New Form to Prevent Mortgage Fraud

This morning I received an email from one of the major banks we work with recommending the use of a “FBI fraudOccupancy Cert”.   They are recommending the use of this form on any loans we sell to their bank, including owner occupied, investment or second homes.    The form, which must be acknowledged by the borrower, states:

“Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30  years in federal prison or $1,000,000 fine, or both.  It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.”

The borrower must then select the occupancy for the specific property that is being financed:

  • Primary Residence – Occupied by Borrower(s) within sixty (60) days of closing as stated in the Security Instrument I/we excuted.
  • Second Home – To be occupied by the Borrower(s) as a second home (vacation, etc) while maintaining principal residence elsewhere.
  • Investment Property – Not occupied by Borrower.   Purchased as an investment to be held or rented.

Directly above the signature line, the form states:

“I/we acknowledge it is illegal for a person(s) to make a false statement regarding occupancy of property being financed in a loan and credit application and that we are subject to prosecution under Section 1001, 1010 and 1014 under Title 18 of the United States Code”

This document seems to make it crystal clear what occupancy is and the potential risk of trying to finance an investment property as owner occupied or as a second home.   Can something so direct make a difference and curb mortgage fraud?

27 thoughts on “New Form to Prevent Mortgage Fraud

  1. Yes, I do think it will make a difference.

    Rhonda, is the form given to the homeowner at the beginning of the transaction or only at the end?

    In addition I believe that some people are just sociopaths and will lie no matter what the possible consequences. They simply do not care and the added risk of possibly being caught makes it all the more exciting.

  2. Yes, I do think it will make a difference.

    Rhonda, is the form given to the homeowner at the beginning of the transaction or only at the end?

    In addition I believe that some people are just sociopaths and will lie no matter what the possible consequences. They simply do not care and the added risk of possibly being caught makes it all the more exciting.

  3. A form like that has always been in closing packages. Maybe having a big FBI logo on it will make it more prominent, but it has never been a secret that lying about occupancy is mortgage fraud.

  4. Russ, you’re right…it’s never been a secret…but many borrowers gloss of the current disclosure forms and never read the deed of trust which is pretty clear on what occupancy is. I’m thinking that the big color FBI logo and stating what the potential penalties are may make those who were considering stretching their ethics and committing fraud; think twice and do the right thing.

    Jillayne, the form is new and the bank states it is

    “recommending the use of a signed Occupancy Cert on all loans submitted to Underwriting. Misrepresentation of occupancy is considered mortgage fraud and the risk of default is significantly higher on non-owner occupied properties than on those that are owner-occupied.

    Please use the attached form or something similar immediately on all loans in your pipeline.”

    As Russ mentions, we’ve always had disclosures regarding occupancy and that information the borrower has provided us is correct at application.

    One of my most popular posts at Mortgage Porter is addressing “is it a second home or investment”. Everyone wants that second home/owner occupied rate for their home that they *might* rent out…I can’t imagine taking the risk.

  5. Russ, you’re right…it’s never been a secret…but many borrowers gloss of the current disclosure forms and never read the deed of trust which is pretty clear on what occupancy is. I’m thinking that the big color FBI logo and stating what the potential penalties are may make those who were considering stretching their ethics and committing fraud; think twice and do the right thing.

    Jillayne, the form is new and the bank states it is

    “recommending the use of a signed Occupancy Cert on all loans submitted to Underwriting. Misrepresentation of occupancy is considered mortgage fraud and the risk of default is significantly higher on non-owner occupied properties than on those that are owner-occupied.

    Please use the attached form or something similar immediately on all loans in your pipeline.”

    As Russ mentions, we’ve always had disclosures regarding occupancy and that information the borrower has provided us is correct at application.

    One of my most popular posts at Mortgage Porter is addressing “is it a second home or investment”. Everyone wants that second home/owner occupied rate for their home that they *might* rent out…I can’t imagine taking the risk.

  6. Silly — Bankers with too much free time on their hands.

    Don’t you think someone willing to commit mortage fraud might also be willing to lie about it?

  7. Thorn, sociopaths will still lie… I do think there are some people who either don’t totally realize they’re commiting fraud–maybe their LO or RE agent has lead them to believe this. And I think there are folks who might believe it’s okay to “bend the rules” a little. I don’t think these groups of people realize the risk involved when you commit fraud whether it’s a “white lie” or blatant. Hopefully forms like this will make people think twice.

  8. I’d be very interested in my neighbor’s declaration of occupancy on his loan.

    My guess is that he bought the house with an owner-occupy loan, sub-divided it, and built the new house “for himself”, and now the first is on the market, and the second will soon follow.

    He claims he originally “planned” to live there, and is playing the plausible deniability game. I don’t think he’s a sociopath. I think he’s a business man rolling the dice that he won’t be investigated. Since at the time he took out the loan(s) (when the market was still rising), next to no one was.

  9. Cam, there are so many shades of grey. I can’t imagine how many home buyers go to their lenders saying “well, what if we INTEND to occupy”…with only planning to do so for a month or so thinking they’ve met the occupancy requirement. I’m sure we had LO’s who were bad-actors (hopefully no longer around) who would gladly take the loan and say “well we can’t help what happens after the loan closes”…just to earn a commission…and there have probably been some RE agents who have coached buyers the same way.

    This is language from the Fannie/Freddie Deed of Trust:

    Borrower shall occupy, establish, and use the Property as Borrower’s principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances exist which are beyond Borrower’s control….

    Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of Borrower or with Borrower’s knowledge or consent gave materially false, misleading, or inaccurate information or statements to Lender (or failed to provide Lender with material information) in connection with the Loan. Material representations include, but are not limited to, representations concerning Borrower’s occupancy of the Property as Borrower’s principal residence.

  10. Cam, there are so many shades of grey. I can’t imagine how many home buyers go to their lenders saying “well, what if we INTEND to occupy”…with only planning to do so for a month or so thinking they’ve met the occupancy requirement. I’m sure we had LO’s who were bad-actors (hopefully no longer around) who would gladly take the loan and say “well we can’t help what happens after the loan closes”…just to earn a commission…and there have probably been some RE agents who have coached buyers the same way.

    This is language from the Fannie/Freddie Deed of Trust:

    Borrower shall occupy, establish, and use the Property as Borrower’s principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances exist which are beyond Borrower’s control….

    Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of Borrower or with Borrower’s knowledge or consent gave materially false, misleading, or inaccurate information or statements to Lender (or failed to provide Lender with material information) in connection with the Loan. Material representations include, but are not limited to, representations concerning Borrower’s occupancy of the Property as Borrower’s principal residence.

  11. Here’s an example of a borrower with good intentions–wanting to help their parents–but willing to (unknowingly?) commit fraud for an owner occupied rate:

    My husband and I currently own a house, the deed is under our names, but the loan is on his name. I am thinking buying another house close to my house for my parents, so we can take care of them when they are getting older. Can I claim this as my residence home with the lender so we can get lower rate?

    Part of my response to her (this is from a post on my blog) is that she would need to actually occupy the property for it to be owner occupied.

  12. Rhonda:

    We have been using that FBI page in our initial disclosures since mid 2007. That, and a separate Affidavit of Occupancy spelled out, and a handwritten stated income page (when stated income still existed), so that an LO couldn’t slip in a bogus number on the application.

    Yeah, it’s in your face, and I didn’t like that my disclosures ran 23 pages, but I appreciated that my broker was trying his best to ensure that only clean responsible loans made it out the door.

    Today, I have to run my own 4506T (verifying that taxes were filed) and a SS# verification, and a special report to detect fraud. Usually, that is done in underwriting, but we are making sure that it only goes to underwriting after it has been checked out first.

    More work, more paper, can’t say I love it, but at least the loans that we are buying with taxpayer funding, via the fed, are well vetted by the time we buy them!

  13. Rhonda:

    Re the DOT and owner occupied.

    I once spent a week with a borrower going over that issue. He was NOT intending to defraud the lender, but he WAS concerned that he may have to move suddenly (he was a foreign national, work Visa).

    We wanted to know what the bank would do in the case of a violation. So I asked the bank (now out of business), what would be the consequences if the borower were found not to occupy the property.

    They said, in general, unless the fraud was rampant (in which case they would initiate default and foreclosure proceedings), they would keep the loan in place, but adjust the terms retroactively to reflect pricing and terms of an investment property, including increases to the rate, loan costs and possibly down payment.

    Seemed to me to be a reasonable solution.

    I have had to say bye-bye to a number of potential borrowers when they wanted to “pretend” to occupy the property.

    That said, a borrower can certainly lie to an originator about their intent, and an originator does not submit the borrower/client to a lie detector test.

    Good LO’s DO submit it to the unofficial “sniff” test.

    If it smells bad…don’t eat it!

  14. Rhonda:

    Re the DOT and owner occupied.

    I once spent a week with a borrower going over that issue. He was NOT intending to defraud the lender, but he WAS concerned that he may have to move suddenly (he was a foreign national, work Visa).

    We wanted to know what the bank would do in the case of a violation. So I asked the bank (now out of business), what would be the consequences if the borower were found not to occupy the property.

    They said, in general, unless the fraud was rampant (in which case they would initiate default and foreclosure proceedings), they would keep the loan in place, but adjust the terms retroactively to reflect pricing and terms of an investment property, including increases to the rate, loan costs and possibly down payment.

    Seemed to me to be a reasonable solution.

    I have had to say bye-bye to a number of potential borrowers when they wanted to “pretend” to occupy the property.

    That said, a borrower can certainly lie to an originator about their intent, and an originator does not submit the borrower/client to a lie detector test.

    Good LO’s DO submit it to the unofficial “sniff” test.

    If it smells bad…don’t eat it!

  15. Roger, there are times when “life happens” and people are not able to occupy the home for the first 12 months…I’m amazed at the consumers I meet with who are under the impression they only need to occupy or appear to occupy for a few months.

    I’m thankful for the ethical consumers who ask questions upfront, like your borrower…not everyone is willing to “show their cards”.

  16. Roger, there are times when “life happens” and people are not able to occupy the home for the first 12 months…I’m amazed at the consumers I meet with who are under the impression they only need to occupy or appear to occupy for a few months.

    I’m thankful for the ethical consumers who ask questions upfront, like your borrower…not everyone is willing to “show their cards”.

  17. I’m sorry but I don’t feel sorry for these greedy lenders! They created this mortgage mess with their lack lending polices, and now good people for headed to prisons for a long time. The final responsibility has to be placed on the lenders—–it is their business to insure quality assurance of every loan.

  18. Pingback: Occupancy Fraud on the Rise | Rain City Guide

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