Hi folks. I've been having a discussion over at www.ShortSaleSuperStars.com on whether or not having the Buyer of a Short Sale pay off part of a junior lien "outside of closing" without disclosing to the 1st lien holder and without placing the payment as a P.O.C. (paid out of closing) item on the HUD is Mortgage Fraud and/or a violation of RESPA.
The article is presenting a scenario where the 1st lender does not agree to pay the 2nd $7,000 from the sale. They only agree to pay $3,000. So to skirt around this the agent suggest having the buyer pay the additional $4,000 needed to remove the 2nd lien outside of closing. It's my opinion, that this $4,000 is compensation to the seller for the purchase of the property. This fact, that is pertinent to the sale, is being withheld from the 1st lender. Therefore, in my opinion, it is both Mortgage Fraud and a violation of RESPA.
The definition of Mortgage Fraud as per the FBI is: "material misstatement, misrepresentation, or omission of information relied upon by an underwriter or lender to fund, purchase or insure a loan. ".
Also, a Title company that does this without placing these funds on the HUD could very well be breaking the law. Title Companies exist to protect lenders and borrowers. The lien is a title issue and therefore the monies needed to "clear title" need to be shown on the HUD.
THE HUD-1 MUST STATE, WITH COMPLETE ACCURACY, THE FULL FINANCIAL ACCOUNTING OF THE TRANSACTION. Read the rest of the article here.
Not disclosing this $4,000 payment to the first lien holder is fraud. If it weren't ....then disclosing it would not be an issue. Would it?
Now having said all of that I know these types of transactions happen every day. The chance of being caught and prosecuted are probably slim to none. BUT.....it's still fraudulent and it's still wrong. Of course I am NOT an Attorney and this is just my opinion.
Here's some more great info:
HUD promulgates regulations to enforce RESPA, known as Regulation X (24 C.F.R. section 3500, et seq.). Regulation X includes the requirement that settlement statements be prepared in the form of the HUD-1. The regs include line-by-line instructions and rules as to how the HUD-1 is to be completed. The following is from the "General Instructions" (24 C.F.R section 3500, Appendix A):
"The settlement agent shall complete the HUD-1 to itemize all charges imposed upon the Borrower and the Seller by the Lender and all sales commissions, whether to be paid at settlement or outside of settlement, and any other charges which either the Borrower or the Seller will pay for at settlement. Charges to be paid outside of settlement, including cases where a non-settlement agent (i.e., attorneys, title companies, escrow agents, real estate agents or brokers) holds the Borrower's deposit against the sales price (earnest money) and applies the entire deposit towards the charge for the settlement service it is rendering, shall be included on the HUD-1 but marked `P.O.C.' for "Paid Outside of Closing" (settlement) and shall not be included in computing totals. P.O.C. items should not be placed in the Borrower or Seller columns, but rather on the appropriate line next to the columns."
The "P.O.C." requirement is also set forth in the upper part of the first page of the HUD-1 form.
Above info was taken from this article
So what do you think? Fraud? RESPA Violation? Or neither?
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Hey BB, Long time. I figure it this way...they pay for title insurance so they should be guaranteed clear title...I would also think the HUD must completely disclose all the numbers. ...Common sense would explain it.
Typically the first lender puts a requirement right on their short sale payoff letter disallowing any of these type of payments outside of closing. If people start doing sneaky things like this, it could come back and bite them down the road.
Reserved for TLW
That agent suggesting this just fell off the slippery slop and landed dead arse in the middle of the scum pond in fraud land. No doubt in my mind at all.
It is clearly against the law. We know this.
From a lending perspective:
It is not just compensation to the seller.
The buyer's lender must know that a portion of the buyers "reserves" used for qualifying will be absent from their bank account because they are paying funds to the seller in a shady outside of closing transaction.
good post, the entire industry should read it.
Uh, yeah. Fraud. Get on the phone with the FBI now!
It is also likely being withheld from the buyers lender who would be interested to know what happened to the "reserves" the buyer claimed to have on their loan application.
