AHP FRAUD MITIGATION: Trends, Tools, and Tactics · 2017. 3. 20. · AHP Competitive Leverage Ratio –1:13 $177 Million funded through AHP Set-aside products and supporting 25,885

FOR THOSE PERMISSIONED

AHP FRAUD MITIGATION: Trends, Tools, and Tactics

March 7, 2017

EILEEN O’CONNOR DORAN

VICE PRESIDENT

CIS RISK MANAGMENT

Today’s Outline

• Federal Home Loan Bank of Atlanta

• Parties to Real Estate Transactions and Potential Real Estate Fraud Scenarios

• Emerging Trends and Red Flags

• Our Risk Mitigation Framework

• Case Studies

• Post Mortem

2

FHLBANK ATLANTA OVERVIEW

FEDERAL HOME LOAN BANK OF ATLANTA 3

FHLBanks: Helping Institutions Build Communities

• The 11 Federal Home Loan Banks are cooperatives created by Congress in 1932

• Offer competitively priced financing, community development grants, and other banking services

6

Commercial Bank

Credit Union

Savings Bank

Insurance Company

CDFI

FHLBank Atlanta Shareholders of March 31, 2016

5

900+ Total Shareholders*

Connecting Investors to Homeowners

6

Products and Services

• Advances (Loans)

• Letters of Credit

• Mortgage Purchase Products

• Interest-rate Risk Management Tools

• Cash Management Services

• Affordable Housing Program (AHP) and Community Investment Program (CIP)

7

Unique Offering to Shareholder and Community


• Like every “dividend,” predicated upon earnings

• “Equity-like” capital for real estate transactions

• Direct and indirect benefits to shareholders, developers, homebuyers, tenants, and the community

FHLBankProducts

CommunityDividend

Earnings

10 percent

=

Scale and Impact


$714.6 Millioncompetitive funds awarded to create over 113,000 rental

and homeownership opportunities for moderate-, low-and very low-income households since 1990

AHP Competitive Leverage Ratio – 1:13

$177 Millionfunded through AHP Set-aside products and supporting

25,885 units since 1997 AHP Set-aside Purchase Leverage Ratio – 1:21

$7.8 Billionlow-cost CICA advances supporting community

economic initiatives and affordable housing development

*As of December 31, 2016

EconomicDevelopment

Program

AHPCompetitive

Program

CommunityInvestmentProgram

AHPSet-asideProgram

Parties to a Real Estate Transaction

and Potential Real Estate Fraud Scenarios



Why Compile Potential Real Estate Fraud Scenarios?


Further Defines Challenges and Opportunities• The potential scenarios are stories that allow us to learn about how a transaction could possibly unfold.• It is not intended to suggest that these are the actual experiences of the FHLBanks.• Scenarios are not predictions. Rather, they are provocative and plausible accounts of how relevant external forces

might interact and evolve, providing different challenges and opportunities.

Helps in Decision Making• The potential scenarios allow us to weigh our choices more carefully when making short-term and long-term strategic

decisions on how we design our controls and mitigate real estate fraud in an AHP assisted transaction.

Illustrates Our Capacity• The potential scenarios convey a base of understanding of the scale and extent of potential real estate fraud. • This understanding is essential to the professional management of the risk.

Not Every Transaction with a Red Flag and Not Every Potential Fraud Scenario Actually Involves Fraud• The FHLBanks review red flags and potential fraud scenarios knowing that not all questionable transactions actually

involve fraud. Innocent errors may trip red flags where no fraud is found or intended.

Potential Real Estate Fraud Scenarios


















Indicators of Additional Potential Risk


• Related party transaction

• Declining rental market conditions

• Property experiencing high vacancies

• Market where tenant profile has a preponderance of seasonal/self-employed households

• Rehab with no permitting and/or certificate of occupancy

• AHP is the only funding source

• AHP is the majority funding source

• AHP is the only lender (other funding sources are non-traditional lenders (eg., charitable contributions))

• Multiple funding sources for rehab work on single unit

The Fraud Triangle

Breaking the Fraud Triangle

Breaking the Fraud Triangle is the key to fraud deterrence.

