Fraud and Prevention

Insider Fraud Bigger Problem Than Consumer

By Mark Fogarty
March 9, 2007

At the Mortgage Bankers Association’s annual Servicing Conference in San Diego, I asked a roundtable of servicing vendors to talk about fraud issues. I got some great stuff. Even though they were all vendors, I heard that technology is also the bailiwick of fraudsters who are getting ever better at duplicating docs. I heard that insider fraud trumps consumer fraud by a wide margin. I learned... but why not hear it from the voices of the industry themselves? My participants were Damien Weldon, director, collateral risk analytics, First American Loan Performance, San Francisco; Chris Saitta, president, REO Trans, Los Angeles; Allan Martin, chief executive, Mortgage Contracting Services, Tampa; and Cary Burch, chairman and chief executive, Lender Support Services Inc., Poway, Calif.

MARK: FBI Suspicious Activities Reports have tripled in the last couple of years, from 10,000 to 35,000. That is an indication that fraud is blooming in the business. I wanted to get your sense on the scope of the problem. How big is it? How long will it take to get it under control? And how do you reverse the wave of fraud that is paralyzing the business currently?

CARY: With the fraud issues we are facing in the market, the technology tools that are being used has really helped facilitate and created a much more bigger challenge for the lenders when it comes to credit quality and when it comes to the loans. Because in the olden days, you had to use whiteout. Nowadays you can use technology to recreate tax returns. You can recreate verifications. It is very challenging for lenders and brokers to be able to face the fact there is fraud in the market. There are always going to be good lenders and bad lenders and good brokers and bad brokers. It is a bigger issue now, as we see credit quality becoming a bigger challenge with the demise of several large lenders. They have gone out of business primarily because of buybacks and a lot of that has to do with fraud. No matter how you work in our space, fraud will always be something in our space. We will have to deal with it forever. We will not be able to eliminate it. It is really managing the risk of it, minimizing it. Technology can be a necessary evil, where it could also create opportunities to track licensing, the background of the person. I think there are opportunities from a vendor standpoint for us to create technologies and solutions to help lenders and brokers focus on doing good deals with good brokers and good bankers.

ALLAN: MCS is a national property preservation company and we see large increases in the number of defaults and REO properties as a result of this problem with fraud and with just problems within the mortgage market in general. One item that has been prevalent at this conference is the industry's concern that public perception is that the mortgage industry actually makes money on foreclosures and defaults and that could not be further from the truth. So industrywide efforts to curtail and thus reduce overall default and foreclosure rates certainly must encompass better handling of the fraud within the industry.

MARK: What do you see as the split between the consumer fraud problem and fraud coming from inside the business, such as from brokers, title companies, appraisers, etc. Which is a worse problem?

DAMIEN: Unquestionably it is the insider fraud, or so-called participant fraud, that is the major problem for lenders. That is apparent for a number of reasons. Firstly, because, by definition, their knowledge of the systems, their knowledge of the procedures and processes. That is what needs to be distinguished, where, in general, the motivation is not criminal intent, it's not to occasion a loss for a lender, it is simply to occupy a property to get a home to move out of the rental sector. I think, in general, lenders tend to look at that with a kinder eye when they do to the pretty significant losses they incur when there is participant fraud. If you look at some of the big cases from last year, the major flipping scheme in Indiana for example, there was a substantial participant fraud dimension to that, most notably on the Realtor side. I think where brokers play a huge role in combating that is by definition, they are local participants, they know what is going on in the local market. Brokers play a key role in combating fraud, in bringing cases to the authorities' notice and I think (being an intermediary) is a double-edge sword because many of the very large fraud schemes have often involved brokers.

MARK: Have brokers unfairly gotten labeled as being involved with fraud?

DAMIEN: Unfairly they have, but as tended to happen, it is a few bad apples at the bottom of the barrel that ruin it for everybody.

CARY: Of the four players where fraud can manifest itself, it starts with the consumer. It moves to the broker and goes on to the lender. Then there is the third-party provider, whether it is the appraiser or the title company. What happens is the broker gets a bad rap in a lot of cases because when the lights go out and the music stops, they are the last ones in the chair that every one points to. It is almost like the ladder effect. The consumer starts it, the broker buys on to it, and they send it into the lender. Now, whether it is intentional or unintentional, the broker still has to trust what the consumer is providing is valid. If the consumer commits fraud because they can open up QuickBooks and fabricate some tax returns or W-2s, the broker needs to have the measures in place to make sure they can check on the accuracy of the consumer. That is a very difficult position it puts the broker in. The broker is stuck in the middle, gets the rap because they are stuck in the middle. The consumer commits fraud, they are unaware of that, but yet they are warranting that as it is passed on to the lender. The lender finds out and they push it back to the broker. But if gets past the lender, then it goes on to the capital markets and the buyback effect takes place. Some of the things the brokers can do is to take some of the fraud technologies the lenders are generating and try push that into the consumer. These new consumers are more creative, more technology savvy, and the processing is going to start taking place at the consumer level. So, originators are going to have to put origination technology in the hands of the new consumer and they are going to be processing their own loans, which exacerbates the opportunity for fraud.

CHRIS: REO Trends provides software to lenders to help them manage and sell foreclosed homes. One of the aspects we see a lot of people look at is efficiency, and in starting to turn to what we deem transparency. Having the transaction go through technology, a lot more aspects of that transaction can be tracked. Report cards and grading analytics are becoming a lot more prevalent and specifically focused towards identifying and detecting potential fraud.