The HUD-1 and Reality

by James L. Goldsmith, Esq.

You probably have a good idea about what constitutes perjury; someone takes an oath to tell the truth and it is later discovered that the oath-taker lied. Did you know that in Pennsylvania it is also a crime to give false unsworn verifications? Many HUD-1 Settlement Statements include a warning to this effect above the signature lines. The standard settlement package also includes a form to be signed by the buyers, sellers and the settlement agent verifying the accuracy of the settlement statement, that includes the warning that falsely verifying the accuracy of the HUD-1 constitutes a crime. FHA and VA financed transactions include similar forms. Why is it, then, that off-the-record financial exchanges are so commonplace?

The answer is often borne out of a not-so-bad motive, coupled with a great deal of ignorance. Part one, the motive part of the equation, is that mortgage lenders and salespersons, and others connected with a transaction, want to help buyers get the properties they so desperately want. Buyers are buying all that they can afford (and then some), and many can benefit from a little "creative financing." Part two, despite all the news coverage and all that we have heard about mortgage fraud, some mortgage brokers and real estate licensees still don't get it: THE HUD-1 MUST STATE, WITH COMPLETE ACCURACY, THE FULL FINANCIAL ACCOUNTING OF THE TRANSACTION. In other words, there can be no parking lot exchange of money that does not show on the Settlement Sheet. When, by intent or design, the transaction is different than what is stated on the signed HUD-1, there is fraud.

More than a few real estate licensees have experienced firsthand the sting of failing to follow this rule. The severity of the punishment depends on the licensee's role in the fraud. Almost always, the licensee will have his license suspended or revoked, and in the most egregious cases, suffer jail time. Anyone who plays a principle role in proposing to misstate the financial aspects of the transaction on the HUD-1 will likely pay the heavier price.

More often than not, real estate licensees are on the sideline of transactions in which the settlement statement is prepared inaccurately. Perhaps the real estate salesperson has been fooled into believing that a mortgage broker's proposal to substantially elevate the purchase price and have the seller "pay" a greater cash contribution from a "bogus" second loan given by the seller is okay. The victim of such a scheme is the mortgage lender who then loans more money believing that the property is worth more. With so much written in the subject of mortgage fraud, a licensees' excuse that he "didn't know" is less likely to be believed than ever before.

Of course, the purpose of the article is not to better acquaint you with the fraudulent schemes. There are too many; and falsely raising the sale price is among the more frequently occurring examples. Fraud, however camouflaged, can be avoided by assuring that the HUD-1 clearly reflects where the money goes. When you observe that the HUD-1 is at odds with what is really happening, you have an obligation to yourself and your client to advise the client in writing that inconsistencies between the HUD-1 and reality may constitute a crime, and they need to get a legal opinion from an attorney before signing it. If the client insists on going forward, this may be a settlement to avoid! You are entitled to be paid if you have done your job and you have given appropriate warning to the parties in writing. Speak to your own counsel first.

Copyright © Brett M. Woodburn, Esquire, CALDWELL & KEARNS, P.C., 2008

All Rights Reserved

Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at