Company enters joint agreement with government
By COCO SALAZAR
3/18/2005

Pennsylvania investigators have traced significant mortgage fraud to loans originated by Option One Mortgage Corp. brokers -- leading the lender to enter into a joint agreement with the government promising it will more closely watch its brokers.

Option One has implemented a reform package that will focus on its fraud detection systems, allowing the company to find concentrated fraud schemes, the U.S. attorney's office of the Eastern District of Pennsylvania announced Thursday.

"Our office worked with Option One to ensure that these reforms will make a real difference," it said in the announcement.

The subprime-lending subsidiary of H&R Block, which principally originates wholesale loans (90% of its latest volume), made the pact after the office's investigators reportedly discovered that "independent mortgage brokers had, through several schemes, committed significant fraud in loans they submitted to Option One."

The schemes included inflated appraisals, fictitious charitable grants for borrowers to apply toward downpayments, misrepresentations concerning cash brought to closing, and excessive real estate broker commission used to recoup the funds mortgage brokers had provided to borrowers for such downpayments, according to the joint agreement.

"As a result of inquiries by our office, Option One took a hard look at its fraud detection practices, which, in turn, led Option One to make important changes to those practices," the office said, adding that it hopes "other companies will follow Option One's lead. The government cannot stop mortgage fraud on its own. It needs the help of the industry."

Similar sentiments were expressed at a fraud summit recently held by the Mortgage Bankers Association where several industry players gathered to make recommendations to prevent the growing threat of fraud in the industry.

A recent report by Pennsylvania officials identified concentrated areas of foreclosure activity in Pennsylvania -- with the most startling statistic being that nearly 40% of nonprime loans originated in Philadelphia in 1998 were in foreclosure at some point between 2000 and 2003.

"Predatory mortgage brokers, real estate agents, and appraisers know that large, nationwide mortgage lenders have not been paying sufficient attention to what is happening in individual neighborhoods," the office added. "Lenders in California do not understand enough about what predators in Philadelphia neighborhoods are doing. Predators have taken advantage of that ignorance, victimizing neighborhoods and figuring that the lenders will not notice."

A vital part of Option One's reform is targeted sampling, where it will now track delinquency and default rates by branch office, loan officer, and mortgage broker. The move will assist in tracking foreclosure "hot spots," and in turn expose brokers concentrating fraudulent loans in certain areas.

The nonprime lender's reorganization of the corporate reporting structure now separates the production end of the business from the fraud detection end of the business, meaning that employees responsible for fraud detection report directly to the head of the company.

It has also created companywide fraud detection committees consisting of high ranking officers.

Other key elements of the reform package Option One has implemented include: adjustments to certain loan products that now require verifying the source and seasoning of funds used to close on a loan; improvements in its Watch List and Barred Individuals List to prevent things such as originating loans from those who have previously committed fraud against the lender; and improvements in training employees to recognize fraud.

Option One also agreed to provide two reports to the office confirming its compliance with the changes it has made to its internal procedures.

Plus, it voluntarily agreed to provide $100,000 to consumer counseling groups in eastern Pennsylvania involved in preventing predatory lending.

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