Mortgage Loan Fraud

Like many other areas of the country, Coeur d'Alene, Idaho, has experienced an explosive housing market. New homes have increased, and so have the prices associated with them. The nationwide housing boom coupled with low interest rates have spawned another boom: Mortgage loan fraud.

For a reader-friendly explanation of one type of mortgage loan fraud, see the USA Today online story Convicted con artist shows how system flaws could allow him to steal your home by Noelle Knox. The story was posted 1/24/2007 at 8:35 PM ET.

According to the US Treasury Department's Financial Crimes Enforcement Network's (FINCEN) November 2006 report titled Mortgage Loan Fraud - An Industry Assessment Based Upon Suspicious Activity Report Analysis:

Mortgage loan fraud can be divided into two broad categories: fraud for property and fraud for profit. Fraud for property generally involves material misrepresentation or omission of information with the intent to deceive or mislead a lender into extending credit that would likely not be offered if the true facts were known. The fraudulent activities observed in the SAR (suspicious activity report) narratives describing fraud for property include: asset fraud; occupancy fraud; employment and income fraud; debt elimination fraud; identity theft; and straw buyers (someone who buys property for someone else to conceal the identity of the true purchaser). Fraud for property is generally committed by home buyers attempting to purchase homes for their personal use. In contrast, the motivation behind fraud for profit is money. Fraud for profit is often committed with the complicity of industry insiders such as mortgage brokers, real estate agents, property appraisers, and settlement agents (attorneys and title examiners. Typical fraudulent activities associated with this category in the SAR filing sampling are: appraisal fraud; fraudulent flipping (buying and selling the same property in a short period of time intending to make a quick profit); straw buyers; and identity theft.

The linked FINCEN report covers all these topics in much greater detail. It also elaborates on emerging mortgage fraud schemes such as asset rental fraud and debt elimination fraud.

According to the Mortgage Asset Research Institute, Inc., "The Mortgage Bankers Association is giving anti-fraud initiatives a high priority. It recently announced that it will urge Congress to increase funding for new FBI agents and federal prosecutors devoted to pursuing mortgage fraud."

An examination of the FBI's May 2005 publication (pages D1-D12) titled Financial Crimes Report to the Public reveals the depth of the FBI's commitment to investigating mortgage loan fraud. It is also a good primer to educate readers about mortgage fraud indicators and common mortgage fraud schemes. It reports on some of the FBI's very successful mortgage fraud investigations.

Though mortgage loan fraud is most commonly associated with financing private residences, it is useful to end on this note: With only slight procedural variations, the same fraud techniques, indicators, and schemes apply just as well to the financing of commercial properties as to residential properties. In either case, the fraud is a crime itself. The proceeds from the crime, if not reported truthfully and accurately as illegal income on federal income taxes, brings the IRS Criminal Investigations into the investigation for violations of the Internal Revenue Code.

IRS Criminal Investigations

Usually our contact with the Internal Revenue Service (IRS) is limited to filing our federal income taxes on or before April 15. Most of us are honest. We try to calculate our personal and business federal income taxes correctly. We pay our taxes on time. Sometimes we make an honest or procedural error which results in a closer examination of our tax return or with other adjustments to our tax liability.

When someone crosses the line that separates an honest mistake or misunderstanding from an intentional evasion, it becomes a criminal matter for IRS Criminal Investigation (CI). CI is comprised of approximately 4,400 employees worldwide, approximately 2,800 of which are special agents whose investigative jurisdiction includes tax, money laundering and Bank Secrecy Act laws. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.

The IRS's Enforcement Strategy - CI is outlined here.

Its FY 2007 Annual Business Plan is here. Pay particular attention to Goal and Objective II. Enhance Enforcement of the Tax Law.

Finally, to get a better idea of how the IRS-CI approaches its criminal investigations, look at the IRS CI Investigation Manual.

As noted earlier, the IRS is unique because it is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code. Those investigations can involve public corruption as well. Some examples of IRS-CI public corruption crimes investigation are here.

