With budgetary constraints in place within most mortgage lending institutions, the investigative units of lenders are facing ever-challenging methods for documenting and verifying the existence of misrepresentations and fraud within their loan files. Most mortgage lenders have a Quality Control / Investigation Unit in place within their corporate structure, however, these units are normally restricted to desk investigation duties.
In some situations, a desk investigation is sufficient to prove the existence of misrepresentations and/or fraudulent activities. The problems begin when the desk investigation has been conducted as completely as possible and factual information necessary to answer lingering questions is still lacking. Additionally, mortgage lenders must be aware of the liability issues involved in fraud investigations and take these issues under consideration when performing fraud investigations in the field. This is when the use of an experienced outside investigative service can be contracted to conduct a field investigation for the purpose of supplementing the desk investigation and seeking factual data to resolve outstanding questions.
In the following factual scenario, I have documented how one field investigation I performed for a mortgage lender contributed to a criminal charge and plea agreement being reached by a participant in a mortgage fraud scheme. This scenario is being detailed in reverse order from the conclusion of the fraud scheme participant pleading guilty in U.S. District Court backwards through the investigation phase and finishing with the pre-investigation phase so the benefits of utilizing an experienced investigation company are more explicitly illustrated.
April/2006 – On April 11, 2006 in the United States District Court, Southern District of Ohio, Eastern Division at Columbus, a plea of guilty was entered by Steven E. Winter to 2 of 10 counts of a criminal information for creating false documents in violation of 18 U.S. Code ï¿½1001 and for filing false federal income-tax returns in violation of 26 U.S. Code ï¿½7206(1). On March 28, 2006, a Plea Agreement was filed in the United States District Court, Southern District of Ohio which had been signed by Steven E. Winter acknowledging the charges filed against him and detailing his sentencing range guidelines including prison terms and financial restitution. On March 28, 2006, an Information was filed in the United States District Court, Southern District of Ohio detailing a 10 count criminal charge against Steven E. Winter for 4 counts of filing false tax-returns and 6 counts of knowingly and willfully making a false document ï¿½ï¿½for the purpose of achieving FHA financing for a buyerï¿½s purchase of real estateï¿½ï¿½.
The charges brought against Steven E. Winter were the result of investigative actions taken by the Department of Housing and Urban Development (HUD) investigators along with a joint investigation by investigators with the Internal Revenue Service (IRS). In addition to the governmental investigations, an investigation was initiated by a mortgage lender that had originated numerous loans and been made aware of the potential fraudulent loans. As part of their investigative efforts, the lender provided investigative reports and information to the HUD investigators in a cooperative effort. The investigative reports provided to the HUD investigators included both desk investigation efforts and the field investigation results which I had obtained and documented at the request of the mortgage lender.
April, 2004 ï¿½ A field investigation was conducted in the Columbus, Ohio metropolitan area on behalf of the mortgage lender. During the field investigation, I was tasked with the assignment of physically inspecting residential properties in Columbus, Ohio along with tracking down and interviewing borrowers concerning their property purchase and loan origination activities. Additionally, I was tasked with obtaining background information on the targets of the investigation to supplement materials already obtained by the lenderï¿½s investigation unit during their initial desk investigation.
During the field investigation, I physically inspected numerous properties in the Columbus, Ohio area at the instruction of the mortgage lender. The inspection of the properties was multi-purposed in that the lender was attempting to determine current condition of the properties; livability of the properties; marketability of the properties; general value ranges of the properties; and occupancy of the properties. The physical inspections included interior inspections of properties where available. The property inspections revealed a pattern of smaller, single-family residences that were located in lower income areas. The properties were found to have been cosmetically improved by having been painted and cleaned up, but upon closer inspection were found to have numerous problems including rotting/deteriorating woodwork; cracked sheetrock; plumbing back-ups; electrical malfunctions; evidence of mold having been painted over; windows broken and unable to close; and other value detrimental details. The physical inspections I conducted, along with review appraisals contracted by the lender and BPO reviews ordered by the lender allowed the lender to determine that the funded properties were over-valued in the initial appraisals and thus assisted in the lenderï¿½s calculating potential loss exposure.
Along with the property inspections, I was tasked with the assignment of interviewing borrowers/occupants of the properties. Several of the borrowers had become aware of the issues involving their properties after having read recently published news stories concerning the potential fraudulent activities of Steven E. Winters. A few of the borrowers interviewed had already been contacted by HUD and/or IRS investigators and had been providing information to assist the governmental investigation. A representative of the mortgage lenderï¿½s investigative unit was assigned to accompany me during the field interviews to assist in the interviews and to have a second source for verification of information received from the borrowers.
