Chapter 27 — Exercises

Fraud Prevention: Red Flags, Identity Verification, and Protecting Yourself and Your Borrower

Work these with the chapter closed where you can. Items marked † have worked solutions in the answers appendix. There are no answers in this file.

A standing instruction that applies to everything below: most red flags have innocent explanations. An answer that leaps to "fraud" without naming the independent verification that would resolve the question has failed the exercise even when it happens to be right.

A. Recall and definitions

27.1 State the three elements in this chapter's definition of mortgage fraud, and explain what each element excludes.

27.2 In one sentence each, distinguish fraud for housing from fraud for profit on four dimensions: intent, number of parties, involvement of an industry insider, and typical detection method.

27.3 † Define red flag as this chapter uses the term. Then explain why the definition says nothing about suspicion, and state what an originator is required to do when one appears.

27.4 What is a straw buyer? Name three ways a straw purchase is typically detected, and state why "I was told it was legal" is not a defense.

27.5 Define silent second and air loan. For the silent second, name the two facts it falsifies for the first-lien lender. For the air loan, name the single control that defeats it.

27.6 † Explain willful blindness in the terms this chapter uses, and state the single professional habit that protects an originator against it.

B. Red-flag identification

For each item, state (a) whether it is a red flag, (b) the most likely innocent explanation, and (c) the independent verification that resolves it. Several of these are not red flags at all — say so, and say why.

27.7 A borrower's W-2 Box 1 wages are \$4,180 lower than the year-to-date gross on their final paystub for the same year.

27.8 The written verification of employment is returned within thirty minutes, on a Sunday, signed by a "payroll manager," from an email address at a free consumer domain.

27.9 † Bank statements are supplied as photographs taken with a phone, with page 3 of 5 missing.

27.10 The borrower has placed a security freeze on all three credit files.

27.11 The subject property is a duplex; the borrower will occupy one unit and rent the other, and the application states "primary residence."

27.12 The earnest money check clears from an account that is not on the application and is not in either borrower's name.

27.13 † The employer's phone number on the application is a mobile number, and the employer has no website.

27.14 A \$15,000 deposit hits the borrower's savings account nineteen days before application, and the borrower says, "that's from my mother — we'll pay her back when we can."

27.15 A power of attorney was executed eleven days ago naming the borrower's adult child, and the child has answered every question on every call.

C. Applied reasoning and calculation

27.16 † Using the Linden Street figures — qualifying income \$10,500.00 per month, PITI + MI \$3,033.72, other monthly debts \$1,446.00 — compute the back-end ratio before day 41, then compute it again after adding a \$611.00 monthly furniture payment. Show the ratio to two decimals at each step and state the movement in percentage points.

27.17 The furniture balance was \$5,200.00 against a loan amount of \$365,750.00. Express the balance as a percentage of the loan amount to two decimals. Then explain in three sentences why a balance that small moved the qualifying ratio nearly six points.

27.18 † The resolution was to pay the account in full from reserves. Reserves before were \$12,623.66 and PITI + MI is \$3,033.72. Compute reserves after the payoff in dollars and in months, and state the change in months to two decimals.

27.19 The Harlow Street file carries a \$10,000 forgivable county second on a base loan of \$207,475.00 against a \$215,000 purchase price. Compute the CLTV to two decimals. Then state, in one sentence each, three things that make this lien lawful that a silent second lacks.

27.20 † A borrower's cash to close is \$25,376.34 and their total verified assets are \$38,000.00. If the closing funds are wired to a criminal's account, what percentage of the borrower's liquid assets is lost? What remains, and what does the borrower now own?

D. Read the document and find the problem

27.21 You receive an income package containing two paystubs, a prior-year W-2, and a written VOE. The stub's year-to-date gross implies roughly 46 hours per week; the VOE reports "40 hours, overtime not guaranteed." List every ordinary explanation you can think of, then name the two independent verifications you order and the order you order them in.

27.22 † A title commitment arrives showing a recorded deed of trust in favor of the seller, dated the same day as the purchase contract, in an amount equal to 8% of the purchase price. Your file shows a 5% down payment funded from verified savings and no subordinate financing. Write down, in order, the first four things you do — and identify which of the four most originators get wrong.