Most of us do not need to be overly concerned about becoming the focus or target of an IRS-CI investigation. Only those who foolishly and arrogantly believe they can successfully evade paying their fair share of federal taxes need have sleepless nights.

Who Was Wrong? The FBI or the Newspaper?

Previous Whitecaps posts have discussed the role of federal inspectors general when their respective agencies are accused of fraud, waste, abuse, or misconduct. It is unusual for the public to have an opportunity to compare an agency's response to an allegation with the agency inspector general's findings. Today we have an opportunity to compare what the Federal Bureau of Investigation (FBI) did or did not do in the Rep. Mark Foley investigation with what one newspaper, The Washington Post, says it did.

Today's Washington Post headline reads, FBI Faulted for Inaction in Foley Scandal". The subhed reads, "Justice IG Also Says Officials Misled Media About Group That Provided Messages."

First read The Washington Post article (free online registration may be required).

Then read the 31-page report by the Department of Justice Office of Inspector General. The report is dated January 2007 and titled A Review of the Federal Bureau of Investigation's Initial Response to Representative Mark Foley's E-mails to a Former Page. The value in reading the DoJ IG's report is it gives insight into how allegations of misconduct against an agency's employees are investigated.

Reading both the article and the report raises reasonable questions about the fairness and accuracy of the news reporting. It also raises equally reasonable questions about the thoroughness and thoughtfulness of the FBI's investigation.

Missing in Action: Leadership and Supervision

The Friday, January 19, 2007, Seattle Post-Intelligencer (P-I) carried a story by investigative reporters Eric Nalder and Lewis Kamb. The story was headlined Port officers sent explicit e-mails. The article's subhed was "Few received more than reprimand."

Referring to the P-I's story, a Spokane newspaper blogger commented, "Question: According to a Seattle PI poll, almost 40 percent of the work force has sent improper material via a work e-mail (including, of course, individuals in the Kootenai County sheriff's and prosecutor's offices). Why are people so clueless?"

Whitecaps' response to that blogger was succinct: "People", meaning subordinate employees, are not clueless. They are merely adopting the behaviors tolerated and exhibited by their "leaders" and "supervisors". Poor leadership and poor supervision begets poor subordinate behavior. One doesn't need to go outside the boundaries of Coeur d'Alene and Kootenai County to see that.

Whitecaps' assessment seems to be supported by today's P-I story headlined Port commission to call for investigation of e-mails. This article, also by P-I investigative reporters Nalder and Kamb, reveals the Port of Seattle Commissioners believe senior management in the Port of Seattle Police Department has misled them by understating the volume and content of the material exchanged. The article also notes, "The P-I filed a request under state public disclosure law 57 days ago for 'any and all' documents and e-mails generated during the disciplinary discussions in the e-mail case." It further states, "Though the port has released other documents in the case, and has acknowledged the P-I's right under the law to more, it has refused to release those related to the disciplinary discussion. The documents have apparently been prepared for release, with redactions, but an earlier promise to respond by Jan. 20 was not honored."

It was interesting and relevant to note that one of the Commissioners attributed the decision to launch a thorough investigation to the P-I's aggressive news coverage and its demand for more information under Washington's public records law.

In December 2006, ten Port of Seattle Police sergeants sent a letter to Chief Tim Kimsey. The P-I story said the letter raised "serious issues" about, "Strategic planning and direction; the internal investigations process; the administration of our complaint process; enforcement of policies and procedures department wide; morale; support from our command staff and the perceived indifference that is shown when these issues are raised."

Poor leadership and poor supervision beget poor subordinate performance. It's not a mystery.

Executive Session - Shell Gaming the Public

A shell game is one type of confidence or "con" game, so named because for the con man to successfully separate the intended victim (the "mark") from his money, the con man needs to gain the mark's confidence. The con man typically uses accomplices ("shills") whom the con man allows to "win" occasionally to support the mark's misperception that he, too, can win. The mark will only win when the con man and his shills allow it in order to retain the mark's misplaced trust. Trust and confidence are important if the con man is to scam the mark before the con is uncovered.

