A nominee loan is simply one in which a third party stands in for the actual borrower. In and of itself, a nominee loan is neither illegal nor unethical. However, in many cases, the nominee loan structure can be used to mislead a lender into making a loan that it would not otherwise make. Those nominee loans are fraudulent and can carry criminal penalties.
A nominee loan starts with a third party that does not plan to hold onto the loan proceeds or make the loan payments. She applies for the loan, letting the bank lend the money to her based on her income and credit. Once the loan is approved, she forwards the funds to the actual borrower. The actual borrower then makes the payments either directly to the lender or to the nominee so that she can pay the lender.
Nominee loans are frequently used as part of mortgage fraud schemes. A buyer with bad credit finds someone with good credit to stand in his place. That person with the good credit then buys the house and lets the true buyer live in it and make the payments. However, since the payments really aren't being made by the qualified borrower, the loan ends up defaulting when the unqualified buyer can't make his payments. Nominee loans are also used as parts of other mortgage fraud schemes because they allow the criminal behind the scheme to use someone else's good credit to get favorable loans.
Nominee loans made involving a bank insider are especially touchy from a legal perspective. Bank insiders, like board members or senior management, are frequently able to access funds to borrow on preferential terms. When they serve as the straw man in a nominee loan, federal regulators are much more likely to look at that loan as being fraudulent as not. In some cases, an innocent intent isn't enough to protect that insider from legal sanctions.
If you legitimately need help qualifying for a loan, you don't have to hide behind a third party. While nominee loans can be technically legal if you disclose what you're doing and you don't have the intent to defraud, they still frequently fall in a grey zone. However, if you have the party you would have used as a nominee co-sign your loan, that arrangement is perfectly legal. With a co-signed loan, you still use that person's financial strength to get access to financing, but you're also responsible for the loan. Not only is this completely above the board but, if you successfully pay the loan, it will benefit your credit, as well.
- Stewart Title Guaranty Company: Mortgage Fraud: What to Look For - What to Do
- Federal Financial Institutions Examination Council: The Detection, Investigation and Prevention of Insider Loan Fraud: A White Paper
- US Department of Justice: 806 - Nominee Loans
- Texas Department of Insurance: Mortgage Fraud Resource Page
- Bankrate.com: The Basics of Co-Signing a Loan
- Comstock Images/Comstock/Getty Images