Mortgage Fraud Red Flags Every Loan Officer Must Know: Straw Buyers, Income Inflation, and Wire Fraud Patterns

Mortgage fraud exposure starts at the MLO level. Regulators and investors hold loan officers responsible for red flags they should have caught. Understanding the most common fraud patterns protects your license, your employer, and the borrower who may not know they are being used in a fraudulent scheme.

Straw Buyer Indicators

• ✦Borrower has no knowledge of the property address, purchase price, or seller when asked during the application interview
• ✦Third party is present at application and answers questions on behalf of the borrower
• ✦Borrower's down payment is coming from the seller or a party to the transaction disguised as a gift
• ✦Borrower's employment is verified at a company where another party to the transaction is an officer or owner
• ✦Borrower has recently received a large deposit with no clear source documentation, particularly just before the application date

Income Misrepresentation

The most common income fraud involves inflated self-employment income. Watch for: tax returns with unusually round numbers for business income or expenses, Schedule C that shows net income dramatically higher than gross revenue would logically allow, inconsistency between the income on the application and the lifestyle or assets visible in bank statements, and bank statements showing large recurring transfers that appear to inflate average balances. W-2 fraud involves fabricated employer letters and pay stubs; always verify employment via phone call to the employer's publicly listed number, not a number provided by the borrower.

Appraisal Fraud Signals

• ✦Purchase price is significantly above the appraisal but neither party disputes or questions it
• ✦Seller is not the titled owner or has been in title for fewer than 90 days without explanation
• ✦Comparable sales in the appraisal include properties that are not truly comparable in size, condition, or location
• ✦The appraiser is a referral from a party to the transaction rather than an independent AMC selection

Wire Fraud Prevention

Wire fraud targeting real estate transactions has increased significantly. The standard protocol: always verify wire instructions by phone using a number obtained independently (not from an email), never by responding to an email requesting wire information. Never change wire instructions without re-verifying by phone. If a party to the transaction sends updated wire instructions by email, treat it as a potential fraud attempt until verified independently. Instruct borrowers at application that wire instructions will never change by email and they should call you immediately if they receive any such request.