Fraud: A View from the Trenches
Mr. Effertz is vice president of industry relations at Interthinx, a provider of fraud prevention and decision support tools to the mortgage industry.
There is a great deal of fraud in the mortgage finance industry. Though no single uniform figure exists, everyone knows the losses are huge. Typically the anecdotal loss numbers we read about do not take into account the extensive costs associated with lenders working to detect and fight fraud. So, even if we have a number in mind, losses are likely considerably larger.
Because of these factors, the topic is garnering a great deal of attention in the industry and general public and it continues to expand. Some of the awareness can be attributed to the press, which seems to have really sunk its teeth into this meaty and sexy topic. Some awareness is developed through anecdotal stories shared at industry events.
In spite of all the attention being generated, I have yet to read or hear about fraud from the perspective of the people who "toil in the trenches," those who touch the files and processes and keep the industry moving, the mortgage industry workers. I thought it would be refreshing to look at the problem from their perspective.
At present there are two main schools of thought lurking around the industry about the processes of detecting and defeating fraud. The first is that a good, solid processor, underwriter or closer should be able to detect fraud when it comes across their desk. We will examine this in some detail.
Another school of thought is that the fraud perpetrators are so familiar with the industry processes and the fraud so sophisticated; there is little chance for even well trained staff to detect and act upon it.
Unfortunately, both of these are true, for we are fighting both sophisticated insiders in fraud-for-profit schemes and less sophisticated fraud-for-housing schemes neither of which is being particularly well policed. As our industry faces this twofold problem, we should consider: Are we more worried about fraud for housing or fraud for profit; do we implement processes to detect one or both; what could those processes be?
This indecision (and even a temporary pause wastes time) causes distractions from the objective, protracts implementation of solutions and, therefore, leaves the door open for the fraudsters to take advantage. Layered upon one another, one begins to see how difficult this problem is to contain.
The first and most important aspect to understand about trench warfare is the pressure. Everyone talks about it. Sometimes it can be oppressive and overwhelming. We all feel different kinds of pressure in our lives. It is relatively difficult to avoid even for mega lottery winners (though some of us still dream of the good life trying to spend $100 million).
The pressures felt by the industry workforce can be sorted into three categories.
The first is the pressure we place on ourselves to succeed. This can take the form of pushing oneself to achieve status, generate additional bonus income for one's family or driving toward career advancement. This is a very strong desire and may not be 100% palpable even by the individual who struggles with it. Some would say that, if kept in check, this is a good kind of pressure. One that forces us to perform at high levels and become the best person we can be.
The next type of pressure is that which is exerted from outside the individual - from the supervisor or manager. This individual is motivated (or pressured) by the same inner drive to succeed as we discussed above. However, they also have the opportunity to "convince" others to help them in achieving their success. This can manifest in the supervisor pushing for more volume, shorter turn times, less scrutiny on seemingly squeaky-clean deals, etc. Of course the supervisor feels the same pressure as his or her staff. It travels up the chain of command for some distance and is not uncommon. This type of pressure can also be categorized as good or positive if kept in check.
The third category of pressure is delivered by individuals outside the chain of command - notably those in the sales arena. These individuals can be further defined as brokers, loan officers, account executives and so on. These pressures are legendary and discussed frequently at industry gatherings. Similar to the supervisor, the interest is typically based on pushing more volume, shorter turn times and less scrutiny on seemingly squeaky-clean deals. Like the other pressures, this one can also be positive, yet its considerable power is rarely used for that purpose.
These pressures come to bear excruciatingly on the shoulders of some of the least appreciated people in the business. They are typically also the least able to push back against the pressure. I am speaking about the processors, underwriters and closers, the nuts and bolts of our industry.
This is not to suggest these people are pushovers. They are not. They will stand up for their beliefs when necessary. After all, it is their signature on the approval, which stays for the life of the loan. However, as we all know, sometimes higher authorities take over and push things along. Again, we see the pressure.
Is it any wonder, then, that a slight alteration to a document is not always caught? Technology, the Internet and industry knowledge combine to make forged documents believable. In some of the frauds I have reviewed recently, the VODs and bank statements were very good. In fact during the re-verification process, one of the banks indicated that the statement certainly looked like one of theirs but the account number did not exist. The missing account number is the only way the bank had to determine the validity of the document, not the appearance of it.