Affinity Fraud Schemes on Rise


LOS ANGELES–The mortgage industry has experienced a notable rise in “affinity fraud” schemes–investment scams that prey upon members of an identifiable class, community, religion of ethnic group.

“Affinity fraud is not just about religion–it’s not a congregation getting fleeced by a dubious pastor,” said Brent Baker, shareholder and director with Clyde Snow & Sessions, Salt Lake City, Utah, here at the Mortgage Bankers Association’s Risk Management, Quality Assurance and Fraud Prevention Forum. “We’re seeing it in the Boy Scouts; we’re seeing it in the Caribbean community. We’re even seeing it at the institutional level…affinity fraud represents a multi-billion dollar segment of criminal activity.”

Baker noted affinity fraud comes in many forms, such as Ponzi schemes or sales of interests in a “venture” (i.e., orange groves in Florida). In the mortgage industry, affinity fraud examples include upfront fees in exchange for purported provision of financial services (for which no services are actually provided, or situations in which borrowers might be instructed to submit their mortgage payment to a third-party provider directly, a scheme that appears to be prevalent in southern California’s Hispanic and Indian communities.

In many cases, Baker said, the key ingredient is a victim placing trust in a perpetrator who offers assistance. “Trust lets your hair down,” he said. “It makes you lose your common sense.”

Nicolas Morgan, partner with Paul Hastings LLP, Los Angeles, suggested that certain regulatory programs, such as anti-redlining programs, could actually be used to defraud groups of homeowners or potential homeowners. “You need to be wary of the unintended consequences of programs that inadvertently lump groups of people by ethnicity or heritage,” he said.

Michael Trabon, associate with Weiner Brodsky Kider PC, Washington, D.C., said because affinity fraud can be an amorphous concept, they can be hard to spot.

“Typically, actors will approach people of their own ethnicity or religion and offer to offer loan modifications, credit repair, debt relief, bankruptcy representation or offers to short-sell a property for an up-front fee,” Trabon said. “Of course, no services were provided.”

A notorious 2013 case, United States v. Hidalgo, involved more than $700,000 in losses and numerous foreclosures from a group who targeted elderly Hispanic borrowers offering loan modifications under the Home Affordable Modification Program, despite having no relationship with HUD. The defendant even instructed borrowers to send mortgage payments directly to his own business and provided “receipts” that payments had been made, even though no such payment occurred.

In another case, United States v. Teneja, a noted “Bollywood” movie producer concocted a scheme in northern Virginia that targeted members of the area’s South Asian community. Owners of a regional mortgage originator took out numerous loans for members of the Indian and Pakistani communities without their knowledge; they submitted false loan applications, using names and social security numbers, many of whom had approached the perpetrator to refinance their existing loans. In other cases Taneja falsely informed borrowers that they had refinanced and directed payments to Taneja’s own mortgage company. Taneja avoided arousing suspicion for years by keeping payments on loans current. However, the scheme eventually collapsed and Taneja was sent to prison.

“He was able to perpetrate this because of his ability to abuse the trust of people in his own community,” Morgan said.

Trabon also reported an increase in foreclosure avoidance schemes, which target homeowners at risk of defaulting on loans or who are already in foreclosure. The homeowners are misled into believing that they can avoid foreclosure in exchange for upfront fees. The perpetrator profits by simply pocketing fees or remortgaging property if a deed is obtained.

“You don’t have to be a Bernie Madoff,” Trabon said. “You just have to have a relationship with someone in which you have built trust.”

Morgan said it is incumbent on mortgage lenders and servicers to remain vigilant in detecting affinity fraud schemes. “You don’t want to have to be in a position of reaction,” he said.