5 Plead Guilty to Mortgage Scheme$1.5 Million Scam Illustrates Challenges in Catching Fraud
A more than $1.5 million mortgage fraud scheme in Gainesville, Va., that defrauded financial institutions out of more than $700,000 proves mortgage fraud continues to thrive.
On May 18, five defendants pleaded guilty in U.S. District Court to engaging in a conspiracy to defraud financial institutions into making fraudulent mortgage loans. The scheme, which allegedly involved a mortgage broker, an unqualified buyer, an executive from a title company and numerous intermediaries who prepared and approved fraudulent loan documents, involved $1.2 million in mortgage loan proceeds and a $350,000 home equity loan.
Peter Kim, Bok Hee Lee, Jai Sek Lee, Jai Song, and Erin Cullen, all of Virginia, pleaded guilty to conspiracy to commit wire fraud. Each faces a maximum penalty of five years in prison at sentencing set for August.
In addition, Jea Min Lee was indicted by a grand jury. He and his co-conspirators submitted fraudulent and misleading mortgage loan applications for an unqualified buyer, according to the indictment. The fake applications contained falsified information about the applicant's employment, income, assets, immigration status and intent to live in the property as a primary residence.
To pull the scheme off, Jea Min Lee and his co-conspirators allegedly created a fake lease, fabricated bank statement and bogus W-2. One conspirator also falsely verified another conspirator's employment to qualify for the loan.
The investigation into the Virginia scheme is ongoing.
The Challenges of Detection
Although not as common as payment-card and check fraud, mortgage fraud remains a significant concern for financial institutions. In the 2012 Faces of Fraud survey, 25 percent of respondents said their institutions had faced mortgage fraud in the previous year.
Shirley Inscoe, a fraud analyst at Aite, says the case represents the quintessential mortgage-fraud scheme - and one that's difficult for banking institutions to detect.
"For successful mortgage fraud to be conducted, collusion among a number of players is necessary," Inscoe says. "Often, a number of properties and lenders are involved, leading to millions of dollars being stolen. The banker approving the mortgage loan or loans may be part of crime ring, but also may be totally duped."
Collusion is key, because a number of loan documents have to be falsified. "All of the documents must be in order, or the lender will recognize discrepancies and stop the mortgage approval process," Inscoe says.
Detection systems often catch the fraud weeks or months later, after the losses have already been incurred. In some cases, the scheme is so sophisticated, it's never detected.
According to the Financial Crimes Enforcement Network's Mortgage Loan Fraud Update released in March, suspicious activity reports linked to mortgage loan fraud jumped 17 percent, from 16,567 MLF SARs filed in Q3 2010 to 19,934 filed in Q3 2011. More than 25 percent of those suspicious loans included some form of loan workout or debt elimination attempt, questionable refinance or loan modification attempts by borrowers or others targeting distressed homeowners, and Social Security number discrepancies submitted in the original loan application and the workout request.
FinCEN also found that about 62 percent of MLF SAR filings reported in 3Q 2011 involved suspicious activities that started four or more years ago.
FinCEN also notes that the rise in mortgage schemes stems from mortgage repurchase demands and special filings generated by several depository institutions related to mortgages originated in the height of the housing boom.
Because mortgage schemes can be challenging for institutions to detect, Inscoe says banks need to go beyond relying on fraud detection software and take such basic steps as making sure they know all the parties involved in the transaction, she says. And in certain cases, Inscoe says, banks need to verify that the mortgaged property actually exists by driving by or using Google Earth.