Reprinted from the August 3, 2009 edition of The Legal Description, October Research Corp.

Deed fraud is on the rise across the country, and county recorders are scrambling to find cost-effective ways to circumvent the troubling new flavor-of-the-month fraud that is undermining the viability of the land recording system. The problem is particularly challenging for title agents tasked with ferreting out fraudulent deeds, and their failure to do so can result in significant claims and court challenges.

With this type of fraud becoming more prevalent than ever, what are recording offices doing to protect themselves, their constituents and the title agents who utilize their offices and what can title companies do to educate their agents and abstractors concerning the detection of these false documents?

Problems With Detecting Deed Fraud

Paula Lingo, chief legal advisor at the Cook County Recorder of Deeds Office in Illinois, has seen her share of mortgage and deed fraud in the past few years and, along with other recorders across the country, is seeking new methods of verifying the validity of documents coming through her office.

Jeff Nicholson, chief deputy for the Tarrant County Clerk in Tarrant County, Texas, said he has noticed that deed fraud has become much more prevalent in the past year, as well as fraud relating to mineral rights, which are recorded in much the same manner. He has witnessed at least one large-scale deed fraud scheme.

John McGauley, recorder for Allen County, Indiana, on the other hand, said that the only type of deed fraud he has witnessed, or heard of in other parts of the state, were family members stealing from one another, but its the ones he doesn’t know about that scare him. McGauley said that most often deed fraud gets discovered by property owners when they go to sell property. A title searcher will come into the recorder’s office and discover that the property has been conveyed to somebody else without the knowledge of the recorder’s office or the property owner.

In one of the most recent and most noteworthy cases in Tarrant County, Nicholson said a person who had inherited some property drove by the property and found someone working on the house. When research was done, it was discovered that the property was transferred without the heir’s consent.

This discovery led to an investigation by the county’s district attorney that uncovered fraud related to real property and fraud related to mineral rights. That case is currently under investigation.

McGauley said it is almost impossible to identify fraudulent deeds by sight because various entities make it easy to create a deed. He said the Fort Wayne Journal Gazette worked with the county recorders to prove the ease of perpetrating this fraud by actually filing a faulty deed for a commercial building in Fort Wayne, Indiana. He said the reporters were able to get a deed that looked very official off the shelf at an office supply store.

County Recorders’ Role
McGauley pointed out that, in Indiana, most of the verification process happens before the document gets to the recorder’s office.

“Identity verification is the job of a Notary in Indiana,” he said. “Once it gets here, we don’t do any verification because state law doesn’t allow us to. We could ask for ID, someone could decline to provide it, and we would still be required to record that document.” He said recorders are becoming increasingly wary of how easy it is in Indiana to record a document.

“Everything you need to commit this kind of fraud in Indiana is a public record in Indiana,” McGauley said. “A legitimate title searcher or someone with criminal intent can walk in and have the same access [to the property records].”

McGauley has told his employees that if there are things that make them question the validity of the document, they should let McGauley or his deputy recorder take a look at it. “We can’t reject these things based on a hunch, but we can be a little bit more diligent and make some phone calls to make sure the person who is allegedly relinquishing title to the property actually is doing so,” McGauley said.

In addition, McGauley said a law in Indiana designed to help county recorders and title agents make recording documents go smoothly, may actually be preventing recorders from identifying property fraud.

In the last few years, recorders began accepting and recording copies. McGauley said it was designed to help legitimate title companies record documents, even if they couldn’t find the original document, but being able to record copies is also going to aid a property thief. He said, for instance, the fraud that was recently uncovered in Allen County never would have been recorded if recorders were unable to accept copies. Taking away this law, however, would hurt legitimate filers more than it would stop fraudsters.

Lingo also emphasized that employees in her office look over the documents to make sure the essential elements are there, but the office has no police power, so employees have no way of verifying, overseeing or going beyond the recorded pages of the document to affirm that the information in the document is correct and the deed is not fraudulent.

Nicholson agreed that this was his challenge in Texas as well and said that it was difficult for the Tarrant County Clerk’s Office to also get a handle on the extent of this often hidden fraud.

“In the case of this last group, once it was discovered by one person, it appears that the same person had perpetrated a number of fraudulent acts, but it is really difficult to say how many have been done because you don’t know what you don’t know,” Nicholson said.

Notaries: The First Defense
As most recorders are unable by law to verify the information on a property deed or other real estate related document, it is up to the Notary to do their due diligence in verifying the identity of those signing the documents and to be on the look out for red flags to alert them that the document they are notarizing may be faulty.

