Transcript Ethics - Arkansas Land Title Association

Presented by
Lynn W. Wilburn
Wilburn Investigations, Inc.
1980 Post Oak Boulevard. Suite R2B,
Houston, TX 77056
To the
Arkansas Land Title Association
Peabody Hotel, Little Rock, Arkansas
Friday, June 15, 2012
 Proper licensing, paying the fees, filling out
the forms
 Reporting timely, disclosing required
information
 Filing and adherence to regulated rates or
premiums if applicable
 Appointment by underwriters
 And, of course, criminal statutes
 You could conform to every applicable law,
regulation and policy and still be unethical.
 You could establish an ethics policy, appoint
a corporate compliance officer and still be
unethical
 Would you like an example?
 Enron had a 64 page ethics manual AND a
corporate compliance officer with staff
 “Unethical behavior in business more often than not is
a systematic matter. To a large degree it is the behavior
of generally decent people who normally would not
think of doing anything illegal or immoral. But they
get backed into doing something unethical by the
systems and practices of their own firms and
industries. Unethical behavior in business generally
arises when business firms fail to pay explicit attention
to the ethical risks that are created by their own
systems and practices."
 The study of principles relating to right
and wrong conduct.
 Morality.
 The standards that govern the conduct
of a person, especially a member of a
profession.
Ethics, also known as moral philosophy, is a
branch of philosophy that involves
systematizing, defending, and recommending
concepts of right and wrong behavior.
 Look up “ethics” in Wikipedia. You will be
amazed at how some of the references apply
to your business.
 Major areas of study in ethics include:
Meta-ethics, about the theoretical meaning and
reference of moral propositions and how their
truth values (if any) may be determined;
 Meta-ethics is a field within ethics that
seeks to understand the nature of
normative ethics.
 The focus of meta-ethics is on how we
understand, know about, and what we
mean when we talk about what is right
and what is wrong.
Normative ethics, about the practical means of
determining a moral course of action;
 Consequentialism, coined by G.E.M.
Anscombe in her essay "Modern Moral
Philosophy" in 1958, refers to moral theories
that hold that the consequences of a
particular action form the basis for any valid
moral judgment about that action. Thus,
from a consequentialist standpoint, a
morally right action is one that produces a
good outcome, or consequence.
 This view is often expressed as the aphorism
"The ends justify the means".
 Rationalization encompasses
consequentialism
Applied ethics, about how moral outcomes can be
achieved in specific situations.
 Business ethics (also corporate ethics) is a form of




applied ethics or professional ethics that examines ethical
principles and moral or ethical problems that arise in a
business environment. It applies to all aspects of business
conduct and is relevant to the conduct of individuals and
entire organizations.
Interest in business ethics accelerated dramatically during
the 1980s and 1990s
Adam Smith said, "People of the same trade seldom meet
together, even for merriment and diversion, but the
conversation ends in a conspiracy against the public, or in
some contrivance to raise prices."
Governments use laws and regulations to point business
behavior in what they perceive to be beneficial directions.
Ethics implicitly regulates areas and details of behavior
that lie beyond governmental control.
 Here is a case in point….
 Mortgage Broker Sentenced to Over Three
Years in Prison in Fraudulent Mortgage
Rescue Scheme Resulting in Losses of Over
$1.2 Million to Homeowners in Financial
Distress
 Conspirators Also Obtained Over $4.7 Million in
Fraudulent Mortgage Loans
 U.S. Attorney’s Office District of Maryland May 01,
2012
BALTIMORE—U.S. District Judge William D. Quarles, Jr. sentenced Mary Anne Dean,
age 60, of Severna Park, Maryland, today to 37 months in prison, followed by three years
of supervised release, for conspiracy to commit wire fraud in connection with a mortgage
fraud scheme which resulted in over $4.7 million in fraudulent mortgage loans, of which
the lenders ultimately lost at least $944,223.91, and which caused the homeowners to lose
over $1.2 million in equity in their homes. Judge Quarles also ordered Dean to pay
restitution, with the exact amount to be decided at a later date.
 The sentence was announced by United States Attorney for the District of Maryland Rod
J. Rosenstein; Special Agent in Charge Richard A. McFeely of the Federal Bureau of
Investigation; and Inspector General Jon T. Rymer of the Federal Deposit Insurance
Corporation.
 Inspector General Jon T. Rymer of the Federal Deposit Insurance Corporation (FDIC)
said, “I am once again pleased to join our law enforcement colleagues in defending the
integrity of the financial services industry by combating mortgage fraud. We are
particularly concerned in cases like this one where professionals have misused their
positions of trust and whose fraudulent activities in committing mortgage fraud have
harmed numerous innocent homeowners. We are committed to continuing our
investigations of such criminal misconduct to help maintain the safety and soundness of
the nation’s financial and lending markets.”




