Fraud and Prevention

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Right Actions Are the Prevention and Cure

Perspectives by Jay Meadows
October 21, 2009

Self-help author and publishing veteran Walter Anderson once said, "Nothing diminishes anxiety faster than action." In our industry, there's no shortage of anxiety. As though achieving a profit in this market wasn't difficult enough, lenders have also got to figure out how to protect their bottom lines after each loan funds and closes. With stricter lending guidelines and rapidly changing government regulations, the industry is giving lenders plenty of opportunity to kick those anxiety levels right into overdrive.

Underneath all of that anxiety is fraud. The sole reason that guidelines and regulations exist is to ensure that lenders and investors are granting mortgages only to those who are qualified for the commitment. The issue is that we can no longer rely on someone's word to ensure the accuracy of the information they provide.

Experts in both public and private industry have cited mortgage fraud - the misrepresentation of information for the purpose of securing a mortgage - as the primary cause for the difficulties we're currently facing in the mortgage industry, not to mention the turmoil in the American and global economies. As such, we now need to ask for proof that all information used to evaluate a loan application is an authentic and honest representation of the facts.

In the industry's defense, lenders have done an amazing job at taking action. They've implemented formal fraud prevention programs and are screening a higher percentage of their loans for identity, income, employment, account and collateral fraud. Granted, there have been a few government regulations that have prodded them in the right direction, but that's not to detract from the great number of businesses that have taken it upon themselves to verify the accuracy of borrower-provided information on each and every loan they originate.

If only the government would remain as diligent as today's lenders. On Oct. 1, the Social Security Administration raised prices for its consumer-based Social Security Number Verification Service from 56 cents per verification to $5. For those who don't know, the Social Security Administration's CBSV service verifies whether a name and Social Security number combination match the data in SSA's records. It's the primary and most reliable basis for validating the accuracy and authenticity of borrower-provided identity information on a mortgage application. In other words, if lenders want to prevent identity fraud and ensure that their borrowers are who they say they are, this is the de facto industry standard and most reliable way of doing so.

Although the $4.44 increase amounts to only about the cost as a designer cafe latte, it does account for a nearly 900% price jump, which begs the question: If the government is so concerned about helping the industry to recover, why would it increase the cost for verifying borrower identity? It looks as though they're trying to deter usage of their CBSV, rather than enhance it. If this is in fact the case, this is not just a huge step in the wrong direction, it could place the industry in a U-turn that takes us right back into the trap that led to our current crisis in the first place.

As the government takes definitive and well-publicized steps to foster economic recovery through efforts like the Home Affordable Modification Program and Cash for Clunkers, it needs to re-evaluate its efforts toward long-term prevention, as well as an immediate boost. Turning our backs on fraud prevention at this point would mean that the lessons of recent history were all for naught, and could possibly lead to yet another tidal wave of bad loans that strikes our wavering economy right in its already weakened knees.

With the industry and the economy struggling to get back on its feet, it is more important than ever for public and private industry to take every possible precaution to keep mortgage fraud out of our lending transactions. Fraud prevention is critical to the industry's recovery. It doesn't matter where mortgage fraud originates.

Whether at the hands of misled consumers, industry professionals, or experienced criminals, mortgage fraud wreaks havoc - on the consumer public, individual businesses, and on the overall economy. It can cost lenders big money in the form of fees, fines, buybacks and foreclosures - often to the tune of tens or hundreds of thousands of dollars per incident, and on a broader scale, can lead to exactly the type of trouble the housing market is facing today.

The Social Security Administration may be moving in the opposite direction of common sense fraud control, but that doesn't mean that lenders need to follow suit. If lenders neglect to use identity verification because of the higher prices involved, the CBSV program could be eliminated for lack of use, and we'd have very little defense against the tactics used by those intending to commit fraud.

One thing is for certain. Where there is opportunity for profit, there is opportunity for crime. If neglected, fraud will not disappear. In fact, if past history is any indication, it's likely to flourish. Now is the time to take a tough stance on fraud. If the industry wants to quell its anxiety, fraud prevention is the best action that serves as both prevention and cure.