Commentary - January 2007

“Renting” Collateral

A Cautionary Tale

by Lyle Brennan

It seems like integrity and honesty are becoming relics of the past. Every day there’s another news article about identity theft, Internet scams, Enron-style corporate fraud or political corruption.

As publisher of Nevada’s only statewide business magazine, I am often approached to spread the word about issues important to the business community. I recently heard about a new twist on an old scheme to cheat mortgage lenders. Since many of our readers are involved in either real estate or finance, I am passing this on as a word of warning.

Scott Bice, commissioner with the state of Nevada’s Mortgage Lending Division, recently circulated a bulletin to consumers, as well as real estate and mortgage companies, about “fraudulent and deceptive” verifications of assets for credit.

A person or company wanting to borrow money may “rent” capital from an online company, which offers to set up a bank account in the applicant’s name. The “assets” are set up as a sub-account of the company’s master bank account. When a lender calls to verify that the assets are there, the answer is always “yes”, whether or not the potential borrower actually has any of his own money in the bank.

Companies advertising this service have Web sites filled with testimonials from customers who have used borrowed credit to get loans from lenders that wouldn’t have financed them otherwise. One website says: “Our product makes your capital-seeking campaign easier and provides incentive for the lender to fund your package. Attaching our product to your loan package, line of credit request, or business project will make your capital-seeking proposal more appealing to your lender…Your loan, line of credit or borrowing package will stand out with our product.” So, are these companies actually helping out Joe Businessman or Jane Homeowner in their fight against the big bad banks, which is what these people want us to believe? No. They’re just allowing more risky loans to be made.

When borrowers default on these loans and lenders try to attach their assets to get paid, the scheme falls apart. This increases the cost of doing business for lenders, who pass it on to their other customers. In short, as in most fraudulent schemes, we all end up paying for it.

Bice warns, “Consumers, brokers and lenders that complete, submit or participate in the completion and submission of an application for credit that contains misrepresentations or false information are subject to administrative action and potential criminal penalties by the state.” So, how do these “credit lenders” manage to stay in business? Their web sites have a disclaimer that says, “Deposits cannot be encumbered, pledged, put in jeopardy, or used to collateralize or guarantee a loan.” This may give them some legal protection, but why would people pay a fee, which can amount to 3 percent of the amount of capital used, if they don’t intend to use it as collateral?

Bice’s warning continued, “Any broker or lender encouraging or accepting verifications of deposits or assets from this or similar services could also be subject to administrative action for failure to have quality controls in place or failure to follow established quality control procedures.”

Bill Uffelman, head of the Nevada Bankers Association, said most banks have sufficient quality controls in place, so they are unlikely to be defrauded by these schemes. He said their victims would more likely be second-tier lenders that specialize in borrowers with bad credit. “Now that the housing market has cooled and there are fewer investors trying to flip properties for a quick profit, I suspect we’ll see less of this,” he explained. “However, there are always people out there trying to make a dishonest buck. Where there’s a will, there’s a criminal.”

As we start off the New Year, let’s resolve to be more vigilant, on both personal and professional levels. January might be a good time to make sure our computer networks are secure, our company websites are protected, our lending practices provide maximum protection and our employment policies shelter us from claims of harassment or discrimination. It might also be a good month to examine our insurance policies, both personal and professional, to make sure we have adequate coverage.

At Nevada Business Journal, we’ll continue to keep you informed on ways to protect your company and maximize your profits in 2007. We wish you all a safe and prosperous New Year.

Lyle Brennan Publisher
COMMENTS? email: lyle@nbj.com