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Commission Assists Feds, State To Combat Mortgage Loan Fraud

By Janet B. Thoren, Deputy Legal Counsel

The Real Estate Commission is aggressively applying its investigative, prosecutorial and educational resources to assist federal and state authorities in curbing the rising volume of loan fraud in North Carolina .

Within the past three years, the FBI’s mortgage fraud caseload in North Carolina has tripled. Promoters of these schemes have siphoned off millions of dollars from fraudulently obtained loan funds. The impact on North Carolina ’s real estate market has been tremendous.

The Commission has established two priorities with regard to stemming loan fraud: (1) educating agents as to what situations might be “red flags” (see “The Many Faces of Loan Fraud”, Bulletin, May 2004) that require further inquiry by the agent in order to avoid becoming innocently entangled in a fraudulent transaction; and (2) the investigation and prosecution of loan fraud cases.

Commission staff has cooperated with and assisted both federal and state agencies in connection with the investigation and disciplinary action or criminal prosecution of various individuals and entities involved in loan fraud.

• The Commission has sponsored interagency meetings to discuss the issues surrounding the recent surge of loan fraud in North Carolina and to foster cooperation between various agencies, including the United States Attorney’s Office, the SBI, FBI, the Consumer Protection Section of the North Carolina Attorney General’s Office, and other licensing boards.

• Staff members meet on a regular basis with groups of federal and state law enforcement agencies as well as other licensing agencies to discuss pending and potential loan fraud cases.

• Members of the Audits and Investigations Division have been subpoenaed to testify in federal criminal trials and in disciplinary hearings for other licensing boards involving defendants or licensees whose conduct was also the subject of one of the Commission’s investigations.

• Upon request, attorneys in the Commission’s Legal Services Division have assisted prosecutors in the preparation of their cases.

In addition to using its investigative and prosecutorial resources to curb the volume of loan fraud in North Carolina , the Commission has also attempted to educate real estate agents on the new loan fraud schemes and their duty to protect consumers from such fraud whenever possible.

• Commission staff members have made speeches to various groups across the state on the subject of loan fraud and have attempted to identify “red flags” that, if present, should cause an agent to at least inquire further about a transaction before going forward.

• An article on loan fraud was published in the Bulletin (May 2004) in an effort to reach even more agents.

• Course providers have also begun offering courses on loan fraud to help educate agents on the subject.

Educating agents has proved to be a successful approach. As a result, licensees have begun recognizing and reporting potential loan fraud situations. In one situation, Commission staff acted as a liaison between a licensee reporting a potential loan fraud and state and federal authorities who were able to organize an operation that resulted in the arrest of the promoter of the loan fraud scheme. In another situation, the Commission’s staff was able to assist a licensee acting as a seller’s agent in identifying a potential loan fraud on the part of the buyer and advising her seller to seek legal advice and ultimately decline the offer being made to purchase the seller’s property on questionable terms.

The effects of loan fraud can be devastating in many ways. Taxpayers ultimately bear the burden of losses on government-insured loans. When specific subdivisions are targeted for loan fraud, inflated appraisals cause tax values to soar, leaving homeowners being taxed on the inflated values and paying on a mortgage that is often greater than the actual value of the property. In order to sell or even refinance the property, the owner often must take a significant loss and bring a large sum of money to closing. Most owners cannot do this, making foreclosure the only option in many cases.

The cooperative efforts of state and federal agencies, as well as licensing boards, seems to be both effective and efficient. Dozens of individuals have been prosecuted in the federal and state criminal justice system, and many others remain targets of ongoing investigations. Even more have lost their professional licenses and can no longer hold themselves out as being in positions of trust. Most importantly, real estate agents and other professional licensees are beginning to understand the importance of their roles as guardians of the system and to take affirmative steps to ensure that transactions in which they participate are handled in a professional and legal manner. Only the continuous combination of all of these ongoing efforts will bring about the end of mortgage loan fraud in North Carolina .

This article came from the February 2005-Vol35-3 edition of the bulletin.