Forged checks, false occupancy claims and scams on senior citizens are among the schemes lenders should be aware of as growing interest in home equity lending catches the attention of fraudsters.
While home equity lines of credit have been available for decades, the rapid acceleration of mortgage rates over the past three years is raising
Why HELOCs are becoming fraud target?
The rise of accrued home equity wealth this decade to record levels is catching the eye of potential fraudsters. The current value of
Because of the heavy bank and credit union concentration, fraud risk has historically come in low, specifically because borrowers are usually already established customers or members, according to Ramiro Castro, chief product officer at Firstclose.
The recent increase of nonbanks, where lending can often be conducted online, presents fresh opportunities, though. "That larger IMB is probably closer to someone who'd be at higher risk, because their channel is — for lack of better terms — picking people off the street. They sometimes don't have an existing relationship," said Castro, whose company offers a HELOC point-of-sale system.
"You're going through a purely online experience — that becomes more of a concern."
Top HELOC fraud schemes to look out for
While knowing a customer well will mitigate risk, it doesn't eliminate it, even when clients are as well vetted as they are at credit unions. Perpetrators rely on both modern technology and old-school persuasion to commit their crimes and avoid detection.
Although the threat from nefarious outside actors is well documented, fraud can be an inside job as well perpetrated by someone close to the victim, and, knowingly or not, the borrowers themselves.
Compared to first-lien mortgages,"identity fraud is a little bit more of a risk on home equity loans," said Bridget Berg, principal, industry solutions
"It's generally somebody who the borrower knows who might commit the identity fraud. It may be an aged homeowner who's got a caretaker or a relative who has access to things and gets them to take out a home equity loan that they didn't really understand they were doing or completely forges it," she said.
Homeowners have also been known to defraud lenders themselves by misrepresenting who they are or the purpose of the original mortgage. As a general rule, home equity programs require the collateralized property to be occupied by the owner.
"You can't even get a home equity loan if it's not owner occupied, so they will misrepresent that to get that home equity loan," Berg said.
Taking out multiple credit lines is a different tactic homeowners used in the recent past to illicitly access home equity. With a lag in reporting new originations to credit bureaus, it wasn't uncommon for a fraudster to open multiple HELOCs at different banks on the same home, which may have been bought with cash. After obtaining line of credit proceeds that, when combined, exceeded the value of the home, the perpetrators left the country, leaving banks to fight amongst themselves, Berg explained.
Where other HELOC fraud risk lies
The dark web is a treasure trove for scammers. With personal identifiable information available for purchase, scammers can easily ascertain who has large untapped lines of credit along with
Culprits could just as easily be an acquaintance who has access to the same information, security experts warn.
"Account takeover is probably the biggest risk overall with HELOC," Berg said. A change to the mailing address different from the collateralized home, raises a red flag. "That's usually one of those precursors to a fake draw request."
What frequently follows is an order for checks to be sent to the new address. "Any kind of change to the contact information that then is followed by some kind of draw activity would be concerning," Berg added.
No matter the type of institution where a HELOC might be originated, customer-facing employees and other service staff often serve as the best line of defense to protect valued customers, according to Ashley Goodsell, a senior fraud investigator at Omaha, Nebraska-based Centris Federal Credit Union.
In the case of established clients, unusual behavior should raise warnings, Goodsell said, pointing to an example of recent in-person interactions at one of the Centris' branches when a customer sought to increase a HELOC line.
"The conversation in the branch with that loan officer seemed very fast paced," she said, with the customer expressing exasperation at questions being asked and the waiting time for approval.
Following set protocols, the employee alerted the credit union's analysts. "When it was reviewed, we were able to ask them different questions and ultimately identified they were part of a scam to get extra money to send to somebody."
Best practices for HELOC fraud prevention
With no commonly accepted underwriting practices or universal loan application as currently exists in the mortgage industry, the responsibility of providing secure HELOC transactions has fallen primarily on the shoulders of the lenders themselves. The strength of fraud prevention measures, as a result, can range from lax to robust.
Forming a network of peer institutions locally and nationally to
"What we've realized is with HELOC fraud or synthetic ID fraud, impersonation — it hits one financial, and then they learn from there, and they just keep moving. We've learned it's easier to work together, because we maybe can prevent it and help our customers or our members," Goodsell said.
Similar information-sharing networks work for institutions of all sizes, alerting them to the growing potential of risk, according to Cotality's Berg.
"We have a consortium where some of the larger banks that do HELOCs send us their data so that we can compare and say, 'Hey, there's something going on with another bank,'" she said.
The strongest safeguards, though, might be clear guidelines about how to address suspicious activity, which alongside fraud education and training for bank employees, will help lenders stop scams early, Goodsell said.
At Centris, leaders launched an internal red-flag escalation program for staff, spelling out actions to take when suspected fraud appears. Safety precautions include putting transactions on hold for review. The program has helped prevent potential large losses on more than one occasion.
Goodsell prepares staff to engage in difficult conversations with members if a situation initially raises any red flags. "If your gut is feeling that something is not feeling great, asking those hard questions can prevent something catastrophic," she explained.
"It's getting through that really uncomfortable moment, and realizing that's on our financials, I tell them it's OK to be uncomfortable for a minute because then we can get comfortable after we know what it is," Goodsell said.
