Lender Scams and Warning Signs: Beware & Protect Yourself!

107 Replies

Another recent thread on this forum caught my attention, and I thought it important to post this discussion . . .

I'd like to get feedback from our members, including the investors, professionals, and lenders about lender scams that might be out there.

If you've aware of ANY kind of scam or scandalous practice that traditional, private, or hard money lenders are currently engaging in, please share them here. I'd like this thread to hopefully become the go-to place to find out how not to get screwed when it comes to getting a loan.

So . . . lets see what you've got to say:

I have been chasing money for many years now and it is almost universal that people who ask for money:

1. Up front
2. Outside of escrow

that does not involve paying for appraisals or other reasonable costs are scams. Legitimate funding sources can generally provide references too and can rattle off deals they have recently done.

If people pass those hurdles the is a high probability they are legit.

Additionally, in addition to references albeit simple and basic, I recommend to ALWAYS check the company you are looking to do business with out on www.bbb.org. I personally feel that any legitimate business should be an Accredited Business with the BBB.

Lastly, although simple, do a simple Google Search on the company name, company phone number, and company e-mail address of the company and individual you are considering doing business with. This will provide you a substantial amount of information about the company your considering working with (good, bad and indifferent).

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Couple of years ago a real estate investor submitted a loan request to me that called for $5 million. Since my max loan is $1 million I had to politely turn down the request. Later this investor calls me and asks me if I know anything about a lender he had found. I told the investor that the party he was asking about was not a direct lender, but was a broker who had brought me some loans I had funded. I also told him that this broker was a rather small player, and I didn't see him being able to broker a $5 million loan.

About 3 months later, my attorney gets a call from this same borrower's attorney. The borrower had entered into a contract with the broker (despite my advise) and had paid the broker an upfront fee of $100,000.00. That's right - one hundred thousand dollars! The broker strung this borrower along all the way to the closing table at the title company. All docs were signed for the purchase/sale, but of course the money never arrived.

When pressed for the return of the $100K, the broker told the borrower that he had sent the $100K to a lender. When pressed for info as to who this lender was, the broker had arranged for one of his associates to create a shell corporation, register the corporation as a lender, and have his associate deny return of the $100K. Apparently an attempt to get the borrower to sue the shell "lender" and not the broker.

About a year later I run into the borrower at a real estate event. He tells me that he had a deal whereby the broker would pay him $10,000 immediately and $10,000 quarterly unrtil the $100K was recovered. Unfortunately the first check for $10K was a bogus cashiers check printed up by the broker. The broker had fled to Argentina, the borrower asked the district attorney to file criminal charges and extradite the broker.

there's a lot of brokers who only work behind the scenes here...they have zero or a few posts, but PM often and/or email and call if that info is on your profile...these guys have no reputation to risk..my advice for loan seekers would be to first work with the reputable brokers on the site who have built up a reputation..joel soforenko used to post often, although i haven't seen him around here lately, and darryl is doing a good job of building a reputation on BP as the commercial go to guy

my advice to the brokers is to get involved...i think it can be shady when they randomly call me from my number on my profile, and say their from biggerpockets...why haven't i seen you posting on it then???

When lenders or brokers offer financing that is either complicated or outside of the norm, I know to tread slowly. I'm sure that 100% financing is available, but it is not a normal product and there many more scammers do this than real lenders.

There are many red flags. Basically as Charles mentioned, if you get a feeling a lender (broker, HML) is telling you what you want to hear before your pay the application fees, taht's the first red flag.

You need a B.S. Meter in this business. The better something sounds that is contrary to the norm, your BS Meter should sound off and light up. While everyone, to a degree has a BS Meter (most people get one in junior highschool and it is developed with common sence over time) some have units that need to be calibrated.

The best way to calibrate your BS Meter is to study the subject in a conventional manner. The best way to do that is study real estate financing rules and regualtions, really boring stuff, but that's the way it is. Just because someone says they have a degree in finance or they passed a mortgage brokerage exam or even a bar exam, does not give them credibility in real estate financing. The subject is not taught in depth in any formal educational program.

Pay particular attention to what is known as "prudent lending practices". These are the conventionally accepted norms ofoperations that any prudent lender would follow in making a real estate loan. If someone says they can get financing under terms or conditions that do not follow these guidelines (which is possible) expect to pay more in fees and interest rates to compensate for the additional risks associated with these variances from the norm.

What would you do if you were a lender? Would you make a loan like the one being described to you?

Those who usually get ripped off are those who are desperate. They have poor credit or insufficient capital, maybe both. But the biggest reason people get ripped off is because they don't know any better! They are willing to trust those who tell them what they want to hear. They turn their BS Meter off.

There is an old saying: Financing is the key to real estate that opens doors for you. And, if you really don't understand real estate financing then you really can't understand real estate!

The biggest problem I see for many investors is that begin by listening to guru programs orfollowing the advice of other investors as they insist on skipping the basics and diving straight into something they see as having a profit potential. They fail to accomplish any due diligence with themselves. As fast as rules, regulations and laws are changing today, following the advice of another investor might just take you down a road to make the same mistakes that investor makes and your mentor may not know the difference. What I'm saying is that it is up to you to calibrate your BS Meter.

