Mortgage Fraud Through the Straw Person Scheme
What is real estate? As defined on Investopedia, real estate is property that is comprised of land and the buildings on it. For most people, the American Dream is to own their own piece of real estate which also usually happens to be a person’s most valuable asset. Throughout the years’ people have come up with a variety of ways to misrepresent information to obtain an advantage in the real estate transaction. There are many forms real estate fraud can take; these range from mortgage fraud to the straw-man scheme. Here is a list of several types of real estate fraud that are out there (please keep in mind that this is not an exhaustive list and there are many other forms real estate fraud can present itself in) (5 Okla. J. L. & Tech. 44):
- Mortgage Fraud: Occurs when a borrower makes a material misrepresentation or omission on a loan application for which a lender relies upon to give out the loan. Had the lender been aware of the actual facts of the surrounding circumstances, the loan would either not have been approved or the borrower would have received a smaller loan amount.
- Flipping: Flipping homes is not an uncommon practice. There is a fine line between legally flipping homes and doing so illegally. A legal scenario is when a buyer buys a home for what is considered a cheap price. After renovating and/or fixing the home, the buyer then sells the home for a profit. The whole process generally happens within a short time period. The buyer crosses the line from legally to illegally flipping homes when he/she is able to inflate the appraisal price (with the help of a professional) and receives more than what the market value of the home should be.
- Equity Skimming: This type of fraud occurs when the buyer is able to convince the seller to re-list the home for a higher sales price than initially asked for. In doing so, the buyer is able to obtain a larger mortgage than he/she otherwise would have from a financial institution. After the buyer obtains the loan, he/she pays the seller the amount of the original asking price and the buyer keeps the remainder of the loan.
- Straw-Man Scheme: Involved with the process to defraud is usually a professional (i.e. a real estate agent or broker, a mortgage broker, and/or a notary). There may be others involved such as the buyer, seller, and the straw person; however, the straw person being used may not actually have any knowledge of the fraud that is about to occur. The straw person is someone that currently has good credit. They are generally a close relative or friend of the buyer who has bad credit. The name and personal information of the straw person is used on all of the documents involved in the transaction. After the loan is secured, the professionals involved and/or the buyer flip the home for a profit. Unfortunately for the straw person, they never see any of the loan proceeds and are left with assumption of the mortgage, their credit may go bad, and they may face criminal charges.
- This scheme closely resembles “flipping” with a major difference being that a third party is using their personal information to assist a buyer in obtaining the loan to buy a house. From there, the house gets flipped for a profit and the straw person is left to fend for him/herself.
In 1999 the Uniform Electronic Transactions Act (UETA) was passed. Section 7 of this act states that “a record or signature may not be denied legal effect or enforceability solely because it is in electronic form.” This was the first act which allowed the creation of deeds, mortgages, and other documents to be created by electronic means because now, e-signatures were enough to satisfy the signature formality. An electronic signature is considered any identifying electronic sound, symbol, or process that is adopted by the signor with the intent of signing the document that the signature is placed in. UETA was a big step in the push for having transactions occur solely online instead of in person and through paper documents. (5 Okla. J. L. & Tech. 44).
Following the adoption of UETA was the Electronic Signature in Global and National Commerce Act (E-Sign). E-Sign is a federal law that was created with the goal of encouraging those states which have not adopted UETA to adopt it. E-Sign gave legal effect to signatures, contracts, and other transactions that were in electronic form and affected interstate and foreign commerce. Both acts defined and treated “electronic signatures” the same. Their differences were in how the acts responded to the need to correct a mistake in a document and how each act treated consent by the parties. UETA gives the parties the option to either correct or disregard an error in a contract while E-Sign has no provision to allow a party to correct a mistake. For an electronic signature to constitute consent, both acts allow consent to be inferred from the parties’ conduct; however, the intent to consent is a critical element of UETA. In UETA both parties must agree to use electronic forms. (5 Okla. J. L. & Tech. 44).
A major problem with UETA and E-Sign was that neither addressed the issue that a recorder’s office would not record e-documents in the public record. Both acts addressed transactions which were yet to be included in those items which could be recorded. In response to this issue, the Uniform Real Property Electronic Recording Act (URPERA) was passed. This act laid the groundwork for states in creating a uniform system of how to deal with the electronic recording of real estate transactions. (5 Okla. J. L. & Tech. 44).
