Empowering Brokers to Identify and Combat Mortgage Fraud

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1 Empowering Brokers to Identify and Combat Mortgage Fraud An Equifax White Paper October 2007 Author: Paul Wills Equifax Global Product Management

2 Introduction In today s lending environment, mortgage fraud is a global issue that costs businesses billions of dollars annually. According to the FBI, mortgage fraud has increased nearly 60% percent year over year since With mortgage fraud becoming more and more pervasive, the need for solutions to address this growing problem is greater than ever. While there are several types of mortgage fraud, misrepresentation of information tops the list. The FBI recently reported that approximately 10 percent of all mortgage loan applications include at least one form of misrepresentation, making the information used to qualify for a loan fraudulent. FBI statistics also show misrepresentation of information and fraud accounting for about 45 percent of all early payment default files and approximately 25 percent of all foreclosures. Misrepresentations The Many Variants of Authorized User One recent entrant on the mortgage fraud stage is the concept of inflating credit scores by renting tradelines on the applicant s credit file. Here is how the scheme works: An applicant (and prospective mortgage applicant), with a low credit risk score, contacts a tradeline rental website. An array of websites offer to pay consumers with revolving accounts, in good payment status and history, for the rights to add multiple borrowers as authorized users. Consumers can be paid up to $500 per tradeline rental. The applicant, after paying anywhere from $500-$3000 via the rental website, will have the good tradeline added to the borrower s credit file as an Authorized User. The applicant will then apply for a mortgage. Because the good tradeline has been added to the borrower s credit file, his/her credit risk score has been raised to an artificial level and gets approved for the loan. While the act of renting tradelines is not, in and of itself, an act of fraud, applying for a mortgage under false pretenses is unethical. 1

3 Mortgage originators can keep a watchful eye out for borrowers who have a significant amount of revolving delinquency (i.e. greater than 50% of trades being severely delinquent), and one or more Authorized User tradelines in good standing. Occupancy One typical fraud scheme involves misrepresenting information on mortgage applications used for rental properties. In these cases, the applicant will falsify information on the loan application by indicating that they will occupy the property when in reality they plan to rent it. Oftentimes, applicants will misrepresent information related to property use in an attempt to eliminate additional debt and realize potential cost savings. This is only one example of how information is put to work for fraudulent purposes. Other types of information often misrepresented on a loan application include false income statements and employment history, inaccurate assets/collateral, forgeries, false debt and credit ratios, incorrect Social Security numbers and nondisclosure of gift letters. On top of this, you have borrowers that conduct elaborate schemes involving collusion of multiple parties. Like lenders, brokers must take the right steps to protect themselves from potential fraudsters. As a general rule, the more removed a borrower is from a lender, the more risk the lender assumes. For example, if a retail lender purchases a loan from a mortgage broker and has no contact with the borrower, the lender can only assume that the broker has verified the borrower s identity. Building a Mortgage Fraud Defense In today s market, brokers have access to many resources and tools to help prevent mortgage fraud and mitigate risk for the lender. Systems such as electronic loan file reviews and screening tools can be used to mitigate fraud risk. Brokers also have the option of leveraging automated valuation models (AVM) to help ensure valuations are accurate and not misrepresented. Resources such as identity detection tools not only identify Social Security number mismatches, but also prevent straw buyer schemes involving fraudsters who apply for a mortgage loan with no intention of ever occupying the property. 2

4 With the right identity detection tools, brokers can rapidly confirm a borrower s identity and avoid the hassle and cost of potential fraud. Many wholesale lenders have implemented a strict quality control program when reviewing loans from brokers that have provided them with a fraudulent loan in the past. If a loan file is identified as fraudulent, every subsequent file that the broker submits is subject to fraud review and additional quality control reviews. This delays the lending process and causes many headaches for both the borrower and the brokers. Having a standardized program will reduce the incidence of fraud further down the origination process. The later fraud is detected, the greater the monetary loss to the lender. Staying Ahead of the Curve The broker or originator is the first line of defense against fraudsters. To help reduce the risk of fraud, brokers should always ask for original copies of supporting documentation and be wary of documents that have been altered (whiteout, scratch-outs, etc). Other best practices include never allowing the borrower, realtor, or seller to obtain the verification of employment (VOE), verification of deposit (VOD) and mortgage history. A written VOE should be obtained from the employer s Human Resources Department, not the immediate supervisor or a friend of the borrower. What s more, this documentation should always be secured by the loan originator, regardless of the relationship between the broker and the third-party. For brokers, looking at the loan in the same way as a wholesaler is critically important. Brokers should consider the high-risk characteristics of each loan and be especially wary of loans in high-risk categories such as investment properties, multi-family, self-employed, refinance for debt consolidation and high ratios or debt rations. Other red flags brokers should look out for include: Inconsistency of ownership between title commitment, appraisal and sales contract Payoff from seller s funds reflected on HUD-1 statement to non-lien holders Insufficient funds to close (documented) the transaction Significant recent inquiries on a credit report Unusually high income given applicant profile 3

