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Work With Pros Who Know Evolving Mortgage Regulations

March 21, 2016 By Mary Hardy Leave a Comment

Beginning with loan applications taken October 3, 2015, the CFPB (Consumer Finance Protection Bureau) rolled out the new TRID (TILA-RESPA Integrated Disclosure) forms. These forms replace the GFE (Good Faith Estimate), TIL (Truth In Lending) disclosures, as well as the HUD-1 closing settlement statement that mortgage consumers have been used to seeing for years.

So, why am I writing about this now? Well, anyone who has not gotten a mortgage – including a re-fi – since this was introduced will face some changes at their next closing. Who will not be affected? All-cash buyers and borrowers obtaining a reverse mortgage.

“Borrowers will have the benefit of a three-day period to review their Closing Disclosure before arriving at the closing table,” says Loretta Salzano, a Founding Partner with Franzen & Salzano, PC, a law firm which addresses the needs of the consumer financial services industry. “Unfortunately, this ‘waiting period’ and some of the rule’s implementation challenges generally have tended to add a bit of time to the loan process.”

Whereas in the past, your mortgage pro might be able to facilitate same-day closings once loans were “approved to close” by the underwriter, there is now a 3- to 6-day waiting period from the time the borrower acknowledges receipt of the closing disclosure (that is, signs and returns to the lender). It’s important for consumers to know this. And it’s important for customers to review the Closing Disclosure and sign or speak with their lender regarding changes they may want as soon as possible to avoid any potential delays in closing.

“Because the Closing Disclosure includes more private borrower information, some settlement agents are bifurcating the closing,” says Salzano, whose firm works with banks, thrifts, mortgage lenders, mortgage brokers, consumer finance companies, and others involved in the lending process. “Even absent that separation, there is a renewed sensitivity to the privacy of the borrower and how to conduct a purchase money closing with both the seller and buyer in the room.”

She also notes that the other big difference “is most settlement agents will not be able to revise the Closing Disclosure at the closing table even if only to reflect minor changes. This is because, under TRID, the lender is responsible for the accuracy of the Closing Disclosure, so lenders are unable to relinquish authority to the settlement agent.”

This also tends to reduce the number of “surprises” at closing. For instance, for many fees, there is a $0 tolerance to changes, so, for example, if the appraisal fee was higher than quoted and not re-disclosed to the borrower, the lender is not able to charge the difference in the fee to the borrower. This helps to provide clarity to the borrower prior to closing and reduces the changes that the consumers were not aware or prepared for at closing.

“Overall, the introduction of TILA-RESPA is good, as the disclosures are easier for consumers to understand and the disclosures include more important information in one place,” Salzano says. “The downside is that costs to consumers have increased as a result of the substantial implementation costs. Some borrowers are also experiencing closing delays, but I am optimistic that, once we all get used to the new forms and processes, those delays will be rarer. Hopefully costs will also come down.”

With changes like these, it’s even more important for borrowers to communicate with their lenders throughout the process and provide documents as quickly as possible when requested. A one- or two-day delay in providing documents can lead to a closing delay, resulting in extension fees, both with the ratelock on the loan and any contract extensions for the purchase.

“Thus, we are focusing on how our lender clients can increase communications with settlement agents and investors to ensure that they can close and sell loans without TRID-induced delay,” Salzano says.

Ultimately these changes highlight the importance of consumers working with knowledgeable and educated Realtors and lenders who help in setting buyer and seller expectations. If you are buying or selling your home and have not done so since the introduction of TILA-RESPA, simply ask your real estate agent or lender, “How will the sales contract and closing process be different for me this time?”

Resolving Construction Defects: How to Comply with the Florida Construction Defect Statute

February 1, 2016 By Steven B. Lesser ,Esq. Leave a Comment

When construction projects are completed, owners of commercial and residential property often discover construction and design defects, poor workmanship and building code violations. When this happens, owners must follow certain procedures as required by Florida law before being permitted to file lawsuits or arbitration proceedings to collect damages from responsible parties.

Chapter 558, Fla. Stats. is Florida’s pre-suit notice and right to cure procedure. The statute sets forth requirements to notify responsible parties of defects with reasonable detail, allow them to inspect and provide an opportunity to respond with an offer to correct, pay money or dispute the claim. The statute provides a timeline when all of these events occur and only after satisfying these requirements can an owner pursue a claim in court or through an arbitration proceeding. There are some critical things you need to know about how the statute operates to preserve your rights.

