Fraud prevention in the mortgage industry requires licensing, simplification of the lending process and fewer exotic products, according to crime fighters and industry leaders.
But “there’s a danger to doing too much at one time,” says David McLaughlin, senior assistant attorney general for the state of Georgia, which has enacted a seminal anti-fraud law.
“One of the risks in some legislation is they’re trying to do too much, to fix too many problems,” says McLaughlin, who suggests that in trying to reform the problem, “we ought not mix it up with criminalization of certain behavior. That’s where those bills get bogged down.” He spoke at an industry conference earlier this month in San Diego.
It is “up to us as an industry, to take a lot of action ourselves,” says Richard Wohl, president, IndyMac Bank, Pasadena, Calif., noting that this is both a “good time and a bad time to be addressing mortgage fraud.” The industry is in a “pronounced down cycle,” says Wohl, conceding: “I’ve seen deals that we push in our shop that should never have come through the front door.”
In arguing for better data sharing, he says the industry needs to create a national valuation registry, like MERS (Mortgage Electronic Registry Service); a national database where appraisal information would be attached to each file.”
The mortgage industry spends $3 billion to $4 billion on appraisals, compared with $6 billion in fraud losses each year, figures Wohl, so “doesn’t it makes sense to share that $3 billion of work product to help prevent that $6 billion in losses?”
Simplification and clarification
The bigger view is that “the mortgage system and mortgage documentation process is broken in this country and the reason behind that is we need simplification and clarification,” according to John Robbins, co-head and special counsel, American Mortgage Network, San Diego. Robbins also is serving as the current chairman of the Mortgage Bankers Association.
He argues that national licensing is necessary, noting with some irony that “you have to be licensed to be a hairdresser.
“What about a loan officer that has just come into the business, doesn’t understand there’s a ‘t’ in the word ‘mortgage,’ much less (understands the) sophistication of all the products?” asks Robbins.
The company he represents “has 120 different mortgage products; (a loan officer) has no chance, no ability to explain the nuances of those products. And, yet,” he continues: “these are the people who are potentially recommending what kind of loan this borrower should take. We need education — some test that an unregulated organization has to have in order to recommend a mortgage product and then we need ongoing education every year to make sure they stay on top of the industry.”
Georgia’s David McLaughlin says fraud has seeped into the building industry to an alarming extent.
“We’ve created an environment where builders now build for no other purpose than to sell to investor-buyer-fraudsters. They build a cheaper home (and) they care less about the home because they know that they can unload it on someone who doesn’t care about it.”
Outraged, McLaughlin says: “Think of it, a builder who spends a lifetime building something that should be a permanent reminder of their skill is now building a piece of trash just to sell it to a bunch of fraudsters. We’ve created that environment.”