Keeping Your Eyes Open To Fraud Risk
Mortgage fraud is a never-ending concern for lenders and servicers alike. Schemes and fraudsters come and go, as do market conditions, but exposure to fraud risk is a constant. Post financial crisis, our industry is much more focused on checking the checkers. We’ve lived through massive repurchase risk and become experts in mortgage processes automation, regulatory compliance, defect taxonomy, and many other areas that reduce organizational risk. Despite expanding expertise, we cannot become complacent in our efforts to identify fraud, whether through misrepresentation, misclassification, or blatant misconduct, industry players need to make certain they don’t lose sight of fraud risk exposure. Not to mention that in a more pronounced purchase market such as this, fraud is more prevalent.
Staying abreast of current fraud techniques and trends is extremely beneficial; however, sometimes it’s the places that we tend to overlook that creep up on us. Make certain your technology solutions and platforms do not leave systemic gaps that may expose your institution to fraud risk. As lender or servicer shops have embraced technology, multiple proprietary and vendor solutions have been deployed across their organizations. Critical data and/or documentation may be lost or misinterpreted in this process, creating an opportunity for fraud. Experienced third-party quality control and due diligence vendors are often able to provide an expanded perspective on risk and spotlight issues that indicate possible fraudulent activity and/or uncover fraud trends. Trending analysis helps to uncover areas were fraud may occur, even though it might not be fraudulent at this time. It is important to follow established fraud risk reports to gauge possible areas of risk, but more importantly as a tool that will determine exposure specific to your organization.
Quality Mortgage Services (QMS) recently pulled examples of fraud risk and exposure uncovered during their sophisticated mortgage quality control and audit processes. Some key discoveries included:
Occupancy – A common form of occupancy misrepresentation continues to be the identification of an investment property as a second home, or other property scenarios where properties are purposefully misclassified in order to gain profit, manipulate rate and points, and/or secure financing on an ineligible property.
The QMS audit team identified conflicting file documentation on an investment property that was in actuality a nursing home/commercial property.
QMS found where initial loan data reflected that the subject property was a second home. However, the file was closed as an investment property in order to accommodate a 1031 Property Exchange as a documented source of funds. Deferred tax gains under IRC section 1031 are not permitted on properties that are designated for primary use, such as a second home. Data on the uniform underwriting and transmittal summary (form 1008) comment section stated that the investment property was intentionally classified as investment property to accommodate the 1031 exemption.
Assets – Verification of borrower assets has remained problematic despite significant strides in web and mobile banking. With the keys to unlocking this data still in the hands of the borrower, the opportunity for misrepresentation and fraud continues to be a concern.
During the reverification process, QMS auditors found that deposit account information had been purposely altered. The corresponding bank official verified differing balance and transaction activity than what was reflected on the borrower’s financial statement found in the loan file.
Property Eligibility – There are a number of varying circumstances where properties are ineligible for delivery as conforming or government product to Fannie Mae, Freddie Mac, U.S. Department of Housing and Urban Development (HUD), or Veterans Administration (VA). For example, condotels, condominium projects operated as hotels, are not eligible as conforming properties under Fannie Mae and Freddie Mac guidelines.
QMS investigated possible property misrepresentation when it was noted that a condo questionnaire was signed by an individual affiliated with “ABC Resort”, who’s email address reflected the domain name of “abcresort.com”. Additionally, the appraisal included a photograph of property found on the “ABC Resort” website, and disclosures reflected a homeowners association (HOA) fee paid to “ABC House” and an administration fee paid to “ABC Resort”. The property was confirmed as a condotel that was intentionally misrepresented.
These are just a few examples of misrepresentation found in closed loans. Misrepresentation is fraud and creates a plethora of risk from repurchase to reputation. With multiple industry fraud indices reflecting a steady increase in fraud, make certain your eyes are open to documentation and data defects that may in fact indicate organizational risk exposure.Add an experienced quality control partner to your fraud prevention best practices list – .Your institution can gain insight and confidence by partnering with QMS, an experienced professional QC vendor that knows the power of combining red flag processes, keen observation and sophisticated technology in combatting fraud.Offering post-closing and pre-funding audits as a core product solution for over 20 years, QMS is ready to help you minimize your fraud risk exposure today.