How do you and your company combat fraud?
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How do you and your company combat fraud?

February 10, 2010

Being that my company, Quality Mortgage Services LLC, is a compliance company, we help many mortgage companies combat fraud. The first thing that a company must have in place is a commitment to combating fraud or what we call the “Attitude” which emanates from the company’s leadership and trickles down. When a company has the commitment to of zero tolerance for unscrupulous deals, all the team members will be on board to combat fraud. Many mortgage companies only take their Quality Control (QC) Plan as the tool to receive Federal Housing Administration (FHA), Fannie Mae or Freddie Mac approval. The QC Plan is more than a check the block for correspondent or mortgagee approval … it is the company’s written policy on quality production.
Other mortgage companies have combined their Home Valuation Code of Conduct (HVCC) QC Plan and Red Flag Rules as appendices with their QC Plan. This a great process of using the Red Flag Rules as a pre-funding QC Plan to detect fraud prior to closing and using the HVCC QC Plan as a collateral QC Plan.
Training is another way our clients are combating fraud. We audit a number of fraudulent mortgage files and we ask, “How did this get through?” We base this on training. Having a trained set of eyes that knows how to recognize fraud helps strengthen the quality of loans. Several months ago, we conducted training for a group of new QC auditors. After the initial test case, we gave the new auditors a set of live files to audit. We had not pre-screened the files prior to the assignment, and we discovered a number of digitally-altered documents of bank statements produced either by the loan officer or the borrower. The electronically-altered documents raised several red flags. The fax date stamp did not align with the Internet printed document. The fonts on the bank statement were not an exact fit. The kicker was when the withdrawals and deposits did not calculate with the available balance on the bank statement. The fraudster did not reconcile the statement. Why didn’t the processor or underwriter detect this? Fraud for housing is one of the most common types of fraud and rarely prosecuted. However, the mortgage company had internal problems and the company has deviant and/or untrained personnel who are gullible.There are a number of fraud detection course out there and many of them provide a certification at the conclusion of the course. Also, Campus MBA offers a number of course for underwriters and compliance personnel.
Having qualified staff trained in fraud detection is the best way to combat fraud and having fraud detection tools as a resource is good as well, but too many mortgage professionals rely on them to a great degree than the people who have the ability to reach beyond data models into asymmetrical analysis.
What systems do you have in place to spot the red flags of fraud?
Seasoned and experienced staffs that know the mortgage process and software called Mortgage Analysis Review Software (MARS), which guides the end user through the loan as they analyze the loan. MARS is mostly data entry, but through the data entry, the end user applies their fraud detection experiences and analyzes the loan. This method has proven successful when applying asymmetrical analysis that is not data model driven. Asymmetrical analysis is the ability to analyze non-measurable red flags, like association and link analysis, that is not measured through data, or discernment of actions for discernment of actions not taken.
What technologies are available to combat fraud?
I have clients from supervised wholesale lenders to non-supervised loan correspondents and I have seen about every type of fraud detection tool out there, from document compliance vendors, credit bureau services, automated valuation model (AVM) products, compliance software checklists and data services. For some reason, regardless of the technologies available, mortgage fraud keeps increasing. As more technology keeps surfacing the more fraud prevention data systems and tools become available. As far as I know, the industry has not been able to track the success of mortgage fraud detection, but it can track mortgage fraud cases. Therefore, with all the technologies available for detecting fraud, the industry is unable to measure the success of the technology tool available.
When a loan goes into default, we need to know the reason or reasons why. There is no technology available to do this. It is a manual audit and it is a human being, not software or a great database, that discovers the fraud. The problem is that, in many fraud cases, technology was used to screen the loan for fraud, because the mortgage professionals who used the tools were not skilled enough to detect the fraud, except when the loan arrives at the QC professional for audit for fraud. I know that many technological tools are available to detect fraud, however, one of the best tools is the tax transcript service because Social Security, addresses, income and past employment, along with many other things, can be validated. It is my opinion that the tax transcript is the best technology solution for fraud detection prior to funding.
What sort of job has the industry done to police itself and combat fraud?
I think the industry is doing a good job but it could do better. One of the things it has done well is the requirement of licensing of loan originators. I was happy to see the recent Federal Deposit Insurance Corporation (FDIC) requirement for loan officers who work for banks to be held to the same standards as non-banks. Fannie Mae’s recent announcement about having another 4506-T signed at closing to verify or re-verify tax transcripts is yet another positive step in eradicating fraud at the closing table. Training of the Federal Bureau of Investigations (FBI) staff in mortgage fraud investigation and advancing the technology of the U.S. Department of Housing & Urban Development (HUD) so that it can be equal to the large lenders as per training and technology, are another two good things being done in the combating of fraud. Enforcing existing appraisal policies through the Home Valuation Code of Conduct (HVCC) has improved the quality of loans by 16 percent according to Fannie Mae. Something as simple as changing underwriting requirements has deterred fraud as well.
The Mortgage Bankers Association (MBA) is extremely proactive in working with industry professionals and vendors in communicating actions on Capitol Hill and going back to the professional and getting feedback on what works and what needs improvement. In 2009, MBA had several conferences, such as the Fraud, Quality Assurance and Residential Underwriting, Legal and Regulatory, and of course, their national conference where committees met to discuss compliance and fraud and what the industry can do to improve in the department of policies, procedures, technology and lobbying to police the industry. The MBA has listened to the voice of the mortgage professionals who work directly with mortgage compliance and mortgage fraud and has coordinated their unified efforts.
Do you feel more legislation is necessary to fight fraud?
I do not think the industry needs any more legislation. The industry can place policies on itself in order to improve its image to the consumer. For example, most people think HVCC is a law. It is not. It is a compliance policy adopted by Fannie Mae, Freddie Mac and other agencies, but approved by the Federal Housing Finance Agency (FHFA) which has oversight of the agencies.
Things that the industry could do better is to police itself include:
►The prevention of executives of fraudulent mortgage companies from ever opening another operation … the virtual “phoenix” going down in flames and then coming back to life. 
►Stopping the creation of the Consumer Finance Protection Agency (CFPA) and use the legal authorities that are in the mortgage industry that already exist.
►State examiners need to have the equivalent knowledge as QC auditors and underwriters. I would love to report the number of mortgage files that were touched by state examiners and mortgage fraud was prevalent in the file and never noticed by the state examiner. 
►Force mortgage lenders who use their own appraisal panel and rotation to report to their investors or agencies Sections IV & VI of the HVCC, along with their QC reports. If you think these mortgage lenders and banks who use their own rotation are really giving the appraiser their independence and there is not any persuasive influence going on, then I need to introduce you to “Mortgage Compliance 101” or perhaps you need to actually read the HVCC. It is a matter of time before some the small- or medium-sized lenders, community banks and credit unions get busted on HVCC violations.
►Put a policy in place for depository banks to cooperate with lenders and compliance companies when performing re-verification of assets or deposits for the good of the industry.
►Create a way for compliance professionals to consolidate data in order to create watch lists of those professionals, such as real estate agents, appraisers, title companies/attorneys, underwriters, loan officers and processors who are associated with high-risk loans in order to enhance fraud investigations through link analysis and trends.
Tommy A. Duncan, CMT is executive vice president of Quality Mortgage Services LLC.

Compliance, Originations, Residential, Technology