Keeping up with technology can be challenging – especially if one has habitually communicated or operated in certain ways that, over the course of the last 15 years, have become antiquated, if not obsolete. But as with most other things, if one has the willingness to try new products, services and approaches, as well as the determination to master them (be it Ubering home from the airport, reimbursing a friend for dinner with an app, or inserting your new chip credit card rather than swiping it), over time, one will find oneself embracing these emerging technologies and benefiting from them in terms of time saved, money saved and enhanced security.
Staying on top of mortgage fraud is akin to keeping pace with advances in technology. To catch it, one must be willing to adopt and master the tools that can identify it. The first step, however, is to understand the types of fraud that are most prevalent, including some of the new scams that are being continuously tested in the industry. Once one has a handle on the types of fraud to look for, today’s verification tools – which have been greatly enhanced by modern technology – will help one stay ahead of fraudulent activity.
Types of mortgage fraud: what’s trending
According to the Mortgage Bankers Association, the top two fraud characteristics in 2015 were straw buyer and appraisal fraud. A straw buyer/borrower is a person who is paid to lend his or her identity and credit to a transaction for another person. Straw buying is increasingly being used for home purchases whereby the actual buyer with poor credit cannot secure financing. The actual buyer promises to make all of the mortgage payments and typically compensates the straw buyer for using his or her credit.
For lenders, straw buyer fraud increases the risk of default on the loan without the lender’s prior knowledge of that risk. It’s risky for straw buyers, as well, as they could be held legally responsible for the debt they incurred on behalf of other people.
Appraisal fraud occurs when the value of a home is intentionally appraised for more than its true market value. The inflated appraised value is typically used to help a seller get a better price than the market would support; help a buyer secure a loan because the mortgage amount could be much lower than the home’s appraised value of the home; or help a homeowner get a great deal on a home equity loan or line of credit. This kind of fraud can happen when the purchaser or seller physically alters an “honest” appraisal or when an appraiser is involved in the scam and purposely overstates the value of a home.
In addition to these two common forms of mortgage fraud, another popular deceptive practice is taking shape: loan stacking.
Loan stacking, which in and of itself is not a fraudulent practice, is when multiple loans are taken out from different lenders within a short period of time. According to the Wall Street Journal (WSJ), incidents of loan stacking doubled between 2013 and 2015. And, because it increases the chances that a borrower will default, most mortgage lenders discourage it.
In fact, borrowers who apply for a second loan within 15 days are four times as likely to be identified as fraudsters who have no intent to repay – and a third loan makes them 10 times as likely to be fraudulent, according to a recent article in the WSJ. This is particularly concerning for online lenders that sell the convenience of speed, which also makes them more vulnerable to fraud. Processing mortgage applications faster can sometimes force fewer identification and background checks. In addition, these lenders typically issue payments quickly, which can give fraudsters the opportunity to access large amounts of money before any concerns are raised.
Taking advantage of affinity groups
All of these fraudulent and deceptive practices commonly exist under a blanket form of fraud that is really gaining traction today: affinity fraud. At its core, affinity fraud is a form of investment fraud. It is accomplished by members of groups, such as ethnic and religious communities, professional affiliations, and the elderly – people who have an affinity, or share a bond or financial interest, with one another. The fraudsters are usually group members (or are pretending to be group members), and their scams take advantage of the friendship and trust that exist within these groups.
Affinity fraud often involves Ponzi schemes utilizing elements of other deceptive practices, such as straw buyers; falsified appraisals and gift funds; altered employment, assets or income; doctored loan documentation; and multiple loans on a single property whereby the total combined loan amount greatly exceeds the actual property value. The parties involved who have a shared financial interest (including the borrower, appraiser, real estate agent, broker, loan officer and closing agent) typically use common surnames to disguise the fraudulent transaction. And, they often receive kickbacks.
The first steps to combating affinity fraud are to be informed and remain vigilant. You should endeavor to know who each borrower truly is and the professionals involved in each loan transaction. You should also reach out to potential borrowers and educate them about prevalent and new scams as they evolve.
What to look for
When reviewing a loan file, any inconsistencies that are uncovered often point to misrepresentations. This doesn’t mean that the borrower is intending to commit fraud, but it might.
The best thing lenders can do to avoid the fallout of unrecognized mortgage fraud is to regularly search for red flags, such as the following:
- Different handwriting or type styles within a document;
- Address discrepancies within the loan file;
- Social Security number discrepancies within the loan file;
- Documentation that includes deletions, correction fluid or other alterations;
- Numbers on the documentation that appear to be “squeezed” due to alteration;
- Verifications addressed to a specific party’s attention;
- Verifications completed on the same day they were ordered;
- Verifications completed on a weekend or holiday; and
- An excessive number of automated underwriting systems submissions.
Tackling fraud with technology
Fraud schemes can be tricky to detect because they aren’t obvious. Many mortgage technology companies, including our firm, address this challenge with tools that help identify mortgage fraud before it becomes a problem. Today’s technology enables lenders to verify applicant information quickly, conduct comprehensive risk assessments, and find inaccuracies and discrepancies on applications. To accomplish this, verification data is gathered from a variety of sources, such as government entities, public records and validating companies, just to name a few.
Another technological advancement is that lenders can now obtain all of the verifications they need from a single source, which makes the lending process much more efficient. And, the reports they yield clearly identify concerns on every application and summarize the findings, allowing lenders to quickly determine whether an applicant is a risk. These reports contain a tremendous amount of useful information, including the following:
Employment and income verification: The Work Number, a solution offered through Equifax Workforce Solutions, is widely used to accurately confirm an applicant’s employment and income. It is the largest database of up-to-date payroll records available that is contributed to directly by employers.
Identity verification: Advanced technology can verify an applicant’s name, address, Social Security number, birthdate and phone number. In addition, reports can be customized to include other items, such as driver’s license number; other properties owned; alias information; relatives and associates details; voter registration; liens/judgments; and continual monitoring of credit report and undisclosed debts right up until loan closing.
Watch list clearance: Lenders can now use technology to determine if their applicants appear on watch lists, such as the FBI Top Ten Most wanted, HUD Limited Denial of Participation and more – something required by both the Patriot Act and the Bank Secrecy Act.
Mortgage fraud has been somewhat diminished, thanks to some of the regulations that went into effect in recent years. Nevertheless, the industry will always have to contend with people who try to take advantage of the system. For lenders, the most effective fraud prevention program is one that utilizes emerging technologies to ensure applicant information is accurate and monitor borrower activity through closing. Similar to mastering the steady stream of new gadgets and technological advances that permeate everyday life, being willing and able to adopt and utilize verification tools is the best way to stay ahead of mortgage fraud.
Judy Ryan is vice president of corporate sales at Credit Plus Inc., a third-party verifications company serving the mortgage industry. She can be reached at firstname.lastname@example.org.