Alert May 04, 2010

FinCEN Issues Advisory on Reverse Mortgages

The Financial Crimes Enforcement Network (“FinCEN”) released an advisory (the “Advisory”) to assist financial institutions in detecting reverse mortgage fraud schemes targeted at participants in the Federal Housing Administration’s Home Equity Conversion Mortgage (“HECM”) program, the only reverse mortgage program insured by the U.S. government.  As the HECM program, which accounted for nearly 100 percent of the reverse mortgage market in 2009, has grown in popularity, public reports of crimes against participants in the HECM program have increased.  The HECM program is available only to people who are at least 62 years of age (“Seniors”).

The Advisory reminds financial institutions that they have an obligation to file a suspicious activity report if they suspect that a transaction involves funds derived from illegal activities.  It highlights six types of fraudulent reverse mortgage schemes and provides red flags that could be signs of fraudulent activity:

  1. Cross Selling .  Loan officers or other individuals may convince a Senior who receives proceeds from a HECM loan to invest the proceeds in expensive and unnecessary financial products in violation of HUD rules.  Red Flags:  If a Senior deposits little or no funds in his or her bank account after receiving HECM loan proceeds or mentions that he or she has invested his or her HECM loan proceeds in a financial product, these could be red flags.
  2. Cash-out Theft .  A third party who the Senior entrusts with the proceeds check from his or her HECM loan may steal the funds by depositing it into an account that the Senior does not control.  Red Flags:  A Senior’s election to receive his or her HECM loan proceeds in a lump sum or a loan officer’s out-of-the ordinary deposit or withdrawal of large amounts of cash could be red flags.
  3. Property Flipping .  A fraudster may convey a low-value property to a Senior, then instruct the Senior (or assume the Senior’s identity) to obtain a reverse mortgage on the property based on an inflated estimate of the property’s value.  Red Flags:  A Senior’s claim that he or she received the house at no cost as part of a government program, an appraisal that takes into account irrelevant comparable sales (such as outdated sales or those from beyond the property’s neighborhood), or inconsistencies between the Senior’s credit report and his or her HECM loan application could be red flags.
  4. Fake Down Payments .  A variation on item 3, this fraud similarly involves the conveyance of a low-value property to a Senior. Here, the fraudster falsifies paperwork to create the appearance that the Senior put down a large down payment on the property.  Red Flags:  The red flags here are the same as those for item 3.
  5. Distressed Non-Senior Mortgagors .  Fraudsters who have distressed mortgages but are too young to qualify for a HECM loan may deed their property to Seniors who are family members or acquaintances so that the Senior may take out a reverse mortgage on their behalf. The fraudster will then keep the proceeds of the reverse mortgage.  Red Flags:  If a distressed mortgagor deeds his property to the Senior who then takes out a HECM loan to repay the mortgage or if there are other indicators that the proceeds are going to someone other than the Senior (for example, if the proceeds are deposited in someone else’s account or paperwork associated with the HECM loan is sent to someone other than the Senior), these could be red flags.
  6. Power of Attorney .  Often when employing the schemes listed above, fraudsters will obtain a power of attorney, which enables them to apply for HECM loans without the full knowledge of the Senior.