Before the acts affecting e-recording came to fruition, transactions that were conducted with paper documents could take weeks, even months to be completed. With the aid of computers, such transactions could now take several days, hours, or even minutes. What are the implications of this? More transactions started being conducted via electronic means. Hackers and/or criminals that appropriate a borrower’s identity or commit some form of real estate fraud can get away with committing more fraud in a shorter period of time before someone notices that their identity was stolen or before a professional or institution may notice there has been a misrepresentation on a loan application.
Lets talk about how mortgage fraud fits into the process of e-recording. As defined by §817.545, mortgage fraud occurs when a person knowingly and with the intent to defraud makes or uses and facilitates “any material misstatement, misrepresentation or omission during the mortgage lending process” intending for the mortgage lender to rely on such misstatement, misrepresentation, or omission. The statute also covers circumstances where a person receives any proceeds in connection with the mortgage lending process which the person knew was a result of a violation.
As stated earlier, a straw person may be paid for the permission to use their name and personal information in a transaction. The straw person is usually one who can obtain better loan terms than the intended buyer. A straw person may be aware about what they are agreeing to or, like many unsuspecting Americans, they are enticed by the opportunity to make easy money and do not find out what they have consented to until it is too late.
So how does the mortgage fraud statute fit in with the straw person scheme? There are companies that reach out to people who have good credit in an attempt to get their consent in using their identification and personal information. Those companies will usually pay a person around $5,000 to $10,000 for the ability to use their name and personal information. Unfortunately, many people do not consider the consequences of giving such information when they have the option of receiving what they consider a large sum of money. The information these companies acquire are used in mortgage loan applications, generally with the help of professionals in the real estate market.
The information in the mortgage loan application that uses the straw person’s identity and personal information is a material misrepresentation in which the financial institution relies upon and invokes §817.545. Due to the misrepresentations, the lender is under the misbelief that the straw person will be able to pay back the loan due to his/her good credit, among many other misrepresentations. These misrepresented documents are eventually sent into the recorders’ office to be electronically recorded. The straw person is now liable for the mortgage he/she never intended on securing because their name is attached to the mortgage loan application via an e-signature in which someone merely typed out their name within a document.
If there is a backlog at the recorders’ office, a perpetrator or company can fraudulently continue taking out several mortgages on the same or different properties using the same straw person’s information. This is because a loan has already been secured but since it has yet to be recorded, there is no notice being imparted to other financial institutions and even the person whose identity and personal information is being used.
Before a document may be recorded, the signature and notary formalities must be overcome. Such requirements are put in place to help prevent fraud. But such formalities are not hard to get around. The signature formality can be overcome by inducing a person to sign, whether it be under duress or deceit, or forging the signature either on a paper document or an e-document. It is possible to forge a signature on both a paper document (by physically forging the signature) or on an e-document (by typing out a person’s name in the required field). The notary formality may be overcome by either finding a notary who is willing to be involved in the scheme to defraud or finding an incompetent notary.
In 2014, Lawrence Wright, a Florida resident received a sentence of 75 months in prison and was ordered to pay restitution of over $3.7 million after being charged with identity theft, making a false statement to a financial institution, and other counts. Wright enlisted the help of several straw buyers by promising them that he would make payments on the loans and eventually flip the property and share the profit with them. Wright had the straw buyers use the name of his ex-wife on the loan documents. Hopefully the straw buyers knew what they were doing was illegal because Wright was certainly aware of his actions.
Regardless of which type of fraud a perpetrator is trying to commit, there are steps to help prevent fraud. ALTA (American Land Title Association) has laid out several best policy practices to help ensure companies and firms are doing what they can to prevent fraud in the real estate transaction process and to ensure they will not become a victim of fraud themselves. Several of the policies they laid out are as follows: 1. Establish and maintain current licenses; 2. Adopt and maintain written procedures and controls for Escrow Trust Accounts; 3. Adopt and maintain a written privacy and information security program to protect Non-public Personal Information; and 4. Adopt and maintain written procedures for resolving consumer complaints; among other recommendations.
There are also a plethora of steps that the average American can do in order to prevent becoming the victim of fraud. What are several things you can think of that the average American can do or be on the lookout for to prevent becoming a victim of fraud?
As mentioned within the brief description of what “flipping” is, not all circumstances of flipping a home is illegal. Can you think of an example in which using a straw buyer is legal?
Criminal Law in the Virtual Context 
It frightens me to read about just how many ways there are to be defrauded in a real estate transaction. Buying or selling real property is probably the most technical, legal transaction that most ordinary people (read: non-lawyers) will ever partake in. Not to mention, moving is frequently cited as one of the top five most stressful life events. Add these two things together – the confusion and the tension – and it’s clear to see why so many people become easy targets to this type of crime. These aren’t traits that make for good decision making.
