Bulletin: SLS00234

Dear Associates:

Background

Loan fraud is a significant source of Loss. The victims include lenders, mortgage brokers and individuals. Most forms of loan fraud are unrelated to title insurance or escrow procedures. However, transactions involving loan fraud often close at a title company office, and the victims may make claims and attempt to hold the settlement agent responsible their losses.

Loan fraud schemes frequently involve an inflated property appraisal. The inflated appraisal is used to obtain a mortgage loan in a larger amount. The larger loan enables a buyer to acquire a property with little or no equity, or to provide cash to such buyer at the closing. These schemes are sometimes associated with other factors.

Noteworthy Factors

In an effort to reduce escrow Losses, and as a courtesy to the escrow agent should be alert to the following factors:

A. The "seller" named in the contract is not the record owner of the property.

B. The "buyer" named in the contract is not the person or entity that will ultimately acquire the property (the ultimate buyer).

C. The contract is amended to change the sales price.

D. The buyer receives cash at an acquisition closing.

The above situations may be legitimate and innocuous. However, if the escrow agent becomes aware of any of these factors, it may wish to notify the lender in writing, and obtain the lender's written acknowledgment and authorization, rather than that of the mortgage broker. While these issues are escrow matters and do not create liability for the title insurer, the escrow agent may face escrow liability if it does not disclose these matters.

Flip Transactions

One form of loan fraud involves a flip transaction. A flip transaction is not necessarily fraudulent or illegal. A legal flip transaction involves a buyer (an "intermediary") who locates a property at a particular price and finds another buyer willing to pay a higher price. The intermediary may execute a contract or an option to purchase the property and assign its right to purchase the property to the ultimate buyer, or the intermediary may acquire the property and thereafter convey it to the ultimate buyer. The transactions often take place simultaneously or in rapid succession.

An illegal flip involves parties knowingly acting together to defraud a lender by inducing the lender to lend more money than the property is actually worth, usually by obtaining an inflated appraisal in connection with the second transaction. The fraud can involve other knowing participants as well.

Title Commitment Procedures on Flip Transactions:

If you are asked to issue a title insurance policy where the "seller" named in the contract is not the record owner of the property, or the "buyer" named in the contract is not the person or entity that will ultimately acquire the property, please follow these procedures:

1. Any commitment must describe all applicable requirements and exceptions.

2. Schedule A: The commitment must show the name of the current record owner in Schedule A, not the intermediary. Do not show the current record owner as the intermediary (who does not have record title).

3. Schedule B (or Schedule C where applicable) Requirements:

A. If the "seller" named in the contract is not the record owner of the property, the commitment for the ultimate purchaser (or ultimate purchaser's lender) must require two deeds to complete the transaction: one from the record owner to the intermediary, and another from the intermediary to the ultimate purchaser. You must specify the names of the grantor and the grantee for each required deed.

B. If the "buyer" named in the contract is not the person or entity that will ultimately acquire the property, the commitment must require the disposition of the contract buyer's interest in the property by:

(i) the contract buyer assigning its rights under the contract to the ultimate buyer; or

(ii) the contract buyer acquiring the property and conveying it to the ultimate buyer.

C. You must underwrite each transaction separately, in your customary manner (e.g., run searches on all parties, etc.).

Other Escrow Issues: Settlement Statements, Lender's Closing Instructions and HUD Regulations

The escrow agent should prepare a separate HUD-1 Settlement Statement for each transaction. All disbursements from the escrow account and all other disbursements of which the escrow agent has actual knowledge should be shown. The escrow agent should cross-reference the HUD-1 Settlement Statements with each other so that they accurately reflect the source and recipient of all funds. It is always advisable to obtain the lender's written approval of the HUD-1 Settlement Statement(s) for its transaction before closing the transaction. The escrow agent should not disburse net proceeds from the second (ultimate) transaction to the intermediary, except for any amount in excess of the amount required for the first transaction, and only if all conditions for the first transaction have been met.

In addition to the foregoing the escrow agent must follow the lender's written closing instructions. Many lenders' closing instructions prohibit the closing of a transaction if there is an additional pending conveyance at the time of the closing or if there has been a conveyance of the property within the prior six to twelve months. If the escrow agent is aware that the situation is inconsistent with the lender's written instructions or if the escrow agent is otherwise unable to comply with them, it should contact the lender immediately and obtain its written authorization before closing the transaction.

Consistent with some Lender Instructions, HUD Regulations have provided that property is not eligible for an FHA insured loan if the re-sale date is 90 days or less after the date of acquisition by the seller. Re-sales occurring between 91 and 180 days after acquisition will be subject to additional requirements, and re-sales occurring between 91 days and 12 months after acquisition may be subject to added requirements. If the loan is an FHA insured loan, the lender's closing instructions may address these issues.

Some title companies will furnish to the lender a copy of the most recent vesting deed or refer in the title commitment to the vesting deed information.

Each of these issues relates to the separate liability and obligations of an escrow agent in closing the lender's transaction in a flip transaction. They do not create liability under the title insurance policy, or create liability, absent coverage by an applicable closing protection letter.

Conclusion

As a reminder, you must carefully document the identity of all parties using government-issued picture identification.