Archive for September, 2009

Forensic Loan Audits – Debunked and Demystified

Wednesday, September 30th, 2009

If you have something insightful to say and would like to contribute an article, .

When researching loan modification companies or attorneys, one will often see a reference to the firm doing a “Forensic Loan Audit” of your documents. It is claimed that the audit will “discover violations of TILA/RESPA, find fraudulent misrepresentation, and identify the terms of your loan, fees and other “pertinent” information. Then, you should take the audit to an attorney who can use it to achieve a loan modification, or file a lawsuit.

What does this mean? Is it valid? What is the real story behind audits? This article will try and clear up the subject for better understanding.

A Forensic Loan Audit is a process that involves the examination of all of your loan documents.  The purpose of the audit is to find violations within your loan documents that can be used to your advantage under the Truth In Lending Act or the Real Estate Settlement Procedures Act. These pieces of Federal legislation are the guidelines for lending and the disclosure of costs related to any loan. Remedies for violations are damages for up to one year, and a Three Year Extended Rescission for specific violations of required “material disclosures”.

There are variations of Audits, but essentially there are only two true types of audits:

  • Low Level or TILA/RESPA AuditThis audit is the “typical” audit that most companies perform.  It is software based, and it looks primarily for Truth In Lending and RESPA violations.  The purpose of this audit is to attempt to achieve “rescission” of the loan.  Rescission means that you are entitled to cancel the loan.  However, cancelling the loan does not mean that you get the home free and clear, as some people would lead you to believe.The problem with rescission of a loan is that to cancel the loan, the borrower must be able to “tender an offer” of all money borrowed from the lender, minus all costs of the loan and all payments.  The outcome is to “restore” all parties to a state of being prior to the loan being taken out.  In California (as in most other “bubble locales”), most homeowners, for various reasons, have no ability to tender this offer.  Most often, the lack of ability to tender the offer is that the homeowner cannot find the financing to replace the loan. Therefore, rescission is ineffective, and lenders know this.  (See more in my earlier IamFacingForeclosure article, ).There is an “Enhanced” version of the TILA/RESPA audit. This audit purports to look for evidence of fraud, fraudulent misrepresentation, breach of contract and other issues with the loan. The problem with “Enhanced” audits is that the firms who are attempting to look for such only do so upon a superficially. They look at the loan from a myopic level and never dwell deeper in what has occurred.To determine if you are dealing with a firm using either of these approaches, just ask if they use software for the audit and Truth In Lending Disclosure results. If so, you know that they are likely a “Low-Level Audit Firm”. To further determine the firm’s audit ability, just ask them to explain the Securitization Process in detail, and watch them stutter. Or ask them about the technical aspects of the Foreclosure Process and have them explain it in detail. Or ask them about MERS. These firms do not understand these topics and will typically not be able to offer explanations of such subjects nor can they explain the underlying issues regarding these topics.

    Finally, just look at their website. If information is very general in detail, it is likely that you are speaking with someone who is only doing the low-level audit. Additionally, if the website quotes a court case and or a specific law, but offers no analysis of the underlying decision, you can certainly bet that the firm is a Low-Level Audit firm.

    Most attorneys have major issues with these type of audits. In each category, they simply announce whether the applicable test was “passed or failed”. No other explanations are given. The attorney is then left to come up with the reason for the failure.

    If litigation is involved, then the attorney is at a great disadvantage. To receive a Temporary Restraining Order or a Preliminary Injunction, the complaint must be argued with “specificity”. This means that the allegations must be described in detail, explaining what has occurred, and often how it occurred. With the TILA/RESPA audit, even if violations are found, the violations are not described for a “specificity” argument. Often, LFI has been contacted by attorneys using these audits for assistance in what the actual findings meant, and then for instructions on how to argue specificity. Once we have explained and given them guidance, they seek to use LFI.

    By the way, it should be mentioned that the reason for most Temporary Restraining Orders to be denied is specificity of the arguments.

