Since the economic downturn, mortgage fraud has been a prevalent issue plaguing the housing industry for several years.
It seems that every single time new regulations are issued by the federal government to try to mitigate mortgage fraud, scammers always seem to be one step ahead of financial institutions and are already preparing their next scheme.
At the 2013 Mortgage Bankers Association’s National Fraud Issues Conference in Hollywood, Fla., National Mortgage News hosted a roundtable that included top executives from risk mitigation firms who monitor various types of fraudulent activity throughout the country such as loan modification scams, appraisal fraud, foreclosure rescue schemes, short sale fraud and bankruptcy fraud, as well as technology firms that provide software to lenders and servicers in order to prevent fraud from occurring within their businesses.
Moderating the discussion was Mark Fogarty, editorial director of the mortgage group at SourceMedia, and Evan Nemeroff, fraud reporter for National Mortgage News. They were joined by Tim Anderson, director of compliance services for DocMagic; Lisa Binkley, senior vice president of business development and mortgage solutions for Platinum Data Solutions; Darius Bozorgi, president of Veros; Becky Walzak, president of rjbWalzak Consulting; Connie Wilson, executive vice president of Interthinx; Andrew Liput, president of Secure Settlements; and Ed Gerding, senior fraud and risk strategist for CoreLogic.
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In this segment of the discussion, the panelists explain how a closing agent is now doing a vendors job verifying the information that is submitted on a loan application. But do these employees really know how to locate fraudulent red flags on an application? Also, the group talks about the importance of standardizing the loan application process and the need to automate the quality control process.
FOGARTY: Obviously, people want to know is what is the trend in fraud? Is it up? Is it down? Is it stable? With the new entire universe of compliance and regulations—has that had any affect in helping currently or will it in the future?
WILSON: A concern that I am seeing today is a lot of loans where we’re putting a lot of responsibility back on the closing agent to do a vendors job. You know, verification of employment, W-2 and paystub should be brought to closing. Well, excuse me people, I don’t think closers have any idea how to review those documents and we should not allow that.
LIPUT: It doesn’t matter if you put in it in the closing instructions if they don’t know what they’re doing.
ANDERSON: I think the CFPB is covering that, because it is that third party. You notice on the lender now for any compliance a third party that they use for whatever. So the lender really now says, “Hey, if they commit fraud and you used them, they are coming after you and not them.” So that put some teeth in the lender having to be accountable for that, at least part of that.
WALZAK: Well, it goes back to standards. The CFPB is all about standards, everything is measured by standards. Well, if we have no standards for what we expect of a closing agent and we don’t define those standards, and we don’t identify how we are going to measure those standards and what’s a good measurement to have, then we’re spinning our wheels again.
ANDERSON: Or they’d be defined by you.
WILSON: The closing industry should voice in and say, this is what our job is. This is where we draw the line. We are not going to verify your documents for you. That should have been done prior to us getting involved. So until they do, speaking as an ex-lender, we tend to be a little bit lazy sometimes and get in a hurry to get a loan closed so we kind of push the responsibility off on other people. And while the regulations will help, it’s not going to get rid of it.
BOZORGI: The key to standardization, you know everyone’s talking about that 50/50 mix of technology and the human element. For standards to be truly effective, they’ve got to be pushed very early in the loan manufacturing process, all the way through the life of that loan. We’ve made some good strides with appraisals, but really that’s just the tip of the iceberg. We really have to standardize on that data technology side of this equation. Every aspect of the loan file has to be boiled down to its individual data elements, standardize those across the industry and push those standards all the way through the life of that loan.
WALZAK: I’ve been talking about this for 25 years. We shouldn’t be doing quality control 90 days or 60 days after the loan closes. If we’re going to automate, let’s automate the quality control process. Let’s have something that analyzes this data, has a rules based system that says: “Whoa, stop, something’s wrong here.” So we fix it right then and there. And we’ve got those standards, you can meet them, you can measure them, but trying to get Fannie and Freddie and HUD to change their quality control requirements is like trying to push a 10-ton bolder up a hill. They’re not going to do it. And it’s really harming us, because people who want to do that still have to do all this back-end stuff and they are looking at what is all this stuff going to cost me? So if we want to automate, let’s automate that quality control process.
ANDERSON: But it’s also how you incent this as well, right? Sales get incentives to bring in sales because they make money off of that. So, the last thing I want to find out is that there’s a problem before closing because I don’t get paid until it closes. So until those incentives change, and the QRM is going to work toward that because compliance is a cost to them, it’s an obstacle to them getting paid.
