Using Lender Data to Pursue Legal Remedies for Fraud

Richard WohlFortace LLC

22

• Lenders are “Sharing” Huge Fraud Losses but not

Data

• Common Fraud Schemes, Actors & Basis for

Recourse

• Legal Pursuit is Required as Part of Loss Mitigation

• Fraud Identification, Analysis and Pursuit --Program

Template

• Using Fraud Data to Prevent New Losses

• The Future: Sharing Data to Fight Fraud

3

Lenders are “Sharing” Huge Fraud Losses but not Data

Source: US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), FBI, TowerGroup.

40,000

60,000

50,000

80,000

10,000

20,000

30,000

70,000

1996 1998 2000 2002 2004 2006 2008P 2010P

1,318 1,720 2,269 2,934 3,515

75,122

18,391

9,539

5,3874,696

71,554

65,049

50,038

37,313

25,989

SARs

File

d

Fraud Trends:• Losses in 2008 will be between $15.0 & $25.0 BB• Growth of SARs will continue at high levels• Data sharing and vigorous pursuit will be critical

Total losse

s skyrocketing

20.0

30.0

25.0

5.0

10.0

15.0

Tota

l Yea

rly

Loss

es, $

BB

4

Variety of Fraud Schemes are Proliferating

Common Fraud Schemes

“Bad Actors” Breach of Legal Duty

•Inside Collusion•Silent Seconds

•Closing Protection Letter

•Closing Agent

•Property Flipping•Value Fraud

•Identity Theft•Phantom Assets•Churning•Foreclosure Bailout

•Quit Claim Fraud•Adding False Owner

•Short Sale’s Fraud•Straw Buyer•Builder Bailout

•Appraiser •USPAP / E&O Claim

•Loan Officer•Mortgage Broker•Correspondent Lender

•Fidelity Policy Claim•Broker Agreement•Seller Agreement

•Realtor•Home Builder

•Title Company

•Tort Claim

•Fraudulent Underwriting

5

Legal Pursuit and Recovery is a Vital Component of a Robust Anti-Fraud Program

• Fraud Losses Destroy both Lender and Investor Returns– Fraud destroys bond and

portfolio ROIs

– Secondary Market Performance Models can account for statistical losses, but not for fraud

– Lenders and Servicers have historically not pursued fraud recovery beyond the originator

• Servicers Have a Contractual Duty to Pursue Fraud Recovery– Servicers are pre-occupied with

more politically pressing loss mitigation efforts like loan modifications

– Lenders and servicers owe fiduciary duties to Investors to provide loss mitigation programs

– The “Servicing Standard” now includes aggressive action to recoup fraud losses

• Investors and Regulators are Demanding Aggressive Action– HUD and the GSEs have dramatically

increased the pressure on Lenders to repurchase fraudulent loans

– Loan modifications and bankruptcy “cramdowns” will exacerbate losses

– Congress and Regulators are pressing Servicers for accountability

6

Credible Fraud Recovery Requires a Thorough, Proven Process

Portfolio Scrubbing

Loan Portfolio or

Pool

Bad Actor Database

Search

Fraud Marker Algorithm Search

No Further Work

File Audit Review

Field Investigation Claims Pursuit

File Level Audit Review by

trained Forensic Auditors

Field Auditor validates

findings and determines

collectabilityFunds remitted

to Lender or Bond Investors

via Trustee

No Further Work

No Further Work

Management QC Review

No

Funds Collected

Yes

Yes

No

No No

Yes

Claim Developed & Pursuit Initiated

Settlements & Judgments

Yes

Yes

7

Fraud Detection Tools Maximize Recovery Pool

STEP 1Identify Target Loan Pool

STEP 2Prepare and Transmit Data for Analysis

STEP 3Find “Bad Actor” andDetection AlgorithmMatches

STEP 4Determine Loans withHigh Fraud Markers for Audit

• “Bad Actor” Proprietary Data

• Lender/Servicer Shared “Bad Actor” Data

• Business Partner “Bad Actor” Data

Proprietary Detection Algorithms

Database Partner Detection Algorithms

BACKTEST AND REFINE Database and Algorithmswith Known Fraud Loans

• DQ Loans

• Repurchased Loans

• QC Findings

• M/I Claim Denials

MARI/Lexis-Nexis

8

Use Forensic Audits to Confirm “Collectible Fraud”

