mortgage fraud conference crooks, fraud schemes, and … · 2006-12-27 · mortgage asset research...

12/20/20062006 ChoicePoint Confidential 1

MORTGAGE FRAUD CONFERENCE

Crooks, Fraud Schemes, and Trends-Oh My!

Mandalay Bay—Las Vegas, NevadaDecember 11, 2006


Presented ByMerle D. Sharick, AVP

National Manager/CPS Real Estate and Mortgage Services Business

Development803-364-9048-Office803-422-8460-Mobile

[email protected]


What a Great Place!


Mortgage Asset Research Institute (MARI)

• Established in 1990• Cooperative database provider• Acquired by ChoicePoint in June 2003• 90% of use of MARI products—

Wholesalers and others credentialing brokers and other professionals (i.e., correspondents, realtors, appraisers, builders, warehouse lines, etc.)

• 10% of use of MARI products---Quality Control, Quality Analysis, and/or bank/lender investigative units

• Products include: MIDEX (Mortgage Industry Data Exchange) database, state licensing verifications and—criminal, credit information, and identity verification reports

• All reports returned live time/instant


ChoicePoint Services Inc.

• Over $1 billion in annual revenue-through 50+ strategic acquisitions

• NYSE (CPS) company with over $4 billion market cap• Headquartered in Alpharetta (Atlanta), GA• 5,000 FTE in 20+ metro areas• In early 2005 CPS was a part of the first publicized data privacy

breach—today-less than two years later and after many data breaches suffered by others, CPS is nationally recognized (Gartner Case Study, New York TIMES, etc.) for establishing the highest data privacy standards in the industry!

• Leading provider of – Public records data– Pre-employment screening– Locator and Identity verification services– Insurance services (P&C)


Today’s Discussion Topics

• Why Detecting and Fighting Mortgage Fraud Is More Important Now Than Ever Before-it’s déjà vu!More than a HUGE cost of doing business!

• “THE” Solution to all our problems!• “Only One Thing Matters” in Mortgage Lending• “Beware of Frothy Markets”• Trust ONLY Through Verification and, Re-verification!• New Agency Guidance for “Exotic” Mortgages


Today’s Discussion Topics

• MARI’s Role in the Mortgage Industry• Sharing Information Safely Between Lenders Without

Risking Liability!• Mortgage industry evolution – survival of the fittest • Mortgage Industry Data Exchange (MIDEX) & the

stories it tells– Geographic locations—Types of misrepresentation

• 10 ways to prevent fraud in your company


Detecting, Fighting, Stopping Fraud!

WHY IS THIS SUCH AN HONORABLE AND IMPORTANT EFFORT?

Yogi-”Déjà vu all over again”• What can anyone in this room do that is more

honorable, and rewarding, than helping people buy homes they qualify for with the right loan for them?

• What more can any segment of any business do to help the local and national economy?

History repeats! Perhaps the most important reason (at the end of the day) is to protect the investment grade integrity of the mortgage loan to continue to draw capital from the markets to this industry to feed the national desire for home ownership.


“THE” Solution to All Our Problems!

STOP!Paying Commissions!!

Just Kidding!


Life Lessons About the Mortgage Industry

Only One Thing Matters:

“The Value of the Property On the Day there is a Problem with the Loan”

Max Karl, Founder of the PMI Industry/MGIC 1978

“Beware of Frothy Markets”Leon Kendall—CEO/MGIC 1988


When is a Market Frothy?

Pick The Market Conditions-

High volume of loan originations!Systems are stretched

People are less trained

Corners get cut

Production mentality overcomes common sense


When is a Market Frothy?

Or--Low volume of loan originations!Everyone is working to “feed the monster”

Many individuals/companies are working to maintain a lifestyle!

New risks through new lending products/new markets

People are less trained on risks associated with new products/new markets

Changing economy, higher unemployment, increasing interest rates, and/or overbuilding are also factors—managers have less experience/training on combination of risk factors


When was the Last Frothy Market?

