As you think of the suspense-filled spy movies in which the hero must defuse a bomb to save the city, you can hear the familiar “tick, tick, tick” of the bomb’s time clock. With ninja-like precision the hero cuts the yellow wire, or maybe the red wire, just in time to stop the clock, neutralize the bomb, and save the day. The rush of adrenaline, the intensive focus, and the danger seem to only last for a few seconds; then it is all over and everything is safe.
In the mortgage industry we have a similar threat called fraud. According to a recent FirstData report, fraud losses cost the financial and retail industry more than $200 billion annually. Industry experts indicate these losses will only increase as criminals and fraudsters become more sophisticated in their approach.
Mortgage loan fraud is the most predominant type of fraud based on SAR filings. The SARs reported that scams target homeowners who are seriously delinquent on their mortgage and promise them false solutions to prevent foreclosure.
Mortgage fraud includes can also new originations. There is some debate in the industry regarding mortgage fraud. Some question whether these are criminal losses or just credit losses that would have been taken anyway based on the deteriorating market. For both positions the losses are real and understanding the contributing factors may help organizations better manage risk.
One recent trend is synthetic applications which use real data from multiple individuals to create a synthetic (fake) identity. Since parts of the identity are real these are much more difficult to detect and deter. The Financial Crimes Enforcement Network also provides details on two common types of mortgage fraud: quitclaim deed and advanced fee scam.
With a quitclaim deed, the fraudster tells the homeowner to sign a quitclaim deed and the mortgage will be paid. The promise is generally that the homeowner can continue living in the home paying rent and buy back the property once their financial situation improves. However, the fraudster often records the quitclaim deed and sells the property. The purchasers are often straw buyers who misrepresent employment or income information to deceive the new lender. Similar fraudulent activities may include flipping, short sales, appraisal fraud and investment scams. Participants in these criminal transactions can include appraisers, lenders, Realtors, loan officers, title companies, settlement agents and borrowers.
In an advance fee scam, fraudsters tell homeowners they can save their home but require an advance fee for their services. They typically promise to negotiate a loan modification to prevent foreclosure. Other activities include fraudulent lien releases or meaningless legal documents for the borrower to send to the lender. Often there are no services provided and the con artists simply pocket the money.
While fraud can seem almost overwhelming, there is hope. Two specific opportunities for improvement include leveraging employee intuition and implementing industry best practices that can help lenders predict, identify, and respond to fraud in a timely manner.
Employee Intuition has tremendous potential.
Statistical models provide increased protection, but industry experts suggest that the human capability to detect anomalies is unmatched. This can be particularly helpful in identifying new fraud schemes. Internal processes must be established that make fraud prevention everyone’s job. This approach will leverage human intuition to identify potential fraudulent events and situations. In addition, employees can assist with customer contact strategies.
Firms also need business process management to allow for process design and enterprisewide visibility. According to Josh Ablett, industry financial crimes expert and president of Adelia Risk Consulting, “a surprising amount of fraud is preventable through automation and statistical analysis.” While technology can automate and streamline, often firms want the technology vendor to bring them “rules.” Generally, the rules one lender implements should only be used as a starting point for another lender. The lender must focus on their specific products, customers and access channels to determine fraud root causes.
Perhaps in some ways there is an acceptable or expected level of fraud. We admit there is no way to eliminate all fraud. Ultimately there is a trade-off between safety and the customer experience. It comes down to policy, process and people with technology as an enabler.
Technologies can assist in protecting financial institutions, particularly as they deploy cross-channel solutions. There are also processes and policies that can minimize risks. However, one of the biggest opportunities to reduce fraud is the “people” factor. One executive shared, “The fastest route to realizing fraud savings is through the operations team.” Some lenders focus on technology projects but forget they could save money just by adding operations staff members.
One global problem that continues to exist is that sometimes customers are tricked into giving up their confidential information. New fraud tactics will continue to develop and as the criminal get smarter the lenders must follow suit. As you hear the tick, tick, tick of fraud it is important to act promptly and invest wisely to protect your firm from fraudsters. Criminals will continue to attack, so be prepared.
Brian King is president of Wisemar Inc., a management consulting firm based in Charlotte, N.C. He can be reached at (704) 503-6008.
