The dangers of closing fraud still loom large for lendersAndrew L. Liput Esq.mortgage farud, closing, loan origination, HUD-1
"Fraud in loan origination is a serious problem, and has
been thrust upon the mortgage industry largely due to the zeal of
pursuing profits during the housing boom without facing the risk
that large volumes of originations, by untrained loan officers,
would attract opportunists who see any chance in any booming market
to commit criminal acts in pursuit of unbridled
greed."
Much has been written over the past year about the impact of
poor loan origination and overall risk assessment by lenders,
resulting in bad credit decisions and outright mortgage fraud.
Despite the Congressional bailout, FBI investigations and industry
trade association workshops on best practices, the threat of
closing table fraud is still being overlooked. The failure to look
at the back-end of the mortgage loan process is occurring to the
detriment of lenders and threatens to derail the many advances made
in fraud prevention and detection to date.
Fraud in loan origination is a serious problem, and has been
thrust upon the mortgage industry largely due to the zeal of
pursuing profits during the housing boom without facing the risk
that large volumes of originations, by untrained loan officers,
would attract opportunists who see any chance in any booming market
to commit criminal acts in pursuit of unbridled greed. Now that
fraud in originations is down, thanks mainly to self-policing,
increased training and automated fraud detection software, closing
table fraud remains a glaring problem yet to be seriously
addressed.
Closing table fraud involves many of the same elements as
mortgage fraud at the origination stage, except that those who
conspire tend to be off of a lender's radar screen. Real estate
agents, sellers (including builders) and closing agents have little
contact in loan origination, since they do not participate in the
loan application process. However, they play an enormous role in
real estate transactions that are the basis for purchasing money
mortgage loan transactions. Improper and illegal collaboration
among borrowers, sellers, real estate agents and closing agents
creates as equally a dangerous and costly scenario as any other
fraud scheme. Yet, even in todays heightened risk averse climate,
does a lender know enough about the seller, the real estate agent
and most importantly, the closing agent? Everyday, lenders
nationwide wire hundreds of millions of dollars into the accounts
of men, women and settlement companies about whom they know very
little. While they wait anxiously for their signed closing packages
to return, their money lies exposed "on the street," without
guarantees of security. Why lenders (and title underwriters, for
that matter) place universal confidence in the existing loan
closing process is a mystery, and a recipe for disaster.
Who are these closing agents? Are they experienced? Licensed?
Insured? Do we care? Should we care? Of course we should! Lenders
that rely solely on closing protection letters, in those states
where they are issued, ignore the common practice for agents of
title underwriters to issue them without any criteria, and for
closing agents to recycle them on their own. It is not unheard of
for closing agents to simply "white out" the specific transaction
details on a protection letter and use them over and over
again.
Fannie Maes guidelines to banks on "Preventing, Detecting &
Reporting Mortgage Fraud" states, in part, that mortgage lenders
must Know [their] business partners & and consider using
outside sources to & selectively choose closing attorneys and
settlement agents." That was issued back in 2005, yet few, if any,
lenders are following this sound advice. While there is no
foolproof method of preventing fraud (since the fraudsters tend to
frequently change their tactics and methods, and since anyone who
is determined to defraud a lender and has the cooperation of enough
of the parties to a transaction usually can accomplish it), lenders
can arm themselves with more data about the closing process and
demand that closing agents meet certain minimum levels of
experience, insurance and overall reliability. Shining a light on
the closing process, and those who work it, can go a long way
toward weeding out the bad operators and defining a better process
for the honest and orderly distribution of mortgage loan funds.
Furthermore, having access to real-time data about the parties
at the closing table, immediate access to key closing documents, as
well as the ability to access detailed reports about a closing when
audits or loss mitigation efforts are required is highly desirable
in todays fraud-infested environment.
The answer: Closing table data and fraud deterrence is
available. There are online solutions that combine closing table
data collection, warehousing, and reporting functions with closing
agent registration and transaction recording features that help
close the gap between front-end fraud protection and the back end
still vulnerable to fraud. There are also third-party closing agent
verification services to quickly verify the credentials of the
professional to whom lenders are wiring their closing funds.
The third-party verification companies charge the closing agent,
or the fee to verify credentials is charged as a closing fee on the
HUD-1. In both cases, the service is provided without charge to the
lender.
With the financial industry in shambles, due to risky business
practices, there is no room for error when it comes to covering all
the bases in the fight against fraud. Now is the time to
incorporate the practices and procedures necessary to eliminate
this type of fraud when the next housing boom occurs. Every real
estate agent, seller, closing agent and lender will only flourish
under this protection, with minimal worry.
Andrew L. Liput Esq. is president of The Liput Group, and
president and managing attorney with Professional Assurance Ltd. He
may be reached at (888) 424-3728, through www.professionalassure.com
or e-mail
[email protected].
