by Timothy S. Reiniger
Notaries public play an important role in detecting and deterring fraud. Learn some of the ways they can help in the closing transaction.
All titles depend on official records; and all official records depend on the notary’s certificate of acknowledgement,” wrote Professor John H. Wigmore in 1928 for the Illinois Law Review. “The notary’s certificate of acknowledgement of a deed is the pillar of our property rights,” Wigmore continued. “And these pillars of property become a treacherous support when they are permitted with forgery.”
Jump ahead nearly 80 years and forgery and fraud in property transactions are still of grave concern. Officials from the Federal Bureau of Investigation testified before Congress last fall that mortgage fraud was nearing “epidemic” proportions. A hearing on this prolific crime, held by the U.S. House Subcommittee on Housing and Community Opportunity, disclosed a sobering fact: An estimated 5 to 10 percent of all mortgage loan applications contain some kind of fraud or misrepresentation.
“Based on industry reports and FBI analysis, mortgage fraud is pervasive and growing,” testified Chris Swecker, assistant director of the Bureau’s criminal investigative division. Furthermore, Swecker added that, “80% of all reported fraud losses involve collaboration or collusion by industry insiders.”
What is being done to curb this crime? In February of this year FBI Director Robert Mueller testified before the U.S. Senate Intelligence Committee that “the FBI worked with the Mortgage Bankers Association, the National Notary Association, as well as FinCEN [the Financial Crimes Enforcement Network], the Department of Housing and Urban Development, and major lending institutions, to improve the reporting and detection of potential mortgage fraud.”
The industries listed by Director Mueller each play a pivotal role in the fight against mortgage fraud, and the inclusion of the National Notary Association, which represents America’s 4.6 million notaries public, is particularly noteworthy.
The notary ensures the integrity of the closing transaction by establishing the identity, awareness, and volition of the document signer. And yet many in the industry, including the many title agents who perform double duty as notaries, know little about the critical fraud-fighting function of the notarial process and how effective the notary can be in detecting forgery, misrepresentations, or omissions at the closing.
Notaries public represent a significant obstacle to the traditional types of property fraud, including mortgage fraud schemes, which Chris Swecker characterizes as containing some type of material misstatement, misrepresentation, or omission relied upon by underwriters and lenders. The traditional types of fraud effectively countered by notaries fall within two basic categories: identity fraud and misrepresentations. Identity fraud often appears in the form of a forgery, which may involve a con artist posing as a homeowner and taking out a loan on a property by forging the real property owner’s signature on loan documents. The loan is never repaid, and foreclosure is started on the house. Significantly, the FBI has specifically targeted mortgage identity -related theft as a growing problem.
Misrepresentations, meanwhile, often take the form of a scam, which may involve a naive, trusting, or ignorant homeowner who is tricked into signing away property. Often a homeowner’s inability to make mortgage payments, and therefore with the threat of foreclosure looming, the swindler steps in and offers to help save the home. The homeowner is duped into signing loan documents with either direct misstatements of contract terms or blank lines that are later filled in with impossibly onerous repayment terms, and any subsequent failure to comply with these terms causes forfeiture of the property. Or easier still for the scam artist, a deed is slipped into the stack of documents, and the bewildered homeowner signs away his or her property.
How The Notary Deters Fraud
The physical presence of a notary can often prevent these types of illegal acts. Notaries are effective because they make six critical guarantees regarding the integrity of the settlement/closing transaction:
Personal appearance: The law re-quires grantors to sign or acknowledge conveyance deeds in the presence of a notary public. Notaries cannot honor requests to notarize an absent grantor’s signature or to accept another party’s hearsay that he or she was present when the absent principal signed. All other functions of the notary public depend upon the personal appearance of the document signer - whether that signature will be pen-and ink or electronic.
Identification: Once a signer is present before the notary, the notary carefully verifies the individual’s identity. This act of identification provides assurance that a signer is not an impostor trying to cheat an innocent victim out of valuable property through a phony document.
Basic awareness and absence of duress: At the same time as confirming identity, the notary observes whether the signer appears to be alert and aware of the transaction and under no pressure or duress to sign. Only a reckless notary would proceed with a notarization if there were any reasonable doubt that the signer is knowingly and willingly entering into the transaction.
Paper trail: Notaries by law or best practice must record each notarization in a journal of notarial acts. The notary’s journal is a public record that creates an auditable evidence trail for prosecutors in the event of an act or attempt of fraud.
Journal thumbprint: California law requires signers of most real property deeds to leave a thumbprint in the journal. If the impostor is not scared off by the very request for a thumbprint, the print will constitute evidence that a fraud was attempted by a particular individual and that the true owner of the property never appeared before the notary nor signed the forged document. Complete Documents: Notaries must scan each document to ensure that they are not notarizing a totally or partially blank instrument—the equivalent of signing a blank check.
These requirements represent a significant problem for a would-be property or equity thief. How significant? So much so that swindlers will go to great lengths to attempt to “neutralize” the notary. They spend valuable resources to create or acquire virtually undetectable false IDs to present to the notary; they painstakingly research and select an inexperienced or inattentive notary; they steal or forge the notary’s seal; or they attempt to convince or bully a notary into notarizing a document without the required personal appearance of the signer. All title agents and title insurers who also serve as notaries must be alert to these criminal tactics.