Where will this madness stop? I recently saw a PBS broadcast that people's greed center was located in the same area of the brain as the desire for food & safety. I guess maybe that's what is wrong. We have learned greed as a survival instinct.
Since when did P.O.C mean "under the table"?
This should be featured.
If, as you say, there is a lot of this going on, then agents should at least have a clue in the back of their mind if requested something so clearly a violation of RESPA.
Bryant - I think of key importance is the monies that transferred at closing. A seller could pay off a junior lien prior to closing- that would not be on the HUD. He could get financial assistance to do so, say from a cousin, friend, etc. That would not be on a HUD.
Bryant,
and if obtaining an FHA loan there is actually an additional HUD disclosure the buyer must sign stating there are no deals being done outside of closing (HUD 1003 addendum, pg 4). It's fraud plain and simple- even though I'm not an attorney it seems pretty clear to me.
Gerry Suarez, Jr.
Your FHA Loan Pro!
Bryant, I have to agree with your assessment. All costs related to the transaction should go on the HUD-1.
V-I-O-L-A-T-I-O-N. It should definitely go on HUD-1. Also, if I'm not mistakened, if the Realtor involved in the transaction is made aware they have an ethical responsibility to say something as well or likely suffer penalties as well.
Bryant,
We do it all the time. Make arrangement that the Buyer pays all or some of the Seller's debt. It goes on the HUD, it is shown as Buyer's contribution to selltle a payoff of the second loan on behalf of the Seller.
This is clearly a violation of RESPA and also an attempt to defraud the first lien holder (not very good either). It seems that some folks attempt to get around it by making a "payment" prior to closing. Those second lien holders are shameless--at least the ones who take the money in that manner.
Bryant, am I missing something here? Why wouldn't the buyer want it on the paid outside of settlement on the HUD form. Why would the first trust lender care if the buyer paid off part of the second trust?
Yes and Yes, to your questions. I have read about this in a few places.
Disclose, disclose, disclose, but like Patricia, I'm wondering why the buyer would not want this on the settlement statement??
In our area, many people have fixture liens (they are not mortgages or deeds of trust, and they are technically considered superior to the first trust deed, even if they were recorded later). They are typically for new windows or HVAC or something that was installed as an energy savings, and monthly payments on the lien are made to the local utility company. Lenders WILL NOT pay them since they are not trust deeds or mortgages, but they must be paid through escrow and cannot be assumed.
I have found that if the buyer knows about the lien upfront and agrees to pay it in escrow as a cost in addition to the purchase price, the lender will agree. I specify this in the contract and on the HUD-1, so all parties understand what is happening. I have had BofA okay this arrangement. It is the only way to avoid foreclosure in some cases. The seller is broke and can't pay it, and the lender won't pay it out of the purchase price. It means that the buyer may be paying over market, but if they really want the house and it is still right for them, my seller is happy. I think the important thing is full disclosure.
This has taken place in my neck of the woods and all I can say is; VIOLATION.
It absolutely needs to show on the HUD! I certainly would not participate in a transaction that tried to not disclose this type of information. It doesn't matter who thought of the idea, everyone is guilty of FRAUD and could be prosecuted. Not for me! Thanks, I will pass.....
Now you made my head hurt. I'm gonna be lazy and just read the comments... cuz now we can comment again! YAY!!!! =D lol
I say this is clearly a RESPA violation. Definitely fraud as well. Folks-seller, buyer, and agents- should read those docs from the 3rd party lender that they sign in detail and see that many state that you have no side deals. We have been able to get waivers where the 1st allows someone else (read that buyer) to pay more to the 2nd. I have had 2nds suggest payment to them not to be on the HUD-1. NO NO NO. On a side note POC is fine. NOT on the HUD-1 is not. It needs to be on the HUD-1. Period.
Bryant, I've had this type of transaction or request pop up a few times. I agree with you and have not participated in this type of closing.
Babe...
Do you think it will stop? I'm thinking, well, it won't. There will always be fraud cuzz there's money to made in dishonesty.
TLW...ROAR!
We did one where the buyer paid, I paid and the seller paid.
It was on the HUD, the first lien holder knew and approved where the funds were coming from. The second did and didn't care just so they got their money.
