As Gov. Deval Patrick’s administration prepares to file a bill that would criminalize mortgage fraud, a Massachusetts trade association is asking its members to report on incidents of fraud within their ranks.

The Massachusetts Mortgage Bankers Association is passing the tips on to state officials, but without reference to the identity of the person filing the complaint.

“This is Whistleblowing 101, and we are doing it with the encouragement of regulators,” said MMBA Executive Director Kevin Cuff.

The trade group sent out an e-mail to its 400 member companies, including affiliate members who are appraisers and attorneys, on April 19, urging them to detail “abuses, scams and schemes in the mortgage process.” Members are being asked to call an 800 number set up by the association or fill out a form MMBA has set up for that purpose on its Web site.

Cuff said he began thinking the group could serve as a clearinghouse for reports from within the industry following a program the organization hosted on April 12. Attended by more than 100 originators and mortgage company owners, the program featured former Florida loan originator Jackie Free, who was convicted of mortgage fraud under federal statute and has crafted a career warning industry practitioners not to make the same mistakes.

“Following that program, people began to call me. They told me about scenarios of fraud that were taking place, but had concerns about the business-to-business relationship and client privilege in an attorney situation,” Cuff said. “It got us to thinking that we could [offer] a way for the businesses to provide information.”

Regulators, he said, have indicated to him that they’re “leery” of accepting reports from identified mortgage industry members because they might wonder if there’s “a compromising relationship” between a complainer and the company or individual targeted. They worry, in short, that someone might have an ax to grind.

“But as an association, we don’t care about that,” Cuff said.

Cuff reviews the reports personally. He said had received 26 by the middle of last week, including reports of schemes involving straw buyers, inflated home appraisals or pressure on home appraisers to overvalue properties, and reports of false income statements on no- or low-documentation loans. He said he has passed on “most” of the complaints, after verifying their origin and stripping them of the reporting party’s identity, to the state Division of Banks and Massachusetts Attorney General Martha Coakley.

DOB Chief Operating Officer David Cotney and Amie Breton, a spokeswoman for Coakley, said their agencies welcome all reports of fraud. They have always accepted such reports, both said – indeed, both maintain hotlines for that purpose – and when there’s enough information, they act on them. Most reports to date have come from consumers, legal advocacy groups or anonymously.

Cotney said DOB is happy to accept an additional information source. “If people are more willing to provide [reports of fraud to a trade group rather than directly to regulators], that’s fine,” he said.

His agency is most interested in specific names of consumers and companies, redacted copies of consumer disclosure forms, and the like, he added. Documentation of the problem is especially helpful, he said.

One common type of tip DOB has been getting all along is newspaper ads for mortgage companies that are not licensed to do business in the Bay State, dropped in the mail anonymously.

“Those are among the easiest. They [brokers and lenders] are supposed to print their license number in the ad. If they don’t, either they are advertising improperly or they’re unlicensed, which is of course more serious,” Cotney said.

Indeed, the Massachusetts Department of Consumer Affairs and Business Regulation, which oversees the Division of Banks, issued consumer alerts last month about an “advance-fee loan scam” offered by Amcorp Capital, an unlicensed entity with a fake Boston address; and a separate, unnamed “illegal payday lender,” both of which had advertised in the free newspaper Boston Metro in mid-April.

Banking Commissioner Steven L. Antonakes has asked Boston Metro not to run ads from the companies, and consumers who believe they were affected have been invited to call DOB’s consumer hotline, 1-800-495-BANK (2265).

‘A Black Eye’
The MMBA’s campaign is not without controversy among some members.

“I have had some people call me and ask me why we are doing it,” Cuff acknowledged. He said it’s an easy question to answer.

“I tell them it’s because there have been an inordinate amount of cases that have come across my desk that have detailed fraud. I have a mechanism and a sounding board to ask for the industry participation [in putting that information before regulators]. The industry has a black eye,” Cuff said, and MMBA is trying to be proactive about restoring professionalism to the trade.

