Lesson Six – Red Flags

Red flags are critical as a guide to a possible problem, but they do not constitute, without review, a suspicious activity or a violation of a law or regulation. A single red flag may or may not indicate fraud or money laundering, but the greater the number of red flags, the higher the likelihood of criminal activity.

A red flag is a pattern, practice or specific activity that indicates the possible existence of identity theft or fraud.

Some examples of red flags come from Appendix F[1] of the Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual and include the following:

 

Customers Provide Insufficient or Suspicious Information

These types of red flags include the following:

  • A customer uses unusual or suspicious identification documents that cannot be readily verified
  • A customer provides an individual tax identification number after having previously used a Social Security number
  • A customer uses different tax identification numbers with variations of his or her name
  • A customer’s home or business telephone is disconnected
  • A customer makes frequent or large loan payments and has no record of past or present employment experience

There are additional red flags to look for which we will list out for you.  These types of red flags are important to look for and report if you see any thing that looks suspicious.  Let’s take a look at what additional items to look for.

 

Items from Other Sources

  • Using “straw buyers” to secure numerous mortgages on various residential properties, thereby creating a means for the conversion of illicit cash into real property – projecting an appearance of many unrelated mortgages paid on a regular or expedited basis
  • Fraudulent documentation at the initiation of the loan, including false statements, omissions, straw buyers, false appraisals or identity theft
  • Investing the proceeds of illegal activity, including real estate, through direct purchase or in paying down loans shortly after they have been obtained
  • Quitclaim deeds in the chain of title
  • Use of power of attorney
  • Frequent ownership changes in a short period of time (possible flipping)
  • Sales between family members and business partners
  • Employer is a large company but W-2 and 1099 are not computer-generated

 

Fannie Mae – Common Red Flags

Because mortgage fraud and money laundering can occur at any stage of the real estate transaction process, the Common Red Flags list in Fannie Mae’s Mortgage Fraud Program provides further examples of red flags:

 

High-Level Red Flags

  • Social Security number discrepancies within the loan file
  • Address discrepancies within the loan file
  • Documentation includes deletions, correction fluid or other alteration
  • Numbers on the documentation appear to be squeezed due to alteration
  • Different handwriting or type styles within a document

 

 Mortgage Application
  • Significant or contradictory changes from handwritten to typed application
  • Loan purpose is cash-out refinance on a recently acquired property
  • Extreme payment shock may signal straw buyer and/or inflated income
  • Purchaser of investment property doesn’t own a residence

 

Sales Contract
  • Non-arm’s length transaction: seller is real estate broker, relative, employer, etc.
  • Seller is not currently reflected on title
  • Purchaser is not the applicant
  • Purchaser(s) deleted from or added to the sales contract
  • Power of attorney is used
  • Earnest money deposit equals the entire down payment or is an odd amount
  • Multiple deposit checks have inconsistent dates (e.g., #303 dated 10/1, #299 dated 11/1)
  • Name and/or address on earnest money deposit check differs from the buyer’s
  • Real estate commission is excessive
  • Contract dated after credit documents

 

 Credit Report
  • No credit history or “thin” credit files
  • Recently issued Social Security number
  • Liabilities shown on credit report that are not on mortgage application
  • Length of established credit is inconsistent with applicant’s age
  • Credit patterns are inconsistent with income and lifestyle
  • All tradelines opened at the same time
  • Social Security alerts

 

Employment and Income Documentation
  • Employer name is similar to a party to the transaction (e.g., utilizes applicant’s initials)
  • Employer unable to be contacted
  • Year-to-date or past-year earnings are even dollar amounts
  • Withholding not calculated correctly (check FICA tables)
  • Withholding totals don’t add up from paycheck to paycheck
  • Abnormalities in paycheck numbering
  • Handwritten VOE, pay stubs or W-2 forms
  • W-2 form presented is not the employee’s copy
  • Employer’s identification number has a format other than 12-3456789
  • Income appears to be out of line with type of employment
  • Self-employed applicant does not make estimated tax payments
  • Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed
  • Tax returns not signed or dated
  • High income applicant without paid preparer
  • Paid preparer signs taxpayer’s copy of tax returns
  • Interest and dividend income don’t substantiate assets
  • Applicant reports substantial income but has no cash in bank
  • Reasonableness test: Income appears to be out of line with type of employment, applicant age, education and/or lifestyle

 

  Asset Documentation
  • Down payment source is other than deposits (gift, sale of personal property)
  • Applicant’s salary doesn’t support savings on deposit
  • Applicant doesn’t use traditional banking institutions
  • High asset applicant’s investments are not diversified
  • Excessive balance maintained in checking account
  • Dates of bank statements are unusual or out of sequence
  • Recently deposited funds without a plausible paper-trail or explanation
  • Bank account ownership includes unknown parties
  • Balances verified as even dollar amounts
  • Two-month average balance is equal to present balance
  • Source of earnest money isn’t apparent
  • Earnest money isn’t reflected in account withdrawals
  • Earnest money is from a bank or account with no relationship to the applicant
  • Bank statements reflect deposits inconsistent with income
  • Reasonableness test: Assets appear to be out of line with type of employment, applicant age, education and/or lifestyle

 

 Appraisal
  • Appraisal indicates transaction is a refinance, but other documentation reflects a purchase
  • Map scale distorts distance of comparable properties
  • “For Rent” sign appears in photographs
  • Photos appear to be taken from an awkward or unusual standpoint
  • Address reflected in photos does not match property address
  • Weather conditions in photos inconsistent with average marketing time and date of appraisal
  • Appraisal dated before sales contract
  • Significant appreciation in short period of time

 

Title
  • Delinquent property taxes
  • Notice of default or modification agreement recorded
  • Seller not on title
  • Seller owned property for short time
  • Buyer has pre-existing financial interest in the property
  • Date and number of existing encumbrances don’t make sense
  • Chain of title includes an interested party such as a real estate licensee or appraiser
  • Buyer and seller have similar names (property flips often use family members as straw buyers)

 

Owner Occupancy
Purchase Transactions:
  • Real estate listed on application, yet applicant is a renter
  • Applicant intends to lease current residence
  • Significant or unrealistic commute distance
  • Applicant is downgrading from a larger or more expensive house
  • Sales contract is subject to an existing lease
  • Occupancy affidavits reflect applicant doesn’t intend to occupy
  • New homeowners insurance is a rental policy (declarations page)

Refinance Transactions:

  • Rental property listed on application is more expensive than subject property
  • Different mailing address on applicant’s bank statements, pay advices, etc.
  • Different address reported on credit report
  • Significant or unrealistic commute distance
  • Appraisal reflects vacant or tenant occupancy
  • Occupancy affidavits reflect applicant doesn’t intend to occupy
  • Homeowner’s insurance is a rental policy (declarations page)
  • Reverse directory does not disclose subject property address

 

 Closing Disclosure
  • Borrower or seller names are different from sales contract and title
  • Sales price is inconsistent with contract, loan approval and/or appraisal
  • Excessive earnest money or builder deposit
  • Earnest money deposit is inconsistent with sales contract and/or application
  • Payouts to unknown parties
  • Refinance pays off previously undisclosed liens
  • Excessive sales commissions
  • Excessive fees and/or points
  • Seller-paid closing costs, especially for purchaser with sufficient assets for down payment
  • Cash proceeds to borrower are inconsistent with final application and loan approval

 

[1] https://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2014_v2.pdf