V.I.P. Trust Deed Company
Most of the columns that I write are generated because of real life experiences. When the same circumstances become repetitive I usually devote column space, knowing that the problem effects many others.
Some months ago I authored a column about real estate fraud. That column went over some of the common LOAN FRAUD practices in use today. Unfortunately a few licensed professionals, including real estate brokers, CPAs and attorneys, actually assist clients in submitting fraudulent applications. In most cases this is a FEDERAL crime and the Federal Government has actively been prosecuting mortgage loan fraud. Southern California is a hot bed.
The previous column touched on the practice of “TOO MUCH – TOO LITTLE”. In short, TOO MUCH involves a phony INFLATED sale price to induce the lender to lend 80%-90%-100% of the phony price. TOO LITTLE is the practice of showing a sale price less than the true amount with the “balance” paid separately in CASH to deceive the IRS (seller) and county tax assessor (buyer).
Another practice is commonplace and again, professionals sometimes assist the buyer in “smoke and mirror” financing. The lender requires that the buyer show that the down payment is in a bank account or perhaps on deposit at escrow. In reality, there is no down payment as the seller is carrying back a “silent” second or perhaps a friend is lending the down payment in the form of a quiet second trust deed. By “quiet”, I mean, “hidden from the lender”. The lender is making a loan relying on the buyer’s good credit and down payment when, in fact, there is no down payment. Again, this is a FELONY. Those who conspire with the buyer are also committing a felony perhaps even more serious.
This practice involves the seller or someone else actually putting cash in escrow or the borrower’s bank account under the guise that these are borrower funds. Often a third party is approached to make a loan of the down payment “just for a few days” until the transaction closes. As I stated above, “conspiracy to defraud a lender” is not similar to a speeding ticket – don’t do it. While on this subject however, I am often amazed at the profit being offered to a third party for the use of funds for a few days. Not only is this a “no-no” as described above, it is also usurious. When a NON-EXEMPT lender makes a loan in the State of California they are subject to usury laws which, for all practical purposes, limit the interest rate and/or lender’s fee to an annual percentage rate of approximately 10%. A $1,000 profit in a day or two is clearly usurious for a non-exempt lender. There are exempt lenders in California generally described as the typical mortgage company, bank, credit union, finance company and real estate brokers ARRANGING real estate loans. The reason I say APPROXIMATELY 10% is that the usury ceiling for “personal purposes” is 10%. The ceiling for loans for other than personal purposes is a “floating” rate that has been close to 10% for many years. If you’re a private party and intend to lend a friend or relative money for personal purposes, do not charge more than 10% (APR). If you’re intending on lending money for business purposes, even to a company, check with your attorney to verify the maximum rate at that time.
In closing, I have also authored a column some years ago entitled “Greed Kills”. The typical private party lending money at usurious rates eventually finds out the consequences (the hard way). A pattern of usurious practices is, in fact, a criminal offense, though rarely prosecuted. Most usurious loans are made in ignorance of this law, but the civil penalty can still be substantial, i.e. loss of ALL interest and usually attorneys fees.
I promise my next column will be on a lighter subject.
Peter Rosenthal
VIP Trust Deed Company