Some Massachusetts lenders said industry practitioners might still be shy about submitting complaints, even anonymous ones.

“I have not seen fraud or documents related to a fraudulent event,” said Jim Picciotto, president of Framingham-based Patriot Funding, an MMBA member. “But the question is, how would I be in a position to know it’s occurring? I think it’s going to be hard to say, ‘I didn’t see him robbing the store, but I know he did it.'”

Steve Archard, a Brockton-based lender and broker who works for Mortgage Master Inc., said he would be unlikely to witness any fraud in his current position, since he works mostly on his own from his home.

He agreed it is unlikely that someone not involved in a fraudulent scheme would know about it.

NE Moves Mortgage President Bill Mullin said he thinks the anonymous reporting is “a great idea,” but said most incidents of fraud involve virtually everyone in the lending process, including real estate agents, customers, lenders, appraisers and attorneys.

“It’s really hard to [commit fraud] without lots of people involved,” he said.

Of course, an involved party could have second thoughts about fraudulent activity.

“At any point, somebody could open their eyes and say, ‘this isn’t right,'” Mullin said.

Archard said he believes the problem of “suitability,” or risky mortgage loans being offered to inexperienced borrowers, may be more pervasive than actual fraud.

He cited the example of a South Shore woman he recently encountered who, he said, had an option-ARM loan [an adjustable-rate loan in which the borrowers selects how much to pay each month, opening the possibility of negative amortization] on which she had made some minimum payments and now owed 110 percent of the original loan amount. Because of that, her monthly loan payment was recalculated from $1,800 to $4,500 in one month, he said.

“That’s not considered fraud, but it’s just plain wrong,” he said.

Defining Moment
Regulators are directly confronting the need to better define what constitutes fraud in Massachusetts in the bill the Consumer Affairs and Business Regulation department, with DOB, plans to file this month.

No-documentation, stated-income loans are legal, but knowingly misrepresenting someone’s income on a loan document currently is considered fraud, Cotney said. Knowingly misrepresenting the value of a property or pressuring someone to do so also constitutes fraud. Massachusetts offenders face the loss or suspension of their licenses and fines if caught, but the planned legislation could also make these acts criminal offenses.

Those who commit fraud face criminal penalties under U.S. law, although, Cuff said, jurisdiction or the physical ability of U.S. prosecutors to follow up on mortgage fraud is less certain. Criminalizing fraud at the state level would add a new layer of deterrent and enforcement, he said.

Free, who spoke to MMBA in April, was convicted under U.S. mail- and wire-fraud statutes, according to Cuff. Georgia is presently the only state that has criminalized mortgage fraud, although eight others are considering it.

One local lender, who asked not to be identified, said the secondary market, which in recent months has severely limited the type of borrower eligible for fraud-prone no-documentation loans, will be more effective than regulation in reducing fraud.

Picciotto said today’s real estate market also will help reduce fraud.

“The biggest mask for a bad loan is rising home prices,” he said, because a borrower owning a home with an inflated price can continue to resell or refinance, but only as long as prices rise.

Mullin and Archard said existing laws already address many unethical and fraudulent industry practices.

Archard said he gets regular e-mails from Mortgage Master and banks with which he works noting and interpreting requirements of the Real Estate Settlement Procedures Act (RESPA), the 1975 federal law that requires federally insured lenders to disclose all settlement costs, practices and relationships to purchasers of residential real estate.

Mullin said Section 10 of the U.S. Code Title 18, which currently is referenced on documents for loans to be guaranteed by government-sponsored entities Fannie Mae or Freddie Mac, already criminalizes many fraudulent practices.

It’s a federal crime to make false statements on the documents, which lenders have to sign, he noted.

“People have been sent to jail for these types of things” already, he said.

The Massachusetts Mortgage Bankers Association hotline to report fraud is (800) 720-MMBA (6622).