I can easily understand how so many people fall victim to real estate fraud. I – like most people – have very little knowledge about mortgages, equity, foreclosure, home and land values, the roles of various individuals in the real estate industry, or any of the other topics that are essential to making a smart decision when buying or selling a home, office, land, or investment property. The simple fact is that our school system doesn’t teach this subject matter, and it’s considerably difficult to learn on your own.
Often, fraudulent real estate transactions look legitimate to the untrained eye. Occasionally, even a well trained eye will miss the fraudulent nature of a real estate transaction. Thus, it’s easy to fall victim to this type of crime. Even if you know of one specific type of real estate fraud and know what to look for, you could be completely unaware of another type.
Considering how easily victimized people can be to this type of crime, how damaging such a crime can be on the individual, and how impactful real estate fraud is on commerce and the economy, it is clear that it is in the public interest for Congress and states to pass criminal sanctions on such actions.
Laws like the Identity Theft and Assumption Deterrence Act law the basic groundwork to deter potential criminals from committing such acts and to punish them if they do. But part of the problem with this type of crime is that it can be committed in so many different ways, and criminals are always coming up with new ways that may find a technical loophole in the existing criminal law.
Other times, the very way we engage in these transactions may make the criminal law inapplicable or, at the very least, in need of adjustment to ensure applicability. An example is the transition to online real estate sales with the passage of the UETA, E-Sign Act, and the URPERA.
Nowadays, many people are falling victim to online straw man schemes in mortgage fraud because they were unaware of the consequences of allowing someone to use their personal information, because their personal information was stolen, or because they simply typed their name into an online document not fully aware what that document was. No matter how they ended up with their personal information on the fraudulent mortgage that person is now liable for that mortgage. As you point out, the fact that online loans may not be recorded and the relatively easy-to-circumvent precautions allow for these same people to be victimized over and over with ease.
In my opinion, it is clear that criminal laws alone will not do enough to prevent this quickly evolving area of crime. We must do more to educate individuals who are entering the real estate market and those already involved like notaries, real estate agents, mortgage brokers, and loan officers. Additionally, those that are looking to buy or sell real estate property need to educate themselves before putting their name on any dotted line or handing over their personal information. Unfortunately, the people they approach to become educated on this matter – agents, brokers, officers, or even family members – may be out to criminally gain from their ignorance. These real estate professionals have a fiduciary duty to their clients that should not be exploited for personal gain; however, in some instances it will be. Clients, thus, need to be proactive and vigilant. Criminal law needs to punish those individuals that commit real estate fraud. And civil law needs to provide recourse against those real estate professionals that break their fiduciary duty and those individuals who exploit family members or steal personal information online.
In a few short years, I’ll likely look into purchasing my first home. While I already knew that I would have to research all the typical things – loan types, home and land values, transaction types, encumbrances, etc. – now I know I have one more thing to research before I make a purchase: how to avoid being the victim of real estate fraud.
In today’s society, many people share a vast of personal information online without being aware of the consequences. Thus, subjecting themselves to identity theft. The FBI offers helpful tips on how to prevent becoming a victim of identity fraud. Their approach is titled “SCAM”. The first step is to be stingy with information and only hand out personal information on a need to know basis. For example, people should not give out the answer to their security question over the phone. Instead of authorizing new credit cards over the phone, people should ask for a written application to assure that the financial institution is legitimate. If people are traveling, they should ask their local post office or their friends/family to hold the mail. Second, every month people should check their financial statements for any unauthorized charges. Additionally, people should always ask periodically for copies of their credit report and maintain those records carefully. Remember, once a person becomes a victim of identity theft, the damage to one’s financial accounts and reputation can only be minimized not eliminated. It is important to report the fraud to the Federal Trade Commission, Social Security Administration, Internal Revenue Services, and all three principle credit reporting companies immediately.
The majority of real estate frauds are coupled with identity thefts. A major issue with fraud in the real estate realm is that a person in addition to having their credit ruined, the victim could lose his or her home. In most real estate fraud, an educated, sophisticated criminal is targeting vulnerable people, such as the elderly, people on the verge of foreclosure, and low income individuals. Today, with the possibility of e-signing the fraud that a person can commit with another’s personal information are endless. For example, equity fraud occurs when an individual forges another person’s name and on a deed. E-signature makes it a lot easier to forge such documents.
