Common Fraud Schemes

See Crosscutting frauds, which entail the majority of offenses in Community Planning and Development programs.

In Public Housing and Multifamily projects or Community Development organizations receiving HUD funds, the following frauds may occur.

1. EMBEZZLEMENT AND THEFT:

   In several HUD programs, administrators and participants may be entrusted with cash or assets and take them for their personal use. There are many ways they may embezzle, from simply taking money from the cash drawer or writing checks to cash, to more elaborate methods to conceal the theft, like falsifying invoices and misusing credit cards of the HUD funded organization. Other examples are when they may steal rental or laundry receipts; falsify deposits, checks or other accounts; or write bonuses to themselves. They may hire “ghost” employees and convert the payroll checks for their own use. They may use staff, materials, or equipment for personal use, which is also a fraud.

2. CONTRACTING AND PROCUREMENT FRAUDS:

   There are many variations of these frauds and which can involve procurement officials and bidders working alone or in collusion to commit frauds including

   • A false certification of regulatory and statutory compliance, or qualifications necessary to obtain a contract
   • Colluding with others to win a contract using bid rigging, phantom or altered bids, or split bids
   • Falsifying information on contract proposals
   • Using Federal funds to purchase items that are not for Government use
   • Billing more than one contract for the same work
   • Billing for expenses not incurred as part of the contract
   • Billing for work that was never performed
   • Falsifying data such as employee credentials, experience, and rates, false or defective bonds, and test or inspection results
   • Change order abuses; Underbidding to win contract and colluding with procurement officer to make up profits through unnecessary change orders
   • Substituting approved materials with unauthorized products
   • Misrepresenting a project’s status to continue receiving Government funds
   • Charging higher rates than those stated or negotiated for in the bid or contract

3. BRIBERY AND KICKBACKS:

   Bidders offering contract officials money or other items of value to award a grant (bribery) or contract officials requiring funds or items of value from bidders to obtain a contract (kickbacks).

4. CONFLICTS OF INTEREST:

   Persons in positions of trust that use their authority to steer contracts or program benefits to their own undisclosed businesses, family, or business associates.

5. SOCIAL MEDIA SCAMS:

   Programs have seen various scams in which websites and other social media sites are used to induce the public to send money in order to receive various HUD benefits, grants, or contracts. They sometimes falsely advertise as being government representatives or agents of HUD to promote their scheme further.

6. IDENTITY THEFT:

   Program administrators and others who steal identities or create false identities to apply for and illegally receive various HUD funded benefits such as rental assistance, mortgages, or block grant program funds.

1. DUPLICATE BENEFITS:

   Disaster victims who apply for and receive benefits from multiple agencies; often seen for duplicate rental assistance and repairs.

2. FALSE ELIGIBILITY CLAIM:

   Homeowners falsely claim damage to a primary residence when it was actually an investment property. Rental properties are not eligible for repair funding. This also refers to cases where recipients falsely obtain Section 8 assistance when they in fact own an undamaged home. They sublet the Section 8 unit and keep the rents as profit.

3. CONTRACT REPAIR FRAUDS:

   Home repair firms that contract for work, but do shoddy work, or leave when paid while performing little to no work.

Also see Crosscutting frauds.

1. MORTGAGE POOL FRAUD:

   Mortgage companies may submit false documentation and/or certification as to the value of pooled mortgages or falsifying that the loans were FHA insured. The pools may contain undisclosed phantom properties, mortgages that are included in other pools, or contain mortgages supported by falsely inflated appraisals.

2. SERVICER FRAUD:

   Lenders who contract to service GNMA mortgage pools may divert receipts of monthly payments, FHA claim payments, or early payoff remittances for their personal use and not pass these funds on to investors.

3. FALSE CERTIFICATIONS:

   Servicers or applicants to become servicers may falsify financial submissions and certifications to be approved to be a GNMA servicer.

1. EQUITY SKIMMING:

   When multifamily projects are in default or a non-cash position, they may not withdraw funds from the projects for other uses. Owners of projects who lie or conceal these withdrawals violate Title 12 USC 1715Z-19.

2. IDENTITY OF INTEREST FIRMS:

   When owners contract with a management agent or for other services for the multifamily project, they must disclose any financial interest in the contract company. If they lie about their involvement on a HUD certification about this, it is a false statement violation.

