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Treasury May Expand Mortgage Fraud Rules

Reports Sought From More Lenders

By Sandra Fleishman
Washington Post Staff Writer
Friday, March 11, 2005; Page E02

A Treasury Department official said yesterday the government may soon require more financial institutions to report signs of mortgage fraud.

Currently only about one-third of the institutions that make mortgage loans are federally chartered and thus covered by federal reporting requirements. "We are presently considering whether to expand the reach of the Bank Secrecy Act to include other parts of the industry" such as mortgage brokers and finance companies, William J. Fox, director of Treasury's Financial Crimes Enforcement Network (FinCEN), said in an interview.

Shady Dealings Here are some types of mortgage fraud schemes, according to a recent FBI survey.

"We are actively studying it and we're anticipating issuing proposed regulations in the near future," said Fox, whose group tracks reports of criminal activities at financial institutions.

In recent months, the FBI has been pushing for more reporting and greater coordination between lenders and regulators because of what the agency has described as rampant fraud in mortgage transactions, according to an FBI official who spoke yesterday at a fraud "summit" held by the Washington-based Mortgage Bankers Association.

Chris Swecker, FBI assistant director for criminal investigations, said that problems have grown as low interest rates have spurred record home purchases and refinancing. The problem has been exacerbated by identity theft and by financial institution mergers because the person who is reviewing the loan documents may be far from the property's location and unfamiliar with its value.

Mortgage fraud can take many forms. For instance, someone can purchase property, have it falsely appraised for far higher than it is worth and then sell it at the inflated price. The lender or the government agency that insured the loan would get stuck if the new buyer were to default.

"Concern about mortgage fraud against our home finance industry has reached such heightened levels that top management of every lender has to decide how they are going to address this growing threat and protect their company, their employees' jobs and the borrowers they serve," Regina Lowrie, president and chief executive of Gateway Funding Diversified Mortgage Services and incoming chairman of the bankers' group, said at the conference.

The FBI has been promoting creation of a separate special reporting form for suspicious mortgage activity, which would be called "SMARt" for "suspicious mortgage activity report." The form would resemble the Suspicious Activity Reports, or SARs, that federally insured financial institutions must file on possible money-laundering or related activities, including mortgage fraud.

The FBI wants a more detailed, separate form that would be filled out by all financial institutions that issue mortgages.

But mortgage bankers said that before endorsing the idea of additional paperwork, they want to make sure they would get more timely information that would help them combat fraud.

Fox said FinCEN was also concerned about adding a new reporting form. He said Treasury would prefer to alter the current SARs form to capture more details on potential mortgage fraud. "We'll work with the FBI to tailor it to the industry," he said.

FBI Director Robert S. Mueller III testified last month at a Senate Intelligence hearing that 550 investigations of mortgage fraud were conducted in fiscal 2004, compared with 102 in 2001.

The mortgage banker association is planning to launch a Web site on March 31 that will post fraud alerts, news stories and crime-fighting strategies and offer links to state regulators.

In the Washington area, at least 32 people, including real estate agents, appraisers, speculators, loan officers, buyers, bank underwriters and settlement agents have been prosecuted for mortgage fraud in the past three years, according to the U.S. attorney's office in the District, with about a half-dozen investigations still pending. The loss to lenders and the federal government in those cases totals "in the multiple millions of dollars," said Channing Phillips, a spokesman for the office.

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