When does it apply?

As of October 1, 2009, the Chapter 558 pre-suit notice provisions automatically apply to all new construction contracts. It is essential to note that public transportation projects (such as airports and bus terminals) and defects that threaten the health, safety or welfare of others (also known as “life safety defects”), are exempt from Chapter 558. Aside from these limited exceptions, the requirements apply unless the procedure is expressly waived. When a defect is discovered, the first step is for both owners (also defined in the statute as “claimants”) and recipients of Ch. 558 notices to review all agreements for construction or design services to determine if Chapter 558 applies. Be mindful that Chapter 558 only applies to defects discovered after substantial completion has been achieved. Furthermore, Chapter 558 procedures apply to owners even where there is no written contract between the parties.

What is a Notice of Claim?

Once it has been determined that Chapter 558 applies, the claimant is required to provide responsible parties with a written Notice of Claim which describes the construction or design defect with reasonable detail. As of October 1, 2015, claimants are required to identify the location of each alleged construction defect to enable the responding parties to locate the alleged defect without undue burden. The failure to provide this information could result in your lawsuit or arbitration proceeding being “put on hold” or stayed pending compliance with this procedure.

Who are the recipients of a Notice of Claim?

All potentially responsible parties for the design and construction of a construction project, such as the developer, contractor, subcontractors, suppliers and design professionals represent those parties that may receive a Notice of Claim for defective design and construction. As of October 1, 2015, the insurers of the contractor, subcontractor, or design professional should also be given an opportunity to cure or settle the claim without further legal process.

Now that I have received a Notice of Claim per Ch. 558 Fla. Stats., what should I do?

Once a Notice of Claim is received, make sure that none of the statutory deadlines for inspection and responding are missed as outlined below. To the extent you have commercial general liability insurance or if a design professional carries professional liability insurance, promptly notify your insurance carrier to attempt to secure coverage for these claims.

What are the statutory timeframes that may apply to me?

This depends on whether the claimant is the owner of a commercial project, a single family home, a duplex, or a community association representing 20 or fewer residential parcels. In that case, you would have: (i) 10 days to notify any other persons you believe may be responsible for the alleged defects, (ii) 30 days to inspect, and (iii) 45 days to serve a written response to the Notice of Claim.

However, if the claimant is a community association that represents 21 or more residential parcels, you would have: (i) 30 days to notify any other persons you believe may be responsible for the alleged defects, (ii) 50 days to inspect, and (iii) 75 days to serve a written response to the Notice of Claim.

What are some of my rights under Ch. 558 Fla. Stats.?

First, you may request an inspection with the claimant to observe the conditions described in the Notice of Claim. You are also encouraged to retain your own attorneys and consultants to attend the inspection, analyze the owner’s claims, and assist you with the Ch. 558 response process.

Second, you may request certain project records from the claimant and recipient of the Notice of Claim as further explained below.

Third, you may request destructive testing of the premises per mutual agreement with the claimant.

Fourth, if you have received a Notice of Claim, consider providing all potentially responsible parties to you, such as the design professionals, contractors and subcontractors, with a written “secondary notice of claim” of any alleged defects. This option includes them in the Chapter 558 process and requires them to respond to you about the defects outlined by the claimant.

What documents can I get?

As of October 1, 2015, the claimant or recipient may request from each other any design plans, specifications, and as-built plans; photographs and videos of the alleged construction defect identified in the notice of claim; expert reports that describe any defect upon which the claim is made; subcontracts; purchase orders for the work that is claimed defective or any part of such materials; and maintenance records and other documents related to the discovery, investigation and causation of an alleged defect. These records would be produced pre-suit. You would be required to pay for any reproduction costs.

What information can I get to challenge the claim?

In addition the claimant’s documents related to the discovery, investigation, causation, and extent of the alleged defect, you are now entitled to request copies of the claimant’s maintenance records for the property where the alleged defects exist. This includes items such as maintenance vendor logs, service agreements, and invoices, which show how often the claimant maintained the premises prior to, during and even after the discovery of any alleged defects. This could be important because a defense to a condominium statutory implied warranty claim is the failure to perform “routine maintenance”. So a recipient of a notice of claim may request these records in an effort to substantiate this defense. Similarly, claimants can request maintenance records from the Developer of record during its control of the project.

What should my destructive testing request include?