Breaking the Fraud Triangle entails removing one of the elements in the fraud triangle in order to reduce the likelihood of fraudulent activities. Of the three elements, removal of opportunity is most directly affected by the system of internal controls and generally provides the most actionable route to deterrence of fraud.

Emerging Trends and Red Flags


Transactions without simultaneous first mortgage financing

• Higher risk in transactions where there are no other controls typically associated with a loan settlement

• Examples: Owner occupied rehabilitations, rental rehabilitations

Non-arms length transactions

• Higher risk in transactions where there are related parties because the natural checks and balances do not exist

• Example: Purchase transaction involving related buyer and seller

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Emerging Trends

No segregation of roles and responsibilities

• Higher risk in transactions where there is no clear consumer advocate

• Examples: Owner occupied rehabilitations where the sponsor is the contractor; purchase transaction where seller is the realtor or where the realtor is representing both the buyer and seller

Customer can be a collaborator and a victim

• Customer can be intentionally or unintentionally aid in a misrepresentation

– Example: Homeowner knowingly or unknowingly does not read, understand, and take responsibility for the certifications they execute

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Emerging Trends

Disaster Fraud: Criminals Capitalizing on Catastrophes

• Disaster fraud is a deliberate act to deceive people, government organizations or private industries after devastating events for personal financial gain.

• Examples: Double dipping where FEMA and / or insurance companies are paying for the same items

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Emerging Trends

Red Flags

The presence of one or more red flags does not necessarily mean that there is fraudulent activity

Inconsistencies are often a tip-off that the file contains misrepresentations

Concerns communicated

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Seller shown as a relative, Realtor, or employer

No Realtor involved

Mortgage financing with an unusually short maturity

Unusual credits or disbursements shown on settlement statements

Power of attorney used without explanation

Evidence of “white-outs” or alterations without initials

Red Flags - Examples

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Red Flags – Examples (continued)

Unusual or unexplained transactions on borrower’s bank statement

Any alteration to Bank documents (forms or certifications)

Inconsistent dates or unusual sequence of dates for activities

Incomplete documentation (certain fields left blank)

Signatures obviously differ between documents

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Red Flags – Examples (continued)

Shareholder or transaction is located in a High Intensity Financial Crime Area (HIFCA)

South Florida (Broward, Miami-Dade, Indian River, Martin, Monroe, Okeechobee, Palm Beach and St Lucie)

Shareholder is not subject to BSA / AML

CDFI

Insurance Company

HFA

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AHP Risk Mitigation Framework


Risk Mitigation Methods and TechniquesGuiding Principles

1. You cannot mitigate, prevent, or uncover all risk or fraud

– Real estate financing and development has inherent risk and potential fraud. As a component of real estate financing and development, AHP is exposed to fraud scenarios. The scope extends beyond the FHLBank Atlanta.

2. Leverage and rely upon the controls of third parties

– The Bank effectively leverages existing external controls and relies upon third parties, members, regulators, and vendors.

3. Appropriately scaled control environment

– The Bank’s governance, policy, and procedure environment is appropriately scaled to respond to the level of risk identified by the attributes of our Affordable Housing Program.

– The controls are regularly evaluated and adjusted in response to the evolving market and operating environment and the risk in our transactions.

4. Allow flexibility

– It is important to identify the essence of the methods and techniques while allowing flexibility for how it is implemented so as to remain sensitive to the needs of the Bank and its shareholders. Robust, smart methods and techniques are adaptable to various conditions, have various operational features, and can employ similar but diverse ways to achieve goals.

5. How it works here

– The Bank has established its risk tolerance which may differ from other participants in the transaction. The Bank’s AHP and its risk mitigation framework reflects the successful management of the balance between efficiency and risk.

