Title and wire fraud risk appeared in nearly half of 3Q loans

Signs pointing to the threat of wire or title fraud declined from earlier this year but still showed up in nearly half of all third-quarter mortgage transactions, according to a new report from FundingShield. 

The fraud prevention firm found 49.2% of loans had issues that could have compromised loan transactions between July and September, which totaled $61.3 billion in volume. Despite a shrinking number of new originations in 2023, the share was higher than the 47.6% of a year earlier. But the number also fell from elevated levels reported in the first and second quarters this year when fraud risk appeared in 51.7% and 50% of loans, respectively. 

Loans showing signs of fraud risk had almost two issues on average, an indication some closing agents lacked the necessary controls to identify and fix issues, FundingShield also said. While greater use of technology is leading to increased efficiencies in the closing process, it also is opening the door to cybersecurity threats, according to company CEO Ike Suri. 

"Tech innovations that have been deployed by mortgage companies have helped bring down closing costs; however, these emerging technologies being introduced such as AI-driven microservices continue to add new vulnerabilities and gaps that can be exploited by threat actors," he said in a press release. Although the issues leading to title and wire fraud have slowed this year, they still make up well over the 35.7% share found in transactions from early 2022.

Increased levels of insurance-related problems also appeared in the third quarter despite the overall downward-sloping trend. Closing agents with insufficient insurance coverage hit an all-time high share of 8.9% of transactions, jumping upward from 5.4% in the second quarter, a surge that likely resulted from significant increases in premiums that left many companies unable to qualify. Insurance providers are struggling to underwrite new policies for businesses facing cybersecurity threats that might lead to high monetary losses, FundingShield suggested. 

Potential wire fraud showed up in 6.3% of transactions, up from 6.1% in the second quarter. A rise in bank accounts registered to unlicensed third parties, which were not associated with the authorized participants to settle funds, contributed to the increase. 

At the same time, flaws found in closing-protection letters and validations fell quarter-over-quarter to 40.3% and 5.6%, compared to 43.7% and 6.7% three months earlier.

FundingShield also said it sees ongoing instances of business-email threats targeting the technology infrastructure at title and escrow companies and noted that actual occurrences are likely higher than numbers reported to the FBI. Once fraudsters gain access to internal systems, they can subsequently divert and steal closing funds. Ransomware has also been deployed by fraudsters in several hacking cases over the past few years, with a 2021 cyber attack on title-industry platform Cloudstar, leading to a massive disruption to settlement services providers.