In the straw-man scheme, the individual committing the fraud uses another person’s, a straw man, personal information such as credit history, name, social security number, etc. to receive a mortgage. While the straw man often is aware of the transaction taking place, the criminals can achieve their goal through identity theft.
Hacking is taking place every day, especially large companies have to be always aware of such threats. An individual cannot hinder such attacks; however, everyone can assure that their own personal information is as secure as possible. More and more services are becoming electronic. Most people have online portals for their financial institution, input personal date (such as name, age, birth date) on various webpages, or pay their utilities online. The best way to protect yourself from real estate fraud, or any fraud, is to secure personal information as much as possible. Securing personal information starts offline, don’t tell your bank account information to anyone, or recite your social security number in public. Another way to prevent to have one identity stolen, is to become aware of the digital footprint you are leaving behind and trying to minimize it.
In response to the question of what can the average american do or be on the lookout for to prevent becoming a victim of fraud, the average american should follow the FBI’s SCAM approach. The SCAM approach can be broken down as follows:
S: The S is for stingy. The average american should be stingy about giving out personal information to others. With the technology available today it is very easy for criminals to commit a number of different crimes just by obtaining someone’s personal information. The average american should be skeptical of all persons asking to access their personal information and try to investigate to be sure their personal information is actually going to who it is supposed to and being used for agreed upon purposes.
C: The C is for check. The average american should regularly check his or her financial accounts and transactions to monitor for any abnormalities or fraudulent purchases. By quickly becoming aware of any fraudulent activity the average american can limit the damage done to his or her credit or financial reputation.
A: The A is for ask. The average american should periodically ask for a copy of his or her credit report. A credit report should list all of a person’s financial information and provide indications of when fraud has occurred. In the cases involving mortgage fraud and other real estate issues it is important to check credit reports to identify when new mortgages or other debts have been incurred in your name.
M: The M is for maintain. The average american should carefully maintain records of all their banking and financial accounts and transactions. If all financial accounts and transactions are carefully recorded it will be easier for the average american to detect fraudulent activity, and to rectify fraudulent activity by being able to produce documentation proving the transactions fraudulent.
From what I have gathered from the SCAM approach a major part of preventing and rectifying fraudulent activity is to be proactive in trying to secure personal information and trying to monitor all financial activity. Being educated on what fraud looks like can better prepare the average american for issues involving identity theft and fraud.
As for whether I can think of an example in which using a straw buyer is legal, I don’t know enough about the legality of the situation of borrowing through third parties to come up with an example. I don’t see why with proper notice of all intentions and activities and with the proper payment to the straw buyer and other party why the use of a straw buyer would be considered illegal.
I found it interesting how e-recording first started being used because it was more “efficient” but later on it essentially paved a more effective way for hackers/criminals to commit fraud or identity theft. It is incredibly alarming to read about all the types of real estate fraud that is out there and it shows that IT security should be a concern for everyone, not just for business owners or other sophisticated parties.
After reading the Bloomberg article on cyber-attacks I was shocked to hear that 80% of the top law firms have had security breaches. This can lead to huge issues if clients’ “privileged information” could be leaked at any moment. I didn’t even think about the other countries that steal information from the U.S. and the implications that could arise from such events. I am curious to see how big law firms will continue to adapt to the challenges of keeping up with technology and defending against security threats.
I am also very interested to see how legislatures and government will act to ensure that criminals convicted of committing fraud of this level receive sentences that fit the crime. Lawrence Wright who was sentenced to 75 months seems rather low when such a large amount of money was involved in the crime. I feel like small time drug dealers go to prison for longer.
As far what can the average person do to prevent becoming a victim of fraud, I think the simplest way to put it is to be more careful on who you are giving access to your information and read everything carefully (i.e. websites, agreements, etc.). Although, this is easier said than done because we literally have to provide information regularly for all types of different reasons. I think the best a person can do is ensure they are knowledgeable of the types of fraud out there and do their best to limit giving important information to others as much as possible. Hacking and other virtual crimes have become one of the biggest threats to security in our time and has been expanded for use in so many different crimes. It is definitely a topic everyone should be concerned with.
Identity theft is not a new phenomenon. It predates computers by thousands of years, and social engineering perhaps dates back further. Ancient stories, like the Trojan Horse (now even an outdated name for a form of computer virus), are proof that we have been facing these kinds of scams for millennia, yet the problem persists. In fact, it appears to be growing.