A poster to Huckleberries Online, the weblog of The Spokesman-Review columnist and associate editor Dave Oliveria, said, "I have trouble understanding 'executive session'. This is the business of the people. What, if anything, should ever be discussed behind closed doors?" It sounds as if the poster, pseudonymed John Duh, understands "executive session" very clearly. It's the con game being run by some public officials that troubles him.

"Executive session" is an exception allowed by a state's open meeting laws.

Washington State and Idaho both have open meeting laws. Washington State's open meeting law is codified at RCW 42.30. Idaho's open meeting law is found at Idaho Code 67-2340 through 67-2347.

In passing their respective open meeting laws, both Washington State and Idaho legislatures recognized that government in secret, no matter how convenient or expedient for the elected and appointed officials, is not participatory government of, by, and for the people. The introduction to Washington State's open meeting law reads:

Citizens can control their government only if they remain informed about the decisions their government officials are making.

That important principle underlies Washington's open public records and meeting laws. The laws, which are now more than three decades old, are intended to give us an informed electorate that can evaluate the performance of elected officials and in order to ensure an honest, competent and responsive government.

The Legislature described the purpose of the two laws this way: "The people, in delegating authority, do not give their public servants the right to decide what is good for the people to know and what is not good for them to know. The people insist on remaining informed so they may maintain control over the instruments they created."

Idaho says it less elegantly and more succinctly, thus:

The people of the state of Idaho in creating the instruments of government that serve them, do not yield their sovereignty to the agencies so created. Therefore, the legislature finds and declares that it is the policy of this state that the formation of public policy is public business and shall not be conducted in secret.

Both legislatures recognized there would be rare occasions when it would be good public policy for selected small parts of the public business to be conducted privately. Not secretly, privately. To allow for conducting certain specific public business in private, both Washington State's and Idaho's legislatures allowed government bodies to adjourn from scheduled public meetings and go into executive session.

The legislatures recognized the potential for abuse of executive session. In RCW 42.30.110 and in IC 67-2345 the Washington and Idaho legislatures prescribed the allowable circumstances and the procedures that must be followed when a public agency believes it is necessary to adjourn from an open meeting into executive session.

Executive session is permitted but never required in both states. Clearly, the legislatures intended for executive sessions to be the exception rather than the rule.

In Idaho, executive session has been flagrantly abused. The first Idaho Open Meeting Law (IOML) was enacted in 1974 by a legislature that didn't impose suitably heavy personal penalties for knowingly violating the IOML. Even if a public agency's legal counsel advises against going into executive session or otherwise knowingly violating the IOML, the personal penalties involved for offenders ignoring counsel's timely and diligent advice are insignificant.

Neither does the IOML compel county prosecuting attorneys to diligently investigate credible complaints of violations. As we in Kootenai County have learned, the prosecuting attorney can easily exercise prosecutorial discretion to dismiss any and all IOML complaints from citizens.

Those two factors, meaningless penalities and unwilling prosecuting attorneys, combine to render useless any citizen complaints of IOML violations.

The solution is legislatively simple but also probably legislatively unacceptable.

First, the IOML has to be rewritten to overcome the 1974 legislature's original presumption that most public officials will want to willingly comply with it. The law must be rewritten with a new underlying presumption that a significant number of public officials will knowingly, willfully, and intentionally try to circumvent the IOML to deprive the electorate of information we need to hold those public officials accountable and to contribute to the formulation of good public policy.

Second, the IOML has to compel county prosecutors to investigate allegations of IOML violations aggressively and honestly. As a minimum, the complainant must be required to make a sworn complaint of an IOML violation. Any statements of witnesses and suspected offenders must likewise be sworn statements. Lying on a material matter by the complainant, a witness, or an accused is perjury. Any decision of the prosecutor to dismiss the complaint must be reviewed by the Idaho Attorney General's office. The Attorney General's review must include a review of the quality and sufficiency of the prosecuting attorney's investigation as well as the applicability of the law and appropriate use of discretion. Of course, the Attorney General's entire review must be public information.