The second audit that you may find would be the Predatory Lending Audit. It is rare to find a firm that is competent in conducting this audit. That is because it is performed by hand, requires people who not only understand the lending process, but is well versed in not just TILA and RESPA, but is also very familiar with many other Statutes at the State and Federal level. A competent firm doing this type of audit will know Securitization inside and out, be able to obtain Pooling and Servicing Agreements, 10-K filings, FWP documents, Mortgage Loan Purchase Agreements, and then know the Foreclosure Process in detail for their state.

  • Predatory Lending AuditThis audit is the “High Level” audit.  The purpose of the audit is to determine everything that happened regarding the loan.  It identifies not just TILA/RESPA violations, but also numerous other violations designed to allow attorneys to file lawsuits to stop foreclosures and to win damages.  There are very few companies who can do a “quality” Predatory Lending audit.  This is because to do such an audit, one has to be familiar with court processes and the thinking of lenders and their defensive posturing. The LFI [Ed. Note: - LFI is the author's company] audit is a Predatory Lending Audit, designed to assist attorneys in the lawsuit.  It is a “Living Audit”, constantly being revised due to the increasing case law and also due to LFI developing new tactics and legal challenges for attorneys.

To effectively perform a Predatory Lending audit, the audit must be done by a professional familiar with the loan process, forms, regulations, lender practices and broker practices. To be equally effective, the auditor must also understand the laws pertaining to not just disclosure requirements, but often contract law, tort law, civil law, foreclosure law, and other pertinent statute.

Most important is that an auditor must be part detective and part mind-reader. That is because the auditor is dealing with only a portion of the loan file, the portion that has been provided to the borrower by the broker and the closing documents by the title company and lender. Missing will be all the loan documents that the lender has generated for approving the loan. This includes underwriting approval, doc order forms, rate lock requests, rates sheets, and other various documents related to the approval. Usually, the Appraisal is absent as well. As a result, the auditor must use industry knowledge, common sense and intuition to fill in the gaps as to what happened with the loan.

To develop a competent “Predatory Lending Auditor”, it takes my company 4-6 months to train an auditor to a level where he is considered competent and capable of performing audits on his own with no supervision.

Once a Predatory Lending audit is completed by the auditor, it should not be sent out to the client. Instead, it should be reviewed by the head auditor for final sign-off for accuracy

( LFI uses a “two part review” whereby after the initial review is completed, I do a final review on each and every audit to determine that the audit is completely accurate, and that nothing has been missed. Usually, I will still find violations, mostly as a result that I have done audits for so long, I pick up on violations that may occur once every 500 audits or less. Such violations cannot be taught, instead they can only be learned through experience.)

There could be nothing worse than to walk into a courtroom with inaccurate data, and when testifying, being confronted with such an error by opposing counsel. That immediately undermines the credibility of the audit, the auditor, and the legal team that the audit was performed for.

This is a list of some items that LFI will look for.  (This list will omit some issues found in audits or go into significant detail of other items because they are in the process of preparing the arguments for major Class Action Lawsuits that are in the works.  These issues and arguments have been developed at a great expense of time, effort and money to develop these ideas. It is the development of such ideas that sets us apart from all other companies.)

