Originator Fraud: Crimes Of Opportunity & Crimes Of Desperation

Over the past few years, and up until a few months ago, the conditions were ripe for fraud. We had a hot housing market in many parts of the country, involving a combination of high demand and moderate supply, low interest rates, rapidly increasing housing prices, and bidding wars. As a result of those conditions, some buyers and sellers had the opportunity to play some games.

Now that the forbearance programs are being lifted, payment defaults and foreclosures are going to start to occur. Lenders and regulators are going to begin studying those loans to understand what happened, and some fraud is going to be detected. Everything was frozen in time for a while. Now comes the thaw.

Q: What are some common things originators can look for when it comes to borrower fraud?

I originally got involved with mortgage sector fraud cases back in 2005, when I was a brand-new lawyer. Back then, the fraud was heavily slanted toward traditional borrower fraud – falsified bank statements, verifications of employment, etc. In the past 18 years, not a lot has changed. I do see more occupancy fraud these days, particularly when it comes to foreign nationals attempting to move funds to the United States to invest in real estate and using straw borrowers to do so.

The biggest difference is that the same borrower fraud schemes have become more sophisticated. Whereas fraudsters used to create amateurish fake bank statements and have their friend pretend to be a supervisor at work, the false documentation has become far more sophisticated and difficult to detect. The documents look authentic. In a few days’ time, you can set up a faux website for a faux business.

So how do you detect fake documents? I encourage lenders to try to talk to the borrower at least once during the process. Don’t read a script – have a real conversation. If your Spidey sense starts to tingle, there is probably a reason for that. That’s usually a good time to start using those outward-facing analytics that we just talked about. In the company’s files, is the employer’s address or phone number associated with any other loans? Does the same bank account number appear in any other loan files? Do we have other loans on the same street with similar employers or bank accounts?

Q: How can originators protect against mortgage fraud?

In legalese, “design and implement an effective compliance program.” In plain English, “hire smart people and give them the budget and resources to aggressively detect and prevent fraud, which might have the ancillary benefit of saving the company’s bacon.” There are a lot of great compliance products out there, but be careful about buying something off the shelf and assuming that it will work for every business. Someone needs to sit down and assess where your particular risks are and then hire a knowledgeable and adequately-resourced compliance and fraud prevention team that is empowered by senior management to do the job.

This department is your corporate life insurance policy. They’ll catch a lot of fraud, and even if something slips by, it shows that the company is trying to be a good corporate citizen. Most companies are wise to this, but I still see quite a few companies in the mortgage sector that hasn’t invested in any personnel who are tasked with doing the types of fraud detection activities that I talked about above. In a worst-case scenario of insider fraud, those are the companies that have to sweat bullets.