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Alt-Documentation Loans at Greater Risk of Fraud

Report discusses bank statement loans

Nov. 30, 2016

By Mortgage Daily staff

A new report says that residential loans which are underwritten using alternative documentation are more susceptible to fraud.

Mortgage programs that utilize banks statements and letters from certified public accountants are more risky than traditional loans.

Such alternative document programs carry greater risk of income fraud. In some cases, additional documentation might be required.

That is according to the report, Short-Term Bank Statement Loans Carry Heightened Risks, from Moody's Investors Service.

The ratings agency said that programs which require banks statements for just 12 months or less present the most risk because the shorter window requires underwriters to make assumptions about the prospective borrower's total income.

"While a typical bank statement program uses 24 months of bank statements to demonstrate income, those that allow borrowers to provide less than this have the highest risk of income fraud," Moody's stated. "Not only does the shorter window mean that underwriters must make assumptions about a borrower's total income, but fewer bank statement won't reflect the stability of the borrower's income over a period of time."

In addition, short-term bank statements might not comply with the Consumer Financial Protection Bureau's ability-to-repay rule.

"Lenders can reduce this risk by verifying bank statements directly with the bank, using targeted pre- and post-quality control processed that focus on income fraud risk and providing underwriters with specialized fraud training," Moody's said.

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