SALT LAKE CITY–The request seemed simple enough: Look around the room and see whether anyone present had been in jail for mortgage fraud.
About 80 people glanced around, fairly confident they didn’t recognize anyone who would have done such a thing. Then Roger Fendelman, director of compliance for AppIntell and a panelist at a session here this week about mortgage fraud, asked Kevin Barnes to stand up.
Barnes stood up from his seat in the front, giving the other attendees at the 2004 National Association of Mortgage Brokers convention a glimpse of a convicted felon.
Barnes, who perpetrated $24 million in mortgage fraud, had blended in with the others in the room. He didn’t say a word, but Fendelman’s point was clear: You can’t tell by looking at someone whether he or she has committed fraud.
Fendelman, along with Bill Matthews, VP of Mortgage Asset Research, and Rebecca Walzak of RJB Walzak Consulting, led the group through a discussion about mortgage fraud and how to check loan applications for predatory lending practices.
Matthews kicked off the session with statistics compiled by MARI, which tracks potential mortgage fraud incidents through its cooperative database known as MIDEX, or Mortgage Industry Data Exchange.
First, however, he pointed out that mortgage fraud is still fraud even if the loan was never even funded, insured, purchased or in default.
“If there’s an intent to deceive, then that’s mortgage fraud,” Matthews said.
Mortgage fraud has increased over the years as the industry’s business practices have shifted to a commission-based structure, he said. Some mortgage practitioners have responded inappropriately to the incentives by committing fraud.
Types of fraud include misrepresentation of income, credit worthiness, employment, funds to close, property value, purpose of loan and consumer identity theft, which is “one of the fastest growing trends in the United States,” he said.
Source: Mortgage Asset Research Inc.
Misrepresentation on an application ranked as the most popular type of fraud and accounted for 60 percent of the action in 2003, according to MARI. That was followed by misrepresentation of taxes and other financials at 38 percent.
Appraisal and valuation fraud came in at only 12 percent, but Matthews said MARI believes that type of fraud is underreported because appraisals are subjective and expensive to investigate. A loan with appraisal fraud often also includes another type of fraud and may get reported under that category.
Florida and California used to consistently rank in the top five states where mortgage fraud occurs, but that is changing. According to the MIDEX database, Florida made the top five list of “most challenged” states for all loans. The list is compiled from cases where lenders found misrepresentation in loan packages, then reported them to MARI.
Matthews said brokers who know about fraud, but don’t take any action–even if they’re not perpetrating it–can jeopardize their reputation and livelihood. He suggested brokers shouldn’t ask borrowers to sign blank documents, change the deal at closing or imply to borrowers that a particular option is their only chance to get a loan. They should fully disclose their costs and offer fair interest rates.
Fendelman and Walzak offered tips for brokers on how to prevent predatory lending from happening in their offices. Although brokers may say they don’t engage in those practices, they need to have a written policy in place and make sure all loan officers are aware of it.
Brokers also must train employees about the requirements, monitor loans through quality control measures and enforce consequences, such as refusing to pay commission on loans that violate the policy.
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