According to her plea agreement, Dean was a loan originator and operated Sunset Mortgage
Company, a Maryland-licensed mortgage brokerage franchise, from her home. Co-defendant Charles
Donaldson, age 58, of Bowie, Maryland, who was also a loan originator during part of the conspiracy,
steered clients to Dean’s brokerage franchise and facilitated the communication between Dean and
the buyers and sellers that he had recruited.
Beginning in 2005, Donaldson identified homeowners who were in financial distress because they
were unable to make the mortgage loan payments on their homes and enticed the homeowners to
participate in a foreclosure “rescue” plan. Donaldson told the homeowners that he would locate
“investors” to purchase the homeowners’ properties; that the homeowners would rent their properties
after selling them to the “investors,” who would receive a small percentage of the homeowners’ equity;
that the remainder of the homeowners’ equity would be transferred to Donaldson, who would hold it
in escrow; and that the homeowners would buy back their properties after 12 to 18 months, during
which they could rehabilitate their finances and “repair” their credit while they continued to live in
their homes.
Donaldson recruited family members and associates as “investors” to purchase the properties and
paid them a small percentage of the seller’s equity at the time of settlement. As part of the scheme,
the homeowners were expected to pay monthly rent to the “investor” to remain in their home and the
“investor” was to make the mortgage payments. Prior to the sales of the properties, Donaldson
created and recorded Second Deeds of Trust or promissory notes that purported to show debts owed
by the homeowners to Donaldson, and which were secured by the existing equity in their home. At
the closing of the sale of the property to the “investors,” the title companies disbursed funds to
Donaldson’s bank account in order to payoff the liens he had established. Donaldson assured the
homeowners and “investors” that he would assist them, if need be, with their rent and mortgage
payments respectively, using that equity, which he claimed he was holding in his “escrow account.” In
fact, Dean and Donaldson knew that Donaldson was simply putting these funds into his personal
checking account, and using them for personal and business purposes, including the purchase of a
personal residence with a cashiers check in the amount of $169,132.60.





