to me that the buyer had asked her to arrange a sale price that was artificially high.  In this case the sale price was $40,000 higher than the “real” sale price and then the extra money was to be refunded to the buyer after close of escrow.  My friend was concerned about the mechanics and tax consequences.  She was embarrassed when she then realized that she had been innocently asking me about “how to” commit a serious FELONY.  Obviously the buyer, with or without help from a third party, wished to arrange an inflated sale price so that the lender would lend 80%-90% of the “higher” price.  When the seller then refunded the overage amount, the buyer would theoretically have little or no money down.

When I laughingly told her that the real question was “how can I conspire with the buyer to defraud a Federal lender?” she was shocked, as she hadn’t even thought about the big picture, merely the mechanics.  How many times has a seller been asked by a buyer or a “clever” real estate agent to put money in escrow as part or all of the buyer’s down payment and then carry back a Second Trust Deed after the escrow closing?  This again is a conspiracy by the buyer, seller, and sometimes a real estate agent.

Sometimes an accountant is asked to provide inflated profit and loss statements or bogus tax returns.  It’s even more unfortunate that some “professionals” considers this a customary practice.  I am always aghast that an accountant, CPA and sometimes an attorney will cooperate with a client in this conspiracy.  Providing phony documents or inflating income for real estate loans is unfortunately an every day occurrence in some real estate circles.  The true professionals in the industry are aware of this, but rarely “snitch” on the crooks.  “Why get involved?”

If you’re a broker/agent and get caught, loosing your license will mean nothing compared to civil and criminal penalties.  If you’re a buyer and get caught, you may lose the property by foreclosure and get caught up in a criminal mess.  Though sellers sometimes cooperate in these schemes be aware that this is, in fact, a serious criminal offense.

This is not intended to be a warning for the few accountants and attorneys who provide this “extra” service.  You already know the consequences of what you are doing and the good guys in the real estate industry applaud and cheer every time one of you gets caught.

Peter Rosenthal
VIP Trust Deed Company