Mortgage fraud trends and tips: With mortgage fraud on the rise, the need for quality control is more important than everAnna DeSimonemortgage fraud, financial crimes, MIDEX, MARI
Mortgage fraud in the United States is pervasive and growing.
Over the past three years, the number of Suspicious Activity
Reports (SAR) filings related to mortgages has tripled and the
number of investigations processed by the FBI has quadrupled. By
definition, mortgage fraud schemes contain some type of material
misstatement, misrepresentation or omission in the funding,
purchase or insuring of a loan.
There are two distinct types of mortgage fraud. Fraud for
housing represents borrowers who make false statements in order to
qualify for a loan. Fraud for profit involves collusion by industry
insiders and, according to the FBI, accounts for 80 percent of
fraud cases. Mortgage originations dropped $1 trillion dollars
between 2003 and 2004. Sadly, it is the reduction in originations
that is considered a factor in the increase of fraud. If the
perpetrators of mortgage fraud are industry insiders, they can
maintain their lifestyle. In June 2004, the FBI consolidated its
mortgage fraud program into the Financial Crimes Section of the
FBI's Criminal Investigative Division and has been proactive in
forming partnerships with federal agencies, regulators and industry
trade groups to combat fraud. The FBI embarked on a zero-tolerance
program within the mortgage industry to identify and stop the
frontline of industry insiders involved in mortgage fraud through
mandatory reporting. Insiders are defined as appraisers,
accountants, attorneys, real estate brokers, mortgage underwriters
and processors, settlement/title company employees, mortgage
brokers and loan originators. The FBI has collaborated with the
Mortgage Bankers Association of America (MBA) and industry leaders
to establish broader SAR requirements for mortgage lenders.
Non-depository lenders, appraisers, brokers and other mortgage
professionals who do not have adequate protection under the current
safe harbor program would file a Suspicious Mortgage Activity
Report, known as the SMARt Form.
Over the past 10 years, major mortgage lenders, agencies and
insurers have been submitting information describing incidents of
alleged fraud and material misrepresentation to a central database.
The database is maintained by the Mortgage Asset Research Institute
Inc. (MARI) and is known as the Mortgage Industry Data Exchange
(MIDEX). MARI can mine the MIDEX database to obtain statistics on a
wide range of mortgage fraud characteristics. The MIDEX data show
the types of problems found in loan fraud files seem to have been
relatively stable throughout the past four years. The geographic
distribution during the past four years has fluctuated slightly and
the statistics for a given state may differ for prime lenders
versus sub-prime lenders.
The MARI Fraud Index (MFI) is a numerical system that that
measures fraud. An MFI rating of 100 indicates the level of fraud
that would be expected from a given state based on the level of
origination. An MFI of zero means that no fraud was reported. An
index of 300, for example, indicates the level of fraud is three
times greater than would be expected. Lenders must deploy fraud
detection and deterrence steps on both a pre-funding and
post-funding basis. While many mortgage programs in today's
industry call for less documentation and verification, lenders are
cautioned to use stricter controls. Fannie Mae and Freddie Mac have
strengthened quality control requirements on the SISA (stated
income, stated asset) loans. Quality control steps must include a
salary reasonableness test to assess whether the borrower's stated
income conforms to the industry, geographic area and job title.
This may be completed at no cost through Salary.com's Web site
(www.salary.com). A second step for quality control auditors is to
validate the employer through telephone and web directories. Verbal
re-verifications of employment are also completed and documented by
quality control staff.
Most lenders and secondary market investors require a Request
for Transcript of Tax Return (4506/4506T) to be signed by borrowers
at closing. This authorizes the lender to obtain copies of tax
transcripts from the IRS, but only if the quality control
re-verification is completed within 60 days of closing. While the
industry generally orders tax return transcripts for self-employed
borrowers, the 4506T also enables lenders to obtain a W-2
wages-only verification. Fast, easy and inexpensive, this one-line
transcript immediately identifies bogus W-2 forms. Fabricated W-2
forms are very common because these standard forms can be purchased
in any stationary store. Pay stubs have been created through
sophisticated use of computer word processing graphics. In light of
today's awareness of consumer privacy and information security,
lenders must take careful measure to ensure that all document
re-verification on a pre-funding and post-funding basis is treated
confidentially. Before faxing an employment verification, the
receiver should be notified. Mailed re-verifications should be
addressed to the signer of the original employment verification or
addressed to "payroll" and clearly marked confidential on the
outside of the envelope.
Re-verification of checking or savings account statements is
often neglected, since they appear authentic. However, financial
statements may be cut and pasted to show higher account balances
belong to another person and the pasting is virtually undetectable
after photocopying. There are a wide number of tools and resources
available for lenders in the area of fraud detection. Lenders must
train staff on mortgage fraud trends and issue clear directives on
an inter-departmental level. Often, the best method for fraud
detection is to use plain old-fashioned common sense. An investors
document requirements are only a guidelineasking for more proof
means less risk.
Anna DeSimone is director of mortgage quality control for
Integrated Compliance Solutions in Arlington, Mass. and the former
president and founder of Bankers Advisory Inc. DeSimone is author
of numerous publications on the topic of mortgage lending and fair
lending practices, and serves on the Quality Assurance Committee
for the New Jersey Mortgage Bankers Association. She can be reached
by e-mail at
[email protected].
