Why Audit Mortgages?
To create legal leverage which can be used to accomplish the goal of a Homeowner. Forensic loan
audits often reveal violations or mistakes or fraud in your loan that can be used to start legal
litigation with your lender. If Material Evidence of Violations exists in your loan then the
Lender has no choice but to work with you to correct it, because you are entitled to a recourse of
those damages as a financial restitution. Having this leverage means your lender will not only have
to listen, but also be held accountable for the laws that were violated and potential mortgage
A mortgage Forensic Loan Audit determines if any laws were broken during the origination of
the loan. In performing a Forensic Loan Audit the Mortgage loan documents are scrutinized to
determine if all calculations are correct and if they adhere to Local requirements, State
requirements and Federal Statues. Upwards of 80% of loans that were originated from
2001-2008 contain at least one violation. If any violations are found in the loan agreement
this can be used as powerful negotiating tool while performing a loan modification, short sale,
principal reduction, short refinance, sue the lender for damages or Quiet Title Action. If the
violations are presented to the bank the right way, then the bank would be far more willing to work
with the homeowner on whatever goal the homeowner would like to accomplish.
Has your lender violated any Local, State or Federal Banking Regulations?
Violations go unchecked all the time until the homeowner make an informed decision to seize
control of their situation and actually orders an Audit to investigate what if any violation exist. From
2001 to 2008 many loans contained serious errors and violations. Some of these errors and
violations could cost the borrower tens of thousands of dollars and even more. Some of these
errors were honest mistakes, while many violations were created out of greed. Errors and violations
were committed by almost all parties of the loan including lenders, borrowers, loan officer,
mortgage broker, account executive for the lender, processor, underwriter, real estate agent, title
company and appraiser. Excessive fees and interest rates were common among such violations.
A Forensic Loan Audit is an investigation which examines the
loan documents to determine whether all parties completed
the proper procedures and complied with all regulations
during the origination of the loan.
Below are some of the errors, violations and fraud?
Predatory Lending: The deceptive, fraudulent, or unfair practice where the Mortgage Broker
put the borrower in a high cost loan when the borrow actually qualifies for better loan terms.
Falsified Information and Documentation: Faking paystubs, W2s, verification of deposit
and verification of income, even bank statements. Done by having the borrower sign blank
documents and told they will come back to them later, which they did because they trusted their
High Cost Loans: Excessive high fees and/or additional junk fees. Alt-A and Subprime Loans
carry more lending risk and therefore have higher interest rates. Adjustable rate loans with a high
margin. Adjustable rate mortgages with a floor cap whereas the interest rate cannot adjust down
below the initial rate
Steering: Placing minorities or anyone uneducated about Mortgages into high cost loans.
Reverse Redlining: Specifically targeting the lesser desirable borrowers who were hardly ever
offered credit in order to generate additional loans. (distressed neighborhoods, low income
earners, low valued homes)
Junk Fees: These were fees added to a loan which sometimes did not make any sense. They
would have strange names such as mortgage review fee, lending fee, operations fee, advertising
fee and so on.
Escalated Appraisals: Someone would ask the appraiser to increase the appraisal amount
higher than the true property value in order to require a lower down payment or more cash out on
a refinance or lower LTV ratio to qualify for a loan.
Good Faith Estimate: Many borrowers used the GFE to shop the fees against other mortgage
companies and brokers. With this being the case, it became popular for loan officers to omit or
purposely decrease certain fees, making the closing costs to appear lower. The borrower would
find out at closing that the fees on the GFE were not correct.
Annual Percentage Rate (APR): The APR in many loans, especially ARM’s and Option ARM’s
were not correct. If the APR was calculated lower than the actual rate, the borrower could be
paying too much for the loan.
Pre-Payment Penalties: Oftentimes a lender or loan officer would not inform the borrower of
a pre-payment penalty. In some cases the loan officer or lender would go as far as stating there
was no penalty, when there actually was a penalty.
Title Company Fees: Title companies charge fees for closing the loan, processing, title
insurance, taxes and administrative fees. Just like the mortgage company, title companies
sometimes had junk fees and excessive fees.
Data Entry: Some violations were human error and not done on purpose. Some examples of
human error include but are not limited to the data entry of caps, margins, indices, interest rates
and pre-payment penalties which could lead to the borrower paying higher fees and interest rates
than what was agreed to on the loan documents.