  • Fraud Fraud can consist at many different levels. It might just be the loan officer lying about the terms of the loan, or the falsification of the loan application through employment, income or omitting relevant information. Forgery and backdating of documents found to be more common than what would be originally thought.
  • Notary Fraud We have found two such cases in the last month. Each of these cases affected the Deed of Trust. As a result, the Deed of Trust was void, and all foreclosure proceedings stop immediately, since by law, the Deed of Trust enforces the Note and if the Deed of Trust is void, then there can be no foreclosure.
  • Negligent/Fraudulent Misrepresentation Negligent Misrepresentation or Fraudulent Misrepresentation covers any representations, statements, or comments, written or oral made by the loan officer, broker, notary or anyone else which contradicted the terms of the documents or other material issues.Fraudulent Misrepresentation can be applicable to certain loans whereby it can be argued that the loan documents did not present a clear and definitive picture of the loan, and the documents that might lead a reasonable borrower to another conclusion as to the terms of the loan. A California Federal Court has ruled in one such case that the “terms of the note may be unenforceable”.
  • Breach of Contract The note and its riders are a contract executed by the lender and the borrower. The lender must follow all the terms of the contract such as the way the interest is calculated, and the penalties it assesses. The terms of the note should be examined and compared to the servicing of the loan to determine if any terms in the contract were not followed by the lender.LFI sees breach of contract constantly in a certain type of loan from a specific lender. As well, we see violations of calculations of interest rates on adjustable rate mortgages quite often.
  • Lack of Good Faith and Fair Dealings Lack of Good Faith and Fair Dealings can cover a myriad of different issues. It could be in the approval of the loan, in dealings with foreclosures or loan modifications, or a host of different issues. To spot Lack of Good Faith and Fair Dealings, the auditor must know the statute and case law quite well.
  • Unfair and Deceptive Acts and Practices Unfair and Deceptive Acts and Practices is the general term for certain Statutes at both the Federal and State level. These are general catch-all statutes that can be used for a variety of practices that lenders and brokers have undertaken.
  • Yield Spread Premium Yield Spread Premium is the payment to a broker of a fee by the lender for placing the borrower into a higher interest rate loan. LFI has developed the arguments for attacking Yield Spread Premium, and if it is seen in an audit, it is likely that the arguments have been taken from LFI.
  • Negative Amortization Negative Amortization is the process of placing a borrower into a loan that offers a monthly loan payment that results in the loan balance increasing monthly. Court cases attacking Negative Amortization have failed because the attorneys have not adequately pled the action with specificity. After reading tens of cases regarding Negative Amortization, I believe that attorneys will now have an effective manner of arguing the allegations using the information in our audit.
  • Elder Abuse Many states have statutes regarding the abuse of Elders or those of diminished capacity. Often, these statutes have the ability to void the Note in its entirety. To understand when to apply Elder Abuse, the auditor must have an understanding of the Elder Abuse Statutes and case law.
  • Spanish or Foreign Speaking Homeowners This is another of those Statutes that can be of major importance in California and other states. In California, if the conversations with the loan officer were in one of five different languages, then certain loan documents must be in that language. This will be of major importance in future cases, but for now, very few attorneys even know this.
  • Foreclosure Process Examiner of the Foreclosure Process is one of two areas that audit companies consistently fail to address. Likely, this is because if one is to understand the foreclosure process, it consists of taking the time to understand not just the CA Civil Code Statute for foreclosure, but it also requires understanding MERS, Securitization, Commercial Code and many other provisions of law.It also requires the reading of lawsuits across the country to understand how courts are currently interpreting law and causes of action. There will be more to come of this shortly.As a result of studying the Foreclosure Process in great detail, LFI has estimated that up to 70% of all foreclosures in CA may likely be unlawful in California. We are currently working with large “entities” to prove this is the case, and recent case law has supported this work.
  • Securitization Of the few firms doing Predatory Lending Audits, you will only be able to count on the fingers of one hand those that will attempt to review securitization. The reason is that Securitization is an incredibly complex issue, and to understand it fully, the auditor needs knowledge of not just the lending process and the selling of loans, but he also needs to understand finance, the selling of bonds, tranches, and rating of such monetary instruments. As a result, only a few firms are capable of reviewing Securitization. Yet, Securitization is where the future battles in the Foreclosure Crisis will be fought, along with MERS and the Foreclosure Process in specific terms.

What can an Audit do for you?

That is the real question to be asked. What can an audit do for you? It is a question that is difficult to answer, since every audit is different in results and the results will often determine a course of action that the attorney might recommend for you.

