With a nod to Bob Dylan's prophetic lyrics, it seems the times are changing for the mortgage industry. Significant changes now taking place in the way mortgage loans are originated have created new challenges. Creative loan products have become a part of the past. Credit standards have tightened and federal regulation has increased. With the passage of the Dodd-Frank Wall Street Reform bill and an increase in focus on loan quality, has mortgage fraud declined?
Not necessarily, income and employment misrepresentation continues to increase and undermine loan quality. Interthinx's third quarter Mortgage Fraud Risk Report for 2011 reported an 8.8% increase in income and employment fraud from the last quarter and an increase of 50% from 2009. The increase is attributed to misrepresentation of borrower data in an attempt to meet debt-to-income thresholds in an economy with stagnant or declining real incomes.
With more stringent legislation and regulatory requirements around the borrower's ability to repay, it seems fair to ask why income and employment misrepresentation continue to increase. Mortgage fraud and its perpetrators just mutate to fit the current mortgage environment.
Since 2007, regulators have eliminated stated income programs and now require income and employment to be fully documented as it was prior to the inception of reduced documentation concepts. Fraud perpetrators do not look at the requirement for more documentation as a deterrent.
With each document there is an opportunity to alter the document and the facts relied upon by the lender. Some classic fraud tactics are reemerging. Handwritten verifications of employment are making a comeback to document false income and/or employment. Employment misrepresentation is being presented in the form of altered paystubs, W-2's and tax returns. Information is being withheld regarding a borrower's self employment and ownership in their company and employment is documented as if the borrower is an employee of the company. Cell phone banks are being established for verbal verification of employment.
There's a battle outside and it's raging. Financial institutions are under pressure to establish processes that meet legislation and regulatory requirements in establishing the origination of quality mortgages. It seems everything possible has been done to determine the borrower's ability to repay. So, what is the answer?
Just as fraud perpetrators mutate to fit the current mortgage environment, so must financial institutions. Instances of income and employment misrepresentation can be time consuming and difficult to detect. Relying on the historical processes for verification of income and employment in today's environment is not enough. Verification or reverification from authenticated trustworthy sources is a must to determine the accuracy of the income being relied upon for the repayment of the loan. Automating the process of income and employment verification will shift control away from the perpetrator and reduce the potential for fraud losses and regulatory non-compliance.
Income and employment misrepresentation continues to be at the top of the list for fraud risks. Integrated electronic access to tax returns and employment verification from an authenticated trustworthy source reduces the dependency for relying on information provided by the borrower or loan officer, reduces risk and enhances compliance with loan quality requirements.
In short, the industry is changing and financial institutions need to change with the times. Perhaps Bob put it best when he said, “for he that gets hurt will be he who has stalled… for the times, they are a-changin.”
Gayle Shank is a senior product strategist at Interthinx.
