SAN FRANCISCO–Committing mortgage fraud should carry a cost to those who perpetrate it, from being reported to the police to having business dry up.

That’s the view Erik Stein shared Tuesday afternoon during a session on identity theft and mortgage fraud at the Mortgage Bankers Association’s annual convention. Stein, EVP and director of fraud prevention and investigation at Countrywide Financial Corp., believes the mortgage industry should make those who commit mortgage fraud pay for their crimes.

Mortgage fraud is rampant and can cost lenders and consumers millions of dollars. Perpetrators often use sophisticated rings of professionals to bilk lenders out of money. The crimes can take years to investigate.

Stein said the industry should start by not working with people who have a history of being involved in fraud, which can be accomplished by maintaining an internal “do not use” list of professionals, from real estate agents to appraisers to mortgage brokers.

“If you commit a crime against me, I should make sure you don’t get business from me again,” Stein said.

Stein also suggested everyone subscribe to the Mortgage Asset Research Inc.’s MIDEX database, which contains publicly available information, along with non-public data such as suspected fraud reported by those companies that subscribe to the service. Subscribers send MARI a description of any suspected misrepresentation of fraud cases, including the company that originated the loan, the loan officer and any other information they want to reveal. Subscribers can’t check the database without agreeing to contribute to it if they encounter something suspicious.

Other suggestions Stein offered for making fraud perpetrators pay for the crime included reporting them to the appropriate licensing bureau and filing police reports. If the lender is a bank subject to the Bank Secrecy Act, a suspicious activity report should be filed, he said. And there should always be disciplinary action for anyone on staff who commits fraud.

“There has to be a consequence,” Stein said.

The industry also could turn to civil litigation, but the outcome is never guaranteed and often may not be cost-effective. Stein also advocates forming task forces within the housing industry to foster change in how it handles fraud.

No one can say exactly how much money the industry loses from mortgage fraud, he said, and most people don’t even know how much their company loses to such fraud.

The Federal Bureau of Investigation estimates that a $383 million total reported loss for 2004 through the end of August, according to panelist Maxwell Marker, supervisory special agent for the FBI.

“We all know that’s just a drop in the bucket,” Marker said.

That number is only what has been reported to the FBI this year through suspicious activity reports, he said, and the problem is growing. The FBI has ramped up an initiative to investigate mortgage fraud, raise awareness and solicit the industry’s help for prevention.

The FBI is aggressively pursuing mortgage fraud using historical data and performing more data analysis to look for patterns. The agency also has launched undercover operations.

Marker encouraged lenders to call their local FBI office – not headquarters – when they suspect fraud. He said reaching out to the local office before reporting fraud also makes it easier to get their attention if something seems suspicious later on, as does knowing what to report.

The industry should report case of “significant effect,” which vary by locale, but generally include large monetary losses, a large number of victims or a situation that holds industry significance. The sooner a person reports a fraud case, the better, he said.

A local FBI office’s ability to investigate a reported fraud will depend on what else is being worked on at the time, but knowing what they’re looking for in fraud cases will help get their attention, he said.

As more accurate identification techniques become more popular, mortgage fraud that involves using false identities could become less common, according to Bob Simpson, CEO of Investors Mortgage Asset Recovery Co., a Newport Beach, Calif.-based company that recovers money from real estate professionals for loans originated using fraudulent information.

Investigators can use biometrics, fingerprints, palm prints, iris scans and DNA to identify a person. In the future, the same technology could be used for mortgage applications, Simpson said. It may not happen in five years, but it will happen someday.

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