It’s the moment everyone fears: in the frenzy to close a house sale, commitment to fraud preventions falters. Busy professionals involved in the sale override their own cautions about fending off wire fraud by reverting to tried-and-true email addresses to convey the most sensitive financial information.
Trying to keep with the drive to the finish line, the harried consumer let down their guard. Instead of questioning email directions from their agent, title insurer or lender, the consumer hits ‘reply.’
And just like that, coordinates for a wire fraud transfer of tens of thousands of dollars — even a lifetime of home equity — disappear. A digital thief hijacked the transaction, redirected the money, and disappears, leaving the shocked consumers, real estate agent, title insurer, lender and others to pick up the pieces.
Fraud prevention was slowly escalating as an industry priority when 2020’s strange confluence of factors hit.
The pandemic accelerated the use of digital tools and platforms to effect closings, while also tangling many house sales in a patchwork of paper and online functions.
As the pandemic recovery takes hold, a robust housing market has pulled fraud prevention back on track. Houses are selling faster than ever, and for more money than ever. COVID-catalyzed changes are formalizing into new fraud prevention standards, even though some in the residential real estate industry have yet to fully come on board.
Digital fraud comes at real estate transactions in several forms. Released in March, the 2020 report of the Federal Bureau of Investigations’ internet crimes operation documents significant increases in each of the categories most pertinent to residential sales:
- The real estate industry overall, including sales and rentals, lost $213,196,082 to online fraud. This comprised 13,638 victims, up 16.8% from 2019.
- In 2020, 19,369 email compromise complaints totaled losses of $1.8 billion.
- Personal data breaches rose 18.6% in 2020 to 45,330 incidents
- Personal identification theft rocketed 170% in 2020 to 43,330 incidents
- Business email compromise -the subcategory that includes misdirecting transaction emails that include wire transfer instructions – saw 19,369 complaints with adjusted losses of over $1.8 billion
The sophistication and scope of fraud evolves at lightspeed: industry experts say that it’s pointless to concentrate on just one type of fraud, as scams morph and proliferate. The latest twist is mortgage payoff fraud, in which thieves forge mortgage payoff statements with the aim of diverting funds to themselves, not to the owner who is selling or refinancing a property.
“It’s amazing how sophisticated some of these efforts are,” said Kenneth R. Trepeta, president and executive director of the Real Estate Services Providers Council, based in Washington, D.C. Some fraud troupes involve 20 people at the ready to perpetuate the fraud when wary consumers and industry professionals try to independently confirm the validity of the information they’re receiving, said Trepeta.
“They’ve got networks. You’ll have people in 15 different states involved in the same scheme and overseas, they’ve got a shop,” he said.
If there’s a tinfoil lining to the pandemic of 2020, it’s that it proved the case for fully digital closing processes, said Tom Cronkright, co-founder and CEO of CertifID, a Grand Rapids-based transaction platform. The neck-snapping pivot to distanced closings put the spotlight on gaps in the process: points where analog steps stopped digital flows. When governors in some states passed executive orders allowing teleconference notary services to be legally binding, their speedy response served as a pointed prompt to the industry, said Cronkright.
“If anything, we absorbed four years of technological change in 2020,” he said. “We adopted and tried what we could via Zoom and funds protection, and we operationalized technology.”
His perspective is borne of painful experience. In 2015, the title agency Cronkwright was then running was nearly taken under by wire fraud.
“It was a blindsiding moment for me,” he said. “It was too easy [for the thief].”
The fraud started with a routine sale of a gas station. Cronkright’s firm received a “certified check” that looked legitimate, for $185,000. The accompany directions were to wire $180,000 of the funds to an account.
“It’s not uncommon. The seller wants to be sure that they at least get the earnest money,” said Cronkright. “We deposited the check, it sat in the bank for several days, and we sent the wire.”
But the check was “bogus,” Cronkright said. The money disappeared into a series of accounts that Cronkright ultimately learned was operated by a Texas attorney who was the puppetmaster for numerous complicated schemes. After two years of investigations that escalated to the Federal Department of Justice, authorities convicted the attorney.
Not that it helped Cronkright’s firm much. “It was almost a complete loss,” he said. Business insurance did not cover the theft, as it did not involve a breach of data. The cost of time and effort was immeasurable.
The searing experience turned Cronkright into a fraud prevention ambassador and digital platform entrepreneur.
Technology itself is no longer the sticking point, say transaction service executives. The industry must address legal and procedural gaps in the closing process so that transactions can be seamlessly handled via secure platforms. Laws and regulations need to be smoothed out to accommodate fully digital transactions and accompanying fraud prevention. And the industry must rally to communicate consistently and persuasively to consumers so that they are alert, aware and activated to thwart fraud.
“A lot of the fraud that occurs in a traditional paper-based closing is because of the handoffs between parties and disjointed systems,” said Pat Kinsel, founder and CEO of Boston-based Notarize. The traffic jam of players at the traditional closing table is an open invitation for fraudsters, said Kinsel. “Wire fraud occurs because of the handoff. Funds are transferred and a new person is sending information, and you don’t have a secure relationship with that person,” he said, reflecting on the consumer experience of meeting a series of professionals for the first time, or only time, during the high-stakes transaction.
Everyone agrees that using unsecured email to communicate sensitive transaction coordinates is the weakest link — by far. Industry professionals with deep, if antiquated, contact lists, are reluctant to shift to new systems. Players like the National Association of Realtors and American Land Title Association have public information campaigns to remind consumers that it’s imperative to triple-check every communication about transferring funds. But such efforts fall flat when industry professionals abandon fraud prevention practices at the last minute and revert to easy-to-hack, low-security antiquated email addresses.