GERDING: Even in the most basic sense, job responsibility is quality data. And when you talk about inputting basic things like an appraiser license number or different data elements that basically make the loan file what it is, right? And that quality upfront is important. So talking about holding underwriters and processors to standards, that’s a basic job responsibility. It’s very easy to do data checks on completeness, accuracy, is there “XXX” in the appraiser license field or is there actually an appraiser license? Because it’s so easy to just error through that screen and go to the next one, “Oh, yeah, this looks like a great loan.” But we rely on that information to report our fraud trends and get in front of that and if that data isn’t quality, then really we’re not doing ourselves any justice because we’re looking at the wrong things or maybe the trends aren’t exactly what we think they’re telling us.
BINKLEY: You bring up a great point. The fact that all of our legacy systems today is another detriment that harms us as well as enables the criminals. I’ll tell you what, you fill a room with lenders and everybody out there will hold their hand up and say, “Our LOS is greater than 10 years old.” It’s outdated, it’s legacy and it’s not modular, it doesn’t speak to anything and we have to put in the appraiser’s license number five times in our system. Instead of we’ve got it sitting there in a digital format that we can just suck it in and plop it in at one time. And we just don’t get it done.
ANDERSON: That is the problem because most of these systems are based on paper as the input, not data. So it’s all paper driven, tracking paper, trailing docs. It’s just the reverse of what it should be.
WALZAK: What do you think from a secondary marketing perspective, is that going to drive us to be more focused on eliminating fraud?
LIPUT: I am excited about the whole concept moving away from just talking about quality control to loan quality assurance and focusing on the sale of good quality loans within the secondary market. So I think if they’re incentives such as a safe harbor, the availability of maybe specialized insurance to cover losses that don’t exist, then those are great incentives for lenders to focus as much on the sale into the secondary market as they focus on the sale to the borrower.
WALZAK: We are just starting to really see some of these monocline insurers and shareholders of expired companies and people who really got hurt are really only starting to try and recapture some of the money that they lost. But when you look at all those loans, 75% to 80% of them have fraud in them. Granted, they were no doc loans, but still there were red flags all through those files. And it seems like these people who are being asked to go back and insure these securitizations want to know that there’s no fraud in them. And that they would demand that.
ANDERSON: MI companies, too.
WALZAK: Exactly.
BOZORGI: There’s always the debate, talking about the secondary market now, of how you’re going to get that private money back in. We’re starting to see an uptick on that. On the one hand, there are all the discussions about raising g-fees which is attractive from an economic stand point, but the other half of that private money equation and insurance and what have you is all about the confidence of what is actually in these pools. And the ability to not only know that it was accurate at the time of origination, but that that information can be updated on a regular and periodic basis to ensure where that’s sitting today. We are starting to see, again, the very early processes of that—it needs to be expanded quite a bit, but personally, that’s a big key of getting a real good honest to goodness effort of getting private money back into the space and lowering the government’s role.
ANDERSON: Becky, this is actually the key. If investors and securitizers don’t have investments, think about it any business or anything you would buy that you want to do diligently, maybe 10% or 20% is really good. You would buy 80% sight on scene—what business model does that?
BINKLEY: Well, it’s all about really the controls that we have in place and one of the things that that’s going to make the market much more attractive to investors. You’re seeing it already with the certified loan program coming out by other entities and really it’s all about true third-party providers coming in there and providing that information to entities to originate that loan and populate those loan applications and verify that employment and verify that income. When you know you’ve done that, it really creates a box around your information that people can’t come in and change. When you’ve got somebody else that has no skin in that game, they don’t care whether that loan closes or not, they’re just going to say it’s a yes or a no on that information you gave me. And that’s really where we are going to get the controls all around.
BOZORGI: You’re see the other side in addition to that and the investors saying: “Not only do I want that comfort level and assurance that that’s been done, but that I want to be able to verify it myself.” And if I can do that as an investor and get a comfort level with that over time, then I can start doing things like we saw with the GSEs back in the fall by softening the rep and warrant down to 36 months. What does that do in theory? It frees up money, lowers capital reserve requirements and helps the market as a whole. But the only way that occurs is when the investor feels I have confidence and I know what’s in this.
BINKLEY: Those controls were followed.
WALZAK: And that’s what quality control is supposed to be. It’s supposed to be providing that confidence, like you said that assurance. That when I buy something it’s going to be what I thought it was supposed to be. I always buy the same pair of jeans because those people control how they manufacture those jeans and I know they’re going to fit.
BOZORGI: And they’ll last.
WALZAK: And they’ll last. And I can buy them over the Internet.
GERDING: They’ll perform. Long term, we want them to be around for the long haul.
WALZAK: There’s another thing too that would benefit. If the secondary market would focus on other things other than LTV and DTI and the FICO score, because how do you know the DTI was calculated correctly. I mean, that’s a question I keep asking. Does it meet the DTI requirements? Well, how do you know? Did you go back in and calculate it? No, but it was on that data tape, so it’s got to be right.
WILSON: And so are all of those loans that are now in foreclosure or have been in foreclosure. They’ve all met those bare minimum data elements.