Just Now Ending?

orJust Now Beginning?

Who Knows?


Evolution of Mortgage Industry

• 30 years ago – S&L Era-Portfolio lenders– Personalized – the lender knew the borrowers

– Did it all – Loan originator, appraiser & servicer

– Stable interest rates

– Mortgages: boring, but safe (3,6,3 strategy)

– Fixed costs/Salaried

– Long-term assets (10 to 12 years)

– Thrifts joined life insurance companies in expanding secondary market



• 20 years ago – Bank/Mortgage Banker Era –

trying to fill void left by S & L’s– Sellers of loans--specialized – originate and service

– Fluctuating interest rates--Fixed costs

– Medium term assets (6-8 years)

– Secondary market expansion stopped, then resumed-reacting to the decline of the thrift industry, RE slowdown, and flight/return to quality in lending



• 10 years ago – Mortgage Broker Era

– Highly specialized, limited barrier to entry

– Volatile interest rates

– Variable expenses/Outsourced & Commission Based

– Short-term assets (days, weeks, months)

• 90,000 broker companies—individuals, who knows?

• 60-70+ percent of originations

• Secondary privatization and non-traditional loan growth


Evolution of the Mortgage Industry

• Today – Constricting Market• Refinance boom lasted 6-8 years depending on

market• Interest rates are gently moving—some upward• Many lenders are exploring new markets and new

products to find better ways to serve customers and, find more production through Alt A, sub or nonprime, interest only, stated income/asset, etc.

• Very few mortgage managers have experienced a “slow” time or a threat to loan investment integrity


Evolution of the Mortgage Industry

• Today—Lots of Attention! Good/Bad!• Heightened legislative, judicial, and law enforcement

interest in mortgage fraud—state and national• Regulatory guidance is growing quickly on

“alternative and exotic” loan originations• Goal to protect consumer and promote quality

lending! Investors “enforcing” quality!• Regulatory emphasis—Corporate and business

integrity and safety and soundness—coming to the mortgage industry too!



• Tomorrow – Internet Era– Online originations--Less paper

– Lower costs--Increased automation--Technology

– Continued consolidation in all areas of financial services

that will drastically change the competition

-- Harder to know your borrower/customer– lender responsibility—Investor focus on quality!

-- Continued unprecedented interest by regulators, legal, law enforcement, and the press in all types of lending


Are We Ready For The Scrutiny?


Climate: Today and Tomorrow

THE Bottom Line• Trust only through verification and re-verification!• Originations will be more scrutinized than ever• Those that take responsibility will survive• Those that take action to detect, uncover, and

resolve fraud will be rewarded in the marketplacethrough earned reputation capital and the opportunity to stay in business---many will flourish---unfortunately, many will not

• Unmatched ongoing scrutiny from Investors, regulators, law enforcement, consumers and the press!


Trust Only Through Re-verification!

• Why? The thieves have better technology tools and,• The Prieston Group (TPG) concludes that of the top

15 Red Flags only 26.67% are automatically flagged by technological toolsTPG’s Top 15 Red Flags

1. Inconsistency of ownership between documents2. Payoffs from seller’s funds on HUD-1 to non-lienholds3. Amount of funds to close documented—not enough4. More than 5 mortgage inquiries in CR in last 90 days5. Unusually high income for job—especially if SI loan6. Bank statement deposits don’t match payroll dates 7. Seller is a corporation


Trust Only Through Re-verification!

8. Inconsistent info on 1003, sales contract and HUD-19. Change in ownership in last 12 mo-subject or comp10.Cross-outs of borrower name on loan documents11.Inability to independently verify VOE12.Borrower is a renter, buying for investment purposes13.Appraisal photos don’t match subject or comps14.Appraisal order date prior to application date15.Bank statements missing borrower name or address,

or no match to 1003, or different print fonts, or largeaccount balance but NSF charges appear


Trust Only Through Re-Verification!