When necessary and appropriate, the laws of criminal conspiracy need to be considered and invoked. For example, if a city council lawfully goes into executive session on one matter but agrees to deliberate (or vote or reach a "consensus") on a different matter not permissible under executive session, the prosecutor needs to consider charging under both the IOML and Idaho's criminal conspiracy law.

But isn't this overkill? Rewrite the IOML to make it tougher? Compel county prosecutors to take IOML violations seriously? Require the state Attorney General to review prosecutor's decisions to not pursue IOML violations? Aren't we going overboard here?

No, I don't think so. Clearly the intent of both Idaho and Washington State legislators was to compel public officials to conduct the public's business in public, not in secret. At least in Idaho, this intent has been knowingly circumvented by mayors, city council members, community college trustees, and other elected and appointed officials including county prosecutors. That needs to be corrected.

Some local elected and appointed officials need only look in the mirror to identify those who continue to con the public by allowing us to think we know which shell the pea of public information is under, even while those officials are concealing it in the palm of executive session.

Educing Information - The Reality of Interrogation

The objective of interrogations, interviews, and elicitations is to get accurate, timely, reliable information which can then lead to timely, reliable decisions or actions. This is true of intelligence operations, law enforcement investigations, or our own evaluations of sales pitches by telemarketers and door-to-door salespersons.

The public often misunderstands the conduct and purpose of interrogations.

"A major stumbling block to the study of interrogation, and especially to the conduct of interrogation in field operations, has been the all-too-common misunderstanding of the nature and scope of the discipline. Most observers, even those within professional circles, have unfortunately been influenced by the media's colorful (and artificial) view of interrogation as almost always involving hostility and the employment of force -- be it physical or psychological -- by the interrogator against the hapless, often slow-witted subject. This false assumption is belied by historic trends that show the majority of sources (some estimates range as high as 90 percent) have provided meaningful answers to pertinent questions in response to direct questioning (i.e., questions posed in an admnistrative manner rather than in concert with an orchestrated approach designed to weaken the source's resistance."

This quotation was taken from the Intelligence Science Board's 374-page study entitled "Educing Information: Interrogation: Science and Art - Foundations for the Future". "Educing information" refers to information elicitation and strategic debriefing as well as to interrogation. The study is not a "how-to" manual to teach practitioners how to conduct interrogations. Rather, it is a series of scientific papers intended to help all of us better understand how information can be educed.

The papers included in the study are:

• The Costs and Benefits of Interrogation in the Struggle Against Terrorism by Robert Coulam
• Approaching Truth: Behavioral Science Lessons on Educing Information from Human Sources by Randy Borum
• Research on Detection of Deception: What We Know vs. What We Think We Know by Gary Hazlett
• Mechanical Detection of Deception: A Short Review by Kristin E. Heckman and Mark D. Happel
• KUBARK Counterintelligence Interrogation Review: Observations of an Interrogator - Lessons Learned and Avenues for Further Research by Steven M. Kleinman
• Custodial Interrogations: What We Know, What We Do, and What We Can Learn from Law Enforcement Experiences by Ariel Neuman and Daniel Salinas-Serrano
• Barriers to Success: Critical Challenges in Developing a New Educing Information Paradigm by Steven M. Kleinman
• Negotiation Theory and Practice: Explosing Ideas to Aid Information Eduction by Daniel L. Shapiro
• Negotiation Theory and Educing Information: Practical Concepts and Tools by M.P. Rowe
• Options for Scientific research on Eduction Practices by Paul Lehner
• Educing Information Bibliography (Annotated) by Theresa Dillon

(Note: The Intelligence Science Board advises the Director of National Intelligence and senior Intelligence Community leaders on emerging issues of special scientific and technical importance to the Intelligence Community.)

Never Say Die; Just Say "Renew!"

Saturday's snail mail brought a letter from AARP. It was addressed to my mom, Thelma McCrory. The outside envelope had the printed message, "It's not too late to renew your AARP membership."

Hmmm. It may be a smidge too late. Mom died in June 2003.

When Dad died about 11 months before Mom, I sent AARP a letter notifying them of his death and cancelling his supplemental medical insurance. After Mom died, I sent an identically worded letter.

