Stated Income Loans and the Potential of Fraud

Stated income loans are essentially loans in which the bank performs no income verification. They basically take it for granted that the income stated in correct. These loans began to become popular in 2002 but there is a big potential of fraudulent activity in these types of loans.

Most Popular Loan Package

Because the bank does no income verification on these types of loans, they are extremely popular among the home buyers. Stated income loans on average are in fact about 37% of the total loans written nationwide, with the largest portions of these loans being written in California where home ownership has a high price tag.

Buyer Unaware

Surprisingly enough it’s usually not the purchaser who is the one to falsely state his or her income. It has been found that this fraud is general is committed by the loan officer or bank representative. The banks love these stated income loans because once it has been closed they can sell the loan to another lender or an investment company for the servicing of the loan, which in turn reduces the banks risk. This is a very profitable endeavor for them and that is what makes them so popular.

Who Buys These Loans?

The bank will usually take risky loans such as these and bundle them up into portfolios valued at millions of dollars and they will sell them off. Such institutions that buy these loan packages are:

  • pension Funds
  • financial Institutions
  • foreign Governments
  • life insurance companies and other such institutions

The sale of these stated income loan packages may occur just a few days after the loan has been funded in most cases.

Why is it Fraud?

When it comes to lending money, the banks take certain risks whether you have good credit or bad. Nearly anything could potentially happen. Their first line of defense is the loan originator such as the bank representative or a loan officer with the bank.

The bank depends on them to do at the very least some basic checking to ensure that what the borrower is telling them is correct. The loans officers however are in a position that they do not get paid unless the loan goes through, so what generally happens is the income is bumped “a little”. Bumping the income a little can not only end up in a disaster for the borrower who in the end faces the reality of losing their home if they default, but it can also cause losses on the pension or other investment fund that buys these notes. These stated income loans can potentially hurt everyone involved except perhaps the lender.

Why Not Eliminate Them?

The US Government is indeed looking into banking reform after the recent collapse of some major financial institutions. The fact is however that it takes time to look at things thoroughly, so presently these loans are still available to many despite the fact that banks have tightened the so-called lending belts. The fact is however, that the sooner these stated income loans are eliminated the fast the industry will be able to get back on its feet. It has been said time and again by experts that these types of “exotic” loan packages are what brought the housing market to its knees.