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General Framework of Risk Mitigation

1. Management

2. Governance

3. Reports and Analysis

4. Research and Investigation

5. Education and Awareness

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General Framework - Management

FHLBank Atlanta

Community Investment Team

– Staff consists of real estate finance professionals that recognize risk and potential fraud scenarios

– Staff and management continue to educate and be educated about emerging trends and best practices

– Dedicated resources to focus on risk management

Internal Bank Partners

– Legal

– Enterprise Risk Management

Shareholder Management

– Underwriters conduct due diligence to include review of sponsors and developers

– Establish and maintain adequate and efficient internal controls, policies and procedures, to assure an effective system for the prevention, detection and reporting of fraud or abuse

– Notify the Bank promptly after discovery or notice of any material change in an AHP transaction

Notify Appropriate Parties of Bank’s Risk Mitigation Environment and Anti Money Laundering Policy

– Element of education and awareness

– Element of agreement and certifications

– Reference in AHP Implementation Plan

– Remedies available to the Bank upon discovery of fraud are timely and substantive

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General Framework – Research and Investigation

Management of all complaints and concerns

• Attention to all feedback at all levels

– Log all concerns

– Ask the appropriate follow-up questions

• Review for patterns and trends

– Look for gaps in, or circumvention of, controls

• Track inconsistencies

Investigation

• Talk to affected parties

– Perceived as normal course of business

• Follow all leads

• Scope assessment

– Expand as needed

• Related parties

• Intent

• Connecting the dots with readily available information

Lessons learned and future enhancements

• Forms elements of education and awareness

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General Framework – Education and Awareness

Risk and Fraud Mitigation Education and Awareness

– Scheduled and regular

– Attendance expectations

– Content includes case studies, awareness of red flags, responsibilities & roles, and escalation & reporting

– Awareness of AHP requirements that have risk mitigation value

– Responsibilities of parties to the AHP Agreement

• Requirement that risk and fraud awareness, best practices, and internal controls are in place

• Attest to specific requirements outlined on the certification

– Internal and external parties

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Why a Toolbox of Mitigation Methods and Techniques?


Helps FHLBank Atlanta in Being Smarter About What to Do and What Not to Do• There is no such thing as an absolute best practice.• The toolbox is a way to explore and understand realistic expectations. It provides a ready resource to

assess whether additional controls are needed and provides the boundaries of effective controls.• While the techniques and methods are tailored to real estate fraud mitigation in an AHP transaction,

they do not guarantee good outcomes in every scenario.

Helps the FHLBanks in Advancing Smart Fraud Mitigation Strategies• These methods and techniques can help solve problems and enable longer term strategy thus

avoiding the need to constantly reinvent the wheel. They demonstrate the various fraud mitigation methods already in place and functioning.

Helps to Better Define Cost and Benefit• Smart practices take “advantage” of a fraud mitigation opportunity at a lower cost. • Methods and techniques provides a point of reference for breaking loose from conventions and

assumptions in order to add value and cost-effectiveness for all parties involved in AHP transactions.

Helps in Understanding Generic or Inherent Vulnerabilities• The toolbox can help the FHLBanks better know, understand, and identify potential vulnerabilities that

could potentially undermine individual current control environments.

Mitigation Methods and Techniques




























Case Studies


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Case Studies in CISAHP Ownership Purchase

Incident:

– Shareholder knowingly approved homeowners that did not meet debt-to-income program requirements

– Falsely certified that the transaction met program standards

Outcome:

– Shareholder suspended

Resulting Changes to AHP:

– Strengthened certifications

– Increased internal analysis at the transactional level prior to disbursement

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Case Studies in CISAHP Owner Occupied Rehab

Incident:

– Sponsor reported suspected employee forgery

Outcome:

– The employees engaged in wrong doing terminated by sponsor

– All AHP subsidy subsequently confirmed as in compliance and properly secured with recorded retention mechanisms

– Sponsor suspended


– Require pre- and post-rehabilitation inspections


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Case Studies in CISAHP Ownership Development

Incident:

– The Sponsor received funds from two products for the same properties (four units) in which the homebuyer received only the benefit of one funding

– One homeowner received less benefit than the AHP funds disbursed

Outcome:

– AHP funds not benefitting the homeowners were repaid and the Sponsor suspended



– Increased internal analysis at the transactional level

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Case Studies in CISAHP Rental New Construction

Incident:

– Sponsor’s attorney informed the Bank of a former employee taking funds from the sponsor’s operating account without authorization (not related to the project’s financials)

Outcome:

– The fraudulent activity did not affect the Bank’s decision making at all, given that the Bank did not rely on the this financial data


– None; since the action involved the sponsor’s business and was not specific to the AHP project, the incident was outside the scope of AHP risk controls