Not fraud, if everyone knows and it is on the HUD.
Bryant,
Clearly a big no-no. We use attorneys for closings and they would never let this happen (or so I hope!).
Indeed, the HUD must disclose everything! There are no options on that one! Great to see you back in ActiveRain - I sure missed everyone!
Even if you are well meaning you can go to jail over this. An agent in my town did about two years ago.
Bryant anytime there is a question or discussion about whether or not something should be disclosed or not, I'm putting my money on disclosure. It's sort of a no brainer.
Sounds pretty much like fraud as it is...RESPA needs revision to allow for seller assisted stimulus monies!
Its certainly fraud. Recently, Citi held a 2nd on a SS we were processing and insisted on $10k. Fannie allows $3k to be paid to Jr. liens. We asked Citi how they expected us to resolve this and they said that the sellers should pay the difference outside of closing. When we pointed out that that IS fraud, we were sent immediately to a supervisor and the $3k payoff was approved :) The lenders KNOW is fraud and yet will try to get you to do it anyway to increase their own payoff.
I say put it on the HUD. Once a transaction goes into escrow, all monies paid -- regardless of where the money came from or where the money went -- goes on the HUD. You'll hear some second lenders encourage borrowers to "make a payment on their account" outside of escrow, saying it doesn't need to be reflected on the HUD. Oh. Yes. It. Does.
Is our buyer paying cash, or is our buyer financing the property?
If the buyer is paying cash I see no violation
Bryant...I just had a listing agent suggest that my client take over the 2nd mortgage as a regular payment. Of course without telling the 1st. He got very upset when I told hem I had not planned on going to jail on this day.
Disclose, disclose, disclose. Part of the whole real estate collapse is due to "non-disclosed" deals. My future income is more valuable than one sale.
Nothing new to add based on what has been commented on already. In this day and age, it's mind boggling that anyone would try and skirt the law.
if someone is trying to do something not on the HUD, they can count me out. Will have no part of it. Actually began flagging listings in our MLS I came across where the LA said a check was needed to be brought to closing without it being on HUD.
My reputation has no price
According to RESPA, all charges to the buyer and seller on a real estate transaction - including those "paid outside of closing" - must be disclosed on the HUD-1. Thus, I am of the opinion that if the 2nd lien holder is requiring another $4000 from the buyer to release the lien, then it must be on the HUD-1.
I've seen people attempt to keep things off the HUD three separate times. In each case the people involved were attempting to skirt a speed issue, not dupe the other side. Two of the three times resulted in problems that were eventually resolved by, guess how, putting the things in question back on the HUD. The third was some minor repair bill ($45) that someone finally took care of.
Anyway, the law aside, keeping it on the HUD resolves misunderstandings that easily pop up in real estate transactions.
Wow, all this blogging for the sake of the "power" of the SECOND lien holder!!! The agent in this scenario being so quick to potentially put their license on the line for a quick fix "solution".
If the second lien holder is killing the deal, then they must think they'll get paid more at foreclosure. To get their cooperation, they need to be convinced otherwise. But oh, that might take some work and effort which the agent is obviously not willing to do, but would rather risk his/her license.
There are so many ways, legal and approveable ways, to get this lien holder to play ball. One of them being described in #30. But so many other ways should that not work. But again, that would require the agent to educate themselves outside of their required learning for their license, which they seem to be treating like an open book, study at home course, and invest some time to learn how to negotiate and actually work a business transaction.
Short sales are not and never have been cookie-cutter real estate deals. Even those with heavy experience are having to learn more in this changing climate.
I guess my point is, a lack in education will lead to you getting pushed around by 2nd lien holders. A lack in integrity leads you to opting towards fraud rather than working to find a viable solution. And ultimately, some deals are not meant to be had.
BB, it's happening all the time & as you've so wonderfully pointed out clearly against HUD regulations. So with that said, it is happening all the time, everyone is turning a blind eye & when will it stop? Who's going to get busted for it to stop?
this FRAUDULENT activity is happening all over.
title company must be hard up.....