If destructive testing is desired, you must describe to the claimant, in writing, who will be performing it, the anticipated damage, and the time needed to perform the test. The request for testing should also identify who will perform any restoration necessitated by the testing and who will cover the cost of those repairs.

What is a “secondary notice of claim” and when does it apply?

The recipient of a Notice of Claim should provide all potentially responsible parties, such as the design professionals, contractors and subcontractors, with a written “secondary notice of claim” of any alleged defects before the expiration of the time limits imposed by Chapter 558, Fla. Stats.

Will an insurer provide me with a defense upon receipt of a notice of claim?

Often, it depends on the insurance carrier. While Ch. 558 Fla. Stats. provides a notice and right to cure mechanism for resolving a dispute, it is not the same thing as a formal proceeding which could trigger the insurer’s duty to defend. A recent court decision has held that the serving of a notice of claim does not trigger coverage or any duty to defend by the insurance carrier.

Fla. Stat. § 558.004(13) now provides that a notice of claim does not constitute a claim for insurance purposes “unless the terms of the policy specify otherwise.” Often a contractor or developer may hold off on retaining its own engineering consultants or attorneys to participate in the Ch. 558 phase of litigation as a cost-saving measure. Excluding these professionals from the pre-suit process could actually impede resolution of the claims under Ch, 558, potentially resulting in litigation.

How should I respond to the Notice of Claim?

Recipients of the Notice of Claim are required to issue a written response, within specific statutory timeframes, either disputing the claim, or accepting the claim and providing the claimant with: (i) repairs of the alleged defects, (ii) a monetary settlement, which may include insurance proceeds, or (iii) some combination of repairs and money, along with a timetable for making payments and/or repairs. If you fail to provide a timely response to the owner’s claim, the owner is free to deem the lack of response a rejection of its claim, and may commence litigation or arbitration.

Conclusion

Chapter 558, Florida Statutes generally applies to all design and construction projects unless the procedure is expressly waived by mutual agreement, or the defects are exempted by statute. Developers, contractors and design professionals should become familiar with the statutory deadlines to insure compliance with the pre-suit procedures, and to avoid delay in pursuing relief for damages arising from construction and design defects. Recipients of a Notice of Claim should avail themselves of the opportunity to discover the basis for a claim and acquire documents to evaluate the claim. By doing so, you may be able to resolve claims more efficiently and cost-effectively.

Author – Steven B. Lesser ,Esq., Becker & Poliakoff Author
Contributor -Michele C. Ammendola, Esq., of Becker & Poliakoff

I Manufacture : Do I need a Lawyer or do I need a CAD Draftsman ?

December 6, 2015 By Joanna Laznicka 6 Comments

My good friend, and for the purpose of this article I will call her Gina, is renovating.

Got your attention yet ?

No, I will admit I was far from excited to wander over into a mess of a home renovation project that consumes practically every homeowner, inclusive of varying conditions ranging from temporary disorganization of belongings strewn about their home, furniture draped in drop cloths, dust coating every corner of every room, unpredictable conduct from tradesmen and their helper – and perhaps I’ll just stop here. But, she is a friend and I put aside my need to write the next article here and earn a living, and visit her to console her in her frustration, unrealistic expectations and overly ambitious deadline to complete this renovation.

On her kitchen table I saw a set of architectural drawings that were perhaps not a stereotypical presentation of what you might expect for Architects renderings. Not laid out in a large format like 24” x 36” but more so in a ledger format ( 11”x17”). In picking them up I quickly realized these were “shop drawings” for her kitchen, mantle, stairway and other millwork related items throughout the project.

I saw her signature on the bottom left, and upon her noticing my snooping she quickly pointed out

– “ Last week, I would have not had a clue about how to read those, but the cabinet manufacturer sent them to our General Contractor, and we’ve spent a few hour going over them – so we made some changes and we are giving them back to the cabinet manufacturer so they can start”.

This was the catalyst into penning this for you.

“Shop Drawings” are they the new “Contract Document”?

Varying construction trades utilize a process of submitting and reviewing “shop drawings”. Mechanical, Millwork, Electrical, Glazing, Structural and Metal fabrication trades are the most common, but the term and process most certainly applies to other construction trades.

Since it was Gina’s woodworking trade that caught my attention on this subject – I researched people and companies in that industry that create or produce these drawings for assistance. One of these companies is Zdraft.com

Zdraft.com is an online outsource company that generates shop drawings for millwork and cabinet shops from Vancouver BC (Canada) – to Miami Florida. There is no question that with the volume of drawings they generate for their hundreds of woodwork customers across North America – these people know the value of shop drawings as a contract document. Managing Principal Gus Magas was more than happy to assist us and provided a plethora of information and resources.

