Due diligence and risk-mitigation systems may help prevent losses

Don Effertz, vice president of fraud risk management, DataVerify

As published in Scotsman Guide's Residential Edition, August 2012.

The reverberations from the bursting of the mortgage bubble still are being felt today — and, according to the 2011 year-end report from the Financial Crimes Enforcement Network (FinCEN), the fallout may continue for several years.

Released this past April, FinCEN’s report found that mortgage-related suspicious activity report (SAR) filings in 2011 increased 31 percent over the previous year’s filings. Because most of 2011’s SARs were based on activities that actually occurred two years or more before their filing, it seems safe to say that fraudulent activities will be affecting the bottom lines of mortgage bankers and lenders for a long time to come.

Bankers and other mortgage professionals can take several measures to help themselves combat mortgage fraud and reduce their financial liabilities. It can be helpful simply to know the various common types of mortgage fraud. For instance, when it comes to fraud for housing and fraud for profit, there are eight broad categories that mortgage bankers and professionals should watch for: occupancy fraud, income fraud, appraisal fraud, employment fraud, liability fraud, debt-elimination schemes, Social Security number fraud and identity theft.

In addition to demonstrating the need for quality due diligence, FinCEN’s statistics unmistakably underscore the need for institutions to invest in effective risk-mitigation tools to guard against losses and protect their portfolios. That said, choosing the right risk-mitigation system can be a tall task. Consider the following factors before your company embarks on its quest for a risk-mitigation system:

1. Know your risk tolerance — and your budget: When you know your comfort level with respect to risk, you have a better idea of the tools that best meet your needs.
2. Invest in automation: Although your institution can conduct manual checks of application elements to prevent the categories of fraud outlined in FinCEN’s report, this method can be time-intensive and subject to human error. Systems that automate verifications and analysis can help enhance efficiency and accuracy.
3. Evaluate the flexibility factor: Seek a system that can fit easily into your existing workflow. The shorter the tool’s learning curve is, the greater the adoption rate will be. The best system in the world can become inadequate to the task if employees don’t embrace it.
4. Assess adaptability: Perpetrators generally try to stay at least one step ahead of the law. The strongest risk-mitigation tools are those that can adapt quickly to emerging fraud schemes.
5. Select a strategic partner: Finding a vendor that can work with you to customize solutions to your specific needs is almost as valuable as the fraud tool itself. From creating alerts for conditions specific to your market area to customizing the system to fit your business practices, the right strategic partner can make all the difference.
6. Calculate the return on investment: Quality systems may initially seem expensive, but they often can save you money in the long run. Efficiency gains, reduction in losses and faster processing speeds all have costs associated with them and should be weighed against a system’s price tag.

Mortgage fraud did not start with the industry meltdown, and it’s unlikely to ever be completely eradicated. This makes it all the more prudent to develop strong prefunding due-diligence strategies that include the use of a risk-mitigation system. Such an investment will pay dividends in reducing losses and minimizing costly repurchase requests.

 

Don Effertz is vice president of fraud risk management for DataVerify, where he manages a team of seasoned fraud investigators who are responsible for reviewing loan files, assisting with client product understanding, training users and customizing the DRIVE platform. This team also advises clients on product integration and DRIVE platform customization to maximize client return on investment. Reach Effertz at (636) 534-4298 or deffertz@dataverify.com.