Are Brokers Liable for Fraud on Stated Income Loans?

If you’re a mortgage broker in Alaska, it appears the answer to the question can be yes. From Newsday comes an interesting story:

A U.S. District Court in Alaska Monday sentenced a former American Home Mortgage branch manager to serve more than 2 years in prison and pay a $50,000 fine and $190,000 in restitution in connection with wire fraud charges after he falsified documentation to secure “stated income” mortgage loans from American Home and Countrywide Financial. Kourosh Partow, who moved from Countrywide to Melville-based American Home in June 2006, pleaded guilty April 20 to two counts of wire fraud, one at each bank, in exchange for the other counts being dropped. In the American Home case, Partow, 41, helped a client refinance his home in 2006. Despite the client having provided accurate information about his income, Partow listed the income as $20,000 per month — “an amount that significantly overstated [the client’s] true income,” according to Partow’s plea agreement. In the Countrywide case, he admitted to knowingly overstating an applicant’s income to qualify the client for a loan in April 2004.

I realize there are good, ethical, diligent loan officers out there. I also know first-hand that the roar of the housing boom brought in more than its share of people who didn’t belong in any industry, let alone mortgage banking. The above ruling would seem to suggest, fair or not, that mortgage brokers will be coming under increasing heat for their role in helping clients get a stated income loan. Especially if that loan is later found to have been fraudulent by, say, the guys now doing portfolio due diligence over at Clayton Holdings. Thing is, fraud like this — even in the cases above — requires complicity from an appraiser, and likely from the borrower as well. While mortgage brokers are busy highlighting their lack of fiduciary duty to borrowers, however, they’re also in turn highlighting their responsibility to protect the lender’s best interests in the deal. Sort of the flip side of the coin: if you aren’t looking out for borrowers, you are looking out for lenders. And there’s the rub. Fudging numbers on stated income deals clearly isn’t in the lender’s or the borrower’s best interest, since it ultimately leads to a default in most cases — and one that can be pushed back for repurchase activity. If you think this is a lone example, and not the norm, you probably need to think again. The incidence of fraud in stated income loan portfolios is overwhelming at nearly every credit level. Which leads me back to my point: with this much fraud in stated income products, an early precedent is emerging in various courts for broker liability. And it’s sure to be something hotly contested in courtrooms and among legislators, and especially by many mortgage brokers themselves.

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