• Over-reliance on technological tools costs the industry billions of dollars in losses annually

• Check out these websites:www.creditlaunchers.comwww.seasonedtradelines.comwww.noveltyid.spaces.msn.com/PersonalSpace.aspxwww.peid.com/index.htmwww.fakenamegenerator.com – Over 2 million 6/06www.verifyemployment.net

http://www.creditlaunchers.com/

http://www.seasonedtradelines.com/

http://www.noveltyid.spaces.msn.com/PersonalSpace.aspx

http://www.peid.com/index.htm

http://www.verifyemployment.net/



• State regulators that take enforcement actions– 1993 – 18 mortgage regulators

– 2006 – 49 mortgage regulators

• Shift to regulate companies AND loan officers– North Carolina

– Ohio

– South Carolina

– Colorado comes on board in 2007



• Trends– More depersonalized

– Shift to variable cost

– More efficient system

– Change in incentives – salary to commission

– Loss of quality control with outsourcing

– Increase in regulatory oversight

– Increase in public (and press) interest


TPO Approval Today

• No industry standards

• Manual process– Tips and leads

– Tracking over time

– Scoring – initial and ongoing

• Part-time job

• Credential: Company, Officers, Loan Officers


TPO Approval Today

Type of Information Individual Company

Cooperative incidents of misrepresentation X X

Reference checks X X

Financial review/net worth requirement X X

Education & employment verification X N/A

Insurance coverage verification X X

Dun and Bradstreet N/A X

Industry sanctions X X

Mortgage licensure data X X

ID verification X X

Credit report X X

Criminal records X N/A

Bankruptcy, Liens and Judgments X X

On-site visit N/A X

Media search X X


On Going Monitoring and Scoring

• Updates on initial approval data– Licensing– Public sanctions– Credit history and financial data– Insurance coverage

• Internal data– Early payment defaults– Pull-through rates – Churning– Compliance – predatory loans

• Scoring of information• Very ad hoc


Tomorrow's Approvals – Lenders

• Standardized process– Data– Approval thresholds

• Increased automation– Combining multiple data sources into one report– Reduction of false positives– Scoring of applicant

• Performance sharing w/in industry• Increased accountability


Tomorrow's Approvals

• National Licensing Registry: Nearly everyone knows one is needed

• Various government units (HUD, etc.) have wanted to register companies, officers, LOs

• MBA, NAMB, GSE, National lenders– 3-year study– Voluntary versus mandatory– TPO versus retail (cost)


Tomorrow's Approvals

• National registry—2007/2008CSBS and AARMR– Standard license application – all states– National repository: Licenses, Due Diligence,

Permanent Number

National registry issues:– Who do you register– Cost to retail lenders– Must be mandatory


Fraud is When Evil Doers…

Intentionally entice a financial entity to make, buy or insure a mortgage loan when it would not otherwise have done so, had it possessed correct information


MIDEX-Exchange Information Safely!

• The Mortgage Industry Data Exchange (MIDEX) was founded by mortgage industry participants with a “common interest”-- lenders, MI’s, agencies

• MIDEX Public—financial sanction information from over 200 federal and state regulatorsMIDEX Non-Public—derogatory submissions from almost 700 subscribers—only available from MARI

• MARI founders sought and received a positive opinion on MIDEX database from the US Department of Justice


MIDEX-Exchange Information Safely!

The DOJ informed MARI that it had no intention of taking any enforcement actions against MARI.

The DOJ noted that the MIDEX database would be accessible to all participants in the mortgage banking industry and was unlikely to be used to benefit a particular class of market participants. Subscribers have a “common interest.”Submitting subscribers are not identified and subjects can post a rebuttal to the submission.The DOJ found favorable the fact that MARI did not take any action in connection with the information other than to maintain the database.


MIDEX Database Information

• Industry-contributed incidents of alleged fraud• Public sanctions and legal actions• Licensing verification reports

NOW WITH CONTINUOUS MONITORING!• Criminal