The Cash Back Mortgage Fraud Scheme
There are a variety of different schemes that people use in order to profit off of the mortgage market, and one of the most common is the use of a cash back mortgage fraud scheme, also known as the kickback scheme.
The main idea of a cash back mortgage scheme is when someone poses as a homebuyer, “investor” for our purposes, makes an offer on a home higher than the asking price so that they can get a loan from a mortgage lender at that higher price. Later on, however, the investor will end up paying the seller whatever the asking price was, and the investor ends up pocketing the money from the difference between the first offer and the original asking price that they ended up buying it for in the end. The issue with schemes like this is that it involves a great deal of people in an illegal scheme and innocent people can end up getting charged for being involved with fraud when they were actually a totally unknowing victim. The seller will simply agree to sell the house at the asking price and not know that they have been brought into a fraud case.
In order to make the scheme more difficult to find out, the investor will usually get a “straw buyer” involved. A straw buyer is a person that the investor recruits into the scheme (either knowingly or through manipulation) in order to take out a mortgage on a house under their name. If the straw buyer is a knowing part of the scheme, they will usually be paid a fee by the investor, and usually in cases of the cash back scheme they will not be responsible for making any payments or have to live on the property.
The straw buyer’s involvement begins in that the investor will have them apply for a loan. The lender will then have the information of the straw buyer on file for the mortgage. The investor will fill out all of that information fraudulently, saying that the straw buyer intends to live there, has enough money to pay for it, and hides whatever debts the person might have. They will even go as far as to put down false information about where the money for an initial down payment will come from. The straw buyer ends up facing large criminal risks because they have to sign that the information is true.
At this point, an escrow or title company will become part of the process. They will hold the property until the pending contractual obligation is met by the person buying the home, or in this case committing mortgage fraud. Assuming the escrow company approves the HUD-1 or “Pre-Audit” (which lists the payments that need to be made with a loan), the mortgage lender will give the funds to the escrow company which then disburses them to the investor. The escrow agent can end up facing both civil and criminal liability in this case because they have to prepare a “Settlement Statement” that details the exact way that funds were disbursed in order for the mortgage lender to keep a record of them.
In cases of a cash back scheme being used by an original investor, the loan ends up being risky because it begins with what is called negativity equity. Negative equity in a property means that a home is worth less than the amount the loan is for—remember the investor got a loan for above the price that they bought the house for. This type of scheme is actually illegal under federal law, as the Real Estate Settlement Procedures Act writes that “no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
People involved in executing settlement services can also be pulled into the kickback scheme. Settlement services in real estate include the following: title searches, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, title examinations, loan processing, the origination of a federally related mortgage loan, and more. Clearly people involved in these processes can end up being scrutinized in an investigation of mortgage fraud, and in order to prove that they are innocent, they will have to provide full records of these transactions.
Since mortgage fraud cases tend to rope people in who are completely uninvolved, many people are falsely charged for their involvement when they were among the victims of the crime. Should you be charged for a kickback scheme or any other form of mortgage fraud it is crucial that you consult a skilled defense attorney about your case.