While the word "defalcation" is tossed around a lot when real estate crime is the topic of discussion, the word actually refers to a crime involving the misappropriation of money. In the real estate industry, defalcations can take the form of elaborate "flipping" schemes involving rings of appraisers, crooked lawyers or real estate agents, and some are unintentional accounting mistakes by the lender or the title company. Regardless of their size, defalcations often result in catastrophic losses to all parties involved, especially for the homeowner, the underwriter and title insurer.

A recent example of a classic "flipping" scheme involved a Miami couple and their daughter who scammed at least eight south Florida lenders out of more than $3.8 million by manipulating title commitment documents, closing documents and mortgage documents, and obtaining false property appraisals for at least 12 real estate transactions in 2001. Luis F. Lorie, his wife Lourdes R. Lorie and their daughter, Lourdes Sanchez, operated as Global Mortgage Investors, Inc., but coordinated with various other Florida corporations including Southeast Land Title Corporation, Exclusive Real Estate Investments, Inc., and Rall Investments, Inc.

All three were charged with racketeering, criminal conspiracy to commit racketeering, organized fraud, and multiple counts of grand theft. On November 5, 2002, Lorie was sentenced to six years in prison and was ordered to pay the lenders $7 million in restitution. Lourdes Lorie must serve 18 months of house arrest, followed by 10 years of probation; Sanchez was placed on probation as well. All three are banned from participating in real estate and insurance business for life.

Whether the scheme is as complex as the Lorie case or a simple matter of a title agent dealing with a bad financial situation by dipping into a client's trust fund, the instances of such white collar crimes are on the rise. And there are several groups keeping a close eye on the real estate industry, ready to pounce at the next agent, attorney or lender stealing money from the proverbial cookie jar. The last issue of The Legal Description identified several common characteristics of a defalcation and some of the reasons why they happen in the first place. This time, Douglas Pollack, CFE of Orlando-based Information Data Services Inc., explains how title agents can prevent the crime in the first place.

Keep a vigilant eye on operations

According to Pollack, most defalcations are not discovered until a trust account check bounces, making that an easy indicator of a problem. "Your trust balance should be zero at the end of a settlement, and a bounced check could mean a defalcation requiring some extreme efforts from the underwriter to resolve it," he said.

While task forces and investigative groups keep watch on premeditated real estate crimes, establishing control procedures for obtaining receipts, disbursements and investments can prevent unintentional defalcations - such as accounting errors.

In states where the title insurance industry is regulated by a bar association or department of insurance, Pollock said all receipts must be deposited into an escrow account and maintained at a federally-insured institution upon receipt. "Obtain validated deposit slips from the bank and attach them to the office copy of the deposit slip. The deposit slip should indicate the respective file numbers," he said.

Pollack recommends the use of a sequentially numbered file system because it simple to track, most software systems already use one and it makes it easier to have an audit trail than if filed by name only.

Keeping a copy of each check or wire transfer that comes in to the escrow account should also be included in the closing file. "So if anyone has a question of how the lender's funds or the borrower's funds to close came in, it's there. Especially since many lenders these days are focusing on Line 303 of HUD-1, and you can do yourself a big service if that is documented well," Pollock said, adding that a copy of all deposits and receipts should also go into the company's accounting records.

Only accepting collected funds for closing is another way to thwart a defalcation. "Don't accept any personal or company checks. If you do, you may find yourself responsible for those funds," Pollock warned. "Plus, lenders used to let the title agent worry about the funds and just asked for a copy of the check. But now many of them are asking for a cashier's check, wire transfer or other good funds."

And, confirm any wire transfers from the bank. "I've seen a number of cases where lenders have bounced funding checks because the lenders' wires were rescinded before they were credited," Pollock said. "Or, the lender tells the title agent to close the loan and fund the borrower's account and the title agent does it without first checking with their bank. What has often happened is that the lender's warehouse line was shut down and the funds were available to give out."

Pollock also advises title agents to be careful about deposits in transit. They often occur at the end of the month when funds are not posted to the agent's account yet and after the time that money needs to be deposited in order to appear on that day's ledger. "When the agent goes to reconcile the account he comes up short because he is disbursing funds that haven't appeared in the account yet – and won't until the next business day," he said.

And those deposits in transit should never be left on the books for more than three days, warned Pollock. "I often see deposits in transit that are a year or two old, making accounts look as thought there is more money in them. If a company gets audited by a regulatory agency and they see deposits in transit that are more than three days old, the auditor will require that they be funded to the operating account immediately or the company could face penalties."

No end in sight

Unfortunately, research groups and investigative agencies don't predict an end to white-collar crime (such as defalcations) any time soon. In fact, according to the Association of Certified Fraud Examiners' (ACFE) 2002 Report to the Nation, (a report that offers a detailed view of how occupational fraud affects organizations in the U.S.) approximately 6 percent of economic revenues will be lost in 2002 as a result of occupational fraud and abuse. And, over 80 percent of those occupational frauds will involve asset misappropriations. At a cost of more than $400 billion annually to U.S. organizations, defalcations can be fatal to any title insurance company. However, education is considered the first step in prevention. According to the ACFE, employees who receive regular and recurring training about the detrimental aspects of fraud are more likely to aid in controlling it. Are your employees educated?

Published: January 14, 2003

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