Fraud and Prevention

Mortgage Marauders - How to Make Them Think Twice

Perspectives by Michael S. Richardson
July 22, 2009

Where does mortgage fraud begin and how do we prevent - or at least begin to stop - mortgage fraud? They say timing is everything, and in this case, there has never been a better time to commit - or fall prey to - mortgage fraud. A large percentage of fraud has assistance from one or more of the dozen or so specialists - the loan officer, appraiser, real estate agent, title agent - who touches the mortgage as it winds its way through the approval process. Most cases - 80% by some estimates - involve insiders.

Is it any wonder? After all, loan originators and their team members have detailed access to the borrower's information in the transaction. From Social Security numbers to bank account information, it's all above board and on the table. Many of us treat such information as sacrosanct, keeping it under lock and key and using it for one purpose and one purpose only. To those who would perpetrate fraud, however, such information becomes the key they use to unlock the door to fraud.

Every part of the mortgage lending process presents another window of opportunity to unscrupulous loan originators, who by the very nature of their job description come in contact with builders, real estate agents, borrowers, processors, underwriters, appraisers, lender account reps and title closers.

Each one of these positions or areas needed to get a mortgage leaves an opportunity for fraud.

Remember: Loan fraud is typically committed with intent. It is not normally requested or asked for by the homebuyer, but by the originator or real estate professional, or both in partnership along with other insiders in order for the loan to close and make a profit.

One of the most difficult aspects of dealing with mortgage fraud is that it's hard to know the scope of the problem. The human element that's involved makes would-be fraudsters hard to spot, and those already committing fraud even harder to identify. Because these people are white-collar criminals, they look, dress, act and talk just like the rest of us. They won't look like criminals; they'll look like loan officers, real estate agents, members of management and loan processors or closers and, of course, the next-door neighbor. Whether it is in your own company or simply a scourge of the industry itself, fraud is rampant, invasive and ever present.

One of the newest ways to help prevent fraud comes from automated fraud prevention tools, such as various stopgap measures or various software designed to catch suspicious or questionable data.

Now, while we would all agree it is great to use these tools, but please do not let the technology replace the human factor, because using the online tools could give you a false sense of security. In my opinion, you cannot eliminate the proper onsite training of your staff on how to read these complex reports, but also how to identify fraud on documents the technology cannot not identify. The best pre-funding technique is a combination of human intervention along with the automated prevention tools. Implement a third-party review of the pre-funding audits, basically a random based pre-funding audit.

I have always given the individuals I work with my trust until they prove to me otherwise, so basically I believe that people want to do their job and do what it takes to do it right. I don't think I am alone in this; although with mortgage fraud you need employees that are well-trained and well-educated mortgage professionals in place to stop the fraudsters before the loan is funded. Instigating the following pre-funding audit atmosphere in your own workplaces will begin to stop fraud before it is committed, no matter whether it is being done by insiders or others.

There is a variety of reasons to do pre-funding audits, and despite the upfront costs involved in implementing such a program, you will see that the overall benefits far outweigh any upfront costs. You will stop fraud before the loan closes. When you start pre-funding audits, you will, maintain a steady flow of quality originations and closings, deliver better quality loans to your investors, your loans will perform better.

A very simple procedure you could put in place that involves a human element and has been used years ago in our industry is to certify incoming verifications and disclosures. All verifications should have an attached disclosure that certifies the mailed or faxed or at least a stamp certifying it is a true copy of the original document. Individuals other than the actual verifier whom may be the first to handle the document - such as processor assistants and receptionists - should stamp and sign the disclosure. It should certify the person that mailed or faxed the verification, when it was mailed and from what location it was mailed.

This certification will cause a problem for the mortgage marauders, as they would now have to enlist a fraudster at the verifier's location. If the document is altered, the certifier can prove, by retaining their copy, what the original document looked like. If the document is altered by retaining their copy, the certifier can prove the fraud did not originate with them and would help when resolving a dispute between parties as to whether verification was changed or altered, and by whom. Make the individuals stamp all documents or write a certification that they are personally "Certifying this is a true copy of the faxed or original document." Enforcing this will make operational people think twice about what they are given to submit.

Please remember fraud is not just a white-collar crime; it's a people crime. People commit it, people suffer in its wake, people's lives are ruined, people enforce it, and it's people like you and I who can prevent it.

Mortgage fraud is insidious; it creeps up on you. Mortgage fraud exists because it's able to exist. It isn't just the industry that's ripe for manipulation, it's the branch or office operations, the paperwork and all its room for error and margins. We can't point to any one individual and say, "Look, over there, he's the guy we've been looking for. He's the guy who made it possible for fraud to exist ..."

Instead, we must look to ourselves; not as the cause, but the solution. To fight fraud, though, we must first understand it. We must stop seeing fraudsters as criminals and look at them instead for what they really are: colleagues, neighbors, cubicle mates, sometimes even our "friends."

Michael S. Richardson is the director of forensic mortgage services at Lenders Compliance Group and author of "An American Epidemic, Mortgage Fraud a Serious Business." For more information, visit http://www.lenderscompliancegroup.com.