Brokers originate and process approximately 60% of the mortgage lending business today. Because of broker originations, lenders no longer have an instinctive feel for borrowers — who have become anonymous in a broker-based system that pushes for faster closings and rule-bending.
There are two primary motivations for fraud: Economic pressure and peer pressure. Fraud can be economically motivated by rising rates that push a borrower’s mortgage payments higher, a builder that is operating unprofitably or a mortgage broker that is too willing to accommodate borrowers rushing to qualify for loans. Peer-motivated fraud involves borrowers that are trying to keep up with their neighbors.
Fraud For Housing
Fraud for housing is a situation where a borrower — who fully intends on making the mortgage payments — fudges on the application (“if I make the payments, who will it hurt?”) However, once a hardship hits, the loan goes delinquent and ends up in foreclosure because the borrower was right on the edge to begin with.
Fraud For Profit
Fraud for profit involves highly sophisticated schemes and usually involves numerous parties. In these situations, the delay in discovery is what the perpetrators depend on to accomplish their goals. By the time that loan hits the first payment default, they’ve made their money. Professional ‘scammers’ involved in fraud for profit have taken out an average of $37,000 to $40,000 per deal and sent it offshore.
The mortgage banking industry has built up a tolerance to minor misrepresentations. Mortgage fraud is rapidly becoming one of the busiest sub-departments in the white collar crime division of the FBI. The FBI says it would act on more mortgage fraud cases if it had more information on the initial suspicious activity reports. They also encourage individuals that are not from federally regulated entities to phone in information, because such information might add fuel to an ongoing suspicious activity report.
Approximately fifty percent of fraudulent loans had red flags that were missed. Perpetrators of mortgage fraud rely on the inability to discover the truth in a timely manner, lapses in prevention procedure and documents that they know probably aren’t strong enough to send them to jail.
Approximately one-third of loans in foreclosure have at least one form of fraud in the file, so the potential is there to prevent one-third of foreclosures. By quantifying the impact of fraud on the bottom line, firms can begin to see the value of fraud prevention. Therefore, one view is to measure how many loans Quality Assurance (QA) prevented from being funded involving fraud.
First, however, companies must develop QA procedures. Jacqueline Dryer — who was the moderator of the teleconference and the co-author of Mortgage Fraud: The Impact of Mortgage Fraud on Your Company’s Bottom Line — suggested including the following pre-funding steps in a fraud prevention program.
- Verbal verification of employment (VOE) and employer, including independent verification of the employer’s phone number. Also, performing the verbal VOE as close to closing a possible will help prevent fraud from a scam involving temporary phone lines set up specifically to verify the borrower’s employment.
- In-file credit reports, especially where a residential mortgage credit report was provided. Credit reports should be reviewed all the way down to the last line. One red flag is multiple trade lines that were recently paid, indicating a possible consolidation loan that is not yet showing on the bureau.
- HUD 1 closing statement review. Many fraudulent loans have unusual entries on in the seller’s column. HUD 1 red flags include unusual payoffs such as multiple payoffs, an even dollar amount mortgage payoff and payoffs for home improvements.
- Signed IRS form 4506. Requiring this form on the front end will discourage some fraudulent borrowers from completing the transaction.
- Social Security number validation.
- Verify the seller on the contract is the owner of record on the preliminary title report. This requires teaching employees how to read title reports. Other title red flags include delinquent property taxes, IRS tax liens and title work prepared for someone other than the lender.
- Specify in closing instructions if source of funds should be verified.