Deception: When a Lender, Loan Officer or Mortgage Broker made a promises that you can
refinance out of a high cost loan after a few months of on time payments in order to get a more
affordable long term loan based on the fact that home values always go up.
Federal Laws Governing Mortgage Lending
The United States federal government has core laws that make the guidelines uniform and
administered fairly and equally for all individuals. In fact, all lenders are required to operate under
certain rules, regulations and procedures when taking loan applications. Those rules, regulations
and procedures are spelled out in the;
Truth in Lending Act (TILA) 1968
The federal Truth In Lending Act was originally enacted by Congress in 1968 as a part of the
Consumer Protection Act. The law is designed to protect consumers in credit transactions by
requiring clear disclosure of key terms of the lending arrangement and all costs.
The Truth In Lending Act is designed to reduce confusion among consumers resulting from the
different methods of computing interest and prevent fraud, deception and unfair business
practices. It does not require creditors to calculate their credit charges in any particular way.
However, whatever alternative they use, they must disclose certain basic information so that the
consumer can understand exactly what the credit costs. This information must be conspicuous on
documents presented to the consumer before signing, and also possibly on periodic billing
statements. Also known as Regulation Z, requires that annual percentage rate (APR), term of the
loan and total costs must be disclosed to a borrower prior to extending credit to the borrower.
Regulation Z applies to offers or extensions of consumer credit if four conditions are met:
• The credit is offered to consumers
• Credit is offered on a regular basis
• The credit is subject to a finance charge (i.e. interest) or must be paid in more than four
installments according to a written agreement
• The credit is primarily for personal, family or household purposes.
Home Mortgages have become more complicated in recent years. Historically, someone trying to
buy a home had very few options. Often, only a traditional thirty year loan was available. From
2001-2008 loans of various duration and interest rate variations were available to every home
buyer. Regulation Z requires that creditors offering adjustable rate mortgages make a special
disclosure booklet available to consumers. The Federal Reserve Board and the Federal Home Loan
Bank Board have published a book entitled "Consumer Handbook on Adjustable Rate Mortgages"
to help consumers understand the purpose and uses of adjustable rate mortgage loans.
A “Truth In Lending” disclosure statement is required to inform the borrower of the true cost of the
credit extended by providing the correct;
Annual Percentage Rate - This is the measure of the cost of the credit which must be disclosed
on a yearly basis. The method for calculating this rate is determined the underlying transaction.
Finance Charge - This is perhaps the most important disclosure made. This is the amount
charged to the consumer for the credit.
Amount Financed - This is the amount that is being borrowed in a consumer loan transaction, or
the amount of the sale price in a credit sale.
Total of Payments - This includes the total amount of the periodic payments by the
Total Sales Price - This is the total cost of the purchase on credit, including the down payment
and periodic payments.
Real Estate Settlement Procedures Act (RESPA) 1974
Created in 1974 to protect the consumer from unnecessarily high settlement charges and certain
abusive practices that have developed in the residential real estate industry. The idea is to keep the
borrower from being forced to pay "hidden" fees at closing. RESPA also requires that borrowers
receive disclosures at various times. Some disclosures spell out the costs associated with the
settlement, outline lender servicing and escrow account practices and describe business
relationships between settlement service providers. It attempts to achieve these goals by controlling
the manner by which the settlement services are provided and compensated. It also requires
advance disclosure of settlement cost, fees and conditions of the loan to enable a borrower to
make an informed decision as to whether the offered terms are reasonable and acceptable by
them. Section 8 of RESPA prohibits kickbacks between lenders and third-party settlement service
agents in the real estate settlement process. It requires lenders to provide a good faith estimate
(GFE) for all the costs you are likely to pay to allow the borrower to know the specific costs of the
loan and to whom the fees are being allocated. RESPA restricts the amount that fees can increase
between the GFE and final HUD-1 by no more than $35 on a refinance or $100 on a new purchase
Home Ownership and Equity Protection Act (HOEPA) 1994
The law addresses certain deceptive and unfair practices in home equity lending. It amends the
Truth in Lending Act (TILA) and establishes requirements for certain loans with high rates and/or
high fees. The rules for these loans are contained in Section 32 of Regulation Z, which implements
the TILA, so the loans also are called “Section 32 Mortgages.”