There are two kinds of sins; commission and omission. Hiding information is omission. To comply with the law all financial exchanges must be recorded in black and white on the HUD.
There was massive fraud during the boom with straw buyers, false credit reports, invented documentation. Now there is more opportunity for fraud in short sales because the banks weren't prepared, the rules change daily, and the sharks are even hungrier.
What is it's a cash deal and there's no buyer financing involved?
Clearly a violation.
Why do people insist on putting their licenses on the line?
For my point of view as an agent- I want all of the information on the HUd- I am not looking to loose my license or face prison time in the rare instance that they would be found out;)
This blog has been a great piece of education and awareness. I concur with the group that our fiduciary responsibility has two elements 1. to prioritize our clients financial interest and 2. to make sure it is legal.
Ah, comments are working, I can get on AR! YEAH! You have the honor of one of first comments in over a week! Aren't you lucky, LOL!
There are many other legal ways in which to get the second paid that are not fraud. :)
What Missy Caulk said. As long as it's on the HUD there's nothing wrong with it, even if it's listed as a POC item. The only reason not to put it on the HUD that way is to keep someone (i.e. the first lien holder) from knowing about it. Trying to keep material facts about the transaction quiet is pretty much the definition of fraud isn't it?
Interesting post and comments. Sounds like it could be considered fraud. Disclose, disclose, disclose is the best way around it all. Then evereything is covered and no chance of fraud.
I think we should all reference this blog and the comments the next time a payoff outside the hud is suggested to us by the "short sale specialist" There sure are some shady people out there who try to justify shady behavior and put pressure on the buyers, sellers and agents to follow along. I am eager to see stronger regulations come into play regarding short sale negotiation and negotiators. Bravo for a great blog!
What's worse is some lien holders suggest handling it this way. Sometimes you have to know when to say "no."
Tom
Good comments. Sometimes I learn as much from the comments as I do from the post. Thanks Bryant.
Keeping stuff off the HUD is hiding it from someone associated with the sale, and that makes my toes curl. For a while we had companies telling us we had to keep the fees they subtracted from our side of the commission split off the HUD and instead bring a check made out to the listing office to closing. Why hide that from the lender, buyer or seller. Something sure smelled and we did not do it. I can guess what the motivation was, but will keep my thoughts to myself. In any case, a deal should be more or less transparent and I, for one, do not intend to get myself tangled up in a situation that may, or may not, be considered fraud. Others can do as their consciences allow them to.
Keeping stuff off the HUD is hiding it from someone associated with the sale, and that makes my toes curl. For a while we had companies telling us we had to keep the fees they subtracted from our side of the commission split off the HUD and instead bring a check made out to the listing office to closing. Why hide that from the lender, buyer or seller. Something sure smelled and we did not do it. I can guess what the motivation was, but will keep my thoughts to myself. In any case, a deal should be more or less transparent and I, for one, do not intend to get myself tangled up in a situation that may, or may not, be considered fraud. Others can do as their consciences allow them to.
BB ~ Make one think of what other kind of sneaky ways some folks dream up and think well I won't get caught or there is not a law for this yet right? Is it really worth your license? Not mine thanks.
BB:
You are so right about this -- any agent desperate enough for a sale to stoop to this level deserves the harsh punishment that is coming their way. Oh yes, it's coming!
Any agent suggesting such a thing ought to be automatically turned in to HUD, no questions asked the sooner we stop this kind of thing the better.
Seems like it's a solvable issue, and should be a no-brainer. Once the first lender says they're not going to cover the portion, in your example they will only cover $3,000 of the $7,000, then why not write up an addendum with buyer agreeing to bring in $4,000 to escrow at closing? It would be a term of the sales contract, and if the buyer is willing to do that to proceed to close, why all the back room stuff??? Just write it up, have everyone agree, and close the deal. The devil is in the .... HUD-1.
Should be on the Hud.
If we are all saying that, to the best of our knowledge and belief, this type of activity is unlawful - why are there so many "off-HUD-1 Settlement" payoffs happening? Where are the lawyers? Is this something that should be referred to the Real Estate Bar Association and the local Real Estate Boards? As a broker/owner, I wouldn't want our name to be connected with any such transaction !
