According to figures published by the Federal Bureau of Investigation (FBI), the Financial Crimes Enforcement Network (FinCEN), Corelogic, Interthinx and LexisNexis, based upon filed SARS reports and other available data, California has been cited in the top ten fraud states nearly every year for the past decade.
In 2009 and 2010 California was 3rd in the nation for the most mortgage fraud incidents. In 2011 and 2012 California came in 7th out of 50 states. In 2013 the state improved to 10th place, then in 2014 crept back up to 2nd place. According to Bankrate, in 2017 California once again held 7th place, still prominent in the “Top Ten.”
California is a large state, with many investment properties, diverse communities, and a large and diverse housing stock, which ensures that it will also be a target for mortgage fraud.
California allows several different parties to handle and participate in a property’s escrow and closing process. Escrow companies licensed by the state’s corporation commission are the primary agents allowed to handle California real estate escrow and closings, however, property title companies frequently handle real estate escrow and closings and attorneys and real estate brokers may also be involved. In some instances California-licensed real estate brokers can handle escrow and real estate closings for their clients.
Who may conduct a closing may also differ geographically. In Northern California, property title companies traditionally handle escrow and closing activities. Southern California real estate processes are different, however, in that escrow companies as well as lenders deal with escrow and closing services. However, California is so large that the selection of escrow and closing services providers can vary even from county to county.
When fraud occurs, the State of California encourages government reporting however the ability to recover for losses when fraud has already taken place is limited. Escrow officers are required have a stated $25,000 net worth and to maintain a $125,000 fidelity bond as well as a $25,000, $35,000, or $50,000 surety bond depending upon the volume of business passing through their trust accounts. Upon initial application, escrow officers must complete a fingerprint process and a criminal background check. It is performed only once upon licensing; there is no ongoing monitoring or annual checks conducted. In a state where the current median home price is $499,900 (according to Zillow) and the average mortgage is $347,652 (Experian) these protections are helpful but will not prevent fraud nor cover a significant lender loss.
Attorneys are licensed when admitted to the bar and should be insured, however malpractice insurance is not required in California, it is only recommended. Title agents who are not direct employees of an underwriter must maintain a $25,000 surety bond and are issued closing protection letters however the CPL does not cover all fraud incidents such as conspiracies and theft of NPI.
Of further concern to lenders in California is the perceived lack of a legal duty for closing agents to report fraud even if they have actual knowledge that it is taking place. In 1999, in Vournas v. Fidelity National Title Co., the California Court of Appeals held that settlement agents have “no duty to police the affairs of a lender,” and have no obligation to “report fraud.” Similar results were reached in Axley v. Transnational Title Ins. Co. and Lee v. Title Ins & Trust Co.
CFPB vendor management rules require lenders to adopt policies to evaluate and monitor anyone who handles their documents, funds and borrower NPI for risk, not simple rely upon licenses and insurance. Because of pressure from some professional associations in the state, California lenders have been slower in adopting new vendor management solutions to evaluate and monitor risk for closing professionals to deter and prevent fraud and the threat of harm before it occurs.
Greater risk management rules and vendor management programs may never knock California out of the list of top fraud states, but they very well may help deter the types of mortgage and settlement fraud risks that lenders and consumers in the state fear most.