Opinion: Lending has a growing fraud problem

The most common mortgage fraud involves income and employment records

Prices are up, and affordability is down. It may not come as a surprise that with this economic backdrop, lending fraud has been steadily increasing over the past several years, costing lenders and consumers billions of dollars annually. Inflation and mortgage rates are hovering near all-time highs while inventory and affordability are near all-time lows across sectors like real estate, auto and personal lending. 

Fraud by the numbers 

The most common type of mortgage fraud involves misrepresentations on loan applications aimed at falsifying income and employment records, inflated appraisals and misstating intentions to occupy the property. Sophisticated fraud rings will manufacture pay stubs, tax documents, and other paperwork to support their deceptions.

Lenders have traditionally relied on manual verification processes such as calling employers or reviewing applicant-provided documents. But these methods are increasingly inadequate as fraudsters use more complex schemes and high-quality forgeries that can bypass human review.

The growing fraud problem has been hugely costly to both lenders and consumers. The Federal Trade Commission estimates that consumers lost over $5.8 billion to fraud in 2021, up from $3.3 billion in 2019. Lenders have also faced rising costs, as they ultimately bear the losses from unpaid fraudulent loans. 

Specifically in the mortgage industry, experts expect to see an uptick in mortgage fraud in coming years, with CoreLogic‘s National Mortgage Application Fraud Index having increased 30% from its low during the pandemic. The index is a predictive tool, currently suggesting 30% higher risk of fraud in mortgage applications. Investments in fraud-preventing technology have not kept pace with the rise in incidents of fraud over the same period. Why? High costs and technical complexity have deterred many lenders, especially smaller institutions, from making these critical investments.

The need for more reliable tools

As lending fraud continues to rise, the need for more reliable means of detection to qualify and identify leads earlier in the process becomes increasingly urgent. A growing number of lenders are turning to solutions that pull direct data from source providers to validate applicant information on income, employment and other attributes. Using these digital verifications in place of traditional manual processes can significantly improve lending integrity and reduce fraud risk by removing the ability to supply falsified documents.

According to a report from data analytics firm LexisNexis, lenders partnering with firms to utilize direct source data in digital verification for income, employment, or both were able to uncover more fraud risk factors compared to traditional manual verifications, and estimates show that digitally verified loan applications have a higher fraud detection rate on average. For lenders, this translates to millions in potential savings each year from avoided fraudulent lending.

Going beyond fraud detection 

These services are not only impactful or valuable in times of distress, but they are also an integral part of the lending process in any market conditions.

Direct source data verification promises to transform lending risk assessments and significantly curb fraud. Lenders who embrace digital verification early stand to benefit the most from reduced losses and safer, streamlined lending. As bad actors grow ever more sophisticated, lenders must meet the challenge with smarter, higher-tech fraud prevention.

John Hardesty is General Manager – mortgage division, at Argyle.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

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