Nearly half of loans processed in Q1 showed fraud risks: FundingShield

The report found risks of wire fraud on 9.2% of transactions during the first quarter of the year

Nearly half (48%) of a $65 billion portfolio of loans processed during the first quarter of 2024 contained vulnerabilities to wire and title fraud, according to a report released Wednesday by FundingShield.

The portfolio of loans examined included residential, commercial investor and business purpose loans.

On loans that exhibited problems, the analysis found an average of 2.22 issues, which FundingShield says indicates a lack of appropriate controls by closing agents and lenders to identify and fix issues. 

“Q1 was a period where we saw some market improvements and volumes increasing as the winter lull thawed,” Ike Suri, the CEO of FundingShield, said in a statement. “The lenders that have prepared for the market improvements, including some of our new clients, have tech tools for their risk & compliance, operations, funding & accounting teams to fight back against threats. Communication gaps, lack of validation, non-existent verification processes, and system deficiencies created numerous vulnerable endpoints allowing wire and title fraud risk to grow to all high time for lenders today.”

In Q1, the firm saw record high levels of issues with wire, data and CPL validations, which cover things like agents being in good standing, data accuracy between lenders and title systems, and agent registration/active status.

In total, CPL issues were found on 44.6% of transactions, while CPL validation issues were reported on 9.8% of transactions. The report also found wire risks on 9.2% of transactions.

According to the report, “this increase highlights the ability for bad actors to successfully gain knowledge of mortgage and real estate closings and then attempt to use spear phishing, Business Email Compromise attacks or other means to divert funds going to and out of escrows / settlement accounts.”

Quarter over quarter, CPL related issues were up 9.5%, followed by wire related issues (+8.9%), and license related issues (+7.43%). However, CPL Validations issues, including agent good standing, issuance limits or title file order registered in title insurer systems, recorded the largest increase, jumping 29.32%. 

FundingShield also noted that data showed a concentration of higher fraud risk factors in states that are “attorney only,” meaning that the handling of title and settlement work is considered a legal product. According to the report, there was a higher rate of risk for CPL Validations with 13.2% of transactions having errors, as well as a higher rate of insurance coverage issues, at 2.2% up 60% compared to non-attorney only states.

This uptick in fraud risks come as the Federal Bureau of Investigation’s Internet Crime Report found that cybercrime losses rose to a record high of $12.8 billion in 2023.

“The escalating conflict in the Middle East, the upcoming U.S. Elections and an inflationary market create challenging times for the mortgage industry,” Suri said in a statement. “AI driven tools allow bad actors to easily and believably deploy attacks that look legitimate on the face of correspondence taking advantage of the challenges that Geopolitical events can cause as one of many approaches used. We expect there will be more attacks exploiting known and new vulnerabilities among homebuyers, lenders and title agents as the closing process has many players with different level of controls where B2B2C consumer facing solutions are being utilized.”

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