There is an alarming trend of state-sponsored hackers targeting large companies and sabotaging world events in a cold-war style of cyber espionage that rivals the imagination of some of the best spy novels. [1]. The problems of identity theft, especially in the virtual context, have become so pervasive that law firms are spending thousands of dollars to improve their security infrastructure to meet their clients’ increasing demands for security [2]. While smaller firms may not yet need the same level of protection from world-class cyber-attacks, Comment 18 to the Model Rules of Professional Conduct, Rule 1.6 (Confidentiality of Information) mentions a standard of “reasonable efforts” to prevent access, and it is clear to see that reasonableness is going to require much more in the near future. [3]
The demands on real estate professionals, especially lawyers, are likely to be even greater than most. Danielle makes a great point that more transactions will be moving online as more people become comfortable with using electronic signatures to purchase real estate. This could not be more relevant with a massive cohort of millennials currently exiting college, entering the workforce, and looking to settle into their version of the American Dream. As lenders scramble to compete and attract this new mortgage market, it is likely that the major banks will push the forefront of electronic transactions to accommodate this tech savvy generation.
The end-goal will be to mainstream a system of home buying that takes place almost entirely online. Imagine a Frankenstein monster made up of parts from LegalZoom, Skype, Zillow, and E-Trade. Now imagine a closing where every piece of paper is delivered by iPad and the seller teleconferences from a thousand miles away. The potential for fraud will be almost limitless. This is the future, and it will require lawyers to be extremely diligent in overseeing transactions with so little in-person contact.
In addition to providing for electronic signatures, UETA, E-Sign, and URPERA all contain provisions that enable the use of remote notaries. [4]. If adopted into widespread use, this carries the potential to remove one of the two remaining fraud fighting formalities that Danielle identified. The smaller county clerks’ offices will be essentially defenseless in the wake of organized schemes to forge mortgage satisfactions and deeds, and the incidence of real estate and mortgage fraud will continue to skyrocket.
For now, it appears that prosecutors will continue to make examples of straw-man scammers like James Labron and, as Danielle pointed out, Lawrence Wright. [5]. In addition to mortgage fraud statutes (such as § 817.545), Section 1028 of the U.S. Code Chapter on Fraud and False Statements gives prosecutors an arsenal of offenses to combat identity theft and forgery. [6]. For example, sub-sections (a)(7) and (b)(1)(A)(ii) allow for the possibility of a fine and upwards of fifteen years in prison for the production or transfer of a fake ID that the perpetrator knows will be used in the commission of a state felony. In the case of mortgage fraud, a second-degree felony in Florida, a person who creates a false ID to perpetrate a Straw-Man scheme of mortgage fraud could face significant federal charges. In addition, Section 1028(a)(4) provides for a violation upon the very generally defined offenses of “affects interstate commerce” and the mere transportation of a false identity document via the mail. This is in addition to allowing for like-charges under Section 1028(f) against any party that conspires with the perpetrator.
Thus, if, as Danielle pointed out, people are willing to accept five to ten-thousand dollars for their cooperation in a straw-person scheme of mortgage fraud, they may be unaware of the fact that they face potentially significant conspiracy charges. This is typical of these schemes and others like them; the straw man is victimized financially in addition to being arrested. [7]. That is why I feel there needs to be a greater emphasis on preventing these schemes before they can lure-in dozens of straw men. We can do better to combat such an old problem.
In line with this belief, and to answer Danielle’s question, I think average Americans can do a much better job of identifying their neighbors and researching titles. For example, abandoned and empty lots pose a significant risk of fraud because the owners are not present. This creates the cover a scammer needs to pose as the actual owner and initiate a remote transaction. More likely than not, these lots are owned by a bank, and the seller is a scammer who has forged a mortgage satisfaction.
A potential buyer should insist on meeting their seller, or they should corroborate the seller’s contact information by a neural, third-party source. Buyers should also make a point of meeting their future neighbors to confirm the seller’s story. Florida Law requires that deeds and mortgages be recorded in the official county records which can be easily accessed online. A buyer should look to make sure that any mortgage satisfaction came around the same time as a deed, since most people will sell their homes before paying off their mortgage. If the buyer is over-whelmed or suspicious, they should seek out a title insurance policy to ensure they do not lose their investment.
Finally, to answer Danielle’s second question, I do not believe such a flip can be performed legally. By its nature, a straw man scheme commits mortgage fraud by purposefully misdirecting a creditor as to the creditworthiness of the borrower. I believe an approximate legal alternative would be to form a partnership where the partner with the best credit score borrows her capital contribution.
