Only seven or eight years ago, mortgage fraud was one of the top stories in the industry. It was quite common to see stories estimating losses in the millions, with some experts suggesting that these numbers were only the tip of the iceberg. Lenders and their partners scrambled to strengthen their fraud-prevention strategies.
Of course, 2007-2008 turned the mortgage industry’s focus to even larger issues such as the subprime meltdown, the Great Recession and the rise of a new regulatory and compliance-focused landscape. Today, the collective eye of the lending industry tends to rest upon issues such as Ability-to-Repay, Qualified Mortgage or the impending change of the mortgage disclosure rules and forms.
While all of these are important and worthy targets of our attention, however, the issue of mortgage fraud remains. In spite of the efforts of regulators, legislators and enforcement agencies, mortgage fraud is alive and well — even growing in several states. Consider the following numbers:
Although suspicious activity in lending may be down overall, mortgage fraud still remains a major problem in certain areas across the country, including Michigan, California, New Jersey, Illinois, Arizona, Nevada and Florida, according to the 15th annual Mortgage Fraud Report by LexisNexis. (HousingWire, Feb. 11, 2014, Brena Swanson, “Top 8 States for Mortgage Fraud”)
Residential mortgage applications with fraudulent information totaled $10.5 billion in the first half of 2013. (CoreLogic 2013 Mortgage Fraud Report, Sept. 2013)
In 2012, the industry lost an estimated $13 billion as a result of fraudulent residential mortgage originations. (CoreLogic 2013 Mortgage Fraud Report, Sept. 2013)
As of March 31, 2013, the FBI reported 1,954 ongoing mortgage fraud investigations, with 72% involving losses of $1 million or more (Source: Federal Bureau of Investigation, www.FBI.gov)
These statistics reveal that the numbers concerning mortgage-related fraud still remain significant. That is why, even at a time when the cost of originating a mortgage loan is only going up, it is imperative that we redouble our efforts across the industry to combat mortgage fraud.
A PROBLEM THAT WON'T GO AWAY ON ITS OWN
Although as an industry we have made substantial headway combating this problem, our collective attention has been diverted in recent. Our compliance and quality control (QC) efforts have turned to a variety of new federal and local mandates, and retooling our organizations to ensure compliance with the new rules and regulations. This is when fraud (of all sorts) thrives — in the absence of vigilance. We know that the number and complexity of new fraudulent schemes is increasing exponentially. Fraudsters are becoming increasingly sophisticated and technologically savvy as well. As a result, we must evolve with them.
The vast majority of the Consumer Financial Protection Bureau’s efforts over the past two years have revolved around protecting the consumer. Mortgage fraud doesn’t just harm the lender — in fact, it’s the consumer who ultimately pays the biggest price. With transaction costs increasing for a number of reasons, the battle against mortgage fraud is also part of the battle to contain and even decrease the cost of origination.
HOW WE CAN FIGHT IT
As is the case in battling any complex threat, our efforts must be comprehensive. It begins simply by making fraud detection and prevention a key element of our risk-mitigation and quality control programs. A strategic combination of technology, policy/procedure, failsafe elements, QC initiatives and even collaboration with our partners is not only a good idea — it’s necessary to stave off this growing threat.
For lenders, a strong fraud-detection program could begin with carefully crafted closing instructions. A robust post-closing procedure, updated and effective fraud detection technology and multiple layers of quality control are, invariably, part of the strongest anti-fraud programs. It also takes good old-fashioned management discipline. Fraud prevention has to be set as a priority — and then lead from the top. It needs to be ingrained in a company’s collective culture. Training, ongoing education and awareness of the latest in fraudulent schemes take effort as well as technology, and are critical to minimizing fraud loss.
Lenders — don’t underestimate the importance of your partners in preventing fraud as well. From the closing agent to the title underwriter, you have several levels of fraud prevention built into the system already. Make sure they are effective. Are your title and closing partners using their own closing personnel, or do they use vendors? How do they select, train, monitor and audit those vendors? Similarly, how frequently are you auditing your partners as to their fraud-prevention efforts? Is past performance in detecting fraud a part of your selection process when you bring on a new partner?
As with so many other elements of quality control and compliance today, it’s important not only that a mortgage lender build a culture focused on risk mitigation and compliance, but that their strategic partners — appraisers, title insurance companies, closing agents and even vendor managers — do the same. At WFG National Title we are already seeing results with an internal program that financially rewards employees who detect and prevent fraud.
Recently, a senior title officer in one of our Washington offices recognized the name of an owner in a pending transaction. He followed up with some additional research, only to find that two of the owner’s associates were in federal prison and that the private lender involved in the pending transaction was actually the owner’s mother. Needless to say, after the irregularities were discovered and the parties failed to produce the requested additional documentation, the transaction was cancelled.
It takes multiple layers of vigilance to prevent fraud. It takes a combination of modern technology, policies/procedures and the human eye as well. But most important is that fraud prevention starts with the recognition that the threat remains very real, and very significant. Although we, as an industry, have a lot on our proverbial plates at the moment, it is nonetheless imperative that we not let our guard down when it comes to mortgage fraud.