Evidently AARP thinks its benefits are so good, they're worth paying for even after death. I plan on sending the unopened solicitation envelope back to AARP (yeah, I know, a waste of postage...) with my own comment affixed. It will read, "Died in 2003. Still think it's not too late to renew? Do you give a post-mortem discount?"

Mom and Dad would be laughing.

The US Housing and Urban Development Inspector General

On December 19, 2006, BBC Research & Consulting (BBC) of Denver, CO, briefed its December 1, 2006, report titled "Preserving Our Sense of Place: A Housing Needs Assessment of Coeur d'Alene" to the Coeur d'Alene City Council. In its goals (specifically at Section V, page 8) BBC encourages Coeur d'Alene to seek a US Department of Housing & Urban Development (HUD) Community Development Block Grant for more regular funding of housing and community development needs.

Suppose the City and the Lake City Development Corporation does receive HUD money. Who would audit the books to ensure the money was being used as requried by law? Who would investigate allegations of fraud, criminal misuse or diversion of that money?

Initially the audit and investigation would be done by the HUD Inspector General's (IG) Office. The current HUD IG is Ken Donohue. To get a better idea of what the HUD IG's office does, see its Semiannual Report to Congress - October 1, 2005, Through March 31, 2006. A sampling of how the HUD IG deals with public corruption in community planning and development programs begins on page 76.

The mission of the HUD IG is to:

• Promote the integrity, efficiency, and effectiveness of HUD programs and operations to assist the Department in meeting its mission,
• Detect and prevent waste, fraud, and abuse, and
• Seek administrative sanctions, civil recoveries, and/or criminal prosecution for those responsible for waste, fraud, and abuse in HUD programs and operations.

Should HUD IG develop evidence requiring civil action or criminal prosecution, the evidence would be presented to the US Attorney, not the county prosecutor. Any federal court action would be in federal court, not state District court.

Inspector General (IG) Update

If local government officials in Kootenai County and Coeur d'Alene, Idaho, need a reminder that no one, not even Justice Department lawyers, are immune from federal corruption investigations, today's Washington Post article headlined Energy Lobbyist a Target in Ethics Probe should serve as that reminder.

Whitecaps' post on Thursday, January 4, 2007, entitled The "Other" Feds - Ferreting Out Federal Fraud, Waste, and Abuse described how various federal agency Inspectors General conduct federal criminal investigations. That post referred to an investigation conducted by the Department of Interior Inspector General Earl Devaney.

Today's Washington Post article updated the earlier investigation and notes that J. Steven Griles, the former deputy Interior secretary during President G.W. Bush's first administration, has been told he is the target of a federal criminal investigation in the Jack Abramoff corruption probe. That investigation includes Sue Ellen Wooldridge, the assistant attorney general who recently resigned from the Justice Department's environment and natural resources division.

Anonymizing Visitors

The Washington Post reported on January 5, 2007, that the White House and the US Secret Service signed a memorandum of understanding declaring that records of White House visitors are not Secret Service records. They are Presidential records.

Should we care? You bet we should. As Presidential records they are exempt from public disclosure under the Freedom of Information Act (FOIA). The memorandum of understanding between the White House (meaning: people in the Executive Office of the President of the United States, not the building) and the US Secret Service (meaning: its Director) will make it much more difficult for the public (meaning: The Washington Post) to learn how frequently and when visitors like Jack Abramoff, Monica Lewinsky, Denise Rich, and Ralph Reed dropped by for . . .

Congress should "invite" Secret Service Director Mark Sullivan to present himself and explain his agency's legal authority to enter into an agreement to circumvent FOIA. He should also be required to prove conclusively that the agreement was somehow essential for the Secret Service to fulfill its statutory obligations.

That's what Congress should do. It may not, however. The Democrat leadership in Congress undoubtedly remembers the visitor logs were used to substantiate President Clinton's adultery with Monica Lewinsky. Hoping someday to regain the White House, the Democrat leaders may see some advantage in blustering over this agreement but not seriously challenging it. Anonymizing visitors has utility if you're in control of the Oval Office.