27.23 An appraisal report contains interior photographs whose window views do not match the exterior photographs, and a gross living area 380 square feet larger than the county assessor's record. Is this appraisal fraud? What do you actually do, and through which channel?

27.24 A verbal verification of employment is required before the note date. You call the number printed on the written VOE and a person confirms employment immediately and enthusiastically. Explain what is wrong with what you just did, and what you should have done instead.

E. "What do you do next?" — escalation

For each, write the next four actions in order, then name the action you must specifically avoid and say why.

27.25 † On day 40, your borrower says on a recorded call: "We're not really going to live there — my agent said to just put primary residence and nobody checks."

27.26 Three files from the same referral source in eight weeks have each included a large gift from a different non-relative donor, and in each case the wire funding the gift came from the same bank routing number.

27.27 Your borrower calls at 4:40 p.m. on the day before closing: they wired their closing funds yesterday morning to the account in an email from "the title company," and the title company has just told them nothing arrived.

F. Write it

27.28 † Write the fraud review memo for the Linden Street file in fewer than 200 words. Facts and dates only, no conclusions, covering the \$10,000 gift, the \$4,900 deposit, the prior owner's mechanic's lien, and the day-41 furniture account.

27.29 Write the two-to-three sentence script you will deliver at application to prevent a day-41 furniture purchase. It must include the reason, not just the rule, and it must be deliverable in fifteen seconds. Time yourself reading it aloud.

27.30 Write the wire-fraud warning you will send in writing at application. Maximum 120 words. It must state what will never happen, what the borrower should do if it appears to happen anyway, and how they will actually receive instructions.

G. Judgment and ethics

27.31 † A borrower who is \$400 a month short on qualifying income says: "My uncle will put me on his payroll for two months — would that work?" Write your reply. Then write the two sentences you say next, which are the ones that keep the borrower in the conversation.

27.32 A colleague at the next desk asks you to "just sign off" as the originator on a file they took but cannot submit because of a licensing issue in that state. Write your answer, then write what you do after the conversation ends.

27.33 The chapter argues that on the day-44 event "the failure was the loan officer's." Construct the strongest available counterargument — that adults are responsible for their own credit decisions and were told once already — and then say which position you hold and why.

H. NMLS-style exam questions

27.34 A borrower overstates income on an application for a home they intend to occupy and pay for. This is best described as: (a) not fraud, because the borrower intends to repay (b) fraud for housing (c) fraud for profit (d) a material omission rather than a misstatement

27.35 † An individual applies for a mortgage in their own name, using their own credit, on behalf of an undisclosed party who supplies the funds and will control the property. The individual is best described as: (a) a non-occupying co-borrower (b) a nominee trustee (c) a straw buyer (d) a guarantor

27.36 Which of the following is filed with the Financial Crimes Enforcement Network and may not be disclosed to its subject? (a) a Uniform Residential Loan Application (b) an appraisal reconsideration of value (c) a Suspicious Activity Report (d) a notice of address discrepancy

27.37 † Under the S.A.F.E. Act's character and fitness standard, a felony conviction involving fraud, dishonesty, breach of trust, or money laundering results in: (a) a three-year bar to licensure (b) a seven-year bar to licensure (c) a permanent bar to licensure (d) no bar, provided restitution has been paid

I. Loan File extension

27.38 † Apply the three-question test from §27.12 — false statement, concealment when asked, intent to deceive — to each of the following, and state your conclusion with a one-sentence justification for each:

(a) The day-41 furniture purchase, as it actually happened. (b) The same purchase, except that on day 42 the loan officer asked "have you opened any new credit?" and the borrowers said no. (c) The same purchase, except that the borrowers signed a final application at closing showing no new debt while the account was open and unpaid. (d) The \$4,900 commission deposit that generated condition 5.

27.39 Redesign the Linden Street calendar between day 33 and day 44 so that the furniture purchase either does not happen or is discovered on day 42 rather than day 44. Specify each touchpoint: the day, who makes it, the channel, and the exact thing that gets said. Then estimate what your redesign would have saved in business days and in months of reserves.