Please resolve an argument - is this legal?

My friend purchases a home a few years back ("in the boom" as we say), financed 100%, and recieved $10k cash back at closing. She cannot concieve why I think this is fraud! The builder inflated the price of the home, she purchased at the inflated price and got her cash after closing. She's very proud... show more My friend purchases a home a few years back ("in the boom" as we say), financed 100%, and recieved $10k cash back at closing. She cannot concieve why I think this is fraud! The builder inflated the price of the home, she purchased at the inflated price and got her cash after closing. She's very proud of herself, and consideres it a savvy move. I think it's illegal.
Remember - this is a purchase money, 100% LTV loan, not a refinance. I know people often DO get cash out of these, but my question is SHOULD they? I beleive it's in violation of some regulation, but not sure which.
Update: No, this person is not me. My friend is horrified that I'd accuse her of this ignorant fraud.
Update 2: Right, but on a purchase loan, lenders NEVER lend beyond the purchase price of the home, correct? This was a loan officer kickback.
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