[1] http://www.bloomberg.com/news/articles/2012-07-26/china-hackers-hit-eu-point-man-and-d-c-with-byzantine-candor
[2] http://www.bloomberg.com/news/articles/2015-03-19/cyber-attacks-force-law-firms-to-improve-data-security
[3] http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_1_6_confidentiality_of_information/comment_on_rule_1_6.html
[4] http://www.asnnotary.org/?form=enotary
[5] https://www.justice.gov/usao-mdfl/pr/florida-real-estate-professional-sentenced-26-years-federal-prison-mortgage-fraud
[6] https://www.law.cornell.edu/uscode/text/18/1028
[7] http://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/realestatefraud101.html
It is astonishing just how easily people can fall victim to scams and identity theft. The scariest and most tragic part of identity theft is how much it wrecks the victim’s life. To think that an identity thief can max out multiple credit cards (among so many other financial schemes) under a false identity and then the victim has to spend thousands of dollars of his or her own money to get back to a normal life is disturbing. While reading the assigned reading, I kept thinking: how could this be avoided so innocent victims are not at such a loss? But, aside from being vigilant and protecting your own privacy, there is no way to avoid it. As technology advances, criminal activity advances with it and individuals have to stay ahead of that curve to protect themselves.
Law firms, corporations, and government agencies even need to think ahead to protect themselves and their clients’ information. Last semester, I learned from a student that there are security companies (he had a friend that worked for one) that law firms or corporations hire to come in and basically hack their system to see where the weaknesses are. The security company then advises the firm or corporation how to fix the weaknesses. One of the ways they test for weaknesses is by simply sending someone in who pretends to have an appointment but forgot to print his or her resume and asks to either log on to a firm’s computer to access an email with the resume or plug a USB drive into a printer at the firm. By opening an email or plugging in that USB, they release a hacking software through the entire system to find the areas of risk and weakness. It is amazing that a behavior that seems so harmless and normal could result in such catastrophe if done by the wrong person. More firms need to hire security consulting companies to stay ahead of hackers.
I have never bought a house, nor have I witnessed or been involved in a real estate transaction. I know that I would be overwhelmed by the entire procedure and the amount of documents to sign. It is normal for people to feel overwhelmed, or even distracted, when making a huge commitment like buying a house. In the alternative, it would be enormously stressful to know your house is being foreclosed on and you need to save it so your family has somewhere to live. The criminals in the real estate market prey on the vulnerable minds by planning elaborate schemes to act as a savior in an emotional time and then they steal money and then disappear. I consider myself a well-educated person and the detail of the schemes that these people execute tend to go over my head. So it is even more abhorrent to find out that they target the elderly and the low-income populations. People’s greed and their cleverness to outsmart the real estate system has even greater impact than just on each individual family. It impact the economy and the housing market as whole for years to come.
No matter what precautions people take there will be always be hackers and identity thieves, because it is not a phenomenon that started with technology. If anything, technology has just made it easier. The UETA and E-Sign were established to make transactional work simpler and quicker. It also opened a whole new world of hacking and identity theft. The most that people can do is stay vigilant and always question their situation. The amount of threats to an individual’s identity require people to be cynical as a self-preservation technique.
In terms of preventing fraud, as other people here have pointed out, SCAM provides a good framework of actions that should be taken to lower the chance of having personal and financial information stolen by criminals and utilized to enrich themselves. In the realm of real estate transactions there seem to be opportunities for regulation to enhance the current ways to prevent fraud (like SCAM) by making more information available to purchasers and ensuring that only legitimate identities are used during these types of transactions. Especially considering that the typical targets for real estate fraud, parties like the elderly and low income people whose homes are being foreclosed on, might have several factors working against the interest in taking one’s time and performing proper due diligence. Time constraints, financial pressure to get out from under bad decisions or luck (like a foreclosed mortgage), and lack of financial resources or technical knowledge necessary to carry out proper due diligence are factors where even if one of these parties understands how to detect and prevent fraud, they might fail to do so.
I don’t know the answer to this but I’d be interested to see how title insurance factors into some of this when a buyer down the chain of title purchases property that has been fraudulently sold. Firms involved in such insurance should be able to play a role in protecting consumers from the negative consequences of real estate fraud.
On the issue of legitimate uses of strawmen set ups, I think it’s possible to imagine family setups where someone might not have the ability to secure financing and someone else steps in to help. While an old adage says you should never lend family members money the interest in securing stability for a down on their luck relative trying to rebuild a lift might induce someone to undertake purchase that looks like a strawman purchase. Speaking from my own family experience it’s not uncommon to see family members be used as essentially replacement financing vehicles for either relatives with little credit or bad credit due to mistakes long in the past (at least one hopes). In some of these arrangements what looks to be a strawman fraud scheme is actually an agreed upon system to help someone out, it might even be at a loss or undertaken with the knowledge that it could go sour but that the attempt to help is worth the risk.
