Month: August 2017

Feds extend footprint of shell game again

Standard

Will this obligation eventually extend to South Carolina?

shell game

Secretly purchasing expensive real estate continues to be a popular method for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

In early 2016, The Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasurer issued an order that required the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

At that time, the reach of the project extended to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies were required to disclose to the government the names of buyers who paid cash for properties over $1 million in Miami and over $3 million in Manhattan. The natural persons behind the legal entities had to be reported for any ownership of at least 25 percent in an affected property.

By order effective August 28, 2016, all title insurance underwriters, in addition to their affiliates and agents, were required to be involved in the reporting process, and the footprint of the project was extended.

The targeted areas and their price thresholds as of August 28, 2016 were:

  • Borough of Manhattan, New York; $3 million;
  • Boroughs of Brooklyn, Queens and Bronx, New York; $1.5 million;
  • Borough of Staten Island, New York; $1.5 million;
  • Miami-Dade, Broward and Palm Beach Counties, Florida; $1 million;
  • Los Angeles, San Francisco, San Mateo, Santa Clara and San Diego Counties, California; $2 million; and
  • Bexar County (San Antonio), Texas; $500,000.

By order effective September 22, 2017, wire transfers were included, and the footprint of the project will include transactions over $3 million in the city and county of Honolulu, Hawaii.

Although the initial project was termed temporary and exploratory, FinCEN has indicated that the project is helping law enforcement identify possible illicit activity and is also informing future regulatory approaches. The current order extends through March 20, 2018.

We have no way of knowing whether or when this program may be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in money laundering schemes. We will keep a close watch on this program for possible expansion

Total eclipse of the heart….I mean sun

Standard

eclipse

What an experience! Millions were expected to descend upon beautiful and “famously hot” Columbia, S.C. for the total eclipse on Monday. Hundreds of events were planned to welcome the natives as well as the visitors. I thought it was an overly-hyped occasion, but I was mistaken. The eerie darkness descending on the otherwise bright day, the sounds of evening crickets; the brightening of streetlights in mid-afternoon; it was all surreal. And watching the main event was no less than dreamlike. No horror movie ever depicted an eclipse more vividly. A few clouds passed into our vision like inky smoke as we watched the moon chase and completely capture the sun. And two minutes later, the process reversed itself. I wouldn’t have missed it for the world!

A few people who had to miss the eclipse were described in an August 14 HousingWire story by Ben Lane entitled “Ringleader of elaborate mortgage fraud scheme gets 10 years in prison.” Mr. Lane described the complex New Jersey mortgage fraud scheme that involved fake everything, sellers, businesses, lawyers, title agents and notaries. The co-conspirators pled guilty to money laundering in a scheme that involved using stolen identities to pilfer more than $930,000 from lenders in at least eight fraudulent loan transitions.

The criminals created all the aspects of legitimate closings by using stolen and fictitious identities to fill all the required roles. The homes were real, but the homeowners were totally unaware. Virtual offices and businesses were created by setting up dozens of phone numbers, email addresses, fax numbers, websites and mail drop addresses. Several lenders were deceived by the elaborate scheme. Once the loans were disbursed to the accounts of fictitious law firms and title agents, the criminals withdrew loan proceeds by visiting ATMS and bank branches for several months until the entire amounts were withdrawn.

The HousingWire story accurately states that mortgage fraud is an expensive drain on the lending agency which ultimately raises the cost of borrowing for consumers. The astute New Jersey and federal investigators who successfully apprehended these criminals benefited us all.

As the criminals report to jail, we will return to our normal lives but will remain in awe of the powerful occurrence we witnessed yesterday.

History repeats itself

Standard

Fraudulent mortgage satisfaction schemes are back

We have heard recently that a group is engaging in a scheme to fraudulent satisfy mortgages (or deeds of trust) in California and Florida. We all know that trends in California and Florida eventually make it to South Carolina, so I wanted to make sure South Carolina dirt lawyers are aware of this scheme. This is not a new scheme, but we thought it had died down until we got this news last month.

Here are some good rules of thumb to assist you in avoiding losses and protect clients in this area:

  • Have your title examiners provide you with copies of mortgage satisfactions and releases. Two sets of eyes reviewing the documents should help with spotting issues.
  • Pay particular attention to satisfactions and releases within a year of your closings. The normal schemes involve satisfying mortgages in order to collect funds at subsequent closings.
  • Pay particular attention to satisfactions and releases that are not connected with a sale or refinance. Contact the lender for confirmation that the loan has been paid in full.
  • Don’t accept a satisfaction or release directly from a seller, buyer or third party without contacting the lender for confirmation that the loan has been paid in full.
  • Many of the fraudulent documents are being executed by an unauthorized party on behalf of MERS. Compare MERS satisfactions with others you have seen in connection with your closings.
  • Check spellings and compare signatures against those of genuine instruments.
  • Be wary of hand-written documents, unorthodox documents, cross-outs, insertions and multiple fonts.

