Mortgage brokers on the frontlines of fraudStephen Gottmortgage fraud, fraud detection, technology
Mortgage brokers are starting to feel the "big squeeze" not just
on the revenue side of the mortgage industry, but also from
cost-cutting pressures coming at them from lenders. Lenders are
driven to slash costs from the mortgage process. They are
reorganizing, consolidating, deploying new technology and leaving
no stone unturned in their quest to reduce overhead and retain
profits. Still, even the most sweeping operational improvements can
only move the cost reduction needle so far. This is why lenders
must to reach out to their third-party outsourcing partners (such
as mortgage brokers) to find new and better ways to achieve their
goals, such as enlisting brokers to help police borrowers and the
entire origination process for fraudulent activity. A majority of
brokers are more than willing to help lenders in this regard, and
they are just as interested in generating high quality loans to
avoid repurchase.
One of the most important areas where brokers can significantly
affect lender costs is in their role as the first line of defense
against mortgage fraud. Nothing has as much potential to damage a
lender's reputation, harm trading values and soak up profits like
mortgage fraud. Just like any other loan, as a fraudulent loan
makes its way through the mortgage chain, processing costs and fees
are incurred that could have been avoided if the broker had
detected the fraud early on. Even if the lender identifies the loan
as fraudulent before the loan closes, it's too late to recoup the
costs already incurred. Worse, if the fraud goes undetected, early
defaults and foreclosures increase those costs exponentially.
While brokers may agree that they are indeed on the frontlines,
they have mixed reactions to the idea that they can stop fraud.
Most brokers have not been adequately trained to understand the
wide range of fraud schemes and may not be aware of the kinds of
precautions and detection methods that are available for their use.
However, to protect their own reputations and good standing with
lenders, it is imperative that brokers become knowledgeable in the
area of mortgage fraud.
There are many excellent training programs and conferences
available through industry organizations that can help brokers know
what to look for. For example, with some attention to details like
these, a broker can identify documentation inconsistencies very
early in the loan process:
*The W-2 submitted is not Copy C (employee's copy);
*Pay stub check numbers are sequentially different than payroll
dates;
*Evidence of whiteouts or typeface changes within words or figures
on documents (like bank statements) submitted by the
borrower;
*Verification of employment letters are signed illegibly or contain
words or figures that are slightly above or below other words on a
line;
*When Social Security numbers are checked for date of issue,
borrowers seem significantly older or younger than the issue date
would indicate; and
*Look for homes that have appraised values higher than similar
properties in the neighborhood.
Unfortunately, many fraudsters won't make these kinds of
mistakes. They are sophisticated, and more importantly, educated
about the processes and manual detection methods commonly used in
the mortgage industry. Mortgage brokers can be particularly
vulnerable, especially when the industry is in a down cycle, and
they are struggling to make ends meet. When they are looking into
the friendly face of a borrower who seems well qualified, it is
easy to ignore what their gut is telling them and overlook small
discrepancies.
However, the consequences of passing through a fraudulent loan
to a lender can be devastating for a broker. Because lenders are so
focused on their bottom line, they are scrutinizing third-party
originators with more zeal than ever before. The reason? Statistics
indicate that well over 50 percent of early-payment defaults and
foreclosures are preventable. Mortgage fraud creates a tremendous
drain on lender profits, and they must marshal all forces from the
broker all the way through to the loan processor to fight it.
But, is it fair to expect a broker shop to be able to screen out
potentially fraudulent loans? Brokers rarely have a staff available
that can conduct the kind of detailed analysis on every piece of
1003 data that would be required to do a thorough job. Not only
that, but manual analysis alone will not catch a sophisticated
fraudster. Even the most well-equipped lending institution,
complete with a quality control staff and an in-house fraud unit of
trained professionals, will not catch all fraud without the help of
technology.
The good news is this: excellent technology is available that
can detect at least 80 percent of mortgage fraud. Developed by
experts in the industry, the best tools can even provide a
reasonably predictive fraud score with only a name, address and a
Social Security number to work with! Especially for brokers
pre-qualifying a borrower, this technology gives them a tremendous
advantage.
For example, just to check the validity of a Social Security
number requires an originator to first determine if the number has
ever been issued, and if so, when. The number should then be
screened against several other databases to see if more than one
person is using the number, whether it has ever been used in a
death claim benefit or if it has been identified as being
associated with a stolen identity. In a recent example of Social
Security fraud detected by a technology system, it was found that
202 individuals in multiple states were all using the same Social
Security number!
Even borrower names must be checked against a number of
databases, including the Office of
Foreign Assets Control "Patriot Act" Specially Designated Nationals
and Blocked Persons. Especially in today's world of careful
scrutiny of individual citizenship, validating that a borrower is
either a citizen of the United States by birth or has followed the
proper immigration procedures is essential. And when a broker is
working with a strong fraud prevention partner, the firm will run
borrower names through their own "watch list" of people who have
previously been associated with misrepresented information on loan
applications. Having a fraud tool that scans across multiple
databases, almost instantaneously, is ideal for both originators
and lenders.
Fraud detection tools are very economical, but what about
mortgage brokers who only originate approximately 10 loans a month?
Can small shops access and afford these sophisticated tools?
Absolutely. Brokers have the same options as everyone else in
the mortgage chain. They can either have their loan origination
system directly integrated with a fraud technology system or access
these same excellent tools by signing up with a provider that
offers a Web site option. Brokers enter the borrower information
directly into their provider's Web-based fraud detection tool and
within 20 seconds, they can get back a fraud score on the
prospective loan.
Obviously, there are many benefits to utilizing a fraud
detection tool, not the least of which are reduced costs and
increased credibility with organizations further up the mortgage
chain. Whether the originator is working with a lender, a lender is
working with a warehouse vendor or a mortgage banker is working
with a secondary market investor, relationships are strengthened or
dissolved depending on how well loans perform over time.
Originators that take the initiative to screen loans through a
fraud detection technology tool will quickly earn respectand
perhaps better termsfrom their lender partners.
Being on the frontlines is a big responsibility, but it also
provides brokers with the opportunity to strengthen their market
position by driving costs out of the mortgage chain before they are
incurred. With every step beyond origination, costs escalate on
fraudulent loans and those profits are lost forever. As a result,
brokers who are willing to tackle fraud, and use the tools they
need to be successful, will enjoy the kind of long-term lender
relationships that survive the ups and downs of the mortgage
industry. Everybody wins ... except the fraudster.
Stephen Gott is chairman and chief executive officer of Appintell Inc. He may be
reached at (800) 216-7062 or e-mail
[email protected].