Your BS Meter should go off as any lender presents something that varies from the norm, they further away they get, the louder it should be blasting in your head!

Some (not all) of the indicators could be:

Up front loan fees that are outside the norm for the type and loan amount you are seeking; and

Not providing a loan committment in a timely manner. This means a good committment that is not contingent on verifications or committee reviews!

Only having one qualified appraiser to appraise a property. If the applicant is paying for an appraisal, there should not be an "in-house" appraiser. And,

Loan fees should be estimated at the time of application, even in commercial deals!!!!! If that lender has been making SBA loans, they know about what an environmental report will cost. They will know what bond fees will be and what underwriting fees will be by the investor.

Residential properties (owner or non-owner occupied) may vary widely from one region to another. Brokers are nowrequired to disclose premiums received as well as all other loan costs in a Good Faith Estimate of Loan Costs.
I have seen people call foul when the per diem interest was estimated at some two digit figure and then end up being in the high three digits. This is not a scam, it depends on the actual closing takes place. Lenders should be using 15 or 30 days.

Borrowers need to get a signed estimate of costs at the time of application.

Borrowers should give brokers or lenders instructions, that all verifications and credit should be approved prior to spending moneyon any appriasal, but often schedules won't allow this as it could be weeks before an appraisal is completed. If the borrower is aware that there are credit problems, credit should be viewed first before spending other loan fees.

Loan scams are usually found by big name lenders who provide loans on line. Quicken Loans runs a shaddy practice.

They require you to submit a credit card number to pay for the fees before speaking with a loan originator. The originator is pretty much a sales person to "get the ball rolling". People have called back within minutes of the on line application to stop the process and the originator did not stop anything. You have a ding on your credit card for $500.00 which is non-refundable. Even after being assured your loan request is terminated or cancelled, a few days later you might see someone stop in front of the property and take a picture from their car. You just had your property appraised!

As to the BBB, that is absolutely worthless. The BBB only tells you if anyone has filed a complaint, not that the company is in good standing. The clerk at the BBB may not even tell you the truth either, especially if ABC Bank is amember and provides hefty contributions to the office party! Pure politics!

Call the Attorney General's Office and the local prosecutors office and see if they have any actions against them. Call the local police department and ask for the fraud division and ask them if thatname has crossed their desk! They are not to discuss any ongoing investigations, but many times a detective will say something like "I wouldn't go there if it were me". Check court records by name. Now, in fairness, a large bank or lender may have several cases so you have to consider the amount of business they conduct and understand that if they file a floreclosure action, the borrower may have filed a counter suit. But not finding your lender there might be a good thing.

But the best way to no when you are dealing with pure BS, is knowing what is definitely not BS, that would be programs that sound like they conform to prudent lending practices, rules, regulations and laws!

Sorry it's so long!

Another thing, stay away from lenders tha contact you in solcitations, IMO, just like avoiding most attorneys who advertise on TV, good attorneys and lenders don't make personal loan offers directly to proposed borrowers. I'm not talking about your bank where you are a customer, I'm taking about a lender you have had no delaings with and they are seeking you out to offer you a loan! Throw it in the trash with the credit card applications!

Yes if you think residential is bad then commercial real estate funding is really bad for fraud.

Everywhere you turn are companies who can't perform. You ask for references and they quote BS confidentiality agreements.

Then they say my favorite "there has been a funding delay".We need to talk to the lender to see what the delay is. Few weeks later they say there is still a delay but it will be cleared up soon.

There are companies that take upfront fees and never perform or they close one out of every 10 apps they get.This way there is info floating out there that they closed a deal with this company.

This keeps app fees flowing in for these funding mills.

If they need money for an appraisal,due diligence etc. then ask for the contact and say you will pay them directly.

If they balk they are padding the fees and up charging you or they are taking fees and never doing any work on the loan.

Everybody wants in commercial a 100% loan.I think these companies take upfront fees and then string the loan out as long as possible before saying the loan was denied.

Think about if they take 50 loans at 50,000 a pop that is 2.5 million dollars.Invest that money to make interest while you hold it for 6 months and they just made a mint off of your coin.

To be fair some buyers go for a loan and never submit all documentation or fib about their credit or reserves or that the money they have to put down is borrowed or locked up into another deal.

This can make a broker do a ton of upfront work for nothing and can burn a relationship with the legit lender doing the loan by wasting their time.

If people are chasing money right now you may try your local credit union. I have a line about to be approved with one that has $40M to lend right now!

They won't ask for stupid up-front fees!

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I'm coming to this party a little late, but wanted to add my 2 cents.

I want to re-emphasize the advice to google people and companies you are about to do business with. I love BP, and it's pretty evident that there are some real players who frequent this site and give really good information. But as with any forum or group, BP can't vet it's members either. Without mentioning names, there are people right here on BP (unfortunately) whom I have googled and found surprising information. Court actions are frequently available online and so if you google the person with their name in quotes, you may be amazed. So I can't emphasize this approach enough.