– The duty to disclose provision worked

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Case Studies in CISAHP Ownership Rehab

Incident:

– Homeowner contacted the Bank inquiring about the status of rehab work on her home

– Preliminary review showed that the unit had already been funded

– Intermediary and inspector provided funding certifications indicating that all work has been completed

– Expanded investigation to include all units with common intermediary, contractor, and inspector

• Revealed that four units had false certifications, misrepresentations that all of the work had been completed prior to funding

Outcome:

– Intermediaries and inspector, both individually and at the organization level, suspended

– Confirmed that all homeowners received the full benefit of AHP funds


– Further clarified and strengthened certifications

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Case Studies in CISAHP Ownership Rehab

Incident:

– Counseling provider advised the Bank of inconsistencies in homeowner information for several AHP units all with a common intermediary

– Investigation revealed that the intermediary presented themselves as the homeowner to completed the required counseling

– Further review by the Bank revealed that, additionally, work reported to have been completed on some units had not been completed

Outcome:

– Intermediary, both individually and at the organization level, suspended

– Required additional inspections to confirm that all homeowners received the benefit of AHP funds

• Required intermediary and contractors releases of lien


– Require pre- and post-rehabilitation inspections


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Post Mortem


Post-Mortem

• Lessons learned:

– What can we do different? Better?

– Process changes?

– Policy changes?

– Technology changes?

– Certification enhancements?

– Training and education improvements?

• Internal

• External

Always striving for continuous improvement

Internal Training: Identify the Red Flags

[email protected]

Internal Training: Identify the Red Flags

• From Mrs. Joan Jackson: “I’m so happy with the with rehab work on my home. Thank you so much. I’m thrilled that the new roof was installed just in time. Another week later and my house surely would have been leaking due to Hurricane Matthew. My cousin Pearl said the same thing.”

Institution Name

App No Customer Short Code

Amount Requested

Cond Comit Issued

CC Approved

By

CC Docs Received

Funds Disbursed

Disbursed By

Post Fund Approved

Post Fund

Appr By

Estimated Closing or Funding

Actual Closing

Property State

Intermediary Contractor Phase

Apple State Bank

10710001936 PEARL CAMPBELL

VRP $ 12,500.00 03/22/16 fhlbpj2 04/21/16 04/22/16 fhlbms1 5/18/2016 13:19

fhlbpj2 04/22/16 03/29/16 GA City of Anywhere

Bayfield Construction Co

Funded

Apple State Bank

10710001937 JOAN JACKSON

VRP $ 12,500.00 04/21/16 fhlbmdt 08/05/16 08/08/16 fhlbms1 8/25/2016 18:19

fhlbgd3 08/08/16 05/04/16 GA City of Anywhere

LCLS, Inc. Funded

Training and Education - Shareholders


Best Practices for Working with Intermediaries and Contractors using FHLBank Atlanta’s rehabilitation products

Know those representing your organization (Contractor, Inspector, Intermediary)

- Underwrite the organization as you would in your normal course of business Get a background checkGet a credit checkWhat is their experience?

- Are contractors licensed and insured (required)?- Do they have a board of directors? If so, engage the Chair of the Board- Have a legal agreement/ contract with your partners

Know your customer - Are they the homeowner? - Title search or tax records can help document ownership

- Are they current on their mortgage?- What liens are on the property?- Have they previously been awarded AHP for work on their property? - Check-in with your homeowner once the work is complete. A random

sampling will help you ensure your customers are satisfied

Inspections - Written pre- and post-construction inspection reports are required - Request these inspection reports with photos so that you can see the work

is truly required and was adequately completed- Must be conducted by an unrelated 3rd party approved by the member - We suggest the inspection reports be commissioned by you, the member

Member to comply with all applicable BSA/AML and OFAC requirements as they relate to the transaction, including OFAC screening of the homebuyer(s) / homeowner(s)

Thank you.


Eileen O’Connor Doran

FHLBank Atlanta

[email protected]

404.888.5514


mailto:[email protected]

Documents

AHP FRAUD MITIGATION: Trends, Tools, and Tactics · 2017. 3. 20. · AHP Competitive Leverage Ratio –1:13 $177 Million funded through AHP Set-aside products and supporting 25,885