Scary Stuff. Real Scary.
Yes, it absolutely belongs on the HUD - it is also in the best interests of everyone to have full disclosure on this. Sounds like it is time for an official rule to be issued addressing this specific issue if it is something that is happening all the time.
It all goes on the HUD-1. All monies that exchange hands as apart of the transaction needs to be disclosed on the HUD-1, no exceptions. If it is so up and up, why the underhanded actions? If the seller can't get the first and second to agree to terms, then they can't sell the home. A shortsale is not always a viable option. If you try to beat the system, you are trying to cheat the system. Cheaters never win!
Sounds like I Violation to me. Disclose everything, that way nothing can be questioned.
First I agree with Wendy...
Lets play devils advocate since anyone can say "oh yeah, fraud fraud fraud..." So here we go...
Second... you say "The definition of Mortgage Fraud as per the FBI is: "material misstatement, misrepresentation, or omission of information relied upon by an underwriter or lender to fund, purchase or insure a loan. "."
The key of that being FUND, PURCHASE OR INSURE.... How does paying off a debt, now unsecured interfere with the BUYER'S Lender doing any of those 3 things?
If the buyer knows up front that they may need to incure additional expenses at closing to make the transaction go, then they can have as a buyer expense on the HUD. The First lender payoff usually states that the second can only get paid XXXX from the Seller proceeds... they dont care what closing costs the Buyer has... They review the HUD 72 hrs prior to closing and we have approval by them for closing. The Buyer incures the additional cost as a closing cost.
Potential Scenario though... The Seller has the option to pay off any debts they want prior to closing, no? So, if the 2nd or any other jr leinholder wants more than what the sr leinholder will allow, what LEGALLY would stop them from being paid PRIOR to closing? For instance, do I need to get my 1st mortgage to approve me paying off my electricians lein? (if i had one)
I ask for clarity... there are many creative LEGAL ways to make things go. My main question from your writing is regarding those three main words... Mortgage Fraud? Not to the lender. RESPA Violation? Yes, if not disclosed on HUD.
How did the DA do?
BOA told me to create two HUD1s when the 2nd wouldn't release the lien for just $3,000 - Second wanted lots more and buyer was willing to pay it - but BOA wouldn't allow it on their version of the HUD1. I contacted the main offices of BOA to report the negotiator. Negotiator is in INDIA and BOA doesn't seem to care that she is suggesting such things...grrrrr.
Dawn. That doesn't surprise me at all. I believ I would have the closing agents attorney draft a letter explaining why these funds WILL be on the HUD. I bet BofA will then agree.
Matt. So why not just place it on the HUD as a POC? I have NEVER had an issue with this. POC on the buyer side and leave it be. I agree the seller can pay off debr prior to closing. This payment will show up on their bank statements and the 1st lien holder can question it at that time. Can the buyer pay the lein prior to closing for the seller? I don't know. When would they pay it? After the 1st lien holder has already disallowed it? Doesn't this change the sellers financial situation? But again I ask...if it's not wrong then why not just place it on the HUD? Fight to make that happen. That's out job.
Coweta and Ron. Not sure how the buyer is [paying for the transaction has any thing to do with this scenario. The fraud and/or RERSPA violation is to the 1sr lien holder. However, if the buyer is getting financing then paying finds outside closing that are not disclosed on the HUD could also be fraud on that side of the transaction.
To all: I am not an Attorney. This post is just my opinion after hours of research. I'm a simple man. I like things on the HUD. IF I were to do it another way because an attorney advised me to then I would certainly have them put that it writing and make it part of my file.
I read an article on the NAR site about this too. 2nds wanting money outside closing on short sales. NAR's legal said no way Jose. I agree.
Dawn (#66), wow, loan negotiators being outsourced to INDIA! I had heard about it, but hadn't actually talked to someone who had it happen to them specifically.