3. FALSE CERTIFICATIONS:

   Owners sometimes certify to HUD on billings that units are occupied or that the unit meets housing quality standards when those assertions are false.

4. MONEY LAUNDERING:

   This occurs when mortgage company officials receive payments on multifamily loans but do not pass the proceeds to investors in mortgage pools.

5. LOW INCOME TAX CREDIT FRAUD:

   Some developers who build affordable housing under the low income tax credit program illegally inflate construction costs in order to get larger loan amounts and siphon off the extra funds.

Also see Rental Assistance and Crosscutting frauds.

See Rental Assistance and Crosscutting frauds, which entail the majority of offenses in Public and Indian Housing programs.

Rental assistance fraud involves several types of bad actors including program administrators, Section 8 landlords, and tenants.

1. SOLICITING OR ACCEPTING BRIBES:

   Application and recertification staff, grievance officers, or others may require or accept bribes from a tenant or help an applicant get in, or stay in, a unit (or get priority on the waiting list). Inspectors may ask for or accept bribes to pass units for inspections.

2. FALSE BILLING:

   Billing for a vacant unit, or one occupied by an ineligible tenant.

3. CONFLICT OF INTEREST:

   Renting to a relative or having a conflict of interest in allowing themselves or a relative to be a Section 8 landlord. Commissioners (except resident commissioners), officers, and policy influencers of a Public Housing Agency (PHA) are prohibited from living in a Section 8 unit.

4. SEXUAL HARASSMENT / EXTORTION:

   Instead of requesting money, program administrators as well as landlords and inspectors may demand sexual favors to allow an applicant/tenant to get into or stay in the assisted unit.

5. SECTION 8 LANDLORD FRAUDS:

   Section 8 landlords may require additional side payments from tenants above the rents reported to the housing authority.

6. TENANT/APPLICANT FRAUDS:

   Applicants will falsify their true income and assets or family circumstances in order to be eligible for or increase rental subsidy.

1. FRAUD FOR PROFIT:

   A complex profit scheme, fraud for profit involves multiple mortgage lender professionals in an attempt at defrauding the lender of large sums of money. Individuals who may be included are a straw borrower (an accomplice who applies for the loan under the direction of a conspirator), a dishonest appraiser or realtor, and/or a dishonest settlement agent all working to get an undeserved large loan. Some cases have involved hundreds of loans and millions of dollars.

2. PREDATORY LENDING:

   Another form of Fraud for Profit, this involves high-pressure tactics to get people to buy a house for which they do not qualify. The scammers often falsify the documentation without the borrower’s knowledge.

3. INCOME FRAUD:

   One of the most common forms of mortgage fraud involves the borrower overstating his or her income. This allows the borrower to qualify for a loan or a higher loan.

4. GIFT LETTER FRAUD:

   Often people will borrow money from their family in order to make a down payment on a property. However, treating this as a gift reduces the amount of debt you appear to have, possibly causing the lender to approve a loan it would otherwise reject.

5. OCCUPANCY FRAUD:

   This is when a borrower wants to obtain a mortgage in order to purchase an investment property, but claims that they will actually live in the property. Lenders usually charge higher interest rates for investment property mortgages, because they are riskier loans for lenders.

6. APPRAISAL FRAUD:

   This occurs when a home’s value is deliberately or fraudulently understated or overstated. When the value is overstated, the scammer receives more money for the loan. When the value is understated, it is done in order to get a lower price on a foreclosed home so the scammer does not have to pay for the property's full worth. “Air Loans” are another form of appraisal fraud, in which fake appraisals support nonexistent properties.

7. CHUNKING FRAUD:

   Chunking is the term applied to obtaining multiple loans on the same property at the same time from different lenders. This is also found in the Title 1 Home Improvement Loan program where scammers apply for multiple improvement loans for the same property.

8. EMPLOYMENT FRAUD:

   This occurs when a borrower claims to be self-employed in a non-existent company or claims a higher position in a real company in order to misrepresent their income for purposes of obtaining a mortgage.

9. PROPERTY FLIPPING:

   This scheme involves the purchase of cheap properties, doing little or no repairs and selling them quickly, often the same day, for huge profits. This scheme is made possible by fraudulent appraisals. Flipping is legal as long as there is a valid appraisal to support the increased valuation.

