Early Detection Is Key To Fighting Loan Fraud

A former Nevada mortgage regulator told attendees at the recent SourceMedia Nonprime Lending Symposium here that the key to combating mortgage fraud is in having procedures in place to focus on prevention and early detection.

But, added Susan Eckhardt, who is now a compliance consultant, that needs to be combined with high lending and brokering standards as well as industry rewards and sanctions related to findings of fraud.

Some hold a belief that 1% fraud is tolerable. But Ms. Eckhardt presented the audience with several other instances of 1% errors, including 268,000 defective tires will be sold this year, 14 babies would be given to the wrong parents each day, there would be two unsafe plane landings each day and 18,322 pieces of mail would be lost each hour.

She provided a scorecard for attendees to grade themselves, covering such areas as anticipation of potential fraud, accountability, avoidance, action and assessment.

Those companies that scored highest have strong compliance and internal controls in place to expose and eliminate fraud. At the other end of the scale, those that did not do well need to reassess the lack of internal controls that present a serious compliance risk.

During the conference, a number of speakers described the situation in the subprime business as the perfect storm. Merle Sharick, assistant vice president for MARI, defined that term as one part fraud, one part frothy markets, one part an exploding secondary market and one part greed.

The industry has an overreliance on the use of technology to detect mortgage fraud and this costs the industry billions of dollars annually.

MARI just released a new report and among the finding is that Georgia, traditionally the capital of mortgage fraud, has slipped to No. 4, thanks in large part to creating a legal environment where people know if they commit fraud they will go away for a long time, Mr. Sharick said.

Submissions to the MARI database, he noted, are 30% higher on 2006 loans than they were for 2005. Issues include problems with employment history and claimed income.

Florida is the No. 1 state for prime mortgage fraud, followed by California, Michigan and Georgia. For prime loans the metro areas with the highest early payment defaults are along the Gulf Coast affected by natural disasters.

Florida is also the top state for nonprime mortgage fraud, followed by Utah and Michigan. But for early payment defaults, the top four markets are Jackson, Mich.; Enid, Okla.; Kankakee, Ill.; and Oakland, Calif.

During the question-and-answer session, the panelists were asked is it fraud if an originator sees the borrower's W-2 but puts them into a stated-income loan?

Ms. Eckhardt said it is fraud and that lenders and brokers must dismiss anyone who puts someone into a stated-income loan after seeing a W-2. Mr. Sharick added the industry needs to create a zero-tolerance environment for mortgage fraud in its shops.

(c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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