In Part 3, we discussed the scenario of “The Old Switch” in which the buyer and seller agree to change the sales price and the seller gives a kickback to the buyer at closing.  In this fourth article of the series, we’ll introduce “The Contractor’s Scheme.”

In this scenario, the buyer is supposedly going to do a substantial amount of improvements to the property, gets a bid from a contractor (a straw company) and then pays that contractor at closing… who turns out to be the buyer.  Using the same example, it’s a $400,000 purchase, a $200,000 home improvement. The loan is based on the inflated $600,000.  There is no construction loan like one would find in a traditional home improvement loan. The deal is closed and funded, the contractor turns out to be a front for the buyer, and no improvements were ever made. In Houston, there was a developer who converted apartments to condominiums. The subcontractors were paid directly out of the closing proceeds (pursuant to the developer’s instructions). The subcontractors (landscapers, appliance installers, painters, etc.) were all businesses owned by the lender’s senior vice president (who were also the project’s loan officer). He “approved” every loan and settlement. Believe it or not, the lender sued the title company for following their own loan officer’s instructions, and not discovering the fraud! The case settled, three executives of the title company lost their jobs, an escrow officer lost her license forever, and the title company paid a substantial sum to the lender. Remember, it was the lender’s own officer who set this system up. He was fired.

Can you see how title companies get suspicious and cynical? Again, the buyer never makes one mortgage payment, puts the money in his pocket, and moves on to the next transaction.

In the next article of this section, we’ll discuss “The Ultimate Lie.”