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Evolving Widespread Fraud Scheme Targets Distressed Properties and Borrowers

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Sara Tussey
and Brett Beehler
Rosenberg and Associates, LLC
USFN Member (District of Columbia)

In the summer of 2017, title insurers uncovered a large-scale fraud scheme targeting distressed properties and borrowers. To date, the scheme, which involves fraudulent recorded instruments, has been identified in at least twenty states. Indeed, multiple instances where fraudulent documents appear in the land records relating to properties in foreclosure have been identified. Further investigation of these occurrences has shed additional light on the breadth and complexity of the arrangement, as well as divulged the constantly evolving nature of the scheme. In this article, the original scheme is outlined and information is shared regarding the evolutions that have been observed by these authors’ firm — all for the readers’ consideration in determining how to both recognize and react to this and other fraud schemes.

The Scheme
Generally, the fraud proceeds as follows: the perpetrators obtain information about a loan that is in default or already in foreclosure, sometimes offering loss mitigation assistance to induce cooperation from borrowers. The wrongdoers then create and record fraudulent instruments related to the loan in the land records. These may include assignments, deeds, deeds of trust, appointments of substitute trustees, mortgages, and releases — among others. The fraudulent instruments may vest title into the perpetrator, which can allow the perpetrator to sell or refinance the property. Alternatively, the fraudulent instruments may name the perpetrator as beneficiary of a deed of trust, allowing them to demand monthly payments from borrowers, with the potential to foreclose on the deed of trust if payments are not made. These fraudulent recorded documents create a cloud on title that can complicate or prevent loss mitigation efforts, hinder foreclosure and eviction proceedings, and derail timely REO out-sales.

Fraud Identified
Shortly after becoming aware of the scheme, these authors’ firm identified a fraudulent assignment of a deed of trust for a recently foreclosed property. The fraudulent assignment varied in subtle but significant ways from a proper assignment. The most obvious difference was that the entity executing the assignment was also the assignee. The assignment also included, as an exhibit, a copy of a fraudulent allonge to the promissory note; an allonge is not ordinarily recorded in the land records as an exhibit to any document. Upon inspection, it was discovered that the fraudulent allonge was nearly identical to the real allonge attached to the promissory note, which was endorsed-in-blank. This suggested that the perpetrators had obtained copies of authentic loan documents and used them to create the fraudulent documents.

After further scrutiny, it appears that the borrower had executed a letter of authorization for an out-of-state legal company a year earlier and had submitted at least one debt dispute letter written on the legal company’s letterhead. The debt dispute letter directed the respondent to send copies of loan documents to the borrower “care of” the legal company. While the response to the borrower was sent directly to the property address, the borrower may have provided copies of the loan documents to the legal company. The legal company’s name was very similar to the entity that executed the fraudulent assignment and was named on the fraudulent allonge, suggesting that the legal company and the perpetrator of the fraud may be connected.

Evolution of Scheme
A month later, these authors’ firm encountered similar fraudulent documents in a different matter at a hearing in an eviction proceeding. Specifically, a borrower asserted in open court that the bank that had foreclosed on the deed of trust against the property was not the correct beneficiary and that her loan payments were current. She provided documentation to the court and allowed an inspection of the documents. These documents included a fraudulent assignment, with an allonge as an exhibit, transferring the interest in the deed of trust to the same entity as in the alerts from the title insurers and the previously identified assignment and allonge. The borrower stated that she had recorded the documents in the land records as instructed by a legal company. It was the same legal company that was seen on the previous debt dispute letter. These documents were much newer and had some differences from those previously discovered, suggesting that the fraud scheme had evolved.

In the new assignment, instead of being executed by the assignee, the signature line indicated that it was executed by the original beneficiary of the deed of trust, which is more in line with how a real assignment would appear. There were, however, still several red flags. First, the document appeared to be executed by the original beneficiary, but the actual signature line stated that it was being executed by the beneficiary (and its successors and assigns) by its “substitute-trustee-in-fact.” Assignments are ordinarily executed by the most recent beneficiary only. Also, assignments are not ordinarily executed by a substitute trustee, and the term “substitute-trustee-in-fact” is incorrect. Finally, the original beneficiary for the loan is no longer in business, so they would not have been executing any documents or appointing anyone to execute documents. This new assignment was otherwise similar to the one previously identified in form and was made to the same assignee.

In the first encounter with these documents, these authors’ firm was able to discover written correspondence to show the possible connections among the borrower, the legal company claiming to assist them with loss mitigation, and the entity named on the fraudulent assignment. On this second occasion, there was opportunity to get information directly from the borrower in open court. The borrower stated that the foreclosure of the deed of trust was invalid because the foreclosing entity no longer owned the deed of trust. Instead, she claimed that the entity named in the assignment was the holder of her loan and that she was current on her payments. Based on her statements, it is possible that the perpetrators of this scheme are collecting monthly payments from distressed borrowers under the guise of stopping their foreclosures. They also may be providing purported “legal advice” to borrowers in multiple jurisdictions to delay and prolong foreclosure and eviction proceedings. Currently, these authors’ firm is in the midst of necessary title litigation to resolve a cloud on title caused by the fraudulently recorded documents.

Staff Training
As illustrated in these two examples, the importance of understanding the scheme and developing the knowledge to identify fraudulent instruments is critical to prevent loss. Despite active state and federal law enforcement investigations, in-house efforts at all levels of the default servicing industry are essential to combat this fraudulent activity.

Specific tools for combating fraud include ongoing staff training to identify unorthodox recorded instruments, especially for staff members who handle title reviews or assignments. Consider providing additional training to aid staff in recognizing non-recorded fraudulent documents or other evidence suggesting that a potential scheme may be afoot. When an assignment or appointment of substitute trustee is signed by an entity that loan servicing staff does not recognize, particularly one executed by the grantee instead of the grantor, the document can be flagged and escalated for review. A typographical error, an abnormal signature, or an unknown term may also be a red flag. Consider creating a formal escalation point, most likely in your Fraud Department. If there isn’t a Fraud Department in your organization, identify a point person for fraud-related issues.

Assess additional training options for loss mitigation teams to aid in better identifying scams targeting borrowers, and create an action plan for situations where a borrower may be the victim of a fraud scheme. While it is not unusual to see companies from other states assist borrowers with loss mitigation, it is usually a concern if the attorney is located more than one state away from the property. Borrowers also often obtain form debt dispute letters from the internet without reading them fully. Consider a policy of confirming with borrowers by telephone before changing an address or sending documents to a third party where there is no explicit letter of authorization requesting the address change or where the authorization is buried inside a multi-page document. Creating a watermark on any original loan documents, or otherwise marking copies clearly as such, before sending them in response to debt disputes or “qualified written requests (QWRs)” are other important considerations. Additionally, give thought to effecting a policy and procedure for escalating to local or federal law enforcement if it is believed that a borrower may be a victim of fraud.

The fraud scheme discussed here has serious implications for the mortgage industry and more variations are likely to follow. It is essential to enhance servicing staff’s knowledge and improve overall internal procedures to protect companies from loss. Discuss this matter with local foreclosure counsel for advice on how the fraud scheme may affect foreclosures in particular jurisdictions and to request specific training for your teams. Even when these perpetrators are caught, there will always be new schemes, so maintaining a heightened alert for possible fraud may help prevent the success of future schemes.

Copyright © 2018 USFN. All rights reserved.
Winter USFN Report

Note for consideration of the USFN Award of Excellence: This article is not a "Feature."


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