Published on May 02, 2017
Fraud is harder to catch for financial institutions that have close relationships with their borrowers and community, said Joe Prettner, Quality Control Manager for CU Companies, based in Minneapolis. Prettner, who also leads Quality Control Services at CU Companies, gave a presentation on fraud and the red flags financial institutions can use to detect it at the end of 2016.
In addition to borrowers, fraud rings can include loan officers, underwriters, processors, and appraisers. For the three primary types of fraud – fraud for housing, for profit, or for criminal enterprise – the borrower, and often mortgage professionals, seek to misinform and/or hide information during the origination process, Prettner said.
The actions of individuals involved in fraud are often the same as benign actions of employees at relationship-oriented financial institutions. “For example, in a benign effort to be expeditious, an employee might send a verification of employment request to the attention of Jim in HR,” Prettner said. “The processor likely knows Jim and that he has done previous VOEs. This action, though, is a red flag for fraud. Management should be asking why a specific person is being sent that VOE. Jim could be part of a fraud ring; his role could be to report inflated income for borrowers.”
In the VOE example, Prettner was referring to fraud for profit schemes which usually involve multiple industry insiders. Fraud for profit is the costliest type of fraud. Participants are often well compensated for the role they play, he said, which suggests means to catch this type of fraud. “Follow the money, follow it all the way through to the title reimbursement after closing,” he said. “This is very hard to catch. You have to be able to look at loans in groups and identify spikes in compensation that are not normal.”
Relationship-oriented employees will also go a long way to help borrowers. Some actions, however, are red flags for fraud, Prettner said. “A processor can be an unwitting aid to fraud by making another phone call, at the borrower’s request, for a VOE from a different person,” he said. “We need to remember what that looks like from a fraud prevention standpoint.”
Fraud for property is mainly committed by borrowers who provide false information in order to fit parameters for a loan or to get a larger loan. Financial institutions should watch out for falsified documents, Prettner said.
“As much as relationship-oriented financial institutions trust their borrowers, be aware that it is very easy to provide false information about employment,” he said. “All you have to do is go online, search “build me a pay stub” and you’ll find a check stub creator. You also can build a credit report online.”
Prettner said Fannie Mae, Freddie Mac, and the Financial Fraud Enforcement Task Force (stopfraud.gov) have resources that can help financial institutions catch or prevent different fraud schemes. “You can literally go down Fannie Mae’s list of common red flags for each of your loans and use it as a checklist to identify loans you want to review further,” he said.
The most common type of misrepresented information – nearly 60 percent – is liabilities, according to Fannie Mae. “It often happens because mortgage borrowers also apply for a loan for a new car or furniture at the time that they buy a home,” he said. “These liabilities are not grabbed by a 30-day credit report. They end up showing as misrepresentation to Fannie Mae.”
The next largest type of misrepresented information – 26 percent – is occupancy. “Borrowers will also say they intend to occupy a property when it is, in fact, an investment property,” Prettner said.
As financial institutions seek to limit fraud, regulations and investor requirements can be a big help, he said. “Follow the guidelines to the T to avoid fraud.”