Mortgage Fraud Analysis: Part III

Few would dispute that mortgage fraud has been a growing problem. In this third of a three-part series, MortgageDaily.com looks at the prevention of fraud.

By August of 2002 the FBI had already been watching the Cleveland office of mortgage lender American Home Loans for more than two years.

Corrupt employees, appraisers, accountants, mortgage brokers and loan originators — were suspected of fabricating loan applications with phony W-2s, tax returns, bank statements and employment and income histories.

“As a result,” Chris Swecker, assistant director of the bureau’s Criminal Investigative Division, told a Congressional committee last fall, “industry insiders were able to circumvent the safeguards of numerous finance companies.”

But using an undercover operation the FBI identified more than 150 targets, 23 search warrants were executed and 94 people were indicted, among them two accountants, four title company employees, five appraisers, eight underwriters and a staggering 40 loan brokers.

“The FBI is committed to increasing liaison and education efforts and partnering with federal, state and local law enforcement and private industry to combat mortgage fraud,” Swecker said, according to a written draft of his testimony to the House Financial Services Subcommittee on Housing and Community Opportunity.”

A crackdown by law enforcement using undercover techniques that sometimes include wire taps is just one of the fronts in the nation’s growing battle against mortgage fraud.

There is no doubt that fraud has become a significant criminal problem in the mortgage industry. The FBI has reported it has 642 mortgage fraud cases pending, when it had just 534 for all of last year. Suspicious Activity Reports for mortgage fraud, which are basically tips about potential fraud investigated by the federal government, jumped from 4,220 in 2001 to 17,127 last year.

So what can be done to prevent mortgage fraud?

Many law enforcement officials, mortgage lenders, industry experts, security companies and others agree that the best way to fight fraud is a multitiered approach that includes cooperation between the industry and law enforcement, quality control measures enhanced through technology, a better method to report mortgage fraud and tougher laws.

In a stark recognition of the growing problem of fraud the Mortgage Bankers Association, or MBA, launched a Web site earlier this year with the express purpose providing education and information to track, discover and eradicate instances of fraud.

“This online resource is designed to be a one-stop shop for the industry to gather the information and tools they need to combat this problem,” the MBA said in a statement.

The site includes fraud alerts and recent news about fraud, a resource library and information on how to learn more about fraud detection and prevention.

Fraud prevention services are readily available and are becoming big business. Most rely on software and technology to help lenders detect fraud by performing detailed analysis on the process surrounding mortgage loan applications.

Just this month, Sysdome Inc.and AppIntelligence, two leading providers of fraud protection services, announced a new name for their merged company: Interthinx.

Interthinx products and services will allow lenders to interpret and validate loan application and third-party data electronically, permitting them to identify errors and fraud indicators on the front end of loan origination, the company said in a statement.

Marta McCall, senior vice president of Risk Management for the American Mortgage Network, told Congress on behalf of the MBA last fall that mortgage lenders are increasingly investing in technology to reduce the risks of fraud.

“The huge sums lenders spend on detecting and preventing fraud prior to closing are necessary for mortgage companies in our current system because lenders bear practically all the risk of fraud,” McCall told House Committee on Financial Affairs Subcommittee on Housing and Community Opportunity, according to a written transcript of her testimony.

McCall said some lenders are using electronic reviews of data known as Automated Valuation Models, or AVMs, “that attempt to validate the appraisals determination of value and check for fraud red flags.”

Technology is important but communication between the industry and law enforcement is vital and needs to be improved, she said.

“The current system is viewed by lenders as unidirectional,” McCall said. “Mortgage lenders report fraud, but never hear back about their reports. A feedback mechanism could benefit both lenders and law enforcement. Lenders could implement internal policies based on the feedback as well as provide additional support to law enforcement based on the feedback received.”

The MBA and the FBI have begun working together on “tools that could be developed that would enhance communication, such as regular reports from law enforcement to the industry summarizing the types and locations of reported frauds they are receiving.”

But reporting suspicious activity can be a challenge. Brokers simply aren’t permitted under law to discuss some of the financial and other information included in the mortgage loan process. And law enforcement officers are prevented from saying much about open investigations into mortgage fraud.

“Communication between mortgage lenders is hampered by the fear of lawsuits if one company discloses to another the results of its investigations into fraud,” McCall said. “Some form of ‘safe harbor’ is critical for the type of communication necessary for the industry to protect itself, and consumers, against fraud.”

To increase the flow of information the FBI supports the creation of “safe harbor” provisions for lenders, appraisers, brokers and other mortgage professionals that would be designed to increase the flow of info between the mortgage industry and federal authorities.

“The ‘safe harbor’ provision would provide necessary protections to the mortgage industry under a mandatory reporting mechanism,” Swecker said. “This would also better enable the FBI to provide reliable mortgage fraud information based on a more representative population in the mortgage industry.”

The MBA has also called for help from lawmakers and policy makers in drafting more uniform laws in dealing with mortgage fraud enforcement and reporting issues.

Many states do have laws that use licensing and registration to track brokers, appraisers, loan officers and others in the industry.

“Unfortunately, there is a lack of uniformity among these state efforts, which can lead to loopholes that criminals can exploit in moving from one state to another,” McCall said. “MBA believes that his patchwork system should be examined for potential improvements.”

But the best way to tackle mortgage fraud is by putting the bad guys in jail, McCall said.

“There is no substitute for strong law enforcement that aggressively prosecutes those who commit mortgage fraud and sends a clear message to those who contemplate it,” she said.