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.