RESPA Violations and Mortgage Fraud Schemes that Emerge During a Real Estate Bubble

1. RESPAViolationsandMortgageFraud
SchemesthatEmergeDuringaReal
EstateBubble
Jillayne Schlicke
CE Forward, Inc.
Spokane Mortgage
Lenders Association
June 16, 2021

2. Agenda
RESPAViolations
Mortgage Fraud
Anti-Money Laundering

3. Agenda
RESPAViolations
Mortgage Fraud
Anti-Money Laundering

4. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Affiliated Business
Arrangements
Ownership
Example:
Real estate company owns
a lender

5. RESPA
Violations
and Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Hometown Financial Group
DBA K Loans
Luisito “Louie” Flores
and Joseph Kelly
Joseph Kelly owns
Kelly Right Realty
and K Loans
Source:
https://dfi.wa.gov/sites/default/files/consumer-
services/enforcement-actions/C-15-1827-19-CO01.pdf

6. RESPA
Violations
and Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
K Loans gave 50% to 100%
of their mortgage broker revenue to
Kelly Right Realty
in exchange for referrals.
Kelly Right Realty paid ALL of the
operating and marketing expenses of
K Loans
Other state and federal law violations
Deceptive advertising, failure to
provide disclosures and pay fees.

7. RESPA
Violations
and Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Joseph Kelly owns
Kelly Right Realty
K Loans
“Affiliated Business
Arrangement Disclosure Form”
not given to home buyer

8. RESPA
Violations
and Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
10,000 investigation costs
$50,000 fine
$25,000 STAYED
$25,000 due immediately
$7,339 examination fee
=
$42,739.
But wait!There’s more….
K Loans continued to violate the law
The ”stay” was lifted.

9. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Why did we switch from
Affiliated Business
Arrangements to Marketing
Services Agreements?
The Qualified Mortgage Rule
under the Dodd Frank Act.

10. Qualified
Mortgages
~
Regular periodic payments that
are substantially equal
~
Loan term does not exceed 30
years
~
Total points and fees do
not exceed 3% for loans
over $100,000
~
Total debt to income
ratio does not exceed
43%
~
If loan conforms to
guidelines set forth by
Fannie & Freddie (aka
Conventional,) FHA,VA,
USDA Loan is
automatically a QM Until
Feb 2021.
Ability to Repay: 5Years
10
Higher PRICED
Mortgage Loans
HPMLs
Loans formerly known as
Subprime
Non-Traditional = Any loan
that’s not a 30 year fixed
rate mortgage
Non-prime
Non-QM
A loan is an HPML When:
Annual Percentage Rate (APR)
is:
1.5 or more points higher on a
fixed rate mortgage OR
2.5 or more points on a non-
conforming loan OR
3.5 or more points higher for a
subordinate lien
When compared with the
Average Prime Offering Rate
(APOR)
Ability to Repay: 7 Years
High COST
Mortgages
~
H.O.E.P.A.
Home Owner Equity
Protection Act
Originally for second mortgages,
also known as Home Equity
Lines of Credit. These are VERY
EXPENSIVE mortgages, with
higher costs due to a higher
risk.
~
Annual Percentage Rate (APR)
exceeds Average Prime Offering
Rate (APOR) by more than:
~
6.5% for first lien mortgages
OR
8.5% for first lien mortgages
under $50,000.
OR
8.5% for junior or subordinate
liens.
~
Borrower must attend a
counseling class

11. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
MSAs:
Marketing Services Agreements
Something ofValue
A referral
A quid-pro-quo agreement
The CFPB seems to take the position
that the mere entering into a contract
with a person in a position to refer
settlement service business is a
violation of Section 8 of RESPA due to
the implied quid-pro-quo built into all
MSAs

12. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Homestreet Bank
Shareholders were
complaining:
A certain division was
constantly unprofitable.
Shareholders voted to sell
that division……FDIC

13. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Homestreet Bank
Desk rental agreement in
real estate offices and with
home builders.
Co-marketing online
Quid Pro Quo

14. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
FDIC Civil Monetary
Penalty
$1,350,000.
Source: https://www.fdic.gov/news/press-
releases/2019/pr19103.html

15. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a
Real Estate
Bubble
Office of theWA State
Insurance Commissioner
v.
MODUSTitle and Escrow