Gus outlines the process best in these statements

“Years ago, my father would sketch out a rough layout of a kitchen, write out a crude outline of the work, then go back to the shop and make the items himself, from ordering the material to cutting the pieces, to overseeing their assembly, to delivering and installing a finished product. That left a world of ambiguous decisions unaddressed that were unavoidable unless you had an attorney involved and wrote out iron clad contracts.

I instill this into all of our drafts people today, and point out that our job is to prepare Drawing Projects that inform the consumer and protect the manufacturer and General Contractors from misunderstandings, confusions and avoidable problems”.

Another important statement that stood out was

“ Good and practical drafts people need to have great construction and manufacturing skills, they need to have excellent knowledge of local code compliance and engineering principals, and they MUST have an above average comprehension of the legal obligations ( between the manufacturer and their client) within the drawings they present. We foster an expectation with all of our in-house drafts people for continuing ones education within our field, especially in the technical aspect, but also encourage educating themselves in legal principals, terminologies and expectations as it pertains to their work. This is most important and highlighted for all of our Project Managers“

He also broke down the process in this list of criteria

A. Architectural Detail enhancement

Typical Architectural and Interior Design drawings are reflective only to the outward appearance and concept of the project. In terms of Millwork, they rarely factor in fabrication or even structural engineering. Relate this to the Mechanical & Plumbing sector and the Architectural renderings often neglect their needs completely, showing ceilings that don’t reflect spacing needs and walls that don’t meet piping requirements.

The Drafter taking on the shop drawings needs to add the details required to build and clarify the project so that it goes from concept to reality.

( Image 01-BA) Image below compares the Architects intent , with the Shop Drawing prepared for review. Note the spacing and dimension clarification. Critical for coordinating equipment and other trades

B. Construction Clarification

Build methodology: Every shop has a unique method of fabricating. It relates to their size ,equipment, manpower, and resources and experience. Practically every successful business is in constant state of evolution and they each vary in that state of evolution.You can have shops that don’t utilize CNC technology, while others are using advanced programming tools within their fabrication process. This leads to dozens of ways a simple cabinet can be manufactured.The Shop Drawings should capture the fabricators building methodology and enables their clients to accept it as such.

Material use: Proper specification of hardware and material schedule alleviates about 80% of the common problems between what the client wants and what the client gets. Detailing hardware in its exacting terminology and specification from their manufacturers , as well as identifying material in its exacting nature is equally important.For example – just saying “White Laminate” is practically crazy. There are about 20 different laminate suppliers with about 20 variations of white for each. So you can imagine the disappointment when you deliver a Formica “F79409 – Soft White” product, yet the client wanted to match their white Appliances – in which a “Nevermar S7024 Chalk White” – would have been preferential.Then there is items like identifying handle and hinge and accessory information and placement, wood species and veneer cuts, grain direction, counter top material and finishes and their placement.

Specification & Code compliance: Identifying on the Drafting document specifications such as items that require Fire Rating, Building Code compliances, Trade Association requirements ( AWI / AWMAC ), LEEDS Compliance, Engineering detail requirements are all critical.

Examples in this case are often Architects will design floating millwork or counters that seem to hang off a wall. In this case the Drafting engineer needs to show where the GC must apply proper support blocking and what type of hanging system needs to be employed

In the same sense local code items need to be addressed. This is where a company like Zdraft.com excels. As opposed to having an army of drafters in some obscure location in India or Bulgaria, their North American drafting Studios understand local needs such as seismic requirements in Los Angeles California (high Earthquake potential) are different than those in Kansas City Missouri, or Saskatoon City in Saskatchewan, Canada. In the same context they spec local hardware suppliers and manufacturers as oppose to specifying items that are hard to get from suppliers that may be local or regional – IN A DIFFERENT PART of the USA from where the Millwork fabricator might be.

( Image 01-BB) Image above highlights the differences between a simple wall hanging unit as drawn by an Architect / Designer , vs a Shop Drawing submission. Note the detail in dimension, specification of hanging brackets , and construction style.

