MAY 2010 UNITED STATES ATTORNEYS' BULLETIN 9
not know it is not a true check. The fact that $25,000 is an unusually large pre-closing escrow payment
that the lender might question leads to the second and third ways the buyer and seller might defeat the
requirement.
The second method of defeating the need to evidence buyer/borrower funds will work if the
lender allows a subordinated second mortgage. That is, the seller purports to take back a $25,000 seller-
financed second mortgage to seemingly provide the buyer/borrower funds. In this scenario, the seller
receives the $100,000 in lender loan proceeds and a note for $25,000. There is no intention on the part of
the buyer or seller to have the seller-financed note paid; rather, its only purpose is to convince the lender
that the buyer/borrower really paid $125,000 for the house.
If the lender will not fund a loan with a subordinated seller loan, the buyer and seller may turn to
the last commonly utilized option of using a down payment assistance program. These programs are
willing, for a fee, to help the buyer and seller document CFB. The down payment assistance program
(under the cover of a charity) provides the $25,000 CFB given to the closing agent at the closing. After
the loan closes, rather than give the extra $25,000 back to the buyer, the seller gives it to the down
payment assistance program with an additional fee for the service of fronting the CFB. This use of the
down payment assistance program results in the same happy seller, happy buyer, and scammed lender.
Obviously, regardless of who the bad guy is, success of this fraud-for-property scheme will
depend, in part, on obtaining a $125,000 appraisal to support the inflated price. Appraisers are often
happy to comply with providing such an appraisal. In a fraud-for-property scheme, the inflation of the
price is usually not as great as in a fraud-for-profit scheme and the appraiser has the plausible deniability
of a willing seller and buyer at a $125,000 "price."
C. Money flow in a fraud-for profit scheme
Now change the money flow from a fraud-for-property to a fraud-for-profit scheme. The fraud-
for-property scheme worked so well that we can just escalate the same scheme. The money flow will
change depending on who the bad guy is. Look first at the scenario of the bad guy being the buyer. The
seller is still selling a house worth $100,000, but the buyer now wants to pay $100,000 for the house, does
not have the necessary CFB, and would like to walk away from the deal with money in his pocket. The
buyer suggests to the seller that the price be inflated to $200,000. Now the buyer gets an 80 percent loan
that provides $160,000 (80 percent of $200,000) in loan proceeds with $40,000 CFB due at closing.
Remember that the seller only wants $100,000 but received a total of $200,000. Rather than just use the
extra funds to pay the CFB, the loan proceeds are now enough to cover the true property value, the CFB,
and still have money left over. After closing, the seller keeps the $100,000 he wanted for the house and
provides the extra $100,000 to the buyer. The buyer uses $40,000 for the CFB and still has an extra
$60,000. The seller is happy because he ended up receiving the $100,000 asking price. The buyer is
happy because he got into the house without having to come up with the down payment and has an extra
$60,000. The victim lender has now loaned $160,000 on a house worth $100,000, or made a 160 percent
loan. But, you might correctly observe, how did the buyer win in the deal if he has a $160,000 loan to
repay? The answer is simple. This burdensome loan is not a problem to the buyer who does not intend to
repay it, hence we call this fraud-for-profit not fraud-for-property because the object was the money, not
the property. Even if the buyer uses part of the extra $60,000 to make several mortgage payments to avoid
a telltale early payment default, there still will be plenty of money to make the scam worthwhile—in a
way that any self-respecting fraudster would love.
Staying with this example, how does the money flow change if the seller is the main bad guy?
The house is still worth only $100,000, however, the seller convinces a person with good credit to "lend
their credit to the deal" by being a buyer/borrower for a fee of $5,000. The seller convinces the good-