4 trends in mortgage fraud to watch out for

October 16, 2020 9:40 AM

Instances of fraud in the mortgage industry are generally up annually due to increased use of remote operations amid the pandemic, according to the latest study by LexisNexis Risk Solutions.

Some studies show that in the short term, refi-heavy origination that draws on information from existing borrowers has lowered fraud risk, but purchase issues persist.

While the majority of mortgage transactions aren't fraudulent, the number of attempts to defraud mortgage lenders is higher. So is the number that are successful. The expenses associated with successful scams on average are more than triple each dollar lost, the True Cost of Fraud study finds.

The charts below track the average expenses related to fraud, what the incidence of it is among mortgage lenders this year, and where the real pain points in prevention are.

Scams are up and hitting their targets more often

Increased digital mortgage activity this year opened most types of lenders up to more fraud than there might otherwise been, LexisNexis Risk Solutions' latest annual financial-services study shows.

"There is an increase in terms of the effect of COVID," said Chris Schnieper, director of fraud and identity at LexisNexis Risk Solutions, commenting on the findings in the True Cost of Fraud study.

There were on average 1,316 fraud attempts at mortgage companies per month in 2020, up from 1,280 in the previous year's study.

That average was even higher for digital mortgage lenders at 1,810 in 2020 and 1,390 in 2019.

Also fraudulent actions were more often successful when they were attempted.

On average, 721 or 55% of attempts resulted in fraud loss in 2020, compared to 460 or 36% in 2019. For digital mortgage lenders, 950 or 53% of fraud attempts resulted in loss this year, compared to 22% last year.

Costs associated with misrepresentation are rising

"What we're finding over and over again, through a combination of these studies as well as direct conversation with clients, is it's very difficult to kick the fraud vector," said Schnieper. "There is no panacea."

Every $1 of fraud cost mortgage lenders $3.56 this year, and that’s up nearly 8% from $3.30 last year. In comparison, fraud costs rose 7.5% between 2018 and 2019 and 6% between 2017 and 2018.

The cost of fraud has almost never gone down since LexisNexis Risk Solutions started tracking it.

The financial services study, which is a few years old, has never recorded a decrease. A separate retail study that goes back further to 2011 did record a decrease in 2015, but that year was considered an outlier.

Fraud costs tend to keep going up because scam artists are always finding new ways to perpetrate their schemes, so Schnieper suggests drawing up prevention strategies that rely on flexible automation and data tracking that can be adjusted over time, and to also take the consumer experience into account.

Identity verification is a persistent problem

With the shift to remote operations in March, there was a "target-rich environment" for identity theft this year, said Schnieper.

Many scams in the online channel continue to be linked to identity verification, which 45% of mortgage lenders considered among their top three online fraud-prevention challenges this year.

Respondents said they also faced major fraud prevention challenges address verification (42%), email or device verification (37%), phone verification (36%) and customer experience conflicts (34%).

Malicious bots are getting more aggressive

Automation used in prevention may look for signs of international IP activity or involve behavioral biometrics that identify whether the way in which data entry is occurring seems human or not, he said.

Bot attacks, which involve automated scripts that take over devices and servers, were notably higher for mortgage lenders this year.

The average number of attacks determined to have stemmed from malicious bots was significantly higher in 2020 at 16% compared just 3% in 2019 for mortgage lenders.

Digital mortgage lenders also experienced an increase but appear to have been better positioned to avoid the bot attacks, which they experienced at a 6% rate in 2020. In 2019, the comparable percentage for digital mortgage firms was 2%.

Bot attacks have become much more difficult for the average user to detect and prevention is increasingly reliant on automation overseen by information technology departments, said Schnieper.