The perpetrators of this fraud are sophisticated and will change aspects of the scheme as needed, so remain vigilant and discuss any suspected fraudulent documents with your title insurance underwriter.

The Episcopal Church case is out; It will take more than faith to deed, mortgage and insure church properties

Standard

Today, I am thankful to be a real estate lawyer. As I attempt to decipher the South Carolina Supreme Court’s 77-page opinion involving the Episcopal Church published on August 2,* my mission is limited to the real estate issues.

I don’t have to solve the mystery of the rights of gays in churches. I don’t have to ascertain whether the “liberal mainline” members or the “ultra-conservative breakaway” members make up the real Episcopal Church.  I don’t have to delve into the depths of neutral principles of law vs. ecclesiastical law. I don’t have to figure out who will own the name “Episcopal Diocese of South Carolina.”

The real estate issues are sufficiently thorny to occupy our collective real estate lawyer brains, but I am attempting here to boil those issues down to a manageable few words for all of us.

charleston episcopal churches

St. Philip’s and St. Michael’s Episcopal Churches, Downtown Charleston, SC 

 

News articles refer to the properties as being valued at hundreds of millions of dollars. The historic value of the properties, including St. Michael’s and St. Philip’s of Charleston, is also quite significant.  I assume a petition for rehearing will ensue as well as an appeal to the United States Supreme Court. Nothing is settled at this point. Let’s not try to insure these titles anytime soon.

The controversy began five years ago when 39 local parishes in eastern South Carolina left the Episcopal Church over, among other issues, the rights of gays in church. Since then, the two sides have been involved in a battle over the church’s name, leadership and real estate.

Interestingly, the national church had offered a settlement to the breakaway parishes that would have allowed them to retain their properties if they gave up the name and leadership issues. That settlement offer was apparently summarily rejected.

Wednesday’s ruling upholds the Episcopal Church’s position that it is a hierarchal church rather than a congregational church in which the vote of church membership can determine the fate of real property. It also orders the breakaway group to return 29 properties to the national church. Seven parishes may maintain their independence.

The position of the properties turns on whether the local parishes agreed to be bound by the “Dennis Canon” which was enacted in 1979 and provided, in effect, that real property of a parish is held in trust for the national church and the local Diocese, subject to the power of the local parish over the property, so long as the parish remains a part of the national church and Diocese. No evidence was found in the records of the seven parishes that those parishes ever agreed to be bound by the Dennis Canon. The other 29 properties were the subject of documentation to the effect that the local churches intended to hold the property in trust for the denomination. The opinion did not uphold the Dennis Canon in and of itself. Explicit recognition of the Canon was required.

That, in short, is the impact of the 77-page opinion on real estate lawyers. We will need to watch for a possible rehearing, appeal periods and a potential settlement. In the meantime, we will sit tight and not involve ourselves in sales and mortgages of these properties.

Now that I’ve had a chance to think about it, I am always thankful to be a real estate lawyer!

*The Protestant Episcopal Church in the Diocese of South Carolina v. The Episcopal Church, South Carolina Supreme Court Opinion 27731, August 2, 2017.

CFPB rules have been revised

Standard

Are we now free to share Closing Disclosures with real estate agents?

cfpb-logoThe CFPB recently issued amendments to its rules governing residential loan closings, but it did not settle the debate about whether Closing Disclosures can be shared with real estate agents. Traditionally, real estate agents were provided settlement statements both before closings, to give them the opportunity to explain the numbers to their buyer and seller clients, and after closings, to enable them to close MLS listings.

Since we have been operating under the CFPB rules and generating Closing Disclosures, we have struggled with the insistence on the part of real estate agents to receive those documents and the reluctance on the part of lenders to share them.  Most of us have resolved this conflict by providing real estate agents with separate settlement statements, such as ALTA’s Settlement Statements, which are similar to our prior HUD-1 Settlement Statements. It took us awhile to figure out that Closing Disclosures are not traditional closing statements and do not facilitate disbursement. Once we realized separate settlement statements are actually needed to fully inform borrowers, sellers and real estate agents, this issue became less important.

The CFPB has indicated it has received many questions about sharing Closing Disclosures with third parties. The amendment says:

“(T)the Bureau notes that such sharing of the Closing Disclosure may be permissible currently to the extent that it is consistent with (the Gramm-Leach-Bliley Act) and Regulation P and is not barred by applicable State law. However, the Bureau does not believe that expansion of the scope of such permissible sharing would, in this rulemaking, be germane to the purposes of Regulation Z.”

Lenders will likely continue to refuse to allow sharing of Closing Disclosures in light of this clear-as-mud directive. Most lenders currently state that the consumer may provide the Closing Disclosure to real estate agents if he or she chooses to do so. That rule is not likely to change.