The fine line between Stated Income Loans and Mortgage Fraud
March 14th, 2007 by Mark Flanders
I believe most people are basically honest. Sure, we cut corners at times. We deduct items on our tax returns that may not be quite legitimate. We call in sick to work when we just want a day off without having to explain the true reason. Most people though, would never think of robbing a friend, or lying to their children.
But, there is one area when it comes to home loans where I see folks take a very casual approach to something that can land them in some very hot water.
Pull your chair in closer to the desk and give me five minutes to explain what I mean. It will be worth your time.
Liar’s Loans?
One of the first industry slang terms I heard as a new Loan Officer was ‘Liars Loans’. Of course, I didn’t want to appear ignorant so when time allowed, I turned to my trusty computer to tell me what the term meant. As you have guessed, it’s the derogatory phrase for any Stated Loan product. The attitude behind the term still fascinates me. Does it mean that mortgage professionals have become so used to the abuse of a legitimate loan product that they have become cynical? Yet, the abuse could not have been perpetrated without the loan officer’s involvement, could it? So do they feel cynical towards the clients, or themselves?
What makes a Stated Income Loan legitimate?
The simplest example of a legitimate Stated Income Loan pertains to restaurant employees. Often, the majority of their income is derived from tips. Many restaurants have their servers claim the IRS minimum of 8% of the day’s receipts. The employee has no control over this unless they are willing to change employers. In addition, tips are often paid in cash. Cash goes into the purse or wallet at shift’s end. On payday, the paycheck is deposited in the bank. Items like gasoline and groceries are paid for with the cash. Items like rent are paid from the bank account. There is nothing wrong with this system. It works well for thousands of American waiters and waitresses.
The problem becomes obvious when they apply for a mortgage loan. There is no way to prove their true income! Their employer didn’t provide the IRS with an accurate accounting, so they can’t produce an accurate W2. The tips were never deposited in a bank so bank statements won’t work. And the tips were paid in cash so no cancelled checks are available. These borrowers legitimately earn more than they can prove. Hence, the need for a non-standard type of loan.
When is it mortgage fraud?
The answer is very simple. There is no such thing as a white lie when you are applying for a mortgage! A Stated Income Loan cannot be used simply because you don’t make enough to qualify for the mortgage you want to get. There are other loan programs available for those situations like No Ratio Loans or No Doc Loans.
What I see happening all to often is this. A client meets a Loan Officer and brings along all the requested paperwork. The client arrives with bank statements, tax returns and paystubs. The Loan Officer proceeds to enter data into a computer program prior to printing up paperwork and finds that the client’s income is too low to fit the loan guidelines. One of two things happens at this point. Either the client asks, “Well can’t we just get a Stated Income Loan?” or worse, the Loan Officer says “This won’t work, we’ll have to go Stated Income”. The client might have a defense, if they don’t understand what these loans are for. The Loan Officer has no defense.
In either case, mortgage fraud is about to happen if both parties proceed on with a Stated Income Loan. You cannot just fabricate an income!
If this is suggested to you as a borrower, don’t go along with it just because the person across the desk seems sure of themselves. If you can’t say “I told the truth, the whole truth and nothing but the truth”, something is very wrong. Your money, your home and your future are in peril.
Stated Income Loans were designed to solve a very specific problem. They were never intended to solve all problems. As a borrower, you have a right to expect a mortgage professional who can lead you through the maze of available loan programs with accurate knowledge. But remember, ignorance of the law is a very weak defense. Most courts take a dim view of a defendant who’s only defense is “Gosh, I didn’t realize it’s wrong to lie!”.
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Pretty good information in here. A guy I work with did one of these. He was telling us he could just put down whatever he wanted for his income. He thought it was kind of weird but he got approved.