Lenders can try as hard as they want to prevent mortgage fraud from taking place across the country, but it always seems that the fraudsters will outsmart financial institutions and be one step ahead of them when devising a scheme.
Even though Interthinx revealed in its latest fraud report that national fraud risk is down in the first quarter by 4.3% from the previous quarter and 3.1% from a year ago, there is still one category that lenders should be very aware of right now: employment and income fraud.
Employment and income fraud is when a borrower provides fraudulent information on a loan application about their job and how much money they are earning relative to this position.
“We’re seeing more income and employment issues because it is easier to forge these documents than other types of fraud. There’s not a lot of other places in a loan file to commit forgery,” said Don Efferpz, vice president of fraud risk management at DataVerify.
Efferpz said that borrowers have a much greater capability of creating W-2s and pay stubs off of the Internet rather than falsifying information like an appraisal or credit report that comes directly from an individual and company.
According to Interthinx, employment and income fraud risk rose in the first three months of 2012 by 5% from the fourth quarter of 2011 and 18% from the first quarter last year. Over the last two years, employment and income fraud risk has gone up 37%.
In order to combat employment and income fraud, both Interthinx and DataVerify have tools that are upgraded continually which can help lenders mitigate their potential fraud risk.
At the end of last year, Interthinx integrated its FraudGuard product with The Work Number to provide financial institutions real-time information regarding an individual’s current employment and income status to pay for their loan. The integration allowed lenders to order income and employment verifications directly through FraudGuard and receive verification results within seconds to know a borrower’s employment status and the income that they are making to decide if they should approve a mortgage loan to the borrower.
The latest update the Agoura Hills, Calif.-based firm plans on making to FraudGuard very soon is including a reverify piece that is compliant with Fannie Mae requirements. This enhancement will allow the lender to confirm a borrower’s job on an already pulled income or employment verification on that same loan 10 days prior to closing.
“We want to make sure the borrower is still employed at the same place where we originally pulled the verification for them and are making the listed income so that they can pay off the loan,” said Ian Anthony, director of product management at Interthinx in an interview.
“This makes the closing process smoother, easier, and of course, if there were any issues to recognize any type of fraud, we identify those issues on the FraudGuard report and surface that on the overall borrower’s score.”
Anthony said this FraudGuard upgrade is important because without it, customers would have to use another product or create an internal team to remain in compliance with industry regulations.
“With the reverify piece completely built in to FraudGuard, clients don’t have to go outside of that product and everybody is looking at the borrower who requested the loan in the same consistent manner throughout the whole life cycle until closing time,” Anthony added.
Meanwhile, DataVerify’s Drive platform also can identify potential misrepresentation of occupancy, identity, employment and income within a loan file.
DataVerify’s VOI/VOE service confirms income and employment and exposes any deviations that are evident on an application. Features the product offers a lender includes choosing whether they want written or verbal verifications, creating customizable questions for the solution to meet their specific needs and reminder emails to alert them if the borrower authorization has not been received.
Also, Efferpz said that DataVerify checks for undisclosed self-employment, such as whether an individual has a side job in which they don’t disclose this additional income on the loan application.
“Undisclosed self-employment presents an additional risk to the lender because they know he has one job and can verify this, but the other business is hidden so the lender does not know what the risks and debts are,” Efferpz said.
Secondly, through a direct interface to the Internal Revenue Service’s tax return processing system, the Chesterfield, Mo.-based risk mitigation provider’s 4506-T solution helps a lender streamline their operation by detecting borrower income misrepresentation.
DataVerify said this tool reduces processing time by up to 95% and enhances loan quality be detecting additional IRS tax return information not included with the original loan file, such as whether a borrower is paying alimony.
The 4506-T solution sends instant email notifications to a lender highlighting if there are any red flags to be aware of based on what a borrower labeled as their income on the loan application compared to what was submitted on their tax transcript.
“Clearly, there are ways for the bad guys to falsify that process by sending in a tax return and then making their loan application and getting all through that and then quickly filing an amended with the real numbers, but we have ways of catching it,” Efferpz told this publication.
Through the first quarter, 62 markets are considered to be “very high risk” for mortgage fraud, Interthinx said. Specifically, California and Florida account for more than half of the MSAs classified under this category, while Michigan, Ohio, Colorado and Arizona cities make up another fifth on this list.
But Efferpz recommends that lenders should not make changes to their protocols based on location since mortgage fraud is a national issue.
“The fraud guys are pretty smart and if they see you’re putting more emphasis on employment and income issues in one particular city, they will figure this out pretty quickly,” he said. “Anything that is put in place to put a hurdle in front of them, they find a way around it. The only hope that we have to prevent and minimize mortgage fraud is for all lenders to employ automated tools so that every loan gets the same consistent treatment every hour of the day no matter who is monitoring them.”
