Again today we see the Mortgage Fraud Blog - Perp Walk and have 10 new articles to review. One caught my eye.
In This Issue...
Businessman Sentenced for Loan Application Fraud
Foreclosure Rescuer Sentenced to 25 Years in Prison
Serial Fraudster Sentenced for Real Estate Scam
2 Charged for Loan Modification Fraud
Californian Charged with South Carolina Mortgage Scam
Fraudster Jailed for Defrauding Lenders
Man Sentenced for Fraud Involving 1031 Exchanges
14th Defendant Sentenced for Time Share Purchase Scam
Man Arrested for Foreclosure Scam
Real Estate Executives Sentenced for Mortgage Fraud
Search Mortgage Fraud Blog - Perp Walk
The one story that caught my eye was the seventh story involving a 1031 Exchange. If you engage the linked story you will read Rachel’s description of how the intermediary mishandled the client depositors’ money and when it came time for them to complete exchanges the money was no longer in the account. This is a nightmare scenario for buyers/sellers entering into a 1031 Exchange. One way to guard against it is to insure the exchange transaction. I contacted Ken Tharp at Iowa Equity Exchange and asked what options are available and which he uses to insure the transaction.
For those who aren’t familiar with what a 1031 exchange or tax deferred exchange is, follow this link. It’s a legal mechanism for selling one property and buying another while deferring income taxes till another day dawns. For a slightly more technical explanation follow this link to the 1031 Iowa Exchange. [See Section 1031 Exchanges - The Basics with printable pdf. This is really an excellent one-page printable pdf.]
I asked Ken Tharp to comment on client funds being secure and how the transaction can be secured.
“It’s interesting to me how few of our clients ever ask even a single question about the safety of their funds. Our documentation addresses the issue to some extent, but it is curious that most people don’t ask about the issue before we get to the point of producing documents. Either Iowans and Midwesterners are a pretty trusting group or I have perfected the art of seeming trustworthy over the phone, or perhaps a little of both!”
Here is what Ken had to say.
Your questions really encompass several concerns. Exchange clients should be concerned about the safety of their funds from the perspective of not only intermediary malfeasance, but bank failure, too.
The FDIC currently (through the end of 2012) insures non-interest-bearing accounts in any amount. Most depositories that intermediaries would use for their accounts carry mandatory FDIC insurance to cover bank failure, but the client should not necessarily expect the FDIC to maintain the same level of liquidity of his funds as the depository provided. Bank failure can result in delays in accessing funds, so the client should inquire as to the specific bank or depository institution that the intermediary proposes to store the funds. That way, the client can at least do a cursory investigation of the bank’s ratings to verify that failure is unlikely.
Intermediary malfeasance is the greater issue. Larger exchange companies often tout that they maintain a fidelity bond, and certainly there is some value to a bond for the client. With a bond, if the money is misused and/or disappears, chances are good that the client will eventually see his money, or some portion of it. Fidelity bonds are essentially insurance, though, and we all know of stories of insurance companies delaying or denying payment for supposed violations of the policy. In all likelihood, there will be a delay while the claim makes its way through the system, which will jeopardize the successful conclusion of the client’s exchange. A better alternative to the bond, in my opinion, is the dual signature system. Using this arrangement, the client establishes a direct contact with the intermediary’s depository institution. Any time the intermediary attempts to transfer funds out of the exchange account, the client is contacted and asked for authorization. Using this method, the intermediary would be stopped in his tracks if he were to attempt to move funds inappropriately.
A couple of other notes on safety: First, in my opinion, it is important that the client’s funds be placed in a separate, segregated account tied to the client’s federal tax ID number. Pooling or commingling of funds is never a good idea. Second, the existence of an errors and omissions insurance policy is something else that the client would be wise to verify.
At Iowa Equity Exchange, we seek out banks with strong ratings as our depository. We have chosen Luana Savings Bank of Luana, Iowa, as our primary bank partner because they consistently maintain very high ratings among the various bank rating agencies. Luana allows our clients to contact our representative at the bank directly to establish a unique procedure for the client to authorize any fund transfer requests. Each exchange we handle has its own individual, segregated bank account. And we maintain an ample E&O policy. We believe that this combination, along with other precautions and safeguards, provides our clients with the highest level of safety available in the industry.
Hope that helps! Let me know if you have any questions or need any clarifications.
Thanks Ken and for clients involved in 1031 Exchanges make sure to protect the transactional funds against theft.
To contact Ken Tharp ---
Ken Tharp, President
4800 Mills Civic Parkway, Suite 205
West Des Moines IA 50265
800-805-1031 toll free
INTEGRITY. PRECISION. SECURITY.
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