Attempted mortgage fraud is like playing a game of three-card monty where nobody wins. Image: CC gruntzooki/Flickr

An epidemic of attempted mortgage loan fraud is sweeping the country as the credit crunch lingers on. Consumers should be aware of what constitutes loan fraud to avoid committing it. Penalties for mortgage loan fraud include jail time and hefty fines.

Attempted mortgage loan fraud jumps 57 percent

Attempted loan fraud skyrocketed to nearly 60 percent of all loan applications in 2010, according to Experian. The credit reporting agency said seven out of every 10,000 personal loan applications submitted in the third quarter were fraudulent–a 57 percent year-to-year increase. Attempted mortgage fraud surfaced in 27 out of 10,000 loan applications. As lending standards have tightened, would-be borrowers are trying to hide black marks in their credit histories. Nine out of 10 attempted loan frauds were “first person fraud,” in which people misrepresent their credit history or employment status.

How to avoid mortgage loan fraud

Even though borrowers may be tempted to fudge a little bit, the slightest fib on a loan application can be constituted as first person loan fraud. Things to avoid when applying for a mortgage or any other loan include any deal between buyer and seller than isn’t included on the loan application. Lying about income is a classic. Trying to get more favorable terms by saying you will live in a property when you intend to rent it out is mortgage fraud. Sending in a bogus purchase contract with a higher price in an attempt for a higher appraisal is also mortgage fraud. Saying an earnest money deposit was paid outside of escrow without making the deposit is blatant mortgage fraud.

Penalties for mortgage loan fraud

Sometimes real estate professionals will present schemes that sound too good to be true. They are likely fraudulent and borrowers should protect themselves by reporting them to the FBI. As incidents of mortgage fraud increase, the consequences have gotten harsher as well. Penalties for mortgage fraud can range from one to ten years in prison plus hundreds of thousands of dollars in fines. Recently loan officers who committed mortgage fraud by submitting false data on properties received prison sentences from 25 to 40 years. A fraudster who purposely set up bad real estate loans to sell to banks was hit was a $160 million fine.

Sources

Press Association

About.com

Mortgage Q&A

After urging from the White House, banks have been taking a second look at loan applications that could be loosening lending standards. Image: Thinkstock

Wall Street banks have been taking the heat for starting a credit crunch in the aftermath of the financial crisis. While major U.S. financial institutions received billions in government bailouts, they’ve been refusing to make loans. Last December President Obama met with bank executives at the White House and urged them to find new ways to increase small business lending. One of the ideas suggested was to take a “second look” at loan applications. Since that December meeting, several major U.S. banks have started second look programs. Nine months later, there are signs that a second look may be making a difference.

Second look gains traction

When the president challenged Wall Street banks to take a second look at lending last December, he actually went further. An Associated Press report on the meeting said that when Obama asked bankers to “explore every possible way” to increase small business lending, He suggested that they take a “third and fourth look” as well. U.S. Bancorp CEO Richard Davis, chairman of the Financial Services Roundtable, said he would present the idea to other members of the group, which represents the country’s largest financial companies.

Lending the old fashioned way

Nine months later, the Financial Services Roundtable says nearly all its members have second-look programs. Members include Bank of America Corp., J.P. Morgan Chase & Co., PNC Financial Services Group  Inc. and U.S. Bancorp. The Wall Street Journal reports that second look programs are a throwback to good old-fashioned loan underwriting. Instead of automated analysis of credit scores and other data that drove the industry when credit was easy and cheap, now banks are taking into consideration a borrower’s track record and relationship with them. Some banks search for credit report errors that hurt borrowers the first time around, or ask about unreported sources of income that could lower the risk of a consumer loan. The Journal said the second look program may be having an impact. Last month’s Federal Reserve survey of senior loan officers showed the first easing of lending standards for small businesses since 2006.

Worth a second look

A second look costs more for the banks, but banks are starting to see a business opportunity, instead of merely avoiding risk. Alan Sherter at bNET writes that banks could be  implementing second look programs for PR purposes, rather than increasing risk in lending. Also, the loans that are being made are unlikely to jump-start the small business engine that could reduce the unemployment rate. But those caveats probably won’t matter to a struggling local business able to survive, and perhaps even grow, because of a second look.

Raising a credit score will save money on interest payments that can be invested to finance retirement. Thinkstock photo.