C. Ergonomic verification

Functionality: Many Architects do an excellent job of identifying their clients needs. Most residential projects reflect this well. On a Commercial level – this is where the shop drawings really come in handy. The drawings need to reflect the clients needs BUT also the fabricators experience with similar projects. POS Station, bar tops, benches, table, work surfaces – these all have very narrow margins of acceptance for suitable height requirements. A good Drafter can pick up any errors in the height assignments quickly thus reflecting this on their drawings saving headaches when the final product is delivered – but the counter is too high to work on, or a table is too low to utilize a standard chair.

Bars and bar-backs need this added level in ensuring the fabrication is detailed correctly. There are many times a Designer may neglect to account for bottle heights in the real world and the shop drawings rectify this error. Apparently there is a lot of heartache when a bar is manufactured , but you can’t stand a bottle on the back display area because the shelving is too close together.

D. Trade Co-ordination

This area plays a most critical role in the Commercial building sector.

General Contractors and Construction Supervisors utilize these co-ordination drawings to schedule trades and unify the project. Zdraft.com gave us some excellent examples of where within the millwork sector this becomes critical.

Identifying where wall blocking is critical so that when the hanging of the wall units occurs – it does so with proper structural requirements in place.
Floor installers are often instructed to “not place tiles , flooring , under millwork as a cost saving measure.
Steel and Glazing trades often depend on millwork shop drawings to generate their own (shop drawings).
Stone and Solid surface coordination
Electrical and data integration within items like reception and security desks, bar walls, and retail display mill-work

If the millwork shop drawings don’t show access and chase integration – then many of these projects end up in arguments and finger pointing. While this is an area where the average end-user can’t be obliged to input via approve or review, this is a point where the Trade and GC qualifications come into play and dependent on the project outcome.

E. A Manufacturing Tool (AKA – STOP THE PARADES !)

Everyone in business, specifically in manufacturing knows that if you give two master craftsmen a set of plans, with general information – they will most likely build the product – but with varying differences, some so small an untrained eye may not notice.

When the shop drawings though are clear, concise and have the information detailed – then all excuses for variance discriminate. Companies and manufacturers and their shop Foremen and Administrators need these documents to perform their work effectively. When margins are brought in tight in a competitive market, it seems like the effort in producing these drawings outweighs the variances and problems that are created without them.

Again a strong statement from Gus highlights this issue:

“When I was an Apprentice in a shop, I used to see a literal parade of bench guys, shop guys, and installers going in and out of the office with drawings in hand and bombarding the Project Manager and Owner with questions. I always used to wonder why my Boss used to allow this from the PM’s? The time wasted in these “Parades” was astounding when I calculated it one day. I knew right then that the only way to make these trips stop was to ensure that the drawings were accurate. With the availability of information on the internet, advancements in CAD programs, and a matured thought and manufacturing process – I’m certain these Parades have either been reduced or stopped.in today’s environment”

F. After Project End – Record Keeping

It’s a common requirement by many Architects and General Contractors to have the trades re-submit “AS-BUILT” drawings when a project has concluded. This being a critical aspect of the process that sometimes goes unnoticed. These drawings serve as a record of the changes and variances in the way that a final project was built. The need and use for these drawings justifies a multitude of reasons, including assisting in after project maintenance and alterations, ease of re-ordering – manufacturing of components via a warrantee or damaged condition, and general quick reference for material detail or product use. Again, this is a legally binding document where care needs to be asserted in ensuring product and information is identified correctly so it does not cause turbulence in the future.

So with all this in mind, does it change your perception of what these shop drawings actually do and where their value lays ? It seems that in this complex and ever-changing world, the construction business is no slouch when it comes to relaying of information. Specifically, the new generation of companies that are sprouting up and more-so the old-generation companies that are leading the way, are learning that information is the key to moving forward in a seamless and “conflict free” environment.

Identify for your client the product in as much detail as possible and you rid yourself of headaches and heartaches. Have them look over the drawings and if the case is they are residential clients working without a professional – then make sure you spend time with them to go over exactly everything they are ordering from you. Architects and Contractors don’t have this excuse available to them. They should know exactly what they are agreeing to and saying – “I didn’t understand” is not an option.

In terms of the production of these drawings, many fabricators have in-house people. Obviously by Zdraft.com’s success, many companies are outsourcing the work also. In both of these scenarios the end result should be drawings that you can stand by and alleviate misunderstandings, may it be with the Architect, the Designer, the end-user client, the General Contractor and even within your own organization .

