Wednesday, May 15, 2013

Settlement Agent Cops Plea To Siphoning Off Closing Proceeds From R/E Deals, Failing To Pay Off Existing Liens; Bag-Holding Title Underwriter Expected To Cough Up On $ubtantial Claims

From the Office of the U.S. Attorney (Pittsburgh, Pennsylvania):

  • A resident of Butler, Pa., pleaded guilty in federal court to charges of conspiracy and money laundering, United States Attorney David J. Hickton announced[]. Jeffrey Garbinski, 44, pleaded guilty to two counts before United States District Judge Cathy Bissoon.

    In connection with the guilty plea, the court was advised that Garbinski owned and operated the Closing Company of PA ("Closing Company"), which closed residential real estate transactions.

    Sabrina Spetz was an attorney who closed many of the transactions at issue. Garbinski also operated a mortgage broker business called Main Street Mortgage Services, which did business as Asset Mortgage and Financial Services, Inc., and he was a title insurance agent.

    Closing companies have trust accounts. What is supposed to happen is that the money from the lenders funding the loans goes into the trust account. At or shortly after the closing, those funds are disbursed consistent with the lender's instructions and the settlement statements. Most significantly with regard to this case, is that liabilities associated with the collateral are supposed to be paid immediately. Thus, the liens related to the property are paid and the lender stands in first lien position.

    Rather than immediately paying the liabilities, Garbinski, with Spetz's knowledge and assistance, siphoned money from the company for years to support his lifestyle and for other business ventures.

    He would then use the money from the next transactions to pay the liabilities from the previous transactions.(1)

    He would pay the monthly mortgage payments on the outstanding mortgages that should have already been paid to avoid discovery of his fraud.(2) Eventually, the liabilities grew so large that Garbinski was no longer able to pay the liabilities and he filed for bankruptcy.

    Although Garbinski committed this scheme regarding customers of the Closing Company, he also committed this scheme with his own personal residence. Dollar Bank funded a $600,000 loan to Garbinski arranged through his mortgage broker business and closed by the Closing Company.

    Basically, the loan through Dollar Bank was a typical refinance transaction in which all of the liabilities associated with the collateral, which was Garbinski's personal residence, were supposed to be paid off. Garbinski submitted a loan application that failed to report two significant mortgages on the property, and he also arranged to submit fraudulent title search records that did not reveal the two mortgages.

    Long after the loan closed, Dollar Bank discovered that they were in third lien position rather than first lien position. Now that Garbinski has filed for bankruptcy, Dollar Bank expects to suffer a total loss on that loan because the sale of the collateral is unlikely to pay off the first two liens on the property.

    Ultimately, the title insurance company will likely have to pay substantial claims because of this fraud. The Closing Company was a representative of Fidelity National Title Insurance Company ("Fidelity").

    Fidelity conducted an audit of the Closing Company of PA pursuant to the title insurance contract between Fidelity and the Closing Company. As part of that audit, Fidelity requested and obtained from Spetz bank statements that did not show the fraudulent withdrawals because the statements had been altered by Spetz at Garbinski's direction.
For more, see Butler Man Pleads Guilty In Mortgage Fraud Scheme.

(1) This maneuver is commonly referred to as a Ponzi scheme.

(2) These payments, typically made in the context of a Ponzi scheme, are often referred to as "lulling payments," intended to delay the discovery of the fraud by "lulling" the unwitting scam victims into a sense of security (lulling the victim to sleep, so to speak), in an effort to conceal the true nature of the scheme.

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