Dean and Donaldson obtained the new mortgage loans on the properties in the names of the
“investors” with higher monthly mortgage payments, and, most times, higher interest rates, than that
which the homeowners were currently paying. To obtain the new loans, Dean made false
representations in the loan applications, including, that the “investors” intended to live in the
properties as primary residents and inflating the incomes of the “investors.” Donaldson also assisted
Dean by procuring false verification of employment letters. Dean, who acted as the mortgage broker,
submitted the false loan applications to lenders to obtain financing for the purchases of the
properties in the names of the “investors.” In some instances, Dean submitted fraudulent loan
applications for the same “investor” to purchase multiple properties as their ‘primary residence’ in a
short period of time.
Based on the materially false loan applications, lenders funded loans at high interest rates for the
“investors,” yielding large transactional fees and premiums for Dean. Donaldson and Dean, as the
licensed loan originator and mortgage broker respectively, knew that as a result of these sales, the
seller who sold his or her home to the “investor” had lost control of their home; could not afford the
new mortgage loan with higher payments and interest than they were originally paying; and could not
qualify for a refinance.
Faced with the higher mortgage interest rates and payments, the “investors” and homeowners were
forced to use their personal savings and credit card accounts to make mortgage and rent payments,
respectively, until they were no longer able to do so. Despite his previous assurances, Donaldson only
used a small amount of the equity from the sale of the homes to assist with the payments and the
loans went into default. Thirteen of the homes have been foreclosed upon and foreclosure
proceedings against three other homes are ongoing.
As a result of the scheme, lenders made over $4.7 million in mortgage loans based on the fraudulent
loan applications, and have so far lost at least $944,223.91. Dean and Donaldson’s scheme also caused
the homeowners to lose between $1.2 million and $1.4 million. More than 20 victims were defrauded
by Donaldson and Dean.
Donaldson pleaded guilty to his participation in the scheme and was sentenced to 41 months in
prison on March 8, 2012.
 First, the moral (ethical) obligation to do the right
thing
 Second, to earn the trust bestowed on you as a
professional by all your customers; buyers, sellers,
lenders, etc.
 Third, to act in a manner that preserves not only your
integrity but the integrity of the real estate
transaction
 The “Deep Pockets” theory- in this fraud the lenders and
sellers are looking for recovery. You and your underwriter
will be on the list. Your only defense will be that you did
everything possible to protect them. Even if you did you’ll
still likely be sued on some theory of negligence.
 Loss of your underwriter- high claims and/or policy
defense losses and having a fraud occur in your shop make
cancellation a real possibility
 Your reputation- most of your customers will just
remember that you closed the transactions where there
were fraud losses
 You will be put in the position that, “Being right has
nothing to do with it.”
 Ethics implicitly regulates areas
and details of behavior that lie
beyond governmental control.
 What could the agent have done
to prevent or, at least, reduce this
loss?
 Mortgage broker office was his home. Unusual. Vet
the mortgage broker
 Distressed properties have higher risk of fraudulent
activity. Scrutinize transaction for fraud.
 Foreclosures or threatened foreclosures and “rescue
plans”. Scrutinize. Desperate people do desperate
things.
 Beware investors.
 What is market?
 Do you know investor?
 Does it make sense?
 Homeowner “buyback”. Seller may mention it. Seller




staying in house he sold. All red flags.
Family members as investors. Did title agent get several
files in the same name? Why?
Second mortgages recorded shortly before sale?
Mortgage broker is second mortgage lender? Title agent
would have seen recorded documents with that
information. Major concern for fraud.
Title agent disbursed funds to mortgage broker to pay
off second. Suspect fraud. If check endorsement on
cancelled check had been inspected, may have shown
going to questionable account.
Mortgage application is almost always in closing file.
How many properties has the buyer stated was their
primary residence? Clear indicator of mortgage fraud.
 Same “investor” customers over
and over
 Is mortgage broker new to title
agent? Why? Who referred and
why?
 Mortgage broker may be bringing
in other mortgage brokers
 “Not my problem. The lender
should have caught that.”
 “But they were my best customer.”
 “They had so much money.”
 “Oh, mortgage brokers always
stretch things a little. That’s just
how they do business.”
 Selective ignorance- if I ignore it I won’t have
to deal with it
 Greed- I don’t want to lose the income. If I
raise the issue I may lose the transaction
AND the customer
 Fear of confrontation- I just don’t want to
confront these people
 Fear of being wrong- I don’t think this is
right but I’m not sure. I don’t want to get
sued.
 I don’t want anyone to think I am a snitch
 First, investigate.
 Follow your instincts. If it doesn’t feel right, it probably





isn’t.
 Scrutinize the closing file, especially the mortgage loan
application and similar documents
 Review other files for this broker and/or buyer. Do they
contradict each other on things like the permanent
residency question
Contact your in-house or outside counsel for guidance
Refuse to close or stop the transaction if fraud is evident or
suspected.
Contact your underwriter for guidance. All underwriters are
sensitive to fraud and will assist you.
Contact the lender if you have questionable circumstances.
Notify the appropriate criminal authorities if you suspect
criminal activity.
Translation- do not think….
“If I just keep my head down
and my mouth shut maybe it
will all turn out OK.”
 Ethics are the standards that govern
the conduct of a person, especially a
member of a profession.
 Ethics implicitly regulates areas and
details of behavior that lie beyond
governmental control.
 It is your judgment and your
integrity that will make the
difference.
Thanks for listening
Lynn W. Wilburn, President
Wilburn Investigations, Inc.
1980 Post Oak, Blvd. Suite R2B
Houston, TX 77056
713-629-2222
www.wilburninvestigations.com
[email protected]