  • If nothing is found in an audit, and this is most likely with a 30 year fixed, full income documentation loan, then prepare to “throw yourself to the mercy of the lender”.
  • If the Audit is a TILA/RESPA audit, then the best that you can most likely hope for is a Loan Modification. The Modification may offer some principal forbearance or reduction. Rescission is not a likely result since to rescind, you must be able to “tender back the money borrowed” minus certain loan costs and all interest payments made.
  • If you have a Predatory Lending Audit, then your chances of a favorable loan modification increases greatly. This is because you have options available to you in a Court of Law that are above and beyond TILA/RESPA remedies. These options can result in favorable loan modifications, sometimes “major” principal reductions, and principal forbearance. On the rare occasion, when something as significant as Notary Fraud is found, then the potential results are magnified greatly. I have seen, though not often, the loan voided in its entirety. But just because this has happened before, it is not to be expected, and the homeowner must recognize that this is not realistic in expectation.


I have tried to present an objective article about the Forensic Auditing Industry. However, it is difficult since I am an active participant in the industry, and certainly have my own biases.

Currently, this industry has turned into the “Wild West” again, with the influx of un-employed loan officers buying Audit Software and conducting TILA/RESPA audits. They believe that just having the software “entitles” them to be called auditors. They are only in pursuit of the money, and nothing else. (It should be noted that most of these loan officers will never admit to culpability in the Foreclosure Crisis, but instead blame the borrower or the lender only. This is when it is readily apparent that we were all complicit.)

Even worse, these “auditors” have not studied the laws, nor have they studied the case law on the subjects at hand. As a result, they make claims about what an audit can do for you, and the claims are widely misrepresented or even completely false. As a result, homeowners again suffer from the actions of the same loan officers who harmed them by placing them into the Predatory Loans in the first place.

In final, I would be remiss to not point out the following:

  • If you are considering having an audit done on your loan, and you will be doing the loan modification yourself, do not have an audit done. That is because you most likely have no idea how to present the audit. Once you have given the Servicer the audit and claimed all of the violations present, then the lender will deny everything, and you will then come back to the audit company saying that the company is incompetent or a scam.Any audit company who would perform an audit under those circumstances, knowing the borrower intends to attempt the modification on his own, is simply taking advantage of the homeowner, and does not have the best interests of the borrower at heart.

I hope that this presentation has expanded your knowledge of audits, their purpose, and what can be accomplished. In the right hands, an audit, done correctly, can be a powerful tool for the attorney and the homeowner. However, an improper audit, done poorly, and in the hands of an inexperienced attorney or homeowner, makes for great starter material for the barbeque or the fireplace, on those cold winter nights when you want to keep warm, while sleeping in a tent.

Disclaimer: Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.

The trading room is part of a triumvirate have a glance at this hyperlink of finance a portfolio management program where students manage $2 million in real funds called the fenner fund

What do you think of peer-to-peer lending (,,, etc.)?

Monday, September 28th, 2009

Personally, I think that peer-to-peer lending is an excellent idea. It increases the return for investors and reduces the rate for lenders (vs banks). It is also perfect for small loans and short-term loans, which banks don’t even offer. My biggest concern is that everything has a time and place, and this is DEFINITELY not the time (for potential lenders), although hopefully the US will become the place.

Internationally, Peer-to-Peer defaults are <5%. I wouldn’t be surprised if they were in the 20%-50% default rate here and now. We already know that the average US consumer spends more than they earn (incredible!). So what happens if they are able to get money on the internet and faced with a choice like this:

a) pay mortgage
b) pay car loan
c) pay for food
d) pay for gas
e) pay anonymous lender on the internet

So while 8%-20% rate of returns are tempting, I would wait until the attitudes (and debt) adjusts before getting into this in the US. What are other opinions on the subject?

