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Most of the columns that I write are generated because
of real life experiences. When the same circumstances
become repetitive I usually devote column space,
knowing that the problem effects many others.
Some months ago I authored a column about real
estate fraud. That column went over some of the common
LOAN FRAUD practices in use today. Unfortunately a few
licensed professionals, including real estate brokers,
CPAs and attorneys, actually assist clients in
submitting fraudulent applications. In most cases this
is a FEDERAL crime and the Federal Government has
actively been prosecuting mortgage loan fraud.
Southern California is a hot bed.
The previous column touched on the practice of “TOO
MUCH – TOO LITTLE”. In short, TOO MUCH involves a
phony INFLATED sale price to induce the lender to lend
80%-90%-100% of the phony price. TOO LITTLE is the
practice of showing a sale price less than the true
amount with the “balance” paid separately in CASH
to deceive the IRS (seller) and county tax assessor
(buyer).
Another practice is commonplace and again,
professionals sometimes assist the buyer in “smoke
and mirror” financing. The lender requires that the
buyer show that the down payment is in a bank account
or perhaps on deposit at escrow. In reality, there is
no down payment as the seller is carrying back a “silent”
second or perhaps a friend is lending the down payment
in the form of a quiet second trust deed. By “quiet”,
I mean, “hidden from the lender”. The lender is
making a loan relying on the buyer’s good credit and
down payment when, in fact, there is no down payment.
Again, this is a FELONY. Those who conspire with the
buyer are also committing a felony perhaps even more
serious.
This
practice involves the seller or someone else actually
putting cash in escrow or the borrower’s bank
account under the guise that these are borrower funds.
Often a third party is |
approached to make a loan of the down payment “just
for a few days” until the transaction closes. As I stated
above, “conspiracy to defraud a lender” is not similar
to a speeding ticket – don’t do it. While on this
subject however, I am often amazed at the profit being
offered to a third party for the use of funds for a few
days. Not only is this a “no-no” as described above, it
is also usurious. When a NON-EXEMPT lender makes a loan in
the State of California they are subject to usury laws
which, for all practical purposes, limit the interest rate
and/or lender’s fee to an annual percentage rate of
approximately 10%. A $1,000 profit in a day or two is
clearly usurious for a non-exempt lender. There are exempt
lenders in California generally described as the typical
mortgage company, bank, credit union, finance company and
real estate brokers ARRANGING real estate loans. The reason
I say APPROXIMATELY 10% is that the usury ceiling for “personal
purposes” is 10%. The ceiling for loans for other than
personal purposes is a “floating” rate that has been
close to 10% for many years. If you’re a private party and
intend to lend a friend or relative money for personal
purposes, do not charge more than 10% (APR). If you’re
intending on lending money for business purposes, even to a
company, check with your attorney to verify the maximum rate
at that time.
In closing, I have also authored a column some years ago
entitled “Greed Kills”. The typical private party
lending money at usurious rates eventually finds out the
consequences (the hard way). A pattern of usurious practices
is, in fact, a criminal offense, though rarely prosecuted.
Most usurious loans are made in ignorance of this law, but
the civil penalty can still be substantial, i.e. loss of ALL
interest and usually attorneys fees.
I promise my next column will be on a lighter subject.
Peter Rosenthal
VIP Trust Deed Company |