• “Bad Actor” matches

• Fraud detection algorithm correlations

• Utilize specially trained“ fraud finder” auditors

• Specialist Audit firms can assist (Clayton)

• Fraud must be clear and convincing

• Fraudulent acts must be attributable to a professional party to the transaction

• Find significant available assets from sponsoring company or insurance policy

• Develop and prepare claim for legal pursuit

• Liaison with federal, state and local law enforcement to enhance asset discovery and recovery

STEP 5Audit High FraudMarker Loans

STEP 6Use Specially Trained Auditors

STEP 7Find Material Fraud, Culpable Parties and Recovery Resources

STEP 8Prepare Case for Litigation

9

Use Qualified Counsel to Pursue and Litigate Claims

• Standardized & proven pleadings and motions cover common claims types by jurisdiction

• Refine agreements, pleadings and motions based on case experience and results

• Use Counsel with specific experience in pursuing mortgage fraud

• Use established metrics to ensure timely case resolution

• Identify and manage outside claims attorneys in key jurisdictions

• Utilize uniform performance agreements, quarterly accountability reports and standard fee schedules

• Develop parameters for approval of settlements and judgments

• Settlement and judgment proceeds will mitigate lender and investor losses

STEP 9Use Proven Templates for Claims, Demands and Litigation

STEP 10Develop Specialized and Capable Case Management

STEP 11Qualify and ManageStrong Network ofOutside Attorneys

STEP 12Closely supervisenegotiations andsettlements

10

“Those Who Ignore History are Condemned to Repeat it”

2004-2005…

Hawthorne, CA Home

• Civil Fraud Judgment: LA County Superior Ct, 2005

• Title Agent forged signature on Deed and recorded it to convey title to new owner

• New Owner Borrowed: $470,000

Prior Lien Payoff:$203,000

Net Fraud Proceeds/ $267,000

Bank Losses

2007-2008

Rancho Cucamonga, CA Home #1 Rancho Cucamonga, CA Home #2

• Criminal Conviction : US Attorney, Central Dist CA

• Straw Buyers found to purchase properties using fraudulent title/escrow company

• Straw Buyer Borrowed: $4,000,000

Prior Lien Payoff: $2,000,000

Net Fraud Proceeds/ $2,000,000

Bank Losses

Angela Cotton Victory Title &

Escrow

11

Using Fraud Data to Prevent New Losses

• Lexis-Nexis/Choice Point

• Fraud Guard (SS#, Employment History, Address History

• Credit Report Fraud Alerts – contact borrower directly to confirm identity and legitimacy of proposed transaction

• Internet– Social Security Verification

– State, County & City Licensing Verification

– Tax Preparer Authentication

– Reverse Phone Number & Address Lookups (free sites)

– People/Business Searches (zabasearch.com – free & fee sites)

– Salary Approximation on Stated Income (salary.com – free site)

• Utilize 4506-T with the IRS to validate Tax Returns & Filing Status (stated income loans)

• Property searches & aerial photos (Sitex.com AVM’s – fee; RealQuest.com – fee; Zillow.com – free; Realtor.com – free; Googleearth.com – free & fee)

• County Assessor Data

12

The Future: Shared Lender Database

Key Elements Key Legal Risks Key Mitigants

•Data Contributed by Major Lenders and GSE’s

•Fair Credit Reporting Act Claims

•FCRA consumer defamation claims prohibited

•Providing FCRA appeals process

•Covers all major categories of “Bad Actors” (closing agents, realtors, brokers, loan officers, appraisers)

•GLB privacy claims •GLB safe harbors for preventing fraud and for reporting to Credit Agencies

•Contains origination and servicing “incident” information

•“Interference with Contract Claims”

•Qualified privilege for lenders to share information under “common interest” exemption

•Develop for Mortgage Industry (MERS Model)

•State UDAP Claims •MARI Case Experience