Fraud Prevention: For Commercial Real Estate Valuation

Nominee fraud, as it is called by the FBI, is the practice of concealing the real identity of a buyer or borrower with the use of a false stand-in buyer, often called a “straw buyer,” who is more creditworthy. Nominee fraud is different from the previously described types of fraud because it typically affects credit decisions rather than valuation.

No one has suggested that appraisers police such fraud. Nevertheless, your lender clients would be better protected if you inform them when the name on the purchase contract is different from the name of the borrower; not all lenders look for this. The borrower could be a straw buyer. LLCs are often used to conceal the discrepancy, however, making such detection difficult.

Nominee fraud has become quite prevalent and is arranged openly on online Internet forums and at real estate investment seminars. Its perpetrators do not even seem to consider it illegal. The straw buyers are often convinced by the fraudster that nothing illegal is occurring. Take, for instance, the ad shown in Exhibit 10.1, which appeared on a LinkedIn forum.

Similar “real estate partners needed” ads are often seen on Craigslist or on personal real estate investment forums such as Bigger Pockets or Norada.

The FBI has defined this type of scheme on its website as a nominee loan, in which “the identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.”¹ This straw buyer fraud falls within the FBI’s definition of mortgage fraud, “a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.”²

^{When the straw buyer leaves after the transaction and the less creditworthy owner is left to pay the debt, the loan could go into default. Sometimes the straw buyer is not so lucky, though, and is left holding the debt obligation.}

Such behavior has also been interpreted by prosecutors as a violation of US Code Title 18 (Crimes and Criminal Procedure), Part I (Crimes), Chapter 47 (Fraud and False Statements), Section 1014, also known as the fraud statute:

§ 1014. Loan and credit applications generally; renewals and discounts; crop insurance
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 the Federal Housing Administration, the Farm Credit Administration, Federal Crop Insurance Corporation or a company the Corporation reinsures, the Secretary of Agriculture acting through the Farmers Home Administration or successor agency, the Rural Development Administration or successor agency, any Farm Credit Bank, production credit association, agricultural credit association, bank for cooperatives, or any division, officer, or employee thereof, or of any regional agricultural credit corporation established pursuant to law, or a Federal land bank, a Federal land bank association, a Federal Reserve bank, a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or the Small Business Administration in connection with any provision of that Act, 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 Agency, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Farm Credit System Insurance Corporation, or the National Credit Union Administration Board, a branch or agency of a foreign bank (as such terms are defined in paragraphs (1) and (3) of section 1(b) of the International Banking Act of 1978), an organization operating under section 25 or section 25(a)^[1] of the Federal Reserve Act, or a mortgage lending business, or any person or entity that makes in whole or in part a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974, upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, loan, or insurance agreement or application for insurance or a guarantee, 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 therefore, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.³

^{It is unfortunate that affluent and otherwise legitimate citizens (such as doctors, for instance) get mistakenly caught up in straw buyer schemes in an effort to improve their own investment returns. Fraud is fraud, and it is never excusable. However, initiators of straw buyer scams can be very persuasive and may influence naive investors to serve as straw buyers, all the while convincing them that nothing illegal is occurring.}

Nominee fraud, also known as “straw buyer” fraud, is a common element of mortgage fraud. Appraisers should be alert to evidence that a loan applicant is not the real borrower or buyer of the property. If you are suspicious or see evidence that such a scheme is occurring, it is best to notify the lender and let the lender decide on what type of action to take.

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Misrepresentation of Buyer or Borrower