As real estate loan fraud skyrockets, representing several hundred billion dollars of the annual U.S. housing market, there are a number of ways to recognize and prevent fraudulent activities, a government report said.
Educating employees on common mortgage fraud schemes and implementing monitoring systems are two ways financial institutions can help curb mortgage fraud, according to a white paper from the Federal Financial Institutions Council.
The paper said that up to 10 percent of all mortgage loan applications in the $3 trillion annual U.S. residential real estate market involve some form of material misrepresentation.
Mortgage fraud is on the upswing, with the number of suspicious activity reports to the Federal Bureau of Investigation in 2004 almost triple those in 2003, according to a report the FBI released in May.
The white paper defined mortgage fraud as “a material misrepresentation made by a third party in the mortgage loan document(s) or orally in order to induce the lender to make a loan he might not otherwise make.”
According to the document, there are three main motives for mortgage fraud. Fraud for housing is done by a borrower who wants to buy a house to live in; fraud for profit is schemes by people who don’t intend to live in the house. The third motive involves criminal purposes beyond fraud. These include money laundering and terrorist activities.
The paper detailed 10 different kinds of mortgage fraud, as well as ways to detect and prevent them.
First, the study named application fraud. Red flags for this type of fraud include unsigned or undated applications or the use of power of attorney, among other things.
To help combat application fraud, the report recommended setting up an employee training program providing a good overview of common mortgage fraud schemes – a tactic it suggested to combat almost all of the various types of mortgage fraud. Pre-funding reviews on new production also help curb application fraud, the paper said, along with a number of other tactics.
Appraiser fraud, often an integral part of fraud schemes, can occur when an appraiser falsely provides an inaccurate valuation with the intent to mislead, the paper said. Red flags include appraisers who are frequent or large-volume borrowers at the financial institution in question or own property in the project being appraised, the paper said.
Employee training and a strong appraisal and evaluation compliance review process, as well as establishing an approved appraiser list, are good deterrence methods, according to the white paper, which listed a total of 18 ways to curb appraiser fraud.
Fraud involving credit reports also can be combated with training, the paper said. Including an analysis of the credit report in the pre-funding quality assurance program and making direct inquiries to the borrower and creditors for explanations of unusual information is helpful, the paper said, among other things.
Escrow fraud can be combated with training, and with specific instructions to closing agents for each mortgage transaction, the paper said, along with other tactics.
Indications of possible fraud involving mortgage brokers include close relationships between the broker, appraiser and lender, the report said. Mortgage broker fraud can be combated through initial acceptance reviews and documentation to support broker approval, among other things, according to the report.
Red flags for possible title insurance fraud include the seller not being on the title, the report said. Training employees and including a review of the title commitment are ways to combat it.
Red flags for fraud in employment verification include similarities in names, like the seller and applicant. Training, plus specific employment verification procedures, among other things, can combat fraud in employment, the report said.
Verification of deposit refers to checking an individual’s depository accounts to see if they have the amount of money they claim. If it takes place on the same day it’s ordered, or doesn’t have a date stamp, the verification might be fraudulent, the report said.
Training and independent verification by looking up the depository’s phone number are of the ways the report suggested to combat the problem.
Finally, in the “Other” category, the report detailed a number of general red flags, such as when critical loan processing activities, such as verification of income, employment, or deposit, are delegated to brokers. To combat this, the paper suggests reviewing purchase and sales agreements with brokers, correspondents, and secondary market investors.
The report also set forth suggestions on discovery and follow-up for suspicious transactions.
The white paper, titled, “The Detection, Investigation and Deterrence of Mortgage Loan Fraud Involving Third Parties,” was produced by a number of government financial institutions that make up the Federal Financial Institutions Examination Council.
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