Bill Anderson, vice president of best practices and eNotarization at the National Notary Association, said that there are some things a Notary should always do to be diligent in conducting a transaction. For one thing, he said, a Notary should always require the grantors to be in the Notary’s physical presence during the notarial act. Notaries also need to make sure that they exercise diligent care in identifying the grantors because impostors will often try to come before Notaries with dubious identification credentials.

“Certainly there may be a spike in this kind of fraudulent act in recent months due to the economy and the real property market, but [these] are things we are constantly teaching our Notaries about,” Anderson said.

He also said a Notary should never notarize a document that has blank spaces. For example, the document may not have the legal description for the property included in the document. Notaries may not be able to do anything to protect themselves from someone copying their signature and seal from a recorded document, but Notaries can make sure they don’t allow others to use their seals.

Anderson said that Notaries should always keep their seals locked up and in their exclusive control when it is not in use. There are also some red flags Anderson said a Notary should look out for when notarizing a deed or other document. For one, if a Notary notices any evidence that the grantor is not signing of their own free will, the Notary should decline to notarize the document.

Another red flag would be if the grantor doesn’t seem to have a full understanding of the transaction; that should also make the Notary question the validity of the transaction. He also said Notaries should have a working knowledge of what constitutes proper identification in the state and be on the look out for fake IDs.

Alert!
To help property owners act quickly to address fraudulently recorded deeds on their property, many counties, including Allen County and Tarrant County, are implementing electronic alert systems for their constituents.

Deed fraud has not become an epidemic in Indiana as it has in other states, such as Illinois, and McGauley said that recorders in his state are putting safeguards in place to prevent this type of fraud from occurring, including the use of electronic alert technology. McGauley said that the product Allen County uses, Property Fraud Alert, which is offered by its land record system vendor, Fidlar Technologies, is almost like a credit monitoring service. Once a person signs up for the free service, it will provide that person with a phone call or eMail alert whenever a document is recorded with their name on it. This alert is sent out within a few hours of something being recorded. Over 7,000 people have signed up for the alerts.

Nicholson said that thousands of people in Tarrant County have signed up for the county’s alert system in the month that it has been up and he knows of several neighboring counties that are in the process of implementing similar systems. McGauley said the product was fairly inexpensive to implement. He said the county put the product in place for less than $4,000 so it cost about 50 cents a person to help combat this fraud.

Lingo said that the Cook County Recorder of Deeds was instrumental in having legislation passed in Illinois that requires a quit claim deed notification card to go out to the last owner of record whenever a quit claim deed is filed. If the former owner is aware of it, they have nothing to worry about, but if they are not aware of it, they are told to investigate the matter at the recorder’s office, collect documentation of the fraudulent deed and then contact an attorney to see about quieting title.

Future Legislative Action
Many recorders feel at a loss to help prevent fraudulent deeds from being recorded in their offices. Most are statutorily required to file any complete documents that are presented to them.

To help combat this, McGauley said the Indiana Recorders Association is looking at pursuing legislation that would let recorders in the state put in place some protective measures to try to contain deed fraud, including a requirement to have Notaries capture a thumbprint.

“What that does is gives you a little more proof that the person who [signed the document] actually did it,” McGauley said. “It is also a real deterrent to somebody who’s recording something fraudulent.” He said that fraudsters would be hesitant to provide proof on the recorded documents that they signed it.

McGauley said that when he was talking to a local police officer, the officer told him that had the fraudster who was caught a few weeks ago been required to provide a thumbprint upon recording the faulty deed, the police could have arrested the perpetrator.

Lingo said that the Cook County Recorder of Deeds was instrumental in getting similar legislation passed in Illinois and hopes the new law will help eliminate some of the fraud. Anderson was pleased this year to find that several states have introduced legislation that would require Notaries to obtain a complete journal entry for each notarial act they complete. He said that several states already have laws on the books requiring Notaries to keep journals of their transactions and that such requirements are great fraud deterrents.

“It is a great fraud deterrent because an impostor will not easily leave a signature or even a thumbprint in the Notary’s journal for fear that incriminating evidence might be left behind linking them to the crime,” Anderson said.

Anderson said he expects to see more states require Notaries to keep Notary journals after the National Conference of Commissioners on Uniform State Laws releases for consideration by the states its revisions to the Uniform Law on Notarial Acts, which has a provision requiring Notaries to keep Notary journals.