Do not ignore clear warning signs. Image: Thinkstock.

Potential fraud activity is on the rise nationally that lenders should be wary of during the mortgage loan application process.

According to Kroll Factual Data, there was a 1.1% average increase in fraudulent loan applications throughout the country in the third quarter of 2012 compared to the second quarter.

The Loveland, Colo.-based risk mitigation and verification services provider examined metropolitan statistical areas with at least 1,000 applications per quarter in its research.

The largest quarter-over-quarter increase of possible fraud found within submitted loan applications was seen in Flint, Mich., which was up by more than 50%.

Other cities that rounded out the top five on Kroll’s research list with an increase in fraudulent activity include Columbia, Mo., Lancaster, Pa., Tacoma, Wash., and Santa Fe, N.M., up 29.77%, 28.83%, 25.68% and 24.24%, respectively.

These results come on the heels of the Consumer Financial Protection Bureau coming out with new regulations that require lenders to verify borrowers’ financial records whether they the ability to repay mortgages.

During the same time period, there were some cities that experienced a decline in possible fraud activity, Kroll revealed in its findings.

For example, fraudulent mortgage applications were down in Champaign, Ill., by 19.55% in the third quarter. Additionally, fraudulent activity declined in Bridgeport, Conn., by 18.59%, San Francisco by 18.37%, Birmingham, Ala., fell 17.95% and a decrease of 17.32% in Cleveland.

“This spike in potential fraud is troubling, coming at the same time the mortgage industry is beginning to turn the corner,” said Rod Bazzani, president of Kroll Factual Data.

“More importantly, the fact that red flags are rising in every area of the country highlights the continued need for lenders to remain vigilant against fraud. In addition, the new CFPB restrictions—whose ultimate goal is to ensure a borrower can repay a mortgage over its entire term—raise the stakes for lenders to catch fraud or inadvertent errors that might compromise lending decisions or risk buyback requests.”

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