More recent fraud reports reflect a decline in both fraud and misrepresentation as the lower interest rate market has continued to produce strong refinance volume, which historically has indicated a less risky environment for fraud. Along these lines, the Mortgage Bankers Association reported that refinances represented 58.5 percent of total application volume in their October 23, 2019 weekly survey. Be mindful that this represents a drop due to an uptick in rates from the previous week, when refinance application share was reported at 62.2 percent.
The important takeaway from this scenario is not to ease focus on fraud risk, because fraudsters don’t go away. Bridget Berg, Principal over Mortgage Fraud Solutions at CoreLogic recently stated that, “The decrease in fraud risk mid-2019 appears temporary, based on unexpected interest rate drops and an influx of low-risk refinance transactions. The absolute number of risk loans did not decrease but is part of a larger mortgage market for now.”
That being said, it is critical for lenders to stay informed of trends in fraud and misrepresentation, irrespective of declining or rising risk percentages. One significant area where fraud frequently exists is income. The current misrepresentation of source of income, likelihood of continued employment, and the misstated amount or existence of income, was reflected as the highest area of perpetration earlier this year. Fraud and misrepresentation can increasingly be found in income stated as earned for less than one year, where IRS records are not available. Coupled with the online availability of sophisticated fraudulent documentation, lenders need to ensure that audit and quality control functions are particularly sharp when verifying short term income.
Some additional Income & Employment Red Flags to look for are as follows:
Signatures for the same borrower name differ.
Dates on the application and supporting documentation are inconsistent.
The income reflected is not consistent with type or longevity of employment.
The employer address is listed as a P.O. box.
The same phone number is reflected for the borrower and employer.
When evaluating credit, some Credit Red Flags to consider are:
A decline in property value between borrower’s current property and the property being purchased.
The Social Security Number is not 100% verifiable as belonging to the borrower.
Significant differences exist between the original credit report and new or supplemental reports.
Duration of established credit is not consistent with borrower’s age.
Multiple inquiries appear on the credit report.
Despite significant appraisal regulation since the financial crisis, it is still important to be aware of Appraisal Red Flags such as:
Occupancy status reported on the appraisal does not match the loan application.
The type or location of comparables is inconsistent.
The appraisal photographs do not match information reflected in the appraisal report, including a difference in the house number.
More than one non-MLS sale is used as an appraisal comparable.
The owner reflected on the appraisal differs from the seller listed on the sales contract.
There are several General Red Flags that should also be a part of your fraud review process:
Verifications completed on a date that falls on a weekend or holiday, or on the same day requested/ordered.
The homeowner’s insurance is actually a rental policy.
Addresses on bank statements, paystubs and/or W2s differ.
Child support appears on paystubs but is not indicated on the loan application.
Reported assets are inconsistent with income.
Although these red flags are not unexpected, and may even be on your existing checklists, it is vital that your team looks for even slight discrepancies in data and documentation. Quality Mortgage Services understands the importance of staying engaged in checking for evidence of fraud and misrepresentations, providing training and tools to augment QC collaboration in this area so fraud defects and risk can be minimized. The current state of fraud risk also presents a perfect opportunity to shore up processes in this area before interest rates increase, a deepening in the economy or recession hits, credit parameters ease, non-QM originations increase, or any other industry event that will reopen opportunities for fraud and misrepresentation.
QMS is committed to keeping you apprised of areas of risk as our industry experiences economic, regulatory and digital change. As QC partners, our goal is to help your organization successfully and confidently address audit and compliance needs in a manner that best reflects your business and brand. We are more than just vendors. QMS is the mortgage quality control and audit technology solutions company. Contact us today at qcmortgage.com or call us directly at 615.591.2528 to learn more about the benefits of QC partnership with QMS.