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Cash Back At Closing – All Over Again

On Friday I received a call from Ralph Roberts (FlippingFrenzy.com) inviting me to comment on postings on that website from people questioning the reality of cash back at closing being an actual criminal activity. It seems there are professional doubters.

Let me make this simple statement: ANY cash paid TO THE BORROWER (the person who’s credit is used for you “credit partner” folks) without having been fully disclosed on the 1003 (Uniform Residential Loan Application – URLA) is mortgage fraud and a criminal activity in all 50 states.

For the sake of those of you who honestly do not understand the “why” let me address that in short:

The applicant is asking the lender to disburse funds (write a check) for a specific dollar amount. In addition to that specific dollar amount is a little thing called Loan to Value or Combined Loan to Value (LTV or CLTV) for the loan amount in ratio to the actual sales price. If the sales price is $200,000 but the seller rebates, kicks back, spiffs, or otherwise transfers funds FROM THE PROCEEDS OF THE LOAN to the borrower which has NOT been submitted to the lender for their consideration then a MATERIAL OMISSION has been made. The actual LTV/CLTV has changed and the risk to the lender has increased. This is a federal crime and the FBI is looking for perpetrators.

So what happens if you do disclose a rebate to the borrower from the proceeds of the loan? Each lender has their individual limitations for each loan program of how much can be rebated to the borrower from the proceeds of the loan. Many lenders follow strict Fannie Mae, Freddie Mac or FHA/VA guidelines. Generally up to 6% can be rebated to the borrower for closing costs on a primary mortgage or a mortgage of less than 90% CLTV. On high LTV/CLTV mortgages such as 100% non-owner occupied (investment) mortgages the limit is 3%. Rebates beyond these limits would generally precipitate a denial of the mortgage application.

One statement puts it like this, “Real estate agents and mortgage professionals may discount their commissions or rebate portions of their commissions to the borrower in an effort to qualify the borrower and close the deal so long as those rebates are disclosed to the lender prior to signing the closing documents.”

One recent question I received asked, “Who gets prosecuted?”

From my experience the lender prosecutes the borrower who is in receipt of the undisclosed funds. The authorities, on the other hand, are interested in all parties who had complicity in the fraudulent exchange.

http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1

http://www.grefpac.org/

http://fraudblogger.com/