A nominee loan is a loan in which a third party substitutes for the real borrower. Based on its own merits, a nominee loan is considered neither illegal nor unethical. In many cases, however, some borrowers can use the structure of a nominee loan structure to deceive a lender into approving a loan that would not normally meet the lender's standards. Any deception on the part of borrowers using nominee loans is illegal and can result in severe criminal penalties.
Reasons for Nominee Loans
A nominee loan starts with the third party, also known as the "straw borrower," applying for the loan on behalf of the real borrower. As with a typical loan, the lender verifies the borrower's credit score and capabilities to repay the loan. The straw borrower stands in for the real borrower in cases when the real borrower's credit has been overextended or if the real borrower has a poor or insufficient credit history.
In several cases, nominee loans have been used to finance fraud schemes. Garland Lee Waldroop II, an Oklahoma businessman, was convicted of bank fraud in 2005 after using nominee loans. According to court documents in the case of "U.S. vs. Waldroop II," Waldroop used his employee, David Chandler, as the straw borrower on a series of nominee loans. Waldroop was convicted of using the proceeds from these loans to buy a pickup truck, a race car trailer and two Corvettes.
Bank Managers and Officers
Because nominee loans must go through the standard approval process, many bank managers and officers become implicated in nominee loan schemes. In 2003, an investigation by the FBI led to the conviction of a bank president and a straw borrower for their roles in a nominee loan fraud scheme. The banker allegedly helped the straw borrower increase his credit limit at the bank, but the banker took the money and invested it in a real estate development.
The best way for a borrower to avoid the conflicts that come with a nominee loan is to find a co-signer for the loan. A co-signed loan gives the original borrower the benefits of the co-signer's credit history because the co-signer takes legal responsibility for the loan's repayment. Co-signer loans are perfectly legal and allow the original borrower to work transparently with the lender while developing a good credit history.
- U.S. Department of Justice: Nominee Loans
- Federal Financial Institutions Examination Council: The Detection, Investigation and Prevention of Insider Loan Fraud -- A White Paper
- FindLaw: U.S. vs. Waldroop II
- Bankrate: The Basics of Co-Signing a Loan
- U.S. Financial Crimes Enforcement Network: Ex-Bank President Guilty in Loan Fraud After Investigation Initiated by Suspicious Activity Report Filing
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