I have been a lender on since March 2007, with about $2,400 invested. Although my projected ROI is currently about 9%, I stopped lending in October for a variety of reasons all linked to Prosper’s management. Basically, the best way to summarize Prosper is that it is a wonderful concept, executed horribly due to the incompetence and arrogance of management.

There are too many serious problems with Prosper to list here, but brief review of, which is the largest Prosper forums, will provide anyone interested with a long list. Here are a few:

1) The default rate on Prosper is MUCH higher than advertised. Chris Larsen, Prosper’s CEO has been quoted in news articles saying the default rate is 2.7%. While perhaps technically accurate using Prosper’s narrow definition of "default," this is utter balderdash from any real perspective. Prosper only counts a loan as defaulted when it sells it to a junk debt buyer for pennies on the dollar. However, Prosper currently has such sales only quarterly, so it is not uncommon for there to be many loans that are 5, 6, 7, or more months late. Historically, loans almost never come back from being even 3 months late, so all of these loans are defaults in everything but name. Moreover, Prosper calculates its official default rate as the number of defaults divided by the number of loans, but because many loans are too new to have defaulted even if the borrower never made even the first payment (which happens far more often than you might think), this also tends to understate the default rate. So far as can be seen, the real default rate appears likely to be close to 20%.

2) Another problem with Prosper’s handling of defaulted loans, is that the process completely lacks transparency. Prosper flatly refuses to disclose the identity of any of the junk debt buyers that have purchased defaulted Prosper loans, the identity of (or even the number of) any junk debt buyers that have sought or been solicited to participate in the junk debt sales, the process Prosper uses to advertise the junk debt sales to possible buyers, or the method used to calculate the sale prices of the various defaulted loans. Prosper lenders – who, after all, actually OWN the defaulted loans being sold by Prosper for pennies on the dollar – have no idea whether Prosper diligently and/or successfully obtains as high a price as possible for the defaulted loans, or simply sells them off to the first buyer it can find, regardless of price. For that matter, without transparency there is no way to be sure that Prosper doesn’t simply sell the defaulted loans at a favorable price to a company controlled by a Prosper insider. Given Prosper’s many other shortcomings, there is no good reason to believe that Prosper handles the junk debt sales in an appropriate and competent manner. Moreover, there is at least one piece of evidence that it doesn’t. Long before the last junk debt sale, a lender and forum member made a firm offer to purchase a particular loan that was headed to default. He made this offer by sending it certified mail, return receipt requested, to Prosper’s VP of collections and to its General Counsel. Prosper completely ignored this offer for almost two months, and then sent a rejection letter at the same time it sold the loan (along with others) to a junk debt buyer for considerably less than what had been offered to Prosper. This unjustified rejection by Prosper collectively cost the almost three-dozen lenders on that loan $500, which was the difference between the rejected offer and the actual sales price to the junk debt buyer Prosper chose to sell the loan to instead.

3) One of the contributing factors to issue #1, is that Prosper’s collections are anemic. When a loan turns 1 month late it is turned over to Prosper’s collection agency, but historically, only around 15% of loans in collections are brought current. There have been many anecdotal stories by late or defaulted borrowers on Prosper’s old forums that they either were never contacted by the collection agency, or the contact consisted of an email or 2 and maybe a phone call or two. Prosper’s own newly-hired VP of Collections admitted that the call logs from the collection agency showed that they were repeatedly trying to contact borrowers at the same time of day, such as between 3-5 pm, so if the borrower worked during the day, no contact was made.

4) Very little information about the borrowers is verified by Prosper. Prosper selects a subset of fully-funded listings to verify employment and income, but many listings become loans without such verification. Prosper has already had to repurchase about $400,000 of loans under its ID-theft guarantee, meaning that Prosper let many fraudulent loans through its systems. Indeed, there is one case (identified by a diligent forum member) where one person obtained a dozen loans from Prosper under different identities. After the forum member outed this on the old forum, Prosper repurchased the loans and sued the borrower in Los Angeles Superior Court to get its own money back. However, there is substantial doubt among the lending community that Prosper tries very hard to identify ID-theft loans, because when it does, it has to repurchase them from lenders.

