I. INTRODUCTION
The Financial Crimes Enforcement Network (FinCEN), has issued an advisory to highlight reverse mortgage fraud schemes potentially related to the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) program so that financial institutions may better assist law enforcement when filing Suspicious Activity Reports (SARs).
The FinCEN advisory contains examples of common fraud schemes and potential “red flags” for fraudulent activity related to HECMs. To assist law enforcement in its efforts to target this type of fraudulent activity, the advisory also suggests key words for financial institutions to use when completing SARs involving fraud related to the HECM program.
II. DESCRIPTION OF THE HECM PROGRAM
HUD and FHA established the HECM proprietary reverse mortgage program in 1989. The HECM program, which allows seniors age 62 and older to withdraw some of the equity in their homes, is the only reverse mortgage program insured by the U.S. government (through the FHA). HECM loans are provided through FHA approved lenders. Seniors seeking a HECM loan must meet minimum property standards and discuss the program requirements and associated financial implications with a HECM loan counselor before proceeding. The total loan amount is based upon the appraised home value and other factors, up to a maximum of $625,500. There are five methods of receiving the proceeds on a scheduled or unscheduled basis, including via one or more direct payments, a line of credit, a fixed value annuity, or a combination thereof. Financing costs may be paid from the proceeds of the HECM loan. Lenders are repaid in full upon sale of the home, death of the senior, and certain other circumstances.
The HECM program also allows seniors to purchase homes using HECMs. The “HECM for Purchase” program allows seniors to purchase homes with no mortgage payments if they are able to contribute a substantial down payment.
III. POTENTIAL INDICATORS OF HECM FRAUD SCHEMES IDENTIFIED BY LAW ENFORCEMENT AND HUD OFFICIALS
The following highlights potential indicators of schemes involving the HECM program based upon general typologies received from law enforcement and HUD officials. This information is intended to assist financial institutions in identifying when illicit activities may intersect with their financial institution and HECM or other reverse mortgage-related fraudulent activity. This is not an exhaustive list of common fraud schemes, and the associated “red flags” indicate only possible signs of fraudulent activity relating to reverse mortgages. No single red flag will be definitive proof of such activity and may apply to multiple fraud schemes. Instead, it is important to view any red flag(s) in appropriate context with other indicators and facts, such as the specific role of the financial institution within the HECM loan-related transaction(s), as well as knowledge of the associated fraud schemes. In some cases, the fraudulent activity may involve more than one type of fraud scheme, with one constant being the funneling of the victim’s HECM loan proceeds to the perpetrator(s). These schemes also may involve multiple fraudulent actors, ranging from loan officers or processors to appraisers or public notaries to family members or caretakers.
A. Cross Selling
One common fraud scheme involves the theft of a senior’s HECM loan proceeds through cross selling of financial products in violation of HUD rules. As a part of this scheme, loan officers or other individuals convince the senior to use HECM loan proceeds to finance the purchase of expensive and unnecessary insurance, annuities, or other financial products.
Red Flags
B. Cash-Out Theft
Another scheme involves the theft of reverse mortgage proceeds by individuals trusted by the senior, including family members, caretakers, and loan officers. For example, a senior may receive a HECM cash-out check and provide the check to the loan officer (or other trusted party). The loan officer or other trusted party then co-endorses the check and deposits it to his or her business or personal bank account. The senior is instructed to request cash withdrawals directly from the loan officer or another trusted individual. After the senior obtains several withdrawals, he or she is told all the HECM loan proceeds have been received. The loan officer or other trusted party pockets the remaining funds.
C. Straw Owner-Property Flipping
HECMs have been used to flip properties. One scheme involves a perpetrator (“straw buyer”) transferring ownership of a typically low-value or problem property to an unsuspecting senior (“straw senior”) without going through a mortgage sale. Fraudsters then instruct the straw senior to complete paperwork for a HECM loan against the property, using an overstated appraisal, or assume the identity of the senior to do so themselves. Investigators have noted appraisals as high as 1,000% of the actual fair market value of the home.
