Real Estate Fraud in the age of Electronic Recording – Increased Danger or Possible Improvement?

1. Real Estate Fraud in the age of Electronic Recording – Increased Danger or Possible Improvement? Larry Walker Auditor/Controller-Recorder San Bernardino County

2. Introduction • Real estate fraud is a very real problem in California today. Cases are prosecuted on a regular basis, and many more allegations are not pursued because the proof just isn’t there. When we anticipate the impact of electronic recording on this existing legal environment, some important questions to ask are: • What specific behavioral actions are present in fraud cases today? • a. Why do they work? • b. Is prevention possible in a pre-ER setting? • c. What challenges does a prosecutor experience in pursuing the perpetrators • of this type of crime? • If electronic recording is implemented, what changes will result in the situations • discussed above? • a. Will existing criminal activities be made easier, or the effects accelerated? • b. Or might some criminal activities become more difficult, or be prevented • entirely? • What new dangers might arise because of the new ER operation? • a. Increased misconduct by signers or notaries? • b. Problems of proof because of format change, electronic storage?

3. Principles and Definitions • In asking these questions, and others that will arise, it’s important to identify key principles: • Efforts against real estate fraud can be broken down into major categories: • a. Prevention • i. Systems should be analyzed for factors that contribute to, or allow, real estate fraud, and modified to reduce or eliminate those factors. • b. Documentation • i. Certain information can be documented before a crime is known to exist, but which can become crucial to successful prosecution. • c. Prosecution • i. Aggressive efforts by Law Enforcement against perpetrators are important in the fight to combat real estate fraud.

4. Electronic Recording has many aspects • Many or most California recorders today have substantial electronic systems for imaging, storing and producing certified copies of recorded documents. • As known initially, the term ER described the remote scanning of an original document which was signed and notarized by hand, and its electronic transmission of the document to the Recorder for recordation, storage and future retrieval. I. In this process, the scanning now simply takes place before the presentation for recording, but the stored document looks the same as before ER. II. The original paper document is never seen at the Recorder’s office. c. In subsequent generations, ER involves the electronic creation, signature and acknowledgement of a document that may never exist in paper form until after it has been transmitted to the Recorder, recorded, placed in the image repository, and finally produced on paper as a certified copy.

5. Real Estate Fraud Prosecution Trust Fund • Regardless of whether ER is implemented in a county, I strongly recommend the establishment of a Real Estate Fraud Prosecution Trust Fund, as provided in California Gov. Code Sec. 27388. A County Recorder and District Attorney who work together, using the recording fees authorized by the law, can make major progress in attacking real estate fraud. The knowledge gained from the activities of a DA’s Real Estate Fraud Prosecution unit can be the foundation of efforts to design and improve prevention and documentation efforts in the Recorder’s office. • Some aspects of the Real Estate Fraud Prosecution Trust Fund: • 1. Requires adoption by Board of Supervisors • 2. Authorizes recording fee of up to $2 per instrument • a. Fee charged on Deed of Trust, Assignment of Deed of Trust, Reconveyance, Request for Notice, Notice of Default. • b. NOT charged on Deeds or … instrument [subject to Documentary Transfer Tax].

6. 3. Funds are sent to County Auditor for distribution • a. Admin charge by county cannot exceed 10%. • 4. Net funds go 100% to DA • a. Or funds can be distributed 60% to DA and 40% to local law • enforcement agencies [exclusively for real estate fraud work] • b. Distribution of the 40% to be directed by Real Estate Fraud Prosecution Trust Fund Committee, composed of: • i. DA • ii. County Administrative Officer • iii. County Consumer Protection Officer or appointment of Board of Supervisors

7. Case Studies I am indebted to Larry Roberts of the San Bernardino County District Attorney’s Office for the following information, which describes in broad terms the general categories of real estate fraud activities. (My disclaimer: Any legally inaccurate or inappropriate reference or rendition contained herein should be considered my responsibility, and not reflective on the DA’s office).

8. Forgery of a Deed or Deed of Trust A major category of current criminal activity is the bald forgery of a deed or deed of trust. This crime always involves a notary public. a. The notary may be a knowing partner in crime, or b. The notary may be an unwitting victim of the perpetrator. Case #1: a. The perpetrator, acting as a loan broker, received $120,000 from the private “lender” victim for placement as a loan. b. The perpetrator kept the money, but forged a deed of trust in the name of the victim “borrower”, recorded it and delivered it to “lender”. c. When “borrower” discovered the deed of trust on his property, the perpetrator forged a Reconveyance in “lender’s” name and recorded it.

9. The forgeries were made possible by the negligence of the notary public. She was casual about the care and custody of her notarial seal, and the perpetrator/broker had gained easy access to it. • This case confirms the importance of the notary public in the recordation process. If that part of the system is broken, even in a case of simple negligence by a notary, no appropriate action by the Recorder will stop the crime. • Case #2: • In several cases notary signatures and seals have been scanned, then electronically cut and pasted into documents that were later recorded. Theoretically, a recorder, who is tasked with assuring that an original signature is on the document, would be able to catch this wrongdoing, but sophisticated scanning and printing equipment make it more difficult to enforce, even in the paper world.

10. Case #3: • In many cases, the notary public is deeply involved in the criminal scheme. The notary simply acknowledges a signature, knowing that it is a forgery. • Tip-off: Lack of corresponding entry in the notary journal • If entry is present, look for missing fingerprint, CDL or other identifying information. • Comment from DA – “It is surprising the number of notary journals in cases of this type that simply “disappear”, either through being misplaced or having been stolen.”