My initial impression after reading this week’s blog post as well as the additional readings for this week was that of shock. Shock as to the sheer quantity of different mortgage and real estate schemes that actually exist. I believe that Bobby is correct in his assertion regarding the general lack of knowledge by people in the general public in terms of how to successfully navigate the real estate world. However, I also believe that it is precisely because of this ignorance that many individuals fall victim to these types of fraudulent dealings, and it is precisely because of this ignorance that criminals choose to exploit this area when it comes to engaging in fraudulent activity. If anything, knowing what I know now makes me all the more wary when the time comes for me to purchase my own home. Thankfully, I now understand that I need to be fully cognizant, fully informed, and fully educated in real estate and mortgage proceedings once the time finally comes for me to purchase my own home.
Something else that stood out to me from this week’s reading was the extent that individuals go to in order to engage in fraudulent real estate dealings. Specifically referencing the Department of Justice article where John Lebron was sentenced to 26 years in federal prison for mortgage fraud, Lebron: a) misrepresented and exploited unsophisticated individuals by fraudulently misrepresenting the sale of nonexistent homes, b) created a fraudulent investment company, c) engaged in a straw-man scheme… TWICE, d) engaged in a non-arms length transaction… ALSO TWICE, e) misrepresented personal information to banks, f) created fake pay stubs to further mislead banks, and the list goes on. To be quite honest, I am actually a bit impressed at Lebron’s dedication and resourcefulness in pulling off this scheme. One can only imagine how successful Lebron could have truly become had he utilized that resourcefulness, dedication, and understanding of real estate practices to actually engage in lawful activity.
On that same token, it is also striking that one can essentially combine various real estate schemes in order to create one huge fraudulent scheme. Taking the case mentioned earlier as an example, Lebron engaged in multiple fraudulent real estate schemes in order to advance his illegal activity. To my mind, I count at least three smaller schemes used to advance Lebron’s grand scheme, including: 1) use of the straw-man scheme, 2) aggressive sales tactics, and 3) foreclosure rescue. With this ability, the possibilities of potential fraudulent real estate and mortgage conspiracies are essentially endless.
In answer to Danielle’s first question, one of the biggest things I believe that the average American can do in order to prevent becoming a victim of real estate fraud is to simply use common sense. I understand that in some cases this is easier said than done, and I also understand that common sense is not at all very common. However, and at the risk of sounding cliche, it quite truly is as simple as the saying: If something seems too good to be true, it probably is. I believe that if more individuals actually took a second to stop and contemplate potential opportunities that seem to magically solve all of their problems or promises to be a “quick and easy fix”, the pitfalls will soon reveal themselves. I also understand that, in most cases, people who find themselves falling victim to real estate fraud are desperate individuals who are simply doing any and everything that they can to save their most precious asset. In that situation, an offer that seems a little too good to be true might be just the blessing in disguise that one might have been looking for. However, I do think that there is a fine line between naivety and ignorance, and one should be careful not to confuse the two.
In answer to Danielle’s second question, I believe that there may be situations in which using a straw buyer can be legal. Let’s assume there is a buyer and a seller. The buyer is interested in purchasing a home but is unable to obtain a loan because their credit is horrible. The buyer then obtains a straw-man (let’s assume this straw-person is a close relative) with good credit to obtain the loan for the home. The straw-man’s personal information is on all of the transaction documents and the loan is in the straw-man’s name. Once the loan has been acquired, the straw-man purchases the home. I do not see how it would be illegal or unreasonable for the straw-man to then sign a quit-claim deed relinquishing ownership of the home over to the buyer (with bad credit). Although the loan (now mortgage) would technically still be in the straw-man’s name, the straw-man and the buyer could sign a contract or make some type of arrangement where either the buyer agrees to pay back the loan and picks up the mortgage payments, or the straw-man can continue to make the payments but have the buyer pay the straw-man back directly. I am not one hundred percent sure of the actual legality or feasibility of all of this (as I can readily admit my ignorance of real estate issues), but I do not see any glaring legal issues with this type of proposed arrangement.
