Fraud: Today's Unaffordable Black Eye
Fort Worth, TX-Income and employment data verification appears to be high up in renewed efforts to prevent fraud and redefaults while the mortgage industry faces an unprecedented volume of loan modifications.
As expected at the forefront are technology solution providers and credit rating agencies now expanding to meet data verification demand.
"I think fraud is at the front lobe of everybody's brain in the mortgage industry right now," says Jay Meadows, CEO of Rapid Reporting Verification Co. here.
"It's showing in the volume of loans we process, as far as people are using our products more consistently. Internally we've seen clients who used to use a 4506 [tax form] in 2,000 cases a month, now they're using it in 10,000 cases a month. That trend's continuing and there is no end in sight for that since it need be the rule not the exception."
The current focus on fraud prevention is caused in part by the fact that there very few warehouse lines are still available, he said, in addition to Fannie and Freddie.
"You can't afford to get a black eye in the other lines because if you do, you're out of business. It no longer is like in the old days when you mess up with one line and you just move to another credit line. People are being very cautious about sending bad deals out, [fraud prevention] is very important."
Third-party data verification is a proven way to achieve labor efficiency and accountability in mortgage reporting, says Mr. Meadows.
How employment verifications are obtained can literally mean the difference between catching a bad loan and getting a buyback or foreclosure down the road. A shortage of employment verification staff creates "opportunity for fraud to leak into the business."
"Independent income verification is a key component to a servicer's increase in overall success rate of loan modifications," agrees BasePoint president and CEO, Tim Grace.
Similarly to Rapid Reporting, fraud and risk analytic solutions provider BasePoint Analytics, Carlsbad, Calif., reported record growth in the use of its newly enhanced Income Verification Service system.
Since last year BasePoint said it has recorded 100% more requests every month, showing "income verification is becoming a critical component of mortgage lending."
The company's automated income verification service allows lenders and servicers to retrieve borrower tax returns and W-2 transcripts from the IRS database.
BasePoint said the new product was released responding to demand for data verification through independent sources.
Fraud prevention however is not the only driver of thoroughness in data verification. The Home Affordable Modification program and new regulatory requirements are also pushing lenders and servicers to ensure data accuracy.
"Not only did the housing bill come out with language that expressed the need for the use of a 4506 tax form to verify the income. Now the Treasury, Fannie and Freddie are getting on board. Plus, there are the 9 million modifications that are said to be in the pipeline," Mr. Meadows said.
"It means that if we are going to do 3 million modifications this year then we'll have to find a lot of loans to look at. Plus, it is specifically stated that income verification will be done on each and everyone of these loans ... which some people call deferred foreclosures. There is this thought out there that we could easily be throwing good money after bad."
He has reservations, to say the least, about the efficiency of so-called blanket modifications compared to having various lenders process loan modifications their own way. "Any time those type of transactions come in you can see how the mortgage industry somehow keeps the government form regulating or over regulating as far as it goes to ideas on how to deal with a problem."
Which is why he finds healthy a trend of more third-party usage of technology combined with live decision-making process. The industry, he said, "is doing a better job at accumulating data that lead to better decisions. I think that's what's going to take going forward to maintain the integrity of the lending process."
In times like the present when a refinancing boom is expected to hit the market, he argued, there is more opportunity for fraud just because of the volume.
During the past several months Rapid Reporting has been getting ready for hiring almost 100 new employees. Also, it is about to officially launch EmploymentChek, which was conceptualized at yearend 2008. Since, the company has been busy adopting the new tool to handle scale "growing by 25% a month on the other side of the business." Current market conditions dictate business priorities, Mr. Meadows says, and they start with the bottom line, followed by new products.
Traditionally Rapid Reporting screens over 15 billion records in public and private databases for identity fraud and abuse.
EmploymentChek is a third-party employment verification tool that combines automated data gathering with live, verbal information verification of employment, which is a priority in lender efforts to prevent fraud.
It complements the company's IncomeChek, designed to screen income information obtained from the Internal Revenue Service and DirectChek, which verifies identity data through the Social Security Administration database. In their entirety these tools help lenders deal with the so-called four major fraud risk factors inherent in every mortgage loan: identity, income, employment and collateral.
Through EmploymentChek a trained employment fraud specialist provides to lenders and brokers a definitive answer on a borrower's employment in 24 hours or less. Rapid Reporting processes the data through multiple systems before a risk rating is assigned to an employer and a customer service center specialist calls to verify a borrower's employment.
"This product is taking care of just another piece of the fraud puzzle," he said.
A puzzle other vendors, lenders and investors are equally interested in solving and at the required scale.
Equifax Inc., Atlanta, said it has completed the full integration of Discover Source, a provider of automated IRS 4506-T tax-filing information.
Added to existing Equifax data capabilities such as Equifax settlement services, or predictive income and other consumer analytics, according to president of the Equifax U.S. customer information services unit, for the mortgage industry, "this suite provides a single source" of multiple data needed for loan modifications and mortgage lending today.
"From a vendor standpoint we're seeing companies trying to do more with less, more underwriting with less people. Those who are still in the business are getting all the business so their volume is much higher. That is causing a trend to move towards third-party verifications services that take some of that volume off but also take the conflict of the interest out of the transaction, since an underwriter is in the business to sell loans," Mr. Meadows said.
"We no longer have to trust the people we do business with, we need to be able to trust the process. We need to make sure that data verification is set apart form the mortgage transaction ... to ensure accountability. With EmploymentCheck we also record the employment verification conversation so lenders can pull that sound bite up and listen to it to ensure all due diligence is done."