Lenders Tackle Risk Mitigation Through Technology
Various technology tools have been developed over the years to combat mortgage fraudsters, and a lot of lenders say there is a constant struggle between production quality and compliance.
That's why it's important to find fraud early and find it often, according to Jay Meadows, president and chief executive officer of Rapid Reporting, Fort Worth, Texas.
While mortgage lenders typically use income and identity-verification tools on only a small sampling of their overall production, these industry insiders believe such verification increases the value of the loan portfolio and should be required by investors.
"If you are not using a fraud detection tool, you are asking for double the risk," said Mr. Meadows. "Sixty-four percent of all mortgage fraud is income or identity related. Wholesale, retail and warehouse - fraud happens across the board. There are no divisions."
Mark Fleming, chief economist at CoreLogic, agrees. He says the industry needs to be tougher on identity theft by using tools necessary to identify and prefect fraud before it gets on the books. Create risk mitigation systems in architecture to define fraud upfront. "Stop it before the loan comes to you in the first place.
Recent statistics from the FBI are only the tip of the iceberg when it comes to representing the problem of fraud. Mr. Fleming said suspicious activity reports are not required from many groups of lenders in the industry, so there is only a partial view of the activity that is being done. "There is plenty of evidence that the problem of fraud is rising in significance as well as the rate of which fraud is permitted. There are big and fancy schemes out there. It's no longer the single loan-flipping scheme. Whole neighborhoods are being modified on the perception of value. The sophistication in scale is growing," he said.
Some companies even double up on automated tools to separate the good loans from the bad ones, added Don Effertz, vice president of industry relations at Interthinx. Yet there are a host of companies who think they don't have any fraud, he said. "Do you really watch to catch this stuff? A lot of senior folks don't think they have to make a big commitment. There is all this awareness and FBI activity. But they think they don't have an issue, yet the back door is swinging wide open," he said. "Yes, tools add a burden to the process on a small percentage of loans and time to your production. But you concentrate on the crummy ones and separate the good loans on the way to get them through there."
Lenders grow tired of investigative issues that come up and continue to pay attention to their systems, designing a customized workflow around the solution, he added. "If you don't take the additional step to fully leverage that tool and build procedures around it, it doesn't help. You just forget about it, stick it in a file and not use it at all. The bad guys figure that out. If you have a broad solution in place, you must train people regularly and stay up to speed on what's going on. It's not as simple as just signing a contract."
What scares them the most are street gangs in Chicago and Atlanta, Mr. Effertz said. Fraudsters are getting better and better, and we keep trying to supply tools combat it."
Executives said some in the industry via insufficient documentation and verification are facilitating fraud with stated-doc loans. This type of loan, designed for those who have very complicated financial assets, used to be the exception. The problem is the industry lacks the operational controls to prevent misuse of these loans, said Mr. Meadows. "Many lenders have taken a risk when they allowed borrowers to qualify for certain loans. You have to go all the way with these products and put in stipulations. When each tool is used correctly, the lender can catch fraud and deter it." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com