Fraud and Prevention

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Securing the Water-Tight Doors on Fraud

Perspectives by Jay Meadows
August 12, 2009

Until recently, recommending that servicers use verifications in the loss mitigation process was a lot like recommending screen doors on a submarine - given market conditions of the earlier part of the decade, it just didn't seem to make much sense. It's amazing the difference a few years can make. If the past few years have taught us anything, it's that verifications aren't the equivalent of screen doors on a submarine - they're more like watertight seals. If loan servicers want to keep from drowning in fraud, they just might find that using third-party verifications in their evaluation process is the life preserver they truly need.

There's a seemingly obvious and major issue that the servicing industry should acknowledge: loans are only targeted for modification when borrowers are having difficulty paying their mortgages. Some of those borrowers may have fallen on hard times, suffering from a job loss or layoff, and some may not have the income to accommodate payment spikes. However, others may have provided inaccurate income information to qualify for the loan in the first place. It's the servicer's responsibility to avoid falling into the same trap that comes from modifying the loan without confirming the borrower's ability to pay.

Servicers generally require that borrowers supply tax returns, W-2s and pay stubs to verify their income. Granted, this is a step in the right direction, but it's nowhere near an effective solution. After all, how can servicers be sure that those documents are honest reflections of the borrower's information? These days, just about anyone with access to a computer and tax preparation software can create falsified tax returns. Add a photo editing software program to the mix, and you can alter W-2s and pay stubs, and create enough fake IDs to equip a frat house for spring break. Talk about putting a screen door on a submarine - borrower provided documents do little to keep fraud from infiltrating the system. Have we not learned anything from the recent past?

If servicers want to keep modified loans from re-entering delinquency and default, they need to seal the leaks where fraud can seep in. They need to use accurate information to determine a borrower's eligibility for any loan transaction. Inaccurate information is a leading reason for the high number of delinquencies, defaults and foreclosures on the market today, and the only way to ensure that borrower information is accurate is to have that information cross-checked against data from a reliable, neutral third party.

A borrower's capacity to repay a loan is, predictably, based mostly on income. Using a third party verification service that can provide tax transcripts directly from the IRS is a great start - only the IRS can definitively confirm a borrower's past income history. But it doesn't stop there. In order to get a complete and up-to-date picture of a borrower's income, servicers must verify employment, too. A lot can happen to a borrower's employment and earnings after a year of reported income, especially in economies marked by pay cuts, layoffs and general instability.

This is where things get tricky for servicers. If evaluating borrowers for refinances or loan modifications makes servicers feel like fish out of water, performing employment verifications is like asking those fish to grow wings and fly. It's not the fault of servicers, either. Employment verifications are traditionally one of the most neglected tasks for processors and underwriters of new originations, and those folks have been accustomed to calling employers for generations. The problem: employment verifications are tedious. They require a high-touch manual process, repeated attempts and close attention to detail and accuracy. They're time consuming and often require significant and diligent follow-up.

Well-paid underwriters and senior processors may not find employment verifications to be their highest priority or best use of their time, and temporary employees may not have the commitment to accuracy and scrutiny while securing the information. What often happens is one of two things. Either these important fraud prevention activities get passed from one team member to another - usually one more junior - until someone hopefully completes the task, frequently under so much deadline pressure that it's virtually impossible to ensure a water-tight answer, or in an even worse scenario, the borrower's employment and income information from the original loan underwriting process are assumed to be valid, and used to make the decisions in the new loan transaction.

The solution is to use an outside employment verification service, which can not only provide fast, accurate answers, but also ensure the servicer a standardized, reliable and repeatable process that yields accuracy on each and every transaction. For just a few dollars per file, servicers can utilize the services of trained employment verification specialists that follow a standardized, in-depth process for securing information, while also looking for "red flag" clues such as unprofessional phone etiquette or background noises.

In other words, if there's a dog barking in the background, or if the "receptionist" answers the phone by saying "hello," the file will be flagged, and the servicer will be alerted. Plus, the servicer also gets the added protection of a comprehensive search procedure, which includes the subscription databases that list some of the larger employers in the country. Verification professionals are not easily duped and unlike that temp or low-ranking newcomer to the processing team currently performing this crucial fraud prevention task, they are trained to be both observant and thorough.

When it comes to fighting fraud, servicers need to recognize that inaccurate information can lead to repeated delinquencies and default. Servicers face a challenge to do the right thing, which is to verify income and employment on the never-ending stacks of loan modifications. There's only one way to definitively ensure that borrower-provided information is accurate and current - that's to use a third-party verification service to confirm identity, income and employment. Given the ease, speed and low cost of this essential fraud prevention measure, doing anything less is like putting screen doors on that leaky submarine.