What Is a Foreclosure Forensic Audit?

A “forensic audit” is an in-depth examination of an organization’s financial records and transactions to identify potential fraud, misconduct, or other irregularities. This is commonly done in anticipation of possible legal proceedings. It is a specialized investigation conducted by auditors specializing in these types of audits. The purpose of the audit is to investigate the possibility that some kind of crime was committed, such as the following:

• Fraud
• White-collar crime, such as embezzlement or tax evasion
• Insider trading in stocks

These are crimes for which the evidence may be found in financial documents and records.

Forensic audits have also been used to review how home mortgage loans were prepared and as a tool for foreclosure defense. A forensic audit is a tool often used by federal agencies that fund mortgage loans to detect fraud on the part of borrowers.

How Have Forensic Audits Been Used in Foreclosures?

Forensic audits can be used to examine foreclosures. They will evaluate all the documentation used in preparing a home mortgage loan to ensure that the information used to assess the borrower’s financial capability was used properly.

These audits would aim to locate errors made by mortgage underwriters. Had they been conducted more regularly, these audits could have greatly decreased the number of bad loans made at the height of the housing boom, when many loans were made for properties that the buyers could not realistically afford.

The right kind of forensic audits could have detected predatory lending practices that violated the Truth in Lending Act or other state and federal laws regarding mortgage lending.

Are Forensic Audits for Foreclosures Legitimate?

Many practices used in forensic audits for foreclosures sparked the interest of consumer protection agencies. It was discovered that forensic audits that were, in fact, fraudulent were being sold to consumers facing foreclosure. These audits were marketed as a tool for evaluating all the documentation used in preparing for a foreclosure. Several factors made these “audits” illegal or fraudulent.

For one thing, many of these “audits” claimed to be a way to save borrowers, but they were scams. Their major problem is that they could not lead to the kind of relief that the borrower in foreclosure needs.

Another factor is that many of these purported auditors demanded payments of several hundred dollars to conduct a forensic loan audit in the hope of finding lending violations that could void the mortgage. However, these claims were most often without any basis. They only harmed the borrower by wasting their money on a service that would not help them avoid foreclosure. The homeowner’s money would have been better spent paying their overdue mortgage or taking the steps needed to get out of a home mortgage the borrower could no longer afford.

The “auditors” would sell their service by claiming that a borrower could use the audit report to avoid foreclosure, speed up the loan modification process, reduce their loan principal (i.e., the amount they owe), or even cancel their loan.

But these claims were false and fraudulent. According to the Federal Trade Commission (FTC) and law enforcement, they were fraudulent for the following reasons:

• They provided no payment relief: Some federal laws allow borrowers to sue their lenders based on loan document errors. But even if a borrower were to sue and win, the mortgage lender would not be required to modify their loan simply to make their payments more affordable, which is what the borrower facing foreclosure needs.
• They provided no foreclosure relief: There was no evidence that forensic loan audits would help a borrower get a loan modification or any other kind of foreclosure relief. Even if the audit were conducted by a licensed, trained auditor, mortgage professional, or lawyer, it still would not provide the relief the borrower needs and promised by those selling the service.
• The promise of canceling the loan was not a solution: If a borrower had grounds to cancel their home mortgage loan, the borrower would have to return the borrowed money; this would mean selling the home the borrower bought with the borrowed money. So, this is not a solution to the borrower’s problem if the borrower is looking to stay in their home.

The FTC warns home mortgage borrowers seeking to prevent foreclosure of their home mortgage loan to avoid other scams, such as the following:

• Anyone who pressures a borrower to sign papers they have not had a chance to read thoroughly or that they do not understand.
• Anyone who guarantees that they can stop the foreclosure process – no matter what a person’s expertise may be, no one can guarantee they will stop a foreclosure.
• Anyone who insists on collecting a fee for their service before providing the service and accepts payment only by cashier’s check or wire transfer.
• Anyone who tells the borrower not to contact their lender, lawyer, or credit or housing counselor (a borrower’s lender, lawyer, and housing counselor are the people who can help a borrower who is in default on their mortgage).
• Anyone who tells the borrower to stay away from these people is setting them up for fraud or other scams.
• Anyone who advises a borrower in default to lease their home so they can buy it back over time. This ploy simply does not work.
• Anyone who recommends that the borrower make their mortgage payments directly to them instead of to the mortgage lender or bank.
• Anyone who urges a borrower to transfer their property deed or title to them. If a borrower were to do this, they would be giving this person or company ownership of their home just at a time when they are attempting to protect it.
• Anyone who offers to buy a borrower’s house for cash at a fixed price that is inappropriate for the housing market.
• Any sale of a home, even one in foreclosure, should be supported by a professional appraisal of its value. Like anyone else, a defaulting borrower who must sell their home will want the best possible price.

Some possible real solutions for borrowers in default on their mortgage payments would include a legitimate loan modification. Or a borrower might arrange a forbearance agreement in which the lender agrees not to foreclose, and the borrower agrees to maintain payments, but in an amount the borrower can afford. Negotiating any of these options would not require a forensic audit but only discussion between the lender and the borrower or the borrower’s lawyer.

Should I Seek Legal Advice?

Scam artists and fraudsters know that people facing foreclosure of their mortgage loans may feel desperate and become willing to believe in false promises and fraudulent claims. That is why a borrower must consult an experienced foreclosure lawyer carefully.

If you are in default on your mortgage, facing foreclosure, and have paid for a forensic audit, you should consult an experienced foreclosure attorney. An experienced attorney in your area can identify and help you respond to potentially fraudulent behavior.

Also, an experienced foreclosure lawyer is a person who may be able to offer real help with any ongoing foreclosure issues you are facing. You will most likely get the best outcome if you have an experienced home foreclosure attorney representing your interests.