Qualified Written Request (QWR)
If the borrower believes there is an error in the mortgage account, he or she can make a "qualified
written request" to the loan servicer. The request must be in writing, identify the borrower by
name and account, and include a statement of reasons why the borrower believes the account is in
error. The servicer must acknowledge receipt of the request within 20 business days. The servicer
then has 60 business days (from the request) to take action on the request. The servicer has to
either provide a written notification that the error has been corrected, or provide a written
explanation as to why the servicer believes the account is correct. Either way, the servicer has to
provide the name and telephone number of a person with whom the borrower can discuss the
matter. The servicer cannot provide information to any credit agency regarding any overdue
payment during the 60 day period. If the servicer fails to comply with the "qualified written
request", the borrower is entitled to actual damages, up to $1000 of additional damages if there is
a pattern of noncompliance, costs and attorney’s fees.
Equal Credit Opportunity Act (ECOA)
Prohibits discrimination in lending based on race, creed, religion, national origin, sex, marital status
or age. It also ensures that all consumers are given an equal chance to obtain credit. This doesn't
mean all consumers who apply for credit get it: Factors such as income, expenses, debt, and credit
history are considerations for creditworthiness. The law protects you when you deal with any
creditor who regularly extends credit, including banks, small loan and finance companies, retail
and department stores, credit card companies, and credit unions. Anyone involved in granting
credit, such as real estate brokers who arrange financing, is covered by the law.
Fair Credit Reporting Act (FCRA)
Promotes the accuracy, fairness and privacy of information in the files of consumer reporting
agencies. When you apply for a mortgage, the lender pulls a credit report. The FCRA guarantees
you will have access to that report.
Home Ownership and Equity Protection Act
The law requires certain disclosures and clamps restrictions on lenders of high-cost loans. Codified
in Regulation Z at 12 CFR 226.32, it only applies to non-purchase money transactions
Material facts include the terms of the loan, whether there is a prepayment penalty, or any other
information which a reasonable borrower would want to know before accepting the loan. Did the
broker or loan officer or anyone working for the broker or loan officer fail to disclose any material
facts to the borrower?
Were any representations, statements, or comments, written or oral made by the loan officer,
broker, notary or anyone else contradict the terms of the documents? When a mortgage
professional makes errors which a reasonably diligent mortgage professional would not have made,
he or she may have made a negligent misrepresentation.
Excessive Fees and Improper Charges by your Lender. Deceptive Abusive Predatory Lending
Practices, Excessive Prepayment Penalties, Tangible Benefits to the Borrower, Affordability to the
Borrower, Home Mortgage Disclosure Act (HMDA) Data, Broker Fee Agreements, and State and
Federal Disclosure Accuracy.
Breach of Contract
All the mortgage documents and attachments are a contract. The lender must follow all the terms
of the contract such as the way the interest is calculated, and the penalties it assesses. Were there
any terms in the contract which the lender failed to follow?
Unfair practice or predatory lending could happen during any phase of the life
of the loan.
1. Origination. The company that originally gave out or created the loan.
2. Servicing. During the life of a loan or “note” it may be legally sold to a different investor at any
time for any reason and for any price.
3. Collections. Whether the loan is current, delinquent or in default there is a right and wrong
way to do things.
4. Loss Mitigation. Negotiation of a Loan Modification, Short Sale, Principal Reduction,
Bankruptcy or Foreclosure.
5. Foreclosure. Last ditch resolution to a non-performing Mortgage or Deed of Trust or after
Chapter 7 Bankruptcy.