In the interviews I conducted, a repetitive pattern of misrepresentation was found involving Steven E. Winterï¿½s marketing of the properties and participation in obtaining mortgage funding for the borrowers. I found that Steven E. Winter had placed advertisements in the local newspapers showing ï¿½$500 gets you keysï¿½. From this advertisement, the borrowers had responded in the hopes of getting rental properties as a large majority of the borrowers interviewed had seriously negative credit issues. The interviews developed information that when the borrowers contacted the telephone number in the advertisements, they were presented by Steven E. Winter with the idea of purchasing a home for $500 up-front instead of renting the properties. The borrowers provided information that Steven E. Winter consistently advised the borrowers that credit issues were not a problem and in numerous instances, instructed and/or assisted the borrowers in manufacturing fraudulent documents which showed non-existent or misrepresented credit information to be used in gaining funding for the borrowers. It was revealed that additional actions were taken by Steven E. Winter to facilitate the borrowers receiving mortgage funding including providing monies to some borrowers for closing costs. Additional activities undertaken by Steven E. Winter were determined to include complete marketing of the properties; obtaining, instructing and providing falsified documentation to the borrowers; and directing the borrowers to a specific mortgage broker. From the interviews I conducted, it was evident that Steven E. Winter was the primary participant in the fraud scheme and controlled the activity from initial presenting of the properties for sale through the closing of the mortgage loans.
From the results of the field interviews conducted, the lender was further able to determine their risk exposure and make determinations as to potential participants in the fraud scheme. The lender utilized the information obtained from their desk investigation in conjunction with the field investigation I conducted to adjust loss reserves and to make a more fully informed business decision on the steps needed to be taken to resolve their actual and potential losses resulting from the fraud scheme perpetrated against their company.
March-April/2004 – Prior to the field investigation being conducted, the mortgage lender provided complete copies of their loan files and background materials already obtained by their investigation unit during the desk investigation. The investigation unit had pulled various data including payment information; unpaid principal balance data; foreclosure and REO data; ran background reports on parties to the loans; ordered review appraisals; ordered BPO reports; initiated the SARS preparation; notified industry partners per contractual obligation; prepared spreadsheets with data and desk investigation results; conducted preliminary contacts with borrowers; along with taking other steps necessary to document the alleged fraud and determine a plan of action to complete the investigation including the decision to hire an outside investigation firm.
The materials prepared by the investigation unit were fully reviewed prior to initiating the field investigation so that I was familiar with the parties involved and actions that were believed to have occurred during the loan originations. This file review was a critical part of the investigation process as it allowed me, in conjuncture with consultation with the lenderï¿½s investigation unit, to formulate an investigative plan which would benefit the lender in achieving their fact gathering mission. The review of these materials allowed me to conduct other initial investigation actions including record retrieval and background research which was not a duplication of the activities already performed by the lenderï¿½s investigation unit.
The field investigation was conducted with specific objectives in place as determined by the investigation unit and executives of the mortgage lender. The lender determined that the scope of the investigation would be narrowed to property inspections and borrower interviews as this would be the most supportive effort in achieving the lenderï¿½s fact gathering efforts. The property purchases funded by the lender were partly Housing and Urban Development (HUD) backed loans, with additional loans being sold to secondary market investors. The lenderï¿½s initial loan file review found 90+ loans in the Columbus metro area showed involvement of Steven E. Winter. During this time frame, newspaper articles were being published in the Columbus, Ohio area concerning the potential fraudulent activities and the mortgage lender was fielding inquiries from news agencies and from consumers.
I was hired by the mortgage lender to assist their investigation unit as they were constrained by budgetary issues, liability issues and because they had completed as many tasks as possible during the desk investigation phase, but realized that on-location investigation would be necessary to answer the remaining questions. The lenderï¿½s investigation unit was familiar with my background from prior investigative assignments and from referrals within the mortgage lending industry. They understood that the next step to be taken was to have an independent, third-party investigator gather factual information in support of their desk investigation activities.
The desk investigation and field investigation detailed in this article took place over a several month time frame. Once I received contact from the lender, the pre-investigation steps through the field investigation were completed in an approximate 6-week period. As the article details, a well thought-out and organized investigative effort can produce significant, effective results that benefit the lender and in the long term, the entire mortgage lending industry.
It is extremely important that the investigative company contracted to perform the field investigation has the knowledge and experience necessary to complete a mortgage fraud investigation. Due to the uniqueness of the mortgage lending industry, very few investigators have the knowledge and experience necessary to perform a mortgage fraud investigation. I have received numerous investigative assignments where a lender has hired a local private investigator to conduct their field investigation for them only to find the investigator does not understand the mortgage lending processes and procedures, thus resulting in loss of money and time for the lender.