U.S. Supreme Court Ruling on Fair Housing Law Could Have Wide-Ranging Impact on Community Associations

November 9, 2015 By Donna DiMaggio Berger Leave a Comment

Significant U.S. Supreme Court rulings in 2015 which garnered a lot of media attention addressed diverse topics which included: lethal injection; same-sex marriage; healthcare subsidies and pollution limits. In addition, there was one ruling involving housing discrimination that could profoundly impact the community association industry. The 5-4 Supreme Court holding in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, could have wide-ranging impact on community association boards. The case was brought by a Texas group which helps mostly lower-income black families find housing in the mostly white Dallas suburbs through the use of housing vouchers. Landlords receiving federal low-income tax credits must accept the vouchers. As a result, a disproportionate share of federal low-income tax credits went to landlords in minority communities.

The four dissenting justices (Roberts, Scale, Alito and Thomas) voiced their concerns that the majority decision was based on the Griggs v. Duke Power Co. case rather than focusing on the actual intent and text of the 1968 Fair Housing Act. In Griggs, 401 U.S. 424 (1971), the Court held that black employees could recover from their employer under Section 703(a)(2) of Title VII of the Civil Rights Act of 18-964 without proving that the employer’s conduct (the employer required a high school diploma or a qualifying grade on a standardized test as a condition for certain jobs) was motivated by a discriminatory intent.

So how could the outcome of this case impact your private residential community?

Previously, a volunteer board of directors was diving into dangerous waters when it passed rules and restrictions with the intent to treat people differently. If a Board was not thrilled with having children in the community, a proposed rule may set the pool hours at 9-3 which coincidentally are also the hours that most children attend school. Often, it was not difficult to determine when disparate intent was involved in a Board’s decision-making protocol.

Under the new Supreme Court ruling, however, a board can now be held liable for housing discrimination whether or not anyone on the board intended to discriminate so long as the rule or restriction has a disparate impact on a legally protected group of people. Housing discrimination lawsuits can be very costly, time-consuming and can have a long-term negative impact on a community’s real property values.

Many boards and association members wish to contribute to the continued success of their communities by regularly amending their governing documents. Often those amendments allow elected boards to thoroughly screen prospective tenants and purchasers in order to ensure that newcomers will not present a financial burden on the association by lacking the resources to pay assessments and other monetary obligations to the association in a timely fashion. This rationale would seem to make sense since a delinquent owner who cannot pay his or her assessments timely and in full, passes his or her financial obligations on to the remaining members who must make up the budgetary deficit. Screening and approval restrictions are also routinely drafted to weed out applicants who present a threat to the health, safety or welfare of the community.

The Supreme Court’s dramatic shift in housing discrimination indicia forces us to more closely scrutinize restrictions which are fairly standard in community associations to eliminate any potential disparate impact concerns. How would the following association restrictions fare if evaluated under the new SCOTUS standard?

Screening applications which inquire about previous criminal background?
Screening applications which inquire about credit score, employment status and other indicators of financial stability and resources.
Requirements that a new purchaser have a certain equity interest in the property being purchased.
Rules requiring minors to be accompanied by an adult at all times when attempting to access a community pool, exercise room and other common areas.

While the Texas Department of Housing ruling is a cautionary tale, volunteer boards still have a fiduciary duty to adopt and enforce reasonable rules and regulations so taking a “hands-off” approach is not a long-term solution. Today’s board members will have to show that (a) they had a good reason for the rule or restriction and (b) there was no way in which to accomplish their reasonable goal in a manner which had a less disparate impact.

Disparate impact is a much different (and higher) threshold than disparate intent. Boards should undertake a document and rules audit with experienced association counsel to uncover any existing restrictions which might create a disparate impact and therefore may need to be modified. It is also more important than ever that association boards seek input from an association attorney when crafting and implementing restrictions in order to determine whether a disparate impact could result as well as to identify other avenues to accomplish reasonable goals without creating such an impact.

Recognizing and Reporting Mortgage Fraud

March 10, 2015 By Becky Walzak 3 Comments

There was an advertisement recently showing a thief breaking into a home just as a woman was driving past. Of course, she immediately called the police who then came and arrested the thief before he could get away with the stolen goods. The purpose of the advertisement was, of course, to promote awareness in neighborhoods in order to prevent crime. Unfortunately, not all crime is this easy to detect and much harder to report. Mortgage fraud is the perfect example.