Understandable, but fatal, said Andrew Liput, president and CEO of Secure Insight, a Parsippany, N.J. service that qualifies the parties involved in real estate closings and is involved in building a transaction platform. “Every title package and every email has a warning, but even with all these instructions, people make mistakes,” he said.
Liput and others in the transction-management industry said that fraudulent emails also include fraud warnings – a twist that only serves to confuse consumers more.
Liput predicts that the Biden administration will propel greater accountability for the real estate industry and real estate professionals for protecting consumers from fraud; monitoring attempted and actual fraud; and pushing state and local governments to align their rules and processes with secure digital processes. “Compliance needs an incentive,” Liput said. ”It needs pressure. Most people won’t regulate themselves.”
Experienced closing industry executives say that banks and realty agents and brokerages have thrown up the most resistance to consistent adoption of protected digital closings. Kinsel points to Notarize’s industry partnerships as evidence that agents are pushing for digital closings and said that banks have steadily cleared many hurdles.
“The largest remaining impediment is second market investors,” he said. “They’ve laid more groundwork than most people realize. Ginnie Mae, the Federal Home Loan Banks – the dominoes are falling.”
The transition to digital likely will be propelled by generational changes, predicted Andy White, co-founder and CEO of ClosingLock, an Austin-based closing platform.
“Buyers in their 20s and 30s don’t even have physical checkbooks,” said White. “ If you tell them you have to write a check for earnest money, they don’t know what to do and the agent has to tell them how to go to their bank and get a money order.”
And they don’t want to download an app or set up an account just for the process of the transaction. They’re not going to register with five sites and go through all of that just to download or upload a document or receive wiring information.”
Platforms that streamline the paperwork; give all the players a single point of communication and coordination; and that ensure digital security in the process will emerge as the industry standard, predicted White and his many competitors.
Layering on yet another set of complex controls won’t help, even if the ‘fix’ is digital, said White. “The average homebuyer doesn’t know what an encrypted email looks like versus an unencrypted one and you shouldn’t have to learn that in the home-buying process,” said White.
Industry leaders say that pressure is growing for stragglers to get on board with emerging industry standards.
“You can’t do this on a piecemeal basis,” said Bill Burding, president of the American Land Title Association. “It requires federal intervention so the banks can feel secure that an online transaction is just the same as if they have an ink-signed document. And we have to be sure that the clerks and [county] recorders will record a remotely signed, online document.”
While ALTA works with counties and states to align digital policies, it is also trying to inform consumers and real estate agents to be ever vigilant in thwarting wire fraud.
Systems, governments and companies can be perfectly synchronized through fraud-deflecting technology, but it is all for naught if harried consumers and multitasking agents revert to unprotected email to communicate transaction instructions, said Burding.
“The vast majority of wire transfer fraud is when people use an open platform – free consumer email services and so on – with minimal security. That’s what fraudsters are looking for,” he said. “It’s extremely rare that a title company gets hacked. It’s the consumer or one of the other parties.”
Fewer than 1% of wire fraud cases involve a breach of title agencies’ own data system, he said.
Thwarting fraud requires a choreographed effort especially from the professionals working most closely with consumers…and collaboration has been slow and unsteady, say industry executives.
While ALTA, the FBI and others have mounted consumer education efforts, cautionary messages are often lost in the blizzard of communication, documents, unfamiliar processes and logistical tangles that often characterize selling or buying a house and moving.
State licensing agencies and boards do not require “competency in fraud prevention efforts to acquire or renew a real estate license,” according to an NAR spokesperson.
“In the past, the agents didn’t want to use these platforms because if they went to another real estate brokerage they’d have to change their email address,” said Burding. “But they’re getting better and real estate companies are getting behind this.”
Though RESPRO has been working on fraud prevention initiatives for over five years, the influx of newcomers to the industry means that every sector – especially brokers – must constantly refresh reminders about vigilance, said Trepeta.
And realty agents and others who focus on local markets need to step up to their responsibilities to others in the transaction chain, and to be in sync with federal fraud prevention efforts, said Trepeta, echoing the opinion of others in the title insurance and data security segments of the industry.
Changing longstanding habits is hard and essential, said Maria Deligiorgis, general counsel and compliance officer with Title Alliance, a Pennsylvania title insurer. Her agency has detected the latest twist: fraudulent payoff demands. “We’d ask for a mortgage loan payoff and the mortgage company would send a letter – but it wasn’t a real letter. It was falsified, with a slightly deviated typeface and account number,” said Deligiorgis. “It was human intervention that caught it.”
That incident changed how Title Alliance scouts for fraud and is instructive for the entire industry, as each category of players rises to its responsibilities in the chain of prevention, she said.
Title Alliance now uses a soup-to-nuts digital portal that ensures privacy, control and fraud protection, and integrated that platform with its closing and escrow software. But when it comes to battling fraud, there is no ‘set it and forget it,’ said Deligiorgis . “There has to be a microculture of awareness,” she said.
That means vetting all partners; requiring every party in every transaction to verify every step; and auditing to make sure that new processes become new best practices.
Title Alliance conducts “sniper audits” that review every step of a staffer’s process and then publicly rewards those who hit their marks consistently with a celebration and gift. “It’s repetition and muscle memory,” said Deligiorgis. “Do it not until you do it right but until you can’t do it wrong.”