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Fraud risk factors at closing increased almost 90% last quarter

Contributing to the risk of wire and title fraud in Q1 were significant regulatory and risk challenges

As housing professionals navigate regulatory changes and accelerated tech adoption, wire and title fraud risk factors in mortgage and real estate closings increased almost 90% in the last quarter. According to an analysis by MISMO-certified wire and title fraud prevention Fintech FundingShield, wire and title fraud risk factors in mortgage and real estate closings saw an increase of 87.79% overall across all transaction types in Q1 2021. These risk factors increased from 19.02% in Q4 2020 to 35.75% in Q1 2021.

FundingShield noted that a variety of risk factors could be contributing to these numbers – for example, compliance issues and an increase in transaction data errors. In fact, the report found that 58% of loans that had at least one issue contained multiple errors per transaction.

Other risk factors included problems such as invalid representations by closing agents, invalid/expired licensing, invalid/unregistered title documents, transactions not booked in title insurers’ systems and unauthorized practice of law (UPL violation risk). Wiring and bank account issues such as wire fraud attempts, altered wire account information, compromised bank accounts, and merged and/or closed or otherwise inactive bank accounts also played a part in the increased risk to wire fraud and funding control issues.

Regulatory changes and challenges

Contributing to the risk of wire and title fraud were significant challenges in the regulatory and risk areas for lenders during the first quarter of the year. Updated regulations and an eye toward tighter enforcement have raised new potential for compliance issues – and changes can also provide opportunities for bad actors to insert themselves into the process.

On March 1, 2021, the use of the new Uniform Residential Loan Application (URLA) became mandatory, per Fannie Mae and Freddie Mac, after the impact of the coronavirus delayed last year’s planned implementation. Lenders could begin using the new URLA form, which includes 48 new data points, on Jan. 1, 2021, but it became mandatory after March 1.

In order to use the updated URLA as mandated, lenders needed to ensure that the new form was supported by their tech stack. Otherwise, implementation could potentially disrupt the origination process and lead to errors contributing to fraud risk. These workflow changes required resources from lenders to ensure compliance, which could potentially have taken resources from other risk management areas.

The first quarter of 2021 also saw a changeover in leadership as the Biden administration entered the White House. President Biden appointed FTC Commissioner Rohit Chopra to lead the Consumer Financial Protection Bureau, signaling for many that the administration could be preparing to return the CFPB to a more stringent watchdog status.

A more active approach to enforcement means lenders are likely preparing to work even harder to ensure compliance, while keeping an eye out for any regulatory changes. FundingShield has cited numerous lenders reaching out to discuss closing agent compliance strategies, given indications that third-party service provider oversight as well as the impacts of wire fraud on the industry are top of mind for regulators.

Lingering effects of COVID-19

COVID-19 has continued to have an impact on fraud risks as well, necessitating an extremely accelerated adoption of technology. While this has enabled business continuity, the disruption in normal workflows could have caused errors or created opportunities for fraudsters to step in.

Additionally, ongoing forbearance concerns and CARES Act impacts have created an environment in which criminals may take advantage of confused or concerned borrowers to commit fraud, such as identity theft, intercepting payments and email compromise.

eClosing complications

The increased acceptance and use of eClosing platforms have also contributed to the growth of wire and title fraud risk, FundingShield states in its report. According to an American Land Title Association survey of major vendors working in the remote online notarization space, the adoption of RON skyrocketed 547% in 2020 alone, in part due to more states passing permanent RON legislation as well as the need for virtual closings during the pandemic.

While eClosings have proven invaluable for health and safety and enable a faster closing cycle, these platforms and their integrated partners do not always prioritize wire and title fraud risk management and prevention. Additionally, increased closing cycle speed can create vulnerabilities in the process if data is not being actively verified on a real-time basis, providing live information to help lenders mitigate fraud.

“Third-party oversight of wire and title fraud risk is currently lacking in eClosing workflows, and until they integrate with wire and title fraud prevention fintech solutions, these risks will continue to grow,” FundingShield CEO Ike Suri said. “We are swamped with integration exercises with eClosing partners seeking to protect and secure the journey.”

Conclusion

Given the above challenges as well as the continued stress placed on insurance and risk markets due to COVID-19, it’s evident that preventative solutions for wire and title fraud are necessary. Lenders should work not only to educate and inform borrowers about the risks of fraud but should ensure that their technology helps prevent and manage those risks as well.

To read FundingShield’s full Wire and Title Fraud Index for Q1 2021, click here. For historical quarterly reports or further information reach info@fundingshield.com.

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