D. Straw Owner-Fake Down Payments
A new variation of HECM fraud involves the HECM for Purchase program. Many HECM originators stopped accepting HECM applications from seniors who did not have a seasoned title as a result of the previously discussed property flipping scheme. To get around the new lender rules, fraudsters have started “selling” low-value properties to seniors. Using bogus gifts or fraudulent paperwork, fraudsters create the appearance of a large down payment by the senior to purchase the property. The senior is then instructed to take out a HECM loan on the existing home, based on an overstated appraisal, to complete the purchase of the low-value property.
E. Distressed Non-Senior Mortgagors
Distressed mortgagors under the age of 62 will sometimes ask senior parents, other family members, or friends to take a HECM loan for them. In some cases, distressed mortgagors will submit fraudulent paperwork to take out the loan and receive the HECM loan proceeds directly. Fraudsters also may assume the identity of a senior victim and take out a HECM loan without the senior’s knowledge.
F. Power of Attorney
In a variety of the fraud schemes noted above, the perpetrator may use a power of attorney (POA) for the senior to apply for and close HECM loans without the full knowledge or participation of the victim. A POA also may be used for either the seller or the buyer in a HECM for Purchase transaction. In many HECM for Purchase schemes, fraudsters purchase properties from homeowners without formally recording the purchase. Instead, the fraudster receives a POA from the homeowner and then “sells” the home to the straw senior using the HECM for Purchase program.
IV. SUSPICIOUS ACTIVITY REPORTING
The activities of financial institutions may intersect with a reverse mortgage fraud scheme in several ways. First, HECMs are available only through FHA approved lenders. HECM originators, sponsors, and servicers collect or have access to HECM loan files, which include copies of deeds, appraisals, bank statements, or proof of down payments. Second, persons or entities perpetrating HECM fraud schemes may seek the services of financial institutions for the purpose of receiving, depositing, or moving illicit funds relating to the scams. Third, financial institutions may become aware of such scams through their interactions with customers who have become victims.
Consistent with the standard for reporting suspicious activity as provided for in 31 C.F.R. Part 103, if a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that activities conducted or attempted by, at, or through the financial institution appear to be indicative of money laundering, terrorist financing, or other violation of law or regulation, the financial institution should file a SAR. As noted in FinCEN’s SAR Narrative Guidance Package, financial institutions must provide complete and sufficient descriptions of known or suspected criminal violations or suspicious activity in the SAR narrative sections.
To assist law enforcement in its efforts to target this type of fraudulent activity, FinCEN requests that, if financial institutions become aware of this type of activity, they include the specific term “HECM” within the narrative portions of all relevant SAR filings and highlight the exact dollar amount(s) associated with the HECM loan proceeds. FinCEN further requests that the Suspect/Subject Information Section in the SAR filing include all information available for each party suspected of engaging in this fraudulent activity. This includes individual or company name, address, phone number, and any other identifying information. In addition, if financial institutions become aware of any other type of FHA-insured mortgage fraud, we request the term “FHA” be included within the narrative portions of the relevant SAR filings.
In many circumstances, the senior homeowner is a victim of the scam and, therefore, should not be listed as a suspect, unless there is reason to believe the homeowner knowingly participated in the fraudulent activity. When the senior homeowner is simply a victim of a scam, include sufficient information in the narrative portion of the SAR about the senior homeowner and his or her property to assist law enforcement in investigating and prosecuting these potential crimes.
Financial institutions that have questions or comments regarding the contents of this Advisory should contact FinCEN’s Regulatory Helpline at 800-949-2732. Financial institutions are encouraged to have their customers report HECM fraud, and any other type of FHA fraud, to the HUD OIG Hotline, http://www.hud.gov/offices/oig/hotline/index.cfm, 1-800-347-3735, hotline@HUDOIG.gov.