Bob, Bill, Lou and Little White Lies

Bob Borrower wants to buy a house and needs a loan. Enter Bill Broker. When Bill reviews Bob's application, he finds that Bob doesn't make enough money and that Lou Lender won't finance the loan. But Bill knows that Lou has a loan program where, for a slightly higher interest rate, Bob can "state" his income rather than providing documentation to support it. So Bob, with Bill's encouragement, "states" that he makes $2000 a month rather than $1500. Bill submits the application to Lou, Lou agrees to finance the loan, and Bob gets his new house.

Six months later Bob is behind in his mortgage payments. This is a surprise to Lou Lender because all of his analytics tell him that with the income Bob claimed to have there's no reason he couldn't afford the house. And now it turns out that twenty loans Lou financed for Bill Broker have gone into default. After a little research, Lou finds out that in each case Bill knew that the borrowers, including Bob, didn't really make as much as they "stated."

That's called misrepresentation, which is really just a friendly was of saying fraud. Sure, Bill Broker wasn't committing identity theft, falsifying appraisals or pocketing money from loans where a borrower never even existed. In fact, what he did might just be considered a well-intentioned little white lie when compared to all the unscrupulous things he could have done. But the fact remains that Lou Lender entrusted Bill Broker with diligently providing accurate information when taking a loan application, and now Lou is left holding the bag on about $4 million in defaulted loans.

"Little white lies" can turn into big problems. That's one reason to make sure you only deal with folks who demonstrate they're tremendously unlikely to commit them. It's also why it's best to make sure Bill Broker isn't a felon. After all, what's a little white lie to him?