Mortgage fraud occurs when an individual, group or company takes money from a lending institution which is collateralized by real estate through the use of false information. It may be the tiniest of white lies or the largest of schemes. Regardless of the type or amount of information that is false, if the information provided to the lender is for the purpose of making a decision as to whether or not to lend money, it is mortgage fraud.

There are really two types of mortgage fraud. The first, fraud for housing, occurs when a borrower or borrowers falsify the information intended for use by the lending company when making a decision to approve or deny a loan application. Common fraudulent activities that individuals commit when applying for a loan include:

Borrowing money from another lender and telling the mortgage company that it was your savings.
Asking someone else to lend you money to put into your account until the bank has verified it.
Asking your boss or someone in the company to falsify a verification of employment with a salary higher than what you make.
Having a friend say you work for their company part-time when you don’t.
Providing a set of false tax returns that shows your income as higher than it actually is.
Hiding debt from the lender.
Asking a friend that works at a bank to verify that you paid off a loan when in fact you hadn’t.

Many times the borrower sees this type of “fib” as having little consequence and justify it as a means of getting the loan that they know they will repay, but it is in fact fraud. There is a paragraph at the end of the loan application form that borrowers must sign that spells this out and advises them of the consequences of committing this type of fraud. These consequences include penalties and fines as well as possible prison time.

The second type of fraud is fraud for profit. Rather than benefiting the borrower, this type of fraud actually benefits those individuals that are external parties to the transaction. This typically includes loan officers, appraisers, title agents, brokers and individuals who participate in the transaction without having an actual interest in the property. Many times this type of fraud involves individuals who are unaware of the fraudulent nature of the transaction, but are looking to benefit financially.

One example of this that many individuals were caught up in is that of a straw buyer transaction. In this scenario the individual wants to buy a house but they know they would not qualify for the loan. They seek out someone with good credit and persuade them to act as the buyer. The incentives for doing this may range from a cash payment for their personal information to some actual percentage of ownership. Often these applications involve falsifying the income and assets of the borrower as well as inflating the value of the property. Then at the closing the “straw buyer” signs the note and mortgage but the individual actually buying the house has committed to making the payments. This works fine as long as the actual buyer can make the payments, or the house is rented. In a housing market where prices are increasing, the property may only be held for 6 to 9 months before it is sold again for a profit. If the house is a rental and cannot be rented out, there is no cash flow to cover the mortgage payment. Unfortunately because the “straw buyer” has signed the note and mortgage, they are responsible for making those payments.

How do you report mortgage fraud?

So what to do when you believe you have been unknowingly involved in mortgage fraud or know someone else who has been defrauded? One of the most difficult things about mortgage fraud is knowing who to tell. It’s not like the thief breaking into a house. The police can’t just show up and arrest someone. Fortunately, there are resources for reporting these types of crimes.

Mortgage lenders, including those that are not banks, are required to report any attempted fraud that occurs within their organization. This report, called a Suspicious Activity Report or SAR, is completed by the institution and sent to the Federal Financial Institution Examination Council (FFIEC). These reports are then reviewed and the information is reported to the institution’s regulator. Individuals who believe they are aware of or inadvertently involved in mortgage fraud should report it directly to the lender so that they can take the necessary action and report the activity to the FFIEC.

A more direct approach is to contact the FBI. Since the late 1990’s the FBI has maintained a specific task force focused on identifying and stopping mortgage fraud. You will be asked to supply information on the specific fraud or suspected fraud you are aware of or involved in and will most likely have to discuss the issues and your reasons for reporting it with an FBI agent.

Consumers can also report this type of information to the Consumer Financial Protection Bureau (CFPB). This can be done on-line by going to their web-site, CFPB.gov and filling out the information requested in the consumer complaint section of the site. This information will then be reported to the lender involved as well as notification to regulators and the FBI.

Finally, you can also report it to your local police. While they are not as involved and knowledgeable about this crime, they are becoming more and more involved. However, the incident would most likely be the responsibility of detectives’ rather just police officers.

Remember, mortgage fraud is a crime that impacts everyone. This type of criminal activity causes property values to decrease and/or artificially inflate. Even the most honest homebuyer can become a victim simply because they have borrowed against their property’s value which is based on values pushed by mortgage fraudsters. Furthermore, these activities are frequently used as part of larger, more systemic crimes such as money laundering and other types of money transfers into and out of the country. Stopping mortgage fraud is not just an issue for mortgage lenders, it is everyone’s responsibility.

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