Having a risk-management plan in place is essential to track fraud

Tommy Duncan, vice president of operations and technology, Quality Mortgage Services

As published in Scotsman Guide's Residential Edition, January 2007.

When most mortgage originators and lenders think of compliance and quality control, they think of the steps that keep auditors off their backs. There is another part of mortgage-quality assurance, however, that is usually ignored until it is too late: risk management.

Mortgage-risk management seeks to limit the chance of originators having to repurchase loans because of problems that arise after they're sold. One significant problem that can occur with such loans is mortgage fraud.

As the number of brokers and lenders that have to repurchase loans rises, expect a shift from basic quality-control programs to more comprehensive risk-management plans. Having a risk-management plan in place helps lenders and originators minimize their chances of having fraudulent loans make it to closing in the first place.

Drawbacks to having no plan

Lending institutions that rely on underwriting guidelines to prevent fraud can be ineffective. This is because many underwriters may inadvertently (or sometimes intentionally) overlook the warning signs of fraud in their quest to ensure loans meet the lenders' requirements. Underwriters are most focused on reviewing ratios and checklists. They place little effort on the depth of the loan or the risk assessment. Further, in most cases, underwriters are overworked and under pressure to get loans to closing quickly.

Meanwhile, compliance and quality-control programs focus mostly on minimum requirements, such as having the correct information in the loan (i.e., disclosures, signed and dated documentation and correct charges). This information often has little or no effect on whether a loan is fraudulent or will remain in good standing.

Compliance auditors appear to be good at nitpicking these findings but often lack the skills or tools to detect fraud.

Tracking mortgage fraud

Most fraudulent loans are an inside job. That is, they often are initiated by mortgage-industry professionals, not by borrowers. After all, the typical borrower does not have the know-how about the inner-workings of a mortgage loan to get fraud through the different stages of processing, underwriting and closing.

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