Fraud and early payment default is
In today's market, Federal Housing Administration (FHA) licenses are gold. As many mortgage lenders scale back their broker-related originations, FHA programs offer brokers an important channel for maintaining a steady state of business. However, if fraud and early payment default rates become excessive compared to other brokers, a broker can quickly lose the ability to submit loans for these programs. Maintaining high quality loan packages is the safest bet to keeping a license in good standing. The key to this is becoming keenly aware of the red flags that might result in fraud or early payment default.
Some of the most obvious patterns that have emerged include:
•Broker risk is concentrated on a few bad apples:
Historically, only eight percent of brokers account for 100 percent
of fraud and early payment default (EPD). The overwhelming majority
of brokers did not have a single instance of fraud or EPD.
•Income levels were closely linked to EPD and fraud: In close examination of reported income, if the income appears to be inflated by 150 percent or more, the rate of EPD and fraud was at least double.
•Falsifying occupancy led to higher non-performance issues: When borrowers indicate on an application that they intend to occupy the property when they really did not, loans are more likely to have issues linked to EPD.
•Savings and reserve levels determined affordability: When borrowers have substantial reserves (at least four months worth or more) in their bank accounts, they are more likely to not have an EPD issue. The exception to this is when savings account levels are falsified or manipulated on the bank statements.
Spotting red flags to prevent EPD and
Four important steps a broker can take to prevent fraud and EPD include:
1. Know your employees
The real problem behind a broker's performance is the loan officers hired. In some cases, the broker is unknowingly infiltrated by a fraud ring that is churning high volumes of questionable loans through their practice. Some of the common red flags that are associated with this type of behavior include:
•Loan officers who submit a high volume of loans in a
short period of time.
•Loan officers who bring in potential borrowers that do not fit the typical profile that the brokerage handles.
•Loan officers who charge excessive fees.
2. Routinely check the work of your loan officers
Reviewing your loan officers' packages can be an important step in identifying a problem. The most common type of red flag occurs when a loan officer re-uses the same fraudulent documentation on multiple borrowers—this includes income documents, bank statements and credit reports.
3. Check income documents
Because income is linked to performance, checking income for reasonability is important for a broker to reduce defaults and fraud. Some basic checks and red flags to look for are:
•Does the income make sense for the borrower's age?
•Does the income make sense for the occupation of the borrower?
•Does the income seem reasonable based on the type of house the borrower is buying?
4. Check occupancy of borrower
Misstating the intent to occupy is closely linked to performance problems. Understanding if a borrower will truly occupy the property can prevent occupancy fraud. The most common red flags to look for are:
•Does the commute distance between home and work make
•Does the borrower own another, more expensive property, but claims that they will live in this property?
•Does the borrower live out of state?
Just ask, does the loan file make sense?
In most cases, loans that go on to contain fraud misrepresentations or EPD can be prevented by asking a simple question, "Does this loan file make sense?" The patterns that exist on files that contain fraud often do not make sense according to expectations. Good brokers are able to avoid the problems associated with these loans by questioning if the loan makes sense or not.
Frank McKenna is co-founder and chief fraud strategist at BasePoint Analytics, a Carlsbad, Calif.-based fraud analytics and consulting company serving the mortgage and banking industries. He may be reached at (760) 602-4971, ext. 104 or e-mail [email protected].