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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2009

Fight Fraud With a Balanced Approach

Technology and human instinct have a role in stopping mortgage mayhem

We're all creatures of habit, and we all get used to routines. We have our favorite television shows, and we know how we take our coffee.

When it comes to the mortgage business, routines -- aka, formalized standards -- represent key factors in maintaining a successful and sustainable practice, especially in terms of fraud prevention.

But not just any routine will do. Mortgage fraud is serious business, and brokers must make sure their routines fit the task.

There are several points at which fraud can enter a mortgage transaction. Knowing which vulnerabilities technology can protect -- and which are best handled by a human -- is the secret to fraud-prevention success. By creating standardized programs that balance high-tech and high-touch capabilities, mortgage brokers can create an impregnable barrier to the threat of mortgage fraud and turn the critical task of fraud prevention into a simple-but-serious routine matter.

Fraud's impact

According to the Mortgage Asset Research Institute (MARI), mortgage fraud increased by 45 percent during the second quarter of 2008 as compared to the same quarter in 2007. That increase took place despite stricter guidelines and requirements that spread throughout the industry in 2007 and '08.

A single fraudulent transaction can lead to a buyback, plus fines and fees. Those costs can be debilitating and may cause some mortgage shops to go out of business. Because of that, brokers must take definitive steps to keep fraud out of their transactions. They also need to know that lenders aren't willing to take all of the heat.

This past February, research from the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) indicated that lenders increasingly seem to hold third-party originators accountable in fraud cases. FinCEN's research states that the number of suspicious-activity reports (SARs) filed in the 12-month period ending June 2008 increased by 44 percent from the same period ending June 2007.

According to FinCEN Director James H. Freis Jr., the continued growth in mortgage-fraud SAR filings underscores the increased awareness of financial institutions, particularly as they continue to try to mitigate possible credit losses. In the February release, he noted an increase in fraud detection connected to "purchasers sending home loans back to originators for repurchase."

If you're not taking steps to keep fraud out of your loans, you may be putting your company -- and your livelihood -- on the line.

Third parties and technology

When reviewing or creating a fraud-prevention program, remember that the foundation of any successful program involves securing verifications from a neutral third party.

Roughly 80 percent of all mortgage fraud involves an insider, someone directly involved in the transaction, according to the FBI. And third-party-verification providers have no vested interest in the outcome of their findings. They don't stand to lose from inaccurate or valid information. Using an objective third-party provider often is the best safeguard against insider tampering.

In addition, a specialized third party often will use more-standardized, -auditable and -accountable processes than in-house underwriting and processing staff. A specialty provider performs a repeatable and consistent process for inquiries. This standardized routine eliminates the opportunity for the oversights and errors that can occur when verification duties pass from employee to employee.

This brings us to technology, the first of two main components of a good fraud-prevention program. Technology's contributions are speed and accuracy -- major factors in a market where time is money and where mistakes can be extremely costly.

In this fraud-fraught market, however, speed is more than simply a convenience. According to a MARI report released this past December, most mortgage fraud occurs at the origination stage. Because of this, the report states, mortgage professionals must stop suspicious loan applications before origination.

Fast answers are an important factor in keeping fraud from slipping through the cracks, and technology-based tools are an ideal solution for identity and income verification. These tools can confirm or deny the accuracy of borrower-provided information -- including identity and income -- by cross-checking that information with government databases.

With just a few mouse clicks, brokers can order reports that compare borrowers' provided information against databases kept by the Social Security Administration, the Treasury Department's Office of Foreign Assets Control and the Internal Revenue Service (IRS). Technology also enables the direct, system-to-system transfer of information, so errors and document tampering by borrowers or industry insiders are virtually eliminated.

These days, buying false identity and income documentation is as fast, easy and inexpensive as a trip to the Internet. Just about anyone with access to a computer can purchase fictitious income and identity information. These documents often look surprisingly real, even under intense scrutiny. Placed in the hands of a busy, overworked underwriter or an inexperienced employee, these materials can go undetected.

Using technology to access information directly from a government source puts up a roadblock to fraudulent tax returns, W-2s, Social Security cards and 1099s. In many cases, technology represents the fastest, easiest and most reliable way to ensure that your loans are free from fictitious documents.

Human instinct

Despite the benefits that technology brings, a comprehensive fraud-prevention program wouldn't be complete without the scrutiny and evaluation that can only  come from human review. For example, because of their complex nature, most employment verifications are still best completed through manual processes.

Mortgage companies can use tech-nologies that conduct intricate database research to verify the validity of a company as well as an individual's status as an employee. But these technologies only provide partial protection.

Unlike income or identity verifications, which can be accessed through the IRS or Social Security Administration, there is no one-stop, single-source database for employment verifications. Additionally, the freshness of employment data can be questionable with technology- based methods.

In today's fast-changing economy, it's imperative to make lending decisions based on recent employment data, not information that's six to 12 months old.

There's really only one way to protect thoroughly against employment fraud, and that's to implement a practice of securing verbal verifications of employment from a neutral third-party provider. That means that someone completely unaffiliated with the loan transaction should conduct a person-to-person phone call to the employer in question.

The benefit of using an objective, live, third-party specialist to make this call -- aside from the obvious safety from insider tampering -- is that the specialist will know which red flags to look for when confirming employment.

If a child answers the supposed employer's phone or if there are unusual noises in the background, the verification specialist will understand the need to investigate further. When it comes to verification of employment, few mortgage companies have the level of strict, standardized processes that a third-party specialist often uses. Once again, a consistent and repeatable process produces data that can help guide sound lending decisions.

•  •  •

With the amount of mortgage fraud in the industry, and with lenders looking to hold brokers even more accountable, it's imperative for mortgage brokers to initiate comprehensive fraud-prevention programs. A standardized program can turn the colossal task of stopping mortgage fraud into an effortless but critical routine.

By working with a neutral third party and implementing technology-based tools and manual processes, brokers can protect their assets and survive the market's challenges.


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