11. Procurement of a Legitimately Signed Deed or Deed of Trust by Trick or Device • The obtaining of a legitimately signed Deed or Deed of Trust by trick or device generally involves a variation on a foreclosure scenario. • Case #4: • Property owner is in distress. • Property owner is talked into signing a deed, normally a grant deed. • Perpetrator promises not to record unless borrower defaults. • Borrower may not be told the document is a deed. • The signature(s) on the deed are genuine. • The notarial acknowledgement is genuine. • BUT the resulting recorded deed was recorded in violation of the representation under which it was obtained. • Borrower loses his/her property.

12. This category of crime is more common than one would expect. Representations by perpetrators tend to be oral, therefore difficult to prove, in spite of recent changes in foreclosure laws that help prosecutors. • Marital Dissolution • Case #5: • Many cases involving a false or forged deed arise in the context of a dissolution of marriage. • Prosecutors are often wary of these cases based on lack of corroborating evidence. • However, successful cases have been pursed where a party in a divorce forged or otherwise falsified the signature of a spouse on real estate documents in an effort to hide or encumber marital property. • Again, most of these cases involve a negligent or complicit notary public.

13. General Comments about Real Estate Fraud Cases • The “cases” discussed here are not a statistical sample, nor are they five distinct criminal prosecutions. They reflect one prosecutor’s experience and knowledge of real estate fraud law, and of the acts that damage some people’s lives and result in jail time for others. With that in mind, some themes emerge: • Notaries Public play a monumental role in real estate transactions. Their malfeasance or negligence is involved in a large number of criminal acts. • Many fraud cases take place on the fringes of the real estate world. Private investors place large sums with mortgage brokers. Divorcing parties record various documents. People facing foreclosure deal with “sub-prime lenders”. Few of these transactions would come through the main channel of real estate activity that, at least initially, would be the source of electronically recorded documents.

14. Opportunity Presented By Electronic Information Systems • Electronic Recording is attractive to many in the real estate industry, for a variety of reasons. Speed and efficiency are often cited, but they translate into money: • A better bottom line for the private sector • Reduced cost to the public • The business case must be financially attractive to both sectors in order to keep ER moving forward, and it does appear that a well thought out ER system will enable all participants to benefit financially. • In addition, the employment of information systems in the handling of recorded documents may offer additional benefit in the area of real estate fraud. Phrased as a question, could advancing technology in the area of data bases and the exchange of information enable future efforts to combat real estate fraud that are impossible today?

15. Consider the example of the banking industry. Not long ago, companies wrote checks and banks honored those checks. It was up to the bank to determine validity of signatures. Today, substantial responsibility has been shifted to the company writing the checks, and a system called positive pay enables the bank to quickly compare a presented check with a list of checks the company has transmitted for the day’s processing, enabling the prevention of a significant amount of fraud. • What would be the analogous situation in the recording industry? The California requirement to file completed Notary Journals with the County Clerk appears to have been an attempt to create a reference system. Perhaps an information system could create a database of notarial acts which could ultimately be linked to electronic recording systems. • Notaries public would regularly report their lists of documents notarized, with appropriate descriptive data, to a county or state database, via the internet. • Electronic recording processes would search the Notary database for the entry that corresponds to the acknowledgement on their document.

16. A match would provide a positive basis for recording. • A failure to find a match would initiate a follow-up process to determine exceptions justifying recording, or the reject. • This is a radical suggestion that would need much discussion of all interested • parties, and much refinement. It does, however, hint at the tremendous • potential opportunity offered by electronic recording systems in the effort to • curb real estate fraud.

17. Challenges presented by Electronic Recording • For now, the County Recorder employing Electronic Recording does well to concentrate on the security of the system. In our experience in San Bernardino County (SBC), the key factor is knowing your submitter. We allow three types of ER, and the consistent theme of our requirements is establishing the identity of the submitter – both organizational and individual. • Electronic Submission – the scanning of a paper document and electronic transmission to our office via internet with SSL encryption (“The San Bernardino County Model”) • a. MOU created between SBC and submitter • i. 24 hours of corporate training in system and security requirements. • ii. Includes list of individuals who will process submissions • 1. Must have no fraud-related criminal record. • 2. Two hours of individual training. • 3. May not be a Notary Public. • iii. Biometric confirmation of individual processing submissions.

18. Electronic Recording – Transmission of document images via internet (SSL • encryption) for recordation. • a. Submitter approved by SBC. • i. Includes list of individuals who will process submissions • ii. Facsimile signature of authorizing party on file • b. Submitter required by SBC to contract with InGEO for actual • transmission services. • c. InGEO provides authentication and security from submitter through • InGEO to SBC. • Government to Government • a. Previous relation established by agreement • i. Franchise Tax Board • ii. SBC Treasurer/ TaxCollector • b. Facsimile signature of authorizing party on file • c. Transmission is by pre-arrangement with parallel transmission of • data describing type and quantity of documents submitted.

19. Summary • Electronic recording is a relatively new technology, being applied to a very traditional business activity. Based on this presentation, I suggest the following: • Few current cases of real estate fraud arise from improper functioning of the recording process. • A large percentage of real estate fraud cases involve the kind of transactions that are unlikely to be recorded electronically. • The greatest effort to combat real estate fraud should be addressed to Notaries Public – qualifications, policing, and liability. • ER could actually provide an enhanced platform for attacking real estate fraud, with sufficient forethought and planning. • In the short term, ER systems should focus on the identification and authentication of submitters, and the security of the transmission processes employed

20. Questions/Comments Larry Walker San Bernardino County Auditor/Controller-Recorder (909) 386-8813 larrywalker@acr.sbcounty.gov