10. LOAN MODIFICATION AND FORECLOSURE RESCUE FRAUD:

    Borrowers who fall behind on the payments or default (miss 3 payments) are prey for scammers who offer to get them relief if they will send their payments to them. Most often, they take the payments and provide no services. The borrowers do not realize the fraud until they receive foreclosure or eviction notices. Sometimes they also may have the borrower sign the deed over to them, and then force them out and sell the property for profit. These scammers may advertise fake government assistance programs or present themselves as HUD representatives.

11. FORENSIC LOAN AUDIT:

    HUD prohibits advance fees for loan counseling services, so scammers may sell their services as “forensic mortgage audits.” These audits are reviews of mortgage loan documents to determine whether the lender complied with State and Federal mortgage lending laws. The fraudster claims that the audit report will help avoid foreclosure, force a mortgage modification, or even cancel a loan. The fraudster typically will request an upfront fee for this service.

12. MASS JOINDER LAWSUIT:

    The fraudster, often a lawyer, law firm, or marketing partner, will promise that he or she can force lenders to modify loans. The fraudster will try to “sell” participation in a lawsuit against the mortgage lender, claiming that the homeowner cannot participate in the lawsuit until he or she pays some type of upfront fee.

13. RENT-TO-OWN OR LEASEBACK SCHEME:

    The homeowner surrenders the title or deed to their home as part of a deal that will let the homeowner stay in the home as a renter with the promise that the homeowner will be able to buy the home back in a few years. However, the fraudster does not intend to sell the home back and, instead, takes the monthly “rent” payments and allows the home to go into foreclosure.

14. BANKRUPTCY TO AVOID FORECLOSURE:

    The fraudster may promise to negotiate with your lender or get refinancing on your behalf if you pay a fee up front. Instead of contacting your lender or refinancing your loan, he pockets the fee and files a bankruptcy case in your name—sometimes without your knowledge.

15. REVERSE MORTGAGE FRAUD:

    Reverse mortgage (a home equity conversion mortgage or HECM) is often used to defraud senior citizens of the equity in their homes. Using high-pressure tactics and relying on the inability of some seniors to comprehend what they are doing, the fraudsters trick the seniors into applying for a reverse mortgage. They then take the proceeds. Sometimes the fraudster will forge the senior’s signature on documents unbeknown to the senior. Sadly, many cases involve family, friends, or caretakers. Other reverse mortgage frauds involve fraudsters who heavily push seniors to take out a HECM and to invest the proceeds in investment portfolios that they are selling. They profits off fees, or the investment itself is a scam.

16. SHORT SALE FRAUD (FLOPPING):

    A short sale is a sale of a property where the proceeds of the sale are less than the balance owed on the mortgage loan. A fraud can occur if the seller or a buyer convinces the lender that valuation of the home is less than actual. After the lender approves the short sale, the seller or buyer resells the property at a higher price to a new buyer and pockets the difference. (This is called flopping, a play on the term flipping).

17. SHORT SALE FRAUD (PREDATORY SHORT SALE NEGOTIATORS):

    This is a version of a foreclosure rescue scheme and involves borrowers who are underwater (the value of the property is less than the remaining loan balance). Scammers represent to borrowers, who are desperate to sell their homes, that they can help them do so for a fee. After payment, they provide no help, and disappear with the funds.

18. SOVEREIGN CITIZEN FRAUD:

    Sovereign citizens are individuals who do not recognize the U. S. government and illegally occupy and take ownership of vacant properties. They take advantage of State laws that require county clerks to accept and file any quitclaim deed presented to them as long as the forms are properly signed and fees are paid. No proof of ownership is required. It becomes the burden of the true property owner to go to court and clear the title. There are also instances in which a sovereign citizen has rented a HUD Real Estate Owned (REO) property to unsuspecting tenants. Sovereign citizens have begun participating in the HUD subsidized Section 8 Housing Choice Voucher program as landlords, using properties that they do not own. They provide fraudulent deeds to housing authorities to establish ownership rights so they can participate as a landlord. Sovereign citizens have also been active in foreclosure rescue schemes.

19. EMBEZZLEMENT OF CLOSING PROCEEDS:

    In this scheme, closing attorneys receive proceeds for the loan, and keep some or all of them for themselves. The volume of transactions and poor bookkeeping hides this fraud.