Also, you'll find that local hard money lenders provide only commercial loans and do not provide written GFE's such as are required when lending to homeowners.

True hard money lenders also don't wait around for appraisers, they do their own estimate of value. So you may not be hit with an appraisal fee, but you may have a site visit fee. I personally don't charge either of these, but at the time of loan commitment, we require a deposit to cover title search, etc.

Big upfront fees to evaluate or find a loan should be a big red flag. there are are couple of large national companies who make a business from fees, and do only the loans required to stay in business. But once the loan is committed, payments toward title and attorney fees are common and appropriate.

Updated almost 9 years ago

The deposit to cover loan commitment is paid directly to the attorney or title company who will be handling the closing

Originally posted by Jon Holdman:
I personally feel that any legitimate business should be an Accredited Business with the BBB.

Why's that? All you have to do to join the BBB is pay a fee. Its not as if they do any vetting of their members.

This is true but if the lender is a new BBB member. If he has been a member for a while then there might be complaints filed against them.

Old post, I know. But this information is very useful to newbies! I would have had a healthy skepticism during a transaction as ya'll suggest, but it is good to hear details and know that as a new member I can ask for advice. In fact, I spent a half hour listening to a guru type person talk about his idea for wholesaling and it was through a google search on his name that I found this forum! I think it's going to turn out well to be a pro member...

In the last month, I ran into 3 different people in foreclosure that all contacted the same institution of Attorneys in LA. This Attorney network is marketing "STOP FORECLOSURE" services. These services include illegal and illegitimate loan practices.

They start by contacting the Trust Company and the first deed lender with a bunch of legal BS. While this is going on... (by the way these are all paid services starting at $4500 dollars) they implement another service (minimum $500 per month) on a second (dummie) note and deed that gets recorded on your property. This is to start a paper chase for the first trust deed. The first trust deed must now notify the second that it will need to protect itself, so that it will not get wiped out at trustee sale.(Theoretically buying more time for the homeowner in foreclosure.)

These companies will continue like this until the owner stops paying the fictitious note that is attached.( really a service fee) This is Bank Fraud, and illegal. Please be very careful with notes that are not legitimate. This illegal disservice may stall the foreclosure sale, but inevitably will not stop the sale. In addition you could find yourself in court well after the foreclosure sale is over for these illegal matters.

18 USC § 1344. Bank fraud.

Whoever knowingly executes, or attempts to execute, a scheme or artifice--
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds, credits, assets, securities or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

Bottom line is whatever lenders call it they are junk fees. The lender is trying to make a small spread and still get paid regardless if it closes or funds. When they do not get paid until it closes you will bet they are looking very intently at their funding sources.

You want a lender that will work hard to get you the best rates and only get paid when they perform.

If the lender has nothing to lose they can't be held accountable. Do not fall for a loan with an upfront fee that sound to good to be true because it probably is!!

I'm a hard money lender in Las Vegas, and I see people who are victims of unscrupulous lenders at least once a week, although it is better than it used to be. I've found that a great resource is the District Court records. In Nevada, a lot of hard money lenders have been sued by their investors and borrowers, and you can find out a lot about the character of the lender you are using by reading the lawsuits they are involved in. Another resource is the Bankruptcy Court records. Anyone can join Pacer and review all of the BK documents. Search by name, case number, party name, etc. Very handy for finding out the truth about their financial capacity. Many lenders or loan officers or brokers will lie, cheat and steal when they are in financial trouble. Another resource is the Mortgage Lending Division of your state and the National Mortgage Licensing System. I cannot count how many wanna-be hard money lenders or bird dogs tell me that you do not have to be licensed to make commercial loans or hard money loans. In Nevada, if you hold yourself out as being able to make loans or source money, you MUST be licensed.

Licensing requirements for commercial loans vary by state. Currently 17 states require licensing for commercial mortgage loan activity, some with exemptions for people doing fewer than a certain number per year, or exemptions for funding with your personal funds.

The two states I lend in Arizona and Texas couldn't be more different in this respect. Arizona has a separate commercial mortgage broker license, while Texas has no license requirements for commercial mortgage loan activity. However, in Texas there is a "tax loan", by which a private lender pays off a taxing authority for back do taxes (at the request of the property owner) and assume the taxing authorities position. Making more than 4 of these loans annually requires a separate license.

This was brought to my attention, it's really old, I guess Don's post was a couple days ago....

Still all good stuff here that still applies. Better check out individual types lending as well. Many pool funds thinking they can form a partnership and make a few commercial loans or buy notes, so check again on state laws. It's not as if commercial lending or brokerage activities are regulation free, in most case they aren't. I know a guy who made a loan in his company name and lost part of the balance owing because he didn't have a business license! So, you need to check in municipalities as well if you have an office or address there.

I just got a notice on this thread, so someone was on it, I hope I'm not digging that deep into old posts. :)