Denise James is the director of residential mortgage solutions for LexisNexis Risk & Information Analytics Group. She joined the company in 2003, when ChoicePoint owned the Mortgage Asset Research Institute (MARI). LexisNexis bought ChoicePoint and MARI in 2008.
In the latest installment of In This Corner, James discusses her firm's ability to manage mortgage risk for clients, and addresses current challenges facing the market.
HousingWire: Can you please tell us more about the new types of fraud emerging in today's distressed market? We hear about short sales, builder bail-outs even elderly and immigration frauds; What are these? How are they taking root?
Denise: "Sure. Unfortunately, there are newer emerging frauds that are taking advantage of consumers and lenders which adds more fuel to an already blazing fire. These crimes of desperation aim at stealing homes, absconding illicit funds and maximizing profits through deception. Let me provide some examples:
"Short Sales – Given the continuing decline of home values, lenders have developed approval programs that allow homeowners to sell their properties for less than the obligated amount or mortgaged amount. Benefits include more saleable properties in areas of high abandon or foreclosure rates; expanded opportunities for homeowners to remedy mounting mortgage debt and lenders writing off less loan losses.
"One type of fraud would include realtors or mortgage originators, who arrange to secure the property with an option contract with buyers (some willing participants to the fraud) ready to purchase. The short sale approval process includes a BPO (broker price opinion) or CMA (comparable property analysis) which qualifies the request for a lower than mortgage amount sales price. The realtor or originator will have a ready buyer waiting to purchase the property, usually at a higher price, upon approval. Enter the appraiser, who will appraise the property for much a higher value than what was presented in the BPO or CMA and the realtor or originator walks away with a hefty profit and commission. The fraud in this scenario is that the lender based their decision on misrepresented information from an industry insider who ultimately harmed a disadvantaged consumer and lender for a profit.
"Elderly and Immigration Frauds – For the purpose of this discussion, I will focus on identity fraud or theft. Although the industry is experiencing an increase in reverse mortgage fraud. Identity fraud is not new, but it is emerging as a fraud of choice for straw buyer pools. Increased focus on mortgage fraud investigations and prosecutions, fraudsters are targeting consumers who are less likely to notice inconsistencies in their personal information or credit position. Industry insiders leverage the use of the consumer’s information to generate false applications for home purchases or equity lines recognizing that it may be years before anything is noticed by the victim. Elderly consumers are targeted for equity skimming or theft when there is a substantial amount of equity in the property, as well. Falsified applications for equity cash outs are submitted to unsuspecting lenders and unknown to the actual homeowners. This is facilitated by filing false lien releases, purchase liens or deeds in the county clerks’ office so that ownership is qualified prior to the application process.
"Fraud evolves, it is never eliminated. Fraud takes root in environments rich with desperation, easy prey and greed."
HW: Is fraud spreading rapidly and what can banks do to protect against?
Denise: "Rapidly, No. Widely, Yes.
"We expect fraud to increase as more people become desperate and susceptible to fraud opportunities. The industry is saddled with minimizing losses as a result of loan defaults and ARM turnover modifications, while trying to maintain a healthy balance sheet. Lenders must become more vigilant in their efforts to share information and develop consistent methods for funding quality loans. I don’t know how many times I’ve read that lenders believe they are in good shape with fraud detection tools. As lenders attempt to be more productive with less people, so must their processes at the front-end of origination.
"Early focus on key fraud contributors can help minimize the costs associated with due diligence during underwriting and other downstream costs. Identity theft has become much easier with the advent of technology, so this needs to be balanced with direct source verifications. If the identity of the applicant is in question, the entire transaction is a risk. Insiders perpetrate the most devastating financial losses to any lender. Verifying insider credentials and business risk associations is critical for minimizing exposure to adverse activities. Many lenders leverage a performance score as a determining factor for risk exposure.
"Using a performance score on prior loan transactions can indicate a degree of risk, but the level of risk is much greater when through background checking and monitoring processes are not in place. The transaction itself can be a very good indicator for risk exposure as information is often misrepresented at the time of application. Lenders that participate in an information sharing program that protects the lender’s identity can enable greater visibility into misrepresentations across multiple pipelines (internal and external), present data that indicates collusion among participants and provide analytics that reveal potential fraud schemes, etc. While this is not a simple change in business practices, it is required if the industry intends to collectively prevent and better detect fraud."
HW: LexisNexis wears many hats, and getting one's head around all of the things offered can be tough to do and at times confusing. Can you tell us what you do with risk analytics? You obviously aren't a credit rating agency, but without supplying ratings to risk, how do you quantify risk for your clients?
Denise: "LexisNexis Risk Solutions provides information and analytics solutions for multiple industries. In Financial Services, we provide analytic scores to help identify risk associated with identities, application fraud, credit, application misrepresentation, fraud scenarios, etc. Some of our solutions like RiskView can quantify the risk exposure when doing business with a consumer.
"Our InstantID product is used for verifying identity related information and the degree of risk that the identity may be compromised. For high risk scores, the product asserts recommended remedies for mitigating inconsistencies or non-verifiable data as provided by our customers. Fraud incidence in general, is held very closely to the vest by our customers. It is recommended however, that lenders balance the use of analytics with sound verification policies since information can be manipulated and is not always reported accurately."
HW: More importantly how is risk changing in the face of offering mortgage solutions and how are you meeting that challenge?
Denise: "Risk solutions that address mortgage fraud is changing in that they are being leveraged for every transaction. Heightened investor, regulatory and legislative mandates are requiring lenders to own responsibility for their costumers, business partners and balance sheets. That means a significant amount of checks and balances to ensure thorough verification of information and elevated risk confidence."
HW: On your website, it states as a core mission that your department is about "Leveraging cutting-edge technology, unique data and advanced scoring analytics, [so] we are able to provide our clients with total solutions."
How do you strike that of so difficult balance of scoring versus data in order to offer those solutions? Meaning, do you employ some sort of software forecasting equipment, or merely look into the crystal ball on your desk?
Denise: "How do you strike a balance of scoring versus data? That’s the million dollar question! I wish I had a crystal ball. The balance between scoring and data should not change, as one over the other will create imbalance. Scoring is a byproduct of information or data and without one, the other is of little value. Data can be manipulated and technology has provided an path for fraudsters. If the data is inconsistent or manipulated then the scores will reflect that as well. It is for this reason that both must be employed in order to be successful at minimizing risk.
"For example, an applicant may score a low risk on their identity only because they did a great job assuming the attributes of an identity and actually built a seemingly legitimate profile. If the customer uses the score only as the basis for a risk decision, this would quickly become very problematic and they would be targeted by fraudsters. The same scenario above coupled with information tied to a social security number, address and/or name may reveal multiple identities associated with the input information. Or, inconsistencies in the information when compared to the identity thief’s application information. Great scores and questionable information equals a risky transaction"