Nature abhors a vacuum. Can the same be said about the mortgage industry? Probably not with the same zest. Think back to high school physics and the classic demonstration in which the air from a thick bell-shaped jar was removed to create a vacuum. Light smoke surrounded the outside of the jar and when the inside vacuum was pierced, the smoke rushed in, instantly filling the jar with a light wispy cloud. Nature’s laws held steadfast as the void was instantly and efficiently filled.
Until recently, there existed a ponderous void in risk management solutions on the back-end of the mortgage origination lifecycle—at the closing table. The void has now been filled.
Fraud in the origination cycle
It has been many, many years since the earliest mortgage fraud schemes were carried out, over time impacting all exposed parties to the loan transaction. The mortgage industry has been the target of fraud for many years, for good reasons—“that is where the money is”. The risk management efforts focused on fraud have typically been one or two steps behind, allowing bad actors, schemers and fraudsters to prey upon the industry. The mortgage industry reacts directly or through the marketplace of commercial providers, and the fraudsters react to the reaction, evolving their schemes to stay one step ahead.
Over the years, the void of risk management in the mortgage industry has steadily filled with a variety of utilitarian tools and services. Historically, these tools and services have spanned the broad mortgage origination and servicing lifecycle and addressed every component—almost.
An increasing number of astute observers and engaged practioners realize that one of the most important and risky components of the loan origination lifecycle has remained virtually untouched with respect to effective risk management solutions. The risks associated with unscrupulous or ineffective closing agents are very real, wide spread, and increasingly costly to the affected parties.
Change is not only imminent, it is happening now. Due to the insight and persistence of some dedicated and passionate champions, the first stage of effective risk management for the closing transaction is now a reality and available to all. Filling this void is conspicuously late in the development of the basket of risk management tools. However, there are advantages to late entry.
Solution architects have the advantage of keen insight that comes from years of experiential perspective combined with the knowledge of the initial definitive regulatory requirements. In addition, technology overall has advanced dramatically resulting in a more advanced technology toolbox to be leveraged in solution design.
The good news for the industry is that a solid, efficient, broad solution for all interested parties has been developed and the first major component is now available. The solution architects have developed a multi-pronged approach to closing agent fraud mitigation and availed themselves of the latest technology trends and a vision refined by years of experience and research.
Pervasiveness of closing fraud
Why hasn’t the void been filled previously? It could be that the best design concept requires an aggregated, centralized solution and the industry does not readily coalesce on concerted initiatives. It could be that the extent of closing agent fraud was not well known historically as there were no comprehensive, granular and reliable reporting capabilities.
With support of SARS, the FBI now estimates mortgage fraud losses annually around $13 billion and growing. Indeed, between 2007 and 2011, mortgage fraud cases doubled, notwithstanding the evolution of risk management in the industry. The FBI further estimates that 15 percent of mortgage fraud is associated with the closing end of the origination lifecycle.
“Due to the insight and persistence of some dedicated and passionate champions, the first stage of effective risk management for the closing transaction is now a reality and available to all.”
Even with the growing, wide-ranging set of risk management tools and services that have emerged, those that set about to defraud the industry continue to find success. Today, the FBI considers mortgage fraud the number one white collar crime in America. Of the various mortgage fraud targets, closing fraud could arguably require the least imagination and be the easiest fraud to perpetrate.
There are many schemes and methods for mortgage fraud but several techniques are more commonly encountered and reported such as false documents including income and asset documentation, identity theft, appraisal fraud, hidden straw-buyer relationships and fake title and escrow companies who cover up prior liens.
However, at the closing end of the transaction, not a lot of imagination is required. The money and the collateral security documents are sent to a closing agent in hope that the agent will disburse the money and insure the proper execution, recording, and delivery of loan documents as directed.
As one of my esteemed CIO associates would say, “Hope is not a strategy” —and similarly, it does not make for a very good control. Good controls in this instance require solid processes combined with effective tools and services.
Evolution of tools and services
There is a veritable cornucopia of tools and services available to the mortgage industry with purposes that run the gamut of functionality. These tools and services continue to evolve in their sophistication as the mortgage industry evolves. The jaded observer may note that in recent years the speed advancement in global technology overall has well-outpaced the speed of technology advancement in the mortgage industry. However, the industry continues to progress nonetheless and in recent years more of the technology advances are pushing towards disruptive in nature.
Looking back at the evolution of mortgage technology there are distinct eras that can be characterized. In the early days the technology solutions for any aspect of the process, including risk management, were rudimentary in nature. Again, my quote-happy associate would characterize the technology solutions as akin to “paving the cow-path.” The earliest applications of technology in the mortgage industry involved simply taking a plethora of paper mortgage forms and documents and scanning them into an electronic form, sans process improvements or workflow modifications.
Over time, these simple automations evolved from the most rudimentary level to increasing levels of sophistication. For example, electronic forms and documents became part of electronically defined, controlled, and optimized workflows. Other examples included tools to improve and control data integrity. Eventually, tools and services offerings expanded to include the dimension of automated analytics that today continue to evolve with respect to sophistication.