• Excessive Points
• Securing an inflated appraisal
• Serving alcohol prior to closing
• Having you sign blank documents
• Forging documents and signature
• Charging more than once for the same service
• Successively refinancing your loan or “churning”
• Changing documents after you have signed them
• Loans with prepayment penalties or balloon payments
• Charging fees not allowed or for services not delivered
• Changing the loan terms at closing or “bait and switch”
• Providing a low teaser rate that adjusts to a rate you cannot afford
• Closing in a setting where you cannot adequately review the documents
• Steering you into a loan that is more profitable to the mortgage originator
• Promising they will refinance your mortgage before your payment resets to a higher amount
• Coaching you to put certain income or assets on your application so that you will qualify for a
• Receiving a kickback in money or favors from a particular escrow, title, appraiser, or other service
• Pushing borrowers into default
• Not applying payments on time
• Applying payments to Suspense
• Charging illegal or unjustified fees
• Refusing to return your calls or letters
• Improperly reporting negative credit history
• Failing to provide you a detailed loan history
• Force placing insurance when you have adequate coverage
• Creating an escrow or impounds account not allowed by the documents
• Abusive collection methods
• Refusing to adequately communicate with you
• Failing to provide copies of all documents and assignments
• Producing a payoff statement that includes improper charges & fees
• Failing to provide Default Loan Servicing required on Fannie Mae mortgages
• Fraud on the court
• Failing to follow due process of state foreclosure
• Foreclosing in the name of an entity that is not the true Note Holder
• Lowering the opening bid amount of Foreclosure sale without informing the borrower
In a Forensic Loan Audit the documents will be check for:
Home Ownership & Equity Protection Act (HOEPA)
• Section 32 (High Cost)-did the points/fees exceed maximum thresholds?
Truth in Lending Act (TILA)
• Final Truth in Lending Statement-was the APR or finance charge incorrect?
• Initial Truth in Lending Statement-was this provided to client within 3 business days of
• Right of Rescission Notice (ROR)-was the rescission given to the client accurate and did they
receive adequate disclosure?
• Initial ARM disclosure-was this provided to the client within 3 business days of application?
Real Estate Settlement Procedures Act (RESPA)
• Good Faith Estimate-was this document provided to client within 3 business days of application?
Are there any violations on this document?
• HUD-1 Settlement Statement-Evaluation of the HUD-1 in conjunction with the TIL and GFE to
determine accuracy and if any violations occurred.
• Transfer of Servicing Disclosure-was this provided to the client within 3 business days of
Equal Credit Opportunity Act (ECOA)
• Was the ECOA provided to the clients within 3 business day of application?
• Right to a Copy of the Appraisal Disclosure-Was this document given to the client?
Gramm, Leach, Bliley Act (GLB)
Fair & Accurate Credit Transactions Act (FACTA)
• Was the Notice to the Home Loan Applicant in the file?
• Was the appraisal a fair and accurate description of the property value at time of origination?
• Were values ‘inflated’ and did a specific value need to be given to make the transaction work?
• Did the underwriter use reasonable logic in determining if the client could afford the payments or
if the loan made sense?
• Were any known guidelines exceeded in terms of Debt to Income (DTI), credit analysis, program
affordability and potential payment shock?
• Was the income that was used ‘reasonable’ and was it documented?
• Were assets (down payment) ‘reasonable’ and were they documented?
Predatory or Deceptive Lending Practices
• Were there any red flags in the file that would lead to believe that any type of fraud was
• Were there any exceptions granted in the processing/closing of the loan?
• Was the chain of title accurate and were there any lien issues?
• Were there any state-specific laws that were violated?
• In the end of the analysis, did the lender provide a mortgage to someone who could reasonably
expect to repay the debt?
• Did the lender use the correct information in determining the clients’ payment adjustments for
the life of the loan?
• Did the lender collect the correct amounts of money from the client?
Mortgage Litigation Under the Federal Truth In Lending Act
These laws are in place to protect the homeowner, but they are often completely disregarded.
These laws are violated daily by lenders and mortgage companies and like many laws often go
unchecked. Many mortgage loans may be deemed unlawful and the mortgagor (owner) may be
entitled to prosecute for substantial damages. You may have the right to sue a lender for violations
of these requirements. In a successful suit, you may be able to recover statutory and actual
damages, court costs and attorney’s fees. If the Lender does not accept a settlement out of court
you may have to file a Federal lawsuit on behalf of the homeowner and begin litigating against the
lender for damages. In most cases the parties will reach an out of court settlement agreement as
conclusion of the lawsuit, or in some rare situations continue on to trial and demonstrate to a judge
how the lender has willfully failed to comply with Federal Law. The penalties for failure to comply
with the Truth In Lending Act can be substantial. A creditor who violates the disclosure
requirements may be sued for twice the amount of the total finance charge on the loan. In the
case of a home mortgage, this can be a very significant amount. Costs and attorney's fees may also
be awarded to the consumer.
Foreclosure Often Illegal:
If the loan documents show fraud or violations of any of the federal laws, then this can be a good
tool to prevent foreclosure and even if already foreclosed on the lender is going to have a very
hard time making a foreclosure hold up in a court of law.