16. Agenda
RESPAViolations
Mortgage Fraud
Anti-Money Laundering

17. Fraud for Housing
Intentional misrepresentation of a
fact in relation to a mortgage loan.
Had the lender known of the fact, the
lender might not have made that
loan.
Example: Borrower lies about
occupancy
Fraud for Profit
A group of individuals acting together
in a group to send many loans
through one or more lenders and a
significant percentage of the loans
default leading to large losses.
RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate
Bubble

18. Whoever knowingly executes, or
attempts to execute, a scheme or artifice-
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds,
credits, assets, securities, or other
property owned by, or under the custody
or control of, a financial institution, by
means of false or fraudulent pretenses,
representations, or promises;
shall be fined not more than $1,000,000 or
imprisoned not more than 30 years, or
both.
http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title18-
section1344&num=0&edition=prelim
RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate
Bubble

19. WAState
RCW
19.144.080
Mortgage
Lending
and
Homeownership
Law
Unlawful actions—Fraud,
misrepresentation, deceptive
practices:
(1) It is unlawful for any person in
connection with the mortgage lending
process to directly or indirectly…..
http://apps.leg.wa.gov/RCW/default.aspx?cite=19.
144.080
Class B felony

20. Fannie Mae:
Mortgage Fraud LoanTrends
Loans with mortgage fraud
investigative findings
Third party loans
2020 findings
RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate
Bubble

30. Fannie Mae: Misrepresentation of
Borrower’s Employment
Fannie Mae has identified several
entities listed on loan applications as
places of employment that appear to
be fictitious.The following list of
employers contains entities /
businesses that were listed as the
borrower’s purported place(s) of
employment but whose existence
Fannie Mae could not confirm.
RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate
Bubble

31. Mortgage Fraud Case Studies
David Daughtrey “MLM Guru”
Dana and Michael “Bubba” Roush
Ronald McCord
Chris Schaller
“The Illinois Mortgage Man”
RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate
Bubble

32. QuiTam Action
Guaranteed Rate
RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate
Bubble

33. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
The Silent Second
Two versions:
1) Rapid home price increases
2) Rapid home price decreases

34. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Silent Second:
Rapid Home Prices Decreasing
U.S. v. Century Mortgage, Spokane and
Ronald Burger and Sage Gibbons
(primary owners of Century)
10 LOs, real estate agent and appraiser
Significant mortgage fraud.
Source: https://dfi.wa.gov/news/press/spokane-mortgage-and-
appraisal-fraud-case-concludes

35. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Silent Second: Home Prices DECREASING
• Home is not selling because price is too high.
• Home is taken off the market.
• Home comes back on the market at a much
higher price.
• Home obviously not worth that much so
appraiser is involved with inflating home
value.
• For simplicity:
Home is not even worth $80,000
because it’s not selling.
Home comes back on at $100,000.

36. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Silent Second: Home Prices DECREASING
• Homebuyers are told by LO that
they can buy with zero down.
• Home sells for $100k.
• Inflated appraisal at $100k
• First mortgage: $80,000.
• Second mortgage: 20,000.

37. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Silent Second: Home Prices DECREASING
• Addendum to purchase and sales
agreement:
“At the close of escrow, the second
mortgage shall be paid off for $1.00”
• Addendum to purchase and sales
agreement not provided to the lender
funding the loan.
• Lender has made 100% LTV loan

38. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
The Silent Second
Two versions:
1) Rapid home price increases
2) Rapid home price decreases

39. Silent Second: Home Prices
INCREASING
Home buyer cannot get offer accepted.
The first mortgage loan is calculated
against the lower appraised value.
Homebuyer agrees to a second
mortgage for the diff between sales
price and appraised value.
Lender is provided with purchase and
sales agreement with price at the
appraised value.
Lender is not told about the second
mortgage, because home buyer would
not qualify.
RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble

40. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Silent Second: Home Prices
INCREASING
Escrow closer has borrowers sign
the second mortgage but it is not
recorded.
Loan must close, title policy must
be delivered to the lender so the
loan can be sold.
After the loan is funded and
shipped, the second mortgage is
recorded.

41. RESPA
Violations
and
Mortgage
Fraud
Schemes
that Emerge
During a Real
Estate Bubble
Money LaunderingTrends
FinancialCrimes Enforcement
Network
FinCen.gov
Payday Lenders
Marijuana
Bitcoin

42. Thank you,SMLA
Jillayne Schlicke
206-931-2241
jillayne@ceforward.com
ceforward.com