5) Although Prosper has funded a number of fraudulent loans, it has also cancelled a number of legitimate loans, apparently through incompetence. One such loan involved the brother of a well-respected Prosper lender and very active forum participant. After claiming that faxed documents were illegible and then that Prosper couldn’t open a .pdf file, it cancelled the fully-funded listing with no opportunity for the borrower to resubmit the documents. There have been many other Keystone Kops situations involving Prosper’s verification.

6) Related to issue #5, Prosper’s customer service is terrible. Often, they let the phone just ring and ring without answering it. When you send an email, the response is often irrelevant boilerplate. Lenders used to provide a lot of Prosper’s customer service for free on their old forums.

7) Prosper’s advertising is highly misleading in many ways, if not downright fraudulent. They overstate interest rates in ads directed to lenders, and understate them in ads directed to borrowers. Prosper was caught once apparently having photoshopped a screen shot of an actual listing in an advertisement about the rate (changing the actual rate to something more beneficial). Also, Prosper has repeatedly sent out mass email ads featuring borrower and lender testimonials that were quickly proven to be false. After the first time, Prosper admitted that it hadn’t verified the facts claimed by the person, and said it would do so in the future. But whoops, they promptly did it again (in a different testimonial) in the next ad.

8 ) Prosper used to have a vibrant community on its official forums, with about 400,000 posts. These forums were an amazing learning experience for lenders, so that new lenders could avoid the mistakes of their predecessors. Prosper banned me from the forums and from lending (although I had already publicly announced that I had stopped lending due to Prosper’s mismanagement) because I sent a bunch of PM’s to new lenders alerting them to the existence of Prosper’s own official forums. Then, the day before Thanksgiving, Prosper deleted its entire forum with no notice, in an effort to hide the truth from new lenders. It then replaced the old forums with a super-moderated version that is completely useless (every post must be approved before being posted, which often takes days even when the moderator lets it through).

9) When another forum member made an archive of the old forums available on, Prosper had its lawyers send a threatening letter seeking to take the domain away on baseless trademark, unfair competition and cybersquatting grounds. Undoubtedly, Prosper figured this person would cave in and take down the site. Instead, he retained a lawyer from Public Citizen, who responded to Prosper’s letter by explaining how Prosper’s claims are entirely without merit. Both letters are posted on the site. Prosper has yet to respond.

(10) Prosper also misappropriated thousands of dollars of lenders’ money by charging its servicing fee on loans that were more than a month late, contrary to Prosper’s own legal agreements. This too was discovered by yet another forum member. Prosper admitted that its action was "in error," but only recently returned this money to lenders despite having promised to do so months ago.

(11) Another significant issue is whether Prosper will even survive as a company for the three-year term of its loans. As can be seen on, loan originations have been essentially flat for the last nine months, and Prosper’s CEO has admitted that loan originations need to increase 400%-500% in order for Prosper to turn a profit. Given that, clearly the outlook is troubling. Although the Prosper Lending Agreement specifies that if Prosper goes out of business the loan servicing will be taken over by another servicing company, there is no guarantee that any such company can and will be found, or that the transition will go smoothly, or that the new company won’t require higher fees in order to do the servicing.

The above issues are really just the tip of the iceberg. If anyone is considering lending on Prosper, do your due diligence. Read, and check out the actual performance of lenders on For example, you will see that looking at ALL moderately seasoned lenders on Prosper (those with >20 loans and >6 month average loan age), the median projected ROI is around a mere 4.5%. That is close to what E-Loan is offering on its FDIC-insured, 100% liquid

Game of thrones’ stars to appear on carpool karaoke’ by dan pye monday, march 13, 2017 starkpool karaoke