As someone who came to law school intending to become a prosecutor (a goal I still wish to achieve), my first instinct is to think about the practical issues with cases such as these and several immediately came to mind:
First, the victims targeted by those who wish to rip them off are specifically and exceptionally vulnerable. This of course means that curtailing future recurrences of similar crimes will be a great challenge for law enforcement but it can even lead to difficulties in prosecuting those cases which do result in charges. The very nature of such victims may lead to them being unlikely to garner sympathy from a jury. For instance, some victims become victims because they are tempted by the prospect of a get-rich quick scheme while others are borderline destitute and could draw the ire of a more well-off jury. In any event it is widely acknowledged that the victims of such cases are “unsophisticated” rendering them less-than-ideal witnesses in resulting criminal trials.
Second, there appears to be, though I do not have empirical data on hand to support the assertion, a divergence among younger Americans concerning how they handle their own privacy interests regarding a great number of things including their own identities and identifying information. There are those who are practically paranoid and then there are those who simply hand over information as if doing so carries no risk of harm to their person or finances. It is my fear that the latter is far more prevalent in modern society and this is very dangerous. Reading through these materials demonstrated to me how easy it might be for someone to fall for a scheme, sometimes at the hands of a person’s own friend or family member and yet so many seem willing to give up highly valuable personal information without so much as an inquiry regarding the necessity of the information.
Lastly, I was impressed and horrified to learn of the large number of general areas of real estate fraud that exist and how simple they often are to conduct. It seems to me that, on the surface, such schemes seem complex or would to the everyday person who is more concerned with paying for groceries or enjoying retirement. The perceived complexity perhaps masks the simplicity and ease that some forms of real estate fraud require to complete successfully but the damage is enormous. This leads me to the question of how to aggressively prosecute and prevent similar future crime from occurring.
To the educated mind it seems rather simple what to do avoid such problems – do not trust anyone who comes bearing gifts for which they want little reward…especially as it pertains to property they wish to hold some dominion over. However, the educated are not those who appear most often be victimized in real estate fraud cases. At the very least the average American can easily research a “deal” that has been offered him/her given the amount of information that is now easily accessible. For the more affluent, contacting an attorney would be an excellent idea.
I think the average American does not think about how easy it is to become a victim of fraud like identity theft. We sign documents, pay for items, participate in automatic billing, submit personal information and make transactions online on a daily basis without giving it a second thought. It is convenient and many of us have become accustomed to doing things this way. Many of us have also already decided to go paperless and actually prefer completing transactions online. However, convenience has its consequences which make consumers much more vulnerable to fraudulent activities and schemes.
There are several simple and practical things the average American can do to prevent becoming a victim of fraud. One method is to make checking your bank account for suspicious activity a regular practice. This is something I do often. Sometimes your bank may not catch suspicious transactions being that they have millions of customers or the activity is not very obvious. However, you’re the best person to catch any suspicious transactions since it’s your account and you’re familiar with what you have and haven’t purchased. Another method is to avoid sharing personal information on non-secured sites. Although sharing your personal information on a secured site is no guarantee that hackers won’t be able to access your data, sharing your personal information on a non-secured site is much more dangerous and easily accessible for hackers. People should also avoid receiving large amounts of compensation from companies to use their information. As described in your blog post, people can receive amounts between $5,000-$10,000 from companies to use their name and personal information. The information can be used to acquire a mortgage loan and then the victim who gave up their information is now tied to a mortgage loan they have no actual knowledge of. The victim received $5,000-$10,000 in compensation not realizing that they would be responsible for a much heftier debt. I would advise that no matter how tempting the offer is, stay away from offers like this from companies.
Plenty of people are involved in the business of flipping homes. Personally, I have family members who flip homes. One situation where using a straw buyer is legal is using a straw buyer similar to a cosigner or guarantor. For example, if someone has poor credit or no credit and wants to purchase a fixer upper home to flip it, they can use a straw buyer with good credit in order to assist in acquiring the loan for the home. This is kind of similar to situations where parents cosign a loan for their child’s vehicle or act as a guarantor for their child’s college apartment lease. In both scenarios, there’s the understanding that the borrower or the person who the loan is actually for will pay the loan. However, if the borrower cannot pay then the straw buyer, cosigner or guarantor is legally responsible for paying back the loan. I think that the most important thing in legally using a straw buyer is maintaining complete transparency with the lender and the straw buyer. Using a straw buyer illegally, involves a great deal of misrepresentation as the lender believes that the straw buyer has the ability to pay back the loan because of their good credit. In reality, the straw buyer may not know that their information is being used and the lender is unaware that the straw buyer is not the actual buyer. If there’s transparency, then the lender can better decide whether to give the loan and the straw buyer is aware that they may potentially be responsible for the loan.