The natural evolution of mortgage technology was re-directed in 2006 and the following years. During those turbulent times technology tools and services were often geared to the reaction to the seismic changes that occurred in the mortgage and credit industries. Organic drivers were at least partially displaced by regulatory.
Recently, and to the credit of those in the industry who are more forward-thinking and willing to stretch the envelope, we are seeing more solutions leveraging the global technology trends of the past few years including mobility, advanced data analytics, and outsourced hosting services. Importantly, more emerging solutions have either broad integration capabilities or leverage aggregation across the industry.
From a mortgage technology perspective any broad-spanning solution developed in today’s era also has to pay homage to the advantages brought to bear vis-à-vis the standards developed within the Mortgage Industry Standards Maintenance Organization (MISMO) framework.
The MISMO advancements permit not only electronic process flow within a company, but to various partners, service providers, and customers/investors. The pervasive Logical Data Dictionary and XML interface technology have been keys to the development of complex information sharing at many levels with many types of partners.
Risk management capabilities
Up until last year, the tools and services developed to address risk on the back-end of the mortgage origination process have been valuable but at best, tangential to the direct vulnerabilities of closing agent risk. There are some noteworthy examples of either companies that leverage aggregation, integration, e-capabilities or mobility. For example:
►FinalTrac: Provides an integrated solution that electronically track the validation of the lien pay-off
►CSC Ingeo: Offers a tool for secure, Web-based, recording technology for submitters and recording offices
►Rynoh: Verification of trust and escrow accounts
►ClosingCorp: Established and maintains a comprehensive, aggregated database of all the state and local fees and provides a guarantee of accuracy
►DocMagic: Advancement of electronic signature authorities and confirmations
Only recently has a truly effective solution focused directly on the risks at the closing table been designed.
Late entry solution with benefits
The void of effective closing agent risk management has been filled by a standardized, comprehensive, and consequential solution. A long time coming, and ponderously late, there are advantages in developing a solution at this late juncture. The solution architects had the benefit of:
►Knowing the regulatory requirements and designing a solution that satisfies them accordingly;
►Having the time necessary to fully contemplate and “vet” the solution, reflecting and reacting to years of closing fraud. These years of experience sharpen the vision of the solution architects and led to a most effective design in combating closing fraud, and as a highly leveraged tool;
►Access to the latest technology advancements and capabilities; and
►A target audience that better understands and is more bought into a viable solution due to a combination years of risk experience, observance of government audits, and enlightened perspective on risk management.
What is the solution? The solution has multiple components with the first being a national database of closing agents professionally analyzed and continuously monitored for risk characteristics. This common information warehouse is a single central, aggregated database that can be leveraged by lenders, mortgage banks, real estate agents, and consumers alike. Other complementary components are in the development pipeline for delivery in the not too distant future.
The benefits of aggregation
In general, the tools and solutions developed for the mortgage industry can be focused and deployed in an aggregated or disaggregated manner. A disaggregated approach would place the tool usage within the micro environment of the entity. The aggregated approach reaches across wide segments and delivers a product or service that can be used by many or all within a broad spectrum, universally, in a standard, consistent manner.
A central, aggregated model has been proven out previously by two pioneering initiatives. The Mortgage Electronic Registration System (MERS) and the Nationwide Mortgage Licensing System & Registry (NMLS) both have established and clearly demonstrated the benefits of this model. Both of these initiatives provide widespread, universal, and standard information in a one-stop shopping model.
The architects of the new closing agent risk management solution understood the widespread benefits of aggregation and implemented a solution where one central database can house the risk analyses and characterizations of all the closing agents across the industry. This includes individuals and entities allowing lenders who have not transitioned to an individually-focused model to at minimum understand the risk characteristics of the closing agent entities with which they may want to engage for the closing transaction.
The solution is also largely agnostic of the type of closing professional and can handle all according to state requirements including attorneys, settlement agents, escrow agents, title producer/agents and notaries.
Conclusion
By approaching the problem with a holistic solution, the entire mortgage industry benefits. The inclusion of each closing agent in an aggregated and central database provides one stop shopping for all consumers of this solution. Closing agents also benefit by the centralized, aggregated model in two significant ways. They only need execute the application process once and as a result are visible universally for those in searching for a low risk provider for the closing transaction.
Given the mortgage marketplace and the industry dynamics, the mortgage technology may never be viewed as the leaders of global technology. However, as the industry approaches the proposition of disruptive change, the greater potential for real changes of consequence to the application and functionality to all interested parties.
There are some global technology trends that clearly, when leveraged in the mortgage industry, could have disruptive impacts. Mobility and delivery of new functionality to the user anytime, anywhere, and on any device is an example. Social/business networking and the ramifications of Web 3.0 should have some exciting developments for the industry and consumer. Related to this, the continuing evolution of big data and advanced analytics will result in the more forward-thinking and creative companies making leaps ahead in some yet to be determined ways.
There are plenty of other emerging technology trends but the hope is that risk management and fraud mitigation will advance correspondingly and those responsible for establishing creative visions will avail these technologies to the benefits of the industry.
Todd Hollosi is CIO and CTO for Secure Settlements Inc., a national risk management and technology company focused on the closing dimension of the loan origination lifecycle. He may be reached by phone at (973) 434-7409 or e-mail
[email protected].
