Loan Fraud: Inflating the Purchase Price

Loan Fraud: Inflating the Purchase Price

By: Joe DiPaola

The Buyers suggest the following transaction to the Sellers: (1) Buyers will inflate the property's value and offer a price significantly above asking price; (2) in return, Sellers will either credit the Buyers with large down paymnent monies, pay a large credit to Buyers for closing costs, or return cash to the Buyers after Close of Escrow. Should anxious-to-sell Sellers agree to the deal?

Absolutely Not!

Tile 18 US Code Section 1014 reads as follows:

"Section 1014. Loan and credit applications generally

Whoever knowingly makes any false statement or report, or
willfully overvalues any land, property or security, for the
purpose of influencing in any way the action of...a Federal land bank, a
Federal land bank association, a Federal Reserve bank...a Federal credit
union, an insured State-chartered credit
union, any institution the accounts of which are insured by the
Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, any Federal home loan bank, the Federal Housing
Finance Board, the Federal Deposit Insurance Corporation, the
Resolution Trust Corporation...upon any
application, advance, discount, purchase, purchase agreement,
repurchase agreement, commitment, or loan, or any change or
extension of any of the same, by renewal, deferment of action or
otherwise, or the acceptance, release, or substitution of security
therefor, shall be fined not more than $1,000,000 or imprisoned not
more than 30 years, or both.... "

Federal law makes it illegal to artificially inflate the value of a property in connection with the making of a loan by a Federally-chartered bank or other Federal financial institution. Federal law makes it illegal to fail to disclose to the lender any/all monies or credits received by the Buyers; all information on the loan application and in loan-related documents must be truthful and complete. So if a Buyer, appraiser, real estate broker, or mortgage broker artifically inlates a property's value, or fails to disclose to the lender all cash/credits received by the Buyers, a crime has been committed. "Whenever the lender is not informed, in writing, of the true nature of a transaction, the transaction is illegal."

Even though Sellers may be stressed about their house not selling, that's no reason to be talked into an illegal scheme by disreputable Buyers. Any time a Buyer structures a "creative" deal involving an offer of more than the asking price and large cash back, bells and whistles should go off!

On the other hand, paying a credit to Buyers at close of escrow, or a giving commission rebate, are permissable as long as they are: (1) fully disclosed up front to all parties; (2) part of the written contract; (3) processed through escrow and disclosed to the lender; and (4) not part of a scheme where the property's value has been artificially inflated. Usually lenders will require, as part of their underwriting criteria, that the sum of all credits to Buyers not exceed 3% of the purchase price.


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