New Types of Fraud
In addition to traditional types of fraud, there has been an emergence of new fraud techniques. William Matthews, vice president and general manager of the Mortgage Asset Research Institute, testified before Congress that mortgage fraud is, “not only increasing, but the types of fraud are becoming more severe.”
Matthews refers to new breeds of fraud that have recently emerged, such as “property flipping,” down payment scams, and “chunking.” In many of these frauds, it is often the borrowers themselves who are active, knowing and willing participants in a criminal deception, and all of these non classic frauds are an attempt to circumvent the notary public during the closing transaction.
Property flipping involves a person buying a house cheaply and quickly reselling the property at an inflated price. To get that inflated price, perpetrators use false information from inflated property appraisals or bogus bank statements, pay stubs, W-2 forms or employment verification to trick a bank or mortgage company into approving a loan for the higher amount. Instant profit for them.
In downpayment scams a property sales price is inflated by the amount of the lender-required down payment. The down payment is made either by the seller, who is then reimbursed through the loan funds, or by the borrower, who gets the money back at the close of the transaction. Sometimes the borrower is promised the funds at closing or through repairs to the property, but neither occurs. With chunking fraud, a company promises borrowers they can be landlords or own investment property, pledging to find and manage the property, arrange the loan, attract tenants, send payments to the lender, and, within a year, sell the property at a profit on behalf of the investor, who usually has not even seen it. Almost none of this happens. Instead, the company takes a cash “commission” for the final closing from the investor, who is left with property not worth the mortgage.
These new frauds serve as a painful reminder: The criminal mind never quits. The thief studies the industry, looks for weaknesses, and is constantly scheming to come up with the next great fraud. It can become a game for criminals to see how they can next outwit the industry and law enforcement officials. And there is no more attractive playing field on which to stage their exploitive games than the emerging e-mortgage market.
The Threat of eFraud
There has been crime for as long as there has been commerce. Hopes for preventing fraud in sensitive transactions traditionally have rested on a “three-legged stool” consisting of requirements that serve distinct, complementary purposes.
Written contracts are required to prevent perjured testimony in proof of purported agreements of important types.
Notarization is a time-tested process for ensuring that sensitive transactions are entered into knowingly and willingly by parties who are who they purport to be.
Recording of real estate and other documents provides a transparent public record that can be relied upon by parties to future transactions and the government.
The Uniform Electronic Transactions Act (UETA), adopted in some form by virtually every state, and the federal Electronic Signatures in Global and National Commerce Act (the E-SIGN Act) address point number one listed above, while the Uniform Real Property Electronic Recording Act (URPERA) addresses point number three. But UETA and the E-SIGN Act are often mistakenly cited as also enabling electronic notarization, when in actuality they merely give electronic signatures, including the notary’s, the same legal force as pen and ink. UETA and the E-SIGN Act, therefore, allow for the eventual practice of electronic notarization but do not enable or authorize it.
To minimize the potential for fraud in sensitive electronic transactions, it is important to address notarization and recording requirements in a way that does not compromise traditional standards.
There is a common misconception though that an e-mortgage is the equivalent to a remote mortgage. Many envision a scenario in which each party sits in front of respective computers and completes the closing transaction without ever being face-to-face with the other parties - including a notary public. If mortgage fraud is reaching “epidemic” proportions now, imagine the state of the industry if remote mortgages become a reality. As already mentioned, thieves have developed elaborate schemes like chunking and property flipping in attempts to avoid the watchful eyes of the notary public in the paper-based world. The industry can ill-afford to do the same with electronic transactions. In addition to UETA and URPERA, the states now need to adopt enabling legislation for notarizing electronic signatures and for all notarial acts that involve electronic documents. This is where the National Notary Association comes in.
Realizing the need for uniform state electronic notarization rules that simplify the interstate recognition of notarial acts and preserve such proven principles of traditional notarization as personal appearance of the signer before the notary, the National Notary Association in 2002 published the Model Notary Act, which was the creation of a distinguished national panel working over the course of several years. Specifically, Article III of the Model Notary Act sets forth a comprehensive and systematic set of provisions that states should adopt to enable electronic notarization. This Act covers not only the performance of eNotarizations but also the screening and qualification of electronically capable notaries.
Prepared by a broadly represent-ative committee of experts, Article III provides technology-neutral statutory authority for electronic notarization. By preserving the fundamental principles and processes of traditional notarization, Article III ensures that electronic transactions can be consummated with the same level of assurance concerning identity, capacity, and volition as traditional paper-based transactions. Recognizing the complexity of digital technology, it also requires training and registration of notaries who notarize electronic documents. Its adoption would promote electronic commerce by both re-moving limitations of legacy laws and mitigating the risks of online fraud.
There is an opportunity then, on a state-by-state basis, to transfer the time-tested securities of the paper-based world to the electronic one. Whether the signature is affixed by pen and ink, using technology similar to the signing pads in grocery stores, via digital signature, or some other form of technology, one crucial element must remain: the notary Public as an impartial witness to verify the identity, capacity, and volition of the signer.
Timothy S. Reiniger, Esq., is executive director of the National Notary Association. He can be reached at 818-739-4032 or firstname.lastname@example.org.