The public, however, will lose. The Bush administration has successfully used the authorization for the use of military force in Iraq to justify decreasing the public's access to information we need to make informed decisions as citizens. If this agreement is allowed to stand, it will form the basis for more withholdings by this and future administrations regardless of political party affiliation.

The "Other" Feds - Ferreting Out Federal Fraud, Waste, and Abuse

My blog posts on December 1, 2006, December 13, 2006, and December 20, 2006, discussed the Federal Bureau of Investigation's (FBI) emphasis on public corruption cases.

Not every criminal misuse of federal funds by government employees or their agents starts out or ends up as a public corruption case investigated by the FBI. Ferreting out federal fraud, waste, and abuse often starts with each federal agency's Office of Inspector General (OIG).

The OIG's were created and empowered by the Inspector General Act of 1978. This Act describes the statutory duties and responsibilities of each Inspector General (IG).

A good layman's description of the scope of the Inspectors General duties is available in the short article What is the function of offices of inspector general? Pay particular attention to paragraph 3 which explains notes the IGs are authorized to investigate "federal fund recipients, such as contractors and grantees, to determine if they are complying with federal laws and regulations." Important Note: The IGs investigate allegations that local goverment officials and agencies have fraudulently obtained, criminally wasted, or otherwise criminally misused federal funds.

To get a better idea about just how complex an IG's investigation can get and how far it can go, read this New York Times abstract Criminal Inquiries Look at U.S. Oil-Gas Unit. The IG spearheading this investigation is Earl E. Devaney.

Thus, citizens who believe they have evidence that federal funds have been fraudulently obtained, grossly wasted, or otherwise criminally misused may want to first identify the federal agency that provided the funding and then submit a request for investigation to that agency's IG. Here's an example of a letter of complaint. Letters (or other types of contact) need to provide more than rumor or innuendo. They need to convince the IG that there is sufficient cause to use agency resources to investigate.

Exemplary Citizen?

The Spokesman-Review's editorial on January 1 naming Coeur d'Alene Mayor Sandi Bloem as its 2006 exemplary citizen in government suggests the newspaper's editorial board willingly overlooks that she, the Coeur d'Alene City Council, and the City's urban renewal agency knowingly violate the Idaho Open Meeting Law. Does the newspaper's editorial board not believe exemplary citizenship includes obeying state laws passed to ensure the public’s business is conducted in public and not in secret?

A newspaper's value is measured by its ability and willingness to provide accurate, timely information to citizens. We, the People, are supposed to be the agents of change. The Spokesman-Review's failure to report the facts behind the Mayor's and Council's violations of the Idaho Open Meeting Law suggests the newspaper is unable or unwilling to inform the public about illegal acts committed by elected and appointed officials in Coeur d'Alene.

There are three points I thought The Spokesman-Review editorial board ought to have considered before making its decision to overlook the Mayor's and Council's transgressions:

• Kootenai County Prosecuting Attorney Bill Douglas routinely dismisses Idaho Open Meeting Law complaints. Why would The Spokesman-Review and all the other area news media believe that Coeur d'Alene's Mayor and Council would not exploit this by knowingly and intentionally violating the Idaho Public Records Law as well? If the Prosecutor is willing to allow the public's business to be conducted in secret meetings, why should the press believe he will be less willing to allow misrepresentation in or concealment of meeting records and other public records as well?
• The Idaho Open Meeting Law is low on the list of Idaho offenses. It carries exceedingly minor penalties for conviction on first violation. If Coeur d'Alene's Mayor and City Council are so willing to continue rather than simply acknowledge and cease their violations of the Idaho Open Meeting Law, why should the people, the Prosecutor, and the news media not believe they would go to even greater lengths to conceal more serious offenses?
• The Spokesman-Review editorial board devalued the personally courageous and truly remarkable accomplishment of a genuinely exemplary citizen, Shannon Sullivan, when it compared her effort with the adequate but for the most part incomplete actions of Coeur d'Alene's Mayor Sandi Bloem. Then again, the newspaper had to name someone as this year's exemplary citizen in government. Sadly, Coeur d'Alene's Mayor was apparently the best it could come up with.