Man, that is so messed up! I thought it was bad today when I got a call from India having something to do with my flower delivery order for my mom's bouquet! She's out in the boonies and so the first message was they couldn't deliver it. When I called in to the 800# I spoke to someone who OBVIOUSLY and painfully could BARELY speak English...and only the English that was in her script! It was like talking to a robot who had re-recorded answers and the wrong button was being pushed for each question! She did eek out that my delivery was just fine, but I still gave my mom a head's up.
At least your Indian was advanced enough to direct you to commit potential fraud! LOL! And what's up with BOA not caring? How much you want to bet that they are NOT on the hook for what those reps say which is totally wrong. But maybe that's another reason why they've outsourced it. Sometimes I really worry about this country and where it's headed as a whole.
Nestor & Katerina (#48)...I find it interesting that we are one of 3 posts out of 67 to point out such. Would have been a super post had it turned into everyone posting what else could be done as an alternative. I/we could, but why do all the work when it's apparent people just want to carry on they way they are on this post. Don't mean to sound so negative...just disappointed because this post could have been so much more.
Bryant, you need to be careful. These are items best left to attorneys as we shouldn't operate outside of our area of expertise. That said, your issue depends on the situation and the state laws.
Given that the transaction is a primary residence, AND if there isn't any language in the agreement letter of the 1st prohibiting said lack of disclosure and the 2nd is a Heloc, the law and attorneys in our state (AZ) consider the payment outside of escrow by the seller (after the close of escrow) and the non-disclosure on the HUD to be completely legal and not a violation of RESPA. This from the firm that represents the Arizona Department of Real Estate, for example.
It is not part of the mortgage and it is considered to be a private arrangement between a creditor and borrower....
We always refer all of our short sales to real estate attorneys and have them approve the final authorizations. What if you encouraged or allowed your client to go to foreclosure if they were in the aformentioned situation because you didn't think they were allowed to make a payment outside the close of escrow and not disclose to the 1st?....
I agree with your opinion. Anything that has to be "off the HUD1" is probably not right and probably going to cause you a problem IF someone finds out later. Just don't do it.
It makes sense to me that it should be on the HUD. I see some banks requiring that people sign that there are no side agreements.
I'm actually a little surprised. I thought you were going to hit us with a reverse... And you are absolutey right. Paying stuff outside of closing without disclosure just seems wrong.
Big B- Obviously it is wrong, unethical and Illegal.....How did it turn out? Did the voice of Reason Prevail?
Dean and Sonia. I actually don't advise my sellers on matters such as these. My expertise is selling real estate. This post is my opinion only. I was hoping as Shannon and Keith pointed out that I would get some differing opinions and some insight into how they would handle this.
BUT....I still most ask....If it's NOT fraud then why can't it be dislcosed on the HUD?
I can think of a couple pf solutions right off the top of my head.
Anybody got anything else?
Bryant - Definitely a violation. Anything that is not disclosed to me is either unethical or illegal.
Can of worms I tell ya! I guess I watch too much television and see how prison looks. I don't think I would enjoy ten minutes of it, so I am gonna just go by the book. No fraud for me.
Bryant, Thanks for the post. I guess it can't be overstated, this is Real Estate Licensing 101. How could anyone think anything other than inappropriate and fraudulent!
Bryant I think it is a violation. It would be nice if the lenders would all just work together!
Careful...
this may not be fraud.
If the senior lienholder gave an approval and did not have things like "arms length transaction, no compensation to the seller (this can be tricky because paying off an existing lien could be considered compensation), and various other kinds of clauses of that sort.... And, you have an all cash buyer (the idea here is that although your primary responsibility is to the client, you also have a duty to innocent 3rd parties including buyers lender) and buyer is aware of the reason for the additional money. Then more than likely this is not fraud and you should be compensated for your position as an outstanding realtor and for going out and doing your homework (which is kind of another reason why you are an outstanding realtor).
Additionally, if you take a listing (or even give advice to a distressed homeowner about pretty much anything), and something adverse happens (for ex. home forecloses), ....no matter what it is...you may become a defendant. Especially here in CA. So, you have to absolutely know your stuff...and have good people around you...including your broker.
So if the buyer has an FHA loan are they not allowed to pay the outstanding balance on the second mortgage?