Excerpted from an article by Patrick Pulatie, the CEO for Loan Fraud Investigations (LFI), a Forensic/Predatory Lending Audit company in Antioch CA. LFI has been doing homeowner audits since November 2007. LFI works daily with Attorneys throughout California, assisting homeowners in the fight to save their homes.

We recommend organizing and keeping every piece of paper relating to your home loan and keeping notes on all correspondence with your lender no matter what the stage of your loan. In our experience during the past few years, banks have proven repeatedly to be inept. THAT may save a home and/or if you are in good standing with your lender, it could be negotiating room to lower your interest rate. At this point, several members of the Families Fighting Foreclosure group have been trying for loan modifications for as long as two years, without success. It seems clear that the only way through this is by having a forensic audit done.

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.

What does this mean? 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 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:

1. Low Level or TILA/RESPA Audit: This 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, 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 cannot find the financing to replace the loan. Therefore, rescission is ineffective, and lenders know this.

   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, 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, ask them to explain the Securitization Process in detail. 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, view their website. If information is very general, it is likely that you are speaking with someone who is performing 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.

   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.

2. The second type of audit would be the Predatory Lending Audit. It is rare to find a firm that is competent in conducting this audit. 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.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 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.

   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.

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. 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 to look for:

• 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 affecting 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 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.
• 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.
• 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.
• 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.
• 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: 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.
• 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.

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.

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. Securitization is where the future battles in the Foreclosure Crisis will be fought, along with MERS and the Foreclosure Process in specific terms.

The real question to be asked: What can an audit do for you? 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.

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. The homeowner must recognize that having the loan entirely voided is not realistic in expectation.

Caution: Many “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.

Note: 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.

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.