As The Feds Crack Down On Straw Buyer Fraud And Occupancy Fraud, It’s Important To Know What These Are And How They Are Different
The federal government has been cracking down on straw buyer fraud and the numbers show it. Convictions for straw buyer fraud over the past three years are up nearly 200% compared to previous years. So if you are a real estate investor it is important to know what straw buyer fraud is. It is also important to understand the difference between straw buyer fraud and occupancy fraud.
If you don’t know how a straw deal works, you are not alone. I get dozens of emails a week asking me how they work and if they are legal. Basically, the way it works is a straw buyer/borrower is a person is paid to lend their identity and credit to a transaction for another person.
How Straw Deals Work In Foreclosure Rescue Scams
These types of deals are common in foreclosure rescue scams.
Bob Smith goes into foreclosure and he owes $350,000 on his house worth on a house worth $500,000. Bob’s credit is toast and no one will lend him money except for local loan sharks.
Bob is at the bar one night talking to his buddy Al from the plant. Bob notices Al’s new car out in parking and begins telling Al his dilemma. Al tells Bob he paid cash for his car using the money he makes loaning out his credit and financial information to people. He pitches Bob about how for a fee he could save Bob from being kicked out on the street. Al and Bob had a deal worked out by their third Pabst Blue Ribbon.
Bob will sell the house to Al for $500,000. Al pulls a loan out for $350,000 plus the cost of the closing costs plus his fee of $10,000. This brings Al’s loan amount to $385,000. As fate would have it, Al qualifies for a 3.5% interest rate at an 80% loan-to-value. So, he and Bob decide to increase the loan amount to $400,000 and split the $15,000. Bob then writes up a bogus seller-held second mortgage for $100,000 cover the difference between the sale price and the loan amount. After the closing, Bob writes a check to Al for $15,000 and Bob pockets $7,500.
The two men write up either a Land Contract or a lease agreement indicating Bob makes payments to Al and Al pays the mortgage payment. Or Bob makes the payments directly to the lender for Al.
What Is Occupancy Fraud?
Straw Buyer Fraud is different than occupancy fraud.
Occupancy fraud is purchasing a property and representing to the lender that you will live in the property when you have no intention of living in the property.
Let’s say when Al applied for the mortgage, he checked the box that indicated the property was going to “owner-occupied.” Al did this so he could get better lending terms. Al had no intention of living in the house because Bob and his family were going to live there. Al committed occupancy fraud by doing this.
Other Types Of Straw Buyer Fraud
There are many variations on straw buyer fraud and occupancy fraud that doesn’t revolve around a foreclosure. For instance, straw buyer fraud schemes are often used in real estate investment schemes.
For instance, straw buyer fraud schemes are often used in real estate investment schemes.
There are underwriting limits on the number of residential mortgages a single person can have at one time. If the masterminds of a real estate scheme have maxed out their lending ability, they often use straw buyers to extend their ability and purchase more homes. Sometimes the straw purchasers are relatives or employees.
Straw buyer fraud can also be something as innocent as parents or family members financing a house in their name for a family member. The straw buyer would put the loan in their name. The family member who’s living in the home would then make the payments.
The Penalties For Getting Busted In A Straw Buyer Fraud Scheme
When a loan is obtained under false pretenses by a straw buyer, this can lead to federal charges for this serious offense. Bank fraud has a maximum penalty of 30 years in prison along with a fine of $1,000,000. If you have any involvement in a straw buyer scheme, even acting as the buyer for someone else’s fraud plan, you could face this penalty.
18 US Code Section 1344 defines the federal offense of bank fraud to include participation in any scheme to improperly obtain funds or assets that belong to a financial institution.
Anyone involved in a straw buyer fraud scheme can also expect to face further federal charges for mail or wire fraud. Especially if you sent documents via mail or over the Internet or wire services. Each of these offenses also carries an additional penalty of 30 years imprisonment. If the deal goes bad anyone involved in the straw buyer fraud scheme could face $1 million fine. Banks will not hesitate to file a complaint with the FBI or the Office of the Inspector General of FHFA. After all, it’s easy money to shake down a middle-class guy for $25,000 to $100,000.
New York Penal Code Section 187 also prohibits the crime of residential mortgage fraud. The amount of money involved in the fraud determines the degree of the offense and potential penalties. If the fraud involves more than $1,000, which virtually all straw buyer schemes do, the offense is a felony on the state level.
You need to contact an attorney right away if you have been accused of straw buyer fraud or occupancy fraud. Your lawyer can help you avoid incriminating yourself. Your lawyer can assist you in deciding how best to respond to charges to try to avoid serious penalties.