5 Inconsistency of bank statement deposits with income or payroll dates Seller is a corporation Inconsistency of information reflected in details of 1003, sales contract and HUD-1 Inability to verify employer phone/address to perform verbal VOE Cross-outs on title commitment, sales contract or other required documentations The broker should be aware of geographic hotspots for fraud. For example, it was reported that one Atlanta zip code held the nation s record for the worst incidents of mortgage fraud. For this reason, a broker originating a loan in this particular Atlanta zip code should perform greater due diligence on the loan. Presently, the top 10 states for mortgage fraud are California, Nevada, Utah, Colorado, Missouri, Illinois, Michigan, South Carolina, Georgia and Florida. Many states are making mortgage fraud a felony. Among the states that have passed legislation are: Georgia - In May 2005, Georgia became the first state to enact legislation to criminalize mortgage fraud including qualifying Mortgage fraud under the RICO (Racketeer Influenced and Corrupt Organizations Act) New Jersey - Under S. B. 456, New Jersey is considering making mortgage fraud a separate crime. This bill defines mortgage fraud and what establishes a pattern of mortgage fraud. Other states that have passed or are considering mortgage fraud legislation include Utah, Colorado, and Oklahoma. It s indisputable. Fraud impacts lenders and brokers alike. To protect themselves and the integrity of their business, brokers must exercise the same restraint and caution in originating suspicious loans as a wholesaler or funder. This is their greatest weapon in the fight against mortgage fraud. 4

6 About the Author Paul Wills is director of Product Management for Equifax Mortgage Services. Widely known in the mortgage banking industry, Wills is a member of the MISMO Governance Committee and serves as the co-chair of the MISMO Credit workgroup. He also assisted in the creation of MISMO s Mortgage Fraud Prevention workgroup, making him an expert on this growing problem. Contact Information Equifax empowers businesses and consumers with information they can trust. A global leader in information solutions, we leverage one of the largest sources of consumer and commercial data, along with advanced analytics and proprietary technology, to create customized insights that enrich both the performance of businesses and the lives of consumers. Our mortgage services allow you to efficiently originate mortgage loans through our emortgage platform, which provides fullspectrum origination data and product support. And with the addition of Equifax Settlement Services, you are able to streamline your settlement process and close more loans faster with an advanced ordering platform and scheduling technology that manages your orders for multiple title, closing and appraisal services. Headquartered in Atlanta, Georgia, Equifax Inc. employs approximately 6,900 people in 14 countries through North America, Latin America and Europe. Equifax is a member of Standard & Poor s (S&P) 500 Index. Our common stock is traded on the New York Stock Exchange under the symbol EFX. Equifax Inc Peachtree Street, NW Atlanta, Georgia

7 Legal Disclaimer Equifax is pleased to provide this information for your convenience; however, it is provided with the understanding that Equifax is not engaged in rendering legal, accounting, security or other professional advice. The information contained in this document is believed to be reliable at the time it was written, but it cannot be guaranteed insofar as it is applied to any particular individual or situation. No endorsement of Equifax or any Equifax product is expressed or implied by the mention of any third party in these materials and, likewise, Equifax makes no endorsement of any third party or third-party product by the mention of such third party or product in these materials. This publication contains many of the valuable trademarks, service marks, names, titles, logos, images, designs, copyrights and other proprietary materials owned, registered and used by Equifax Inc. and its affiliated companies, including but not limited to the registered mark Equifax ; any unauthorized use of same is strictly prohibited and all rights are reserved by Equifax Inc. and its affiliated companies. All other trademarks and service marks not owned by Equifax Inc. or its affiliated companies that appear in this publication are the property of their respective owners. Copyright 2007, Equifax Inc., Atlanta, Georgia. All rights reserved. 6