A good credit score is more important than ever. The  credit crunch has raised the bar on credit scores. Raising a credit score is necessary now to get a loan and get a good interest rate on that loan. A good credit score saves money. A bad credit score costs money. A FICO credit score of 650 is considered fair to poor. A FICO credit score of 750 is considered good to excellent. A select few, with discipline and focus have credit scores higher than 800. A man in Arkansas is doing everything he can to achieve a FICO credit score of 850. His diligence could translate into a rich retirement.

Raising a credit score to 850

A FICO credit score of 850 has been achieved by 0.5 percent of Americans, according to FICO. A CNN profile of Chris Plepinski of Rogers, Ark., chronicles his quest to achieve that elusive number. Plepinski is currently at 813, putting him ahead of more than 82 percent of his fellow Americans. His burly credit score will save him a fortune over his lifetime. But CNN reports that Plepinski won’t be satisfied until he hits 850. To do that he studies every factor of a FICO score in detail. He checks his FICO score every 90 days and adjusts his personal finances to squeeze out every possible point. He once took out a car loan even though he could pay cash, figuring that adding the variety to his credit mix could bump up his score.

FICO credit scores and how to raise them

A FICO credit score is distilled from credit report data collected by the Equifax, Experian and TransUnion credit bureaus. Bankrate.com reports that FICO scores range from lows of 300 to 400 to highs of 800 and higher. The number is a result of the following:

1. Payment history – 35 percent
2. Total debt load – 30 percent
3. Length of established credit – 15 percent
4. Types of available credit – 10 percent
5. Recent new credit – 10 percent

Based on the above, tips for raising credit scores include always paying on time, making up missed payments, maintaining low credit card balances, paying off debt instead of transferring it, not applying for new loans or credit cards and not closing existing credit card accounts.

A higher credit score brings a better quality of life

A fair-to-poor credit score can cost a fortune over a lifetime, according to Liz Pulliam Weston at MSN Money. Weston penciled out a comparison between two people over 50 years. One has a credit score of 750 and the other 650. She calculated the difference each person paid in interest on several loans, including student loans, credit cards, auto loans, mortgages and home equity loans. Over a lifetime of borrowing, the person with the 650 credit score paid $201, 712 more than the person with a 750 score. Weston divided $201,712 over 50 years and figured an 8 percent average return. In interest saved, the higher credit score could allow a retirement account to grow to more than $2.3 million.

In the current credit crunch, obtaining credit has become more difficult than ever. Even people who previously had no trouble applying for credit cards or loans are finding their applications turned down in this grim financial market.

Unfortunately, however, credit cards are required for many different transactions, from renting a car to making a hotel reservation, and it can be highly inconvenient to function without them. So what can you do if you’re one of the many people who can’t get a traditional credit card?

Consider a prepaid credit card.   A prepaid credit card may seem oxymoronic – after all, isn’t the point of a credit card that you can buy things without having the money up front? Oxymoronic or not, however, a prepaid credit card can help you to establish the good credit you need to build a solid credit history.

How prepaid credit cards work

When you sign up for a prepaid credit card account, you pay the available-credit limit of the card up front. For example, to get a prepaid credit card with a $500 limit, you deposit $500 when you open the account. You may also incur some nominal fees – usually $5-$10 – but after that, you’re able to use the prepaid card in the same way you would a traditional credit card. There won’t be any interest charges or monthly statements; although you won’t be able to make further purchases once you’ve depleted your balance.

Choosing a Prepaid Credit Card

The first thing that to look for in a prepaid credit card is a provider that reports your payments to one of the three major credit bureaus – Experian, Equifax or TransUnion. Having these payments added to your credit history is essential if you want to use a prepaid card to help build good credit. Not all providers offer this service, so it’s important to check before signing up.

Fees are another important consideration. Some account setup fees are to be expected, but be wary of providers who charge you every time you deposit funds or who charge a percentage fee for certain types of transactions. These fees charged by less scrupulous companies can cut into your prepaid balance very quickly; decreasing your spending power and the amount that you can buy using your prepaid card.

Some cautions about prepaid credit cards

Despite having some advantages, a prepaid credit card is not the same as a traditional credit card, and many payment processors are aware of this distinction. For example, services that require regular monthly payments – like your cable or cell phone provider – may be reluctant to accept a prepaid credit card for payment, because there is no guarantee that funds will be available in the future. Acceptance of a prepaid credit card for periodic payments is typically handled on a case-by-case basis – some providers will accept a prepaid card, and others will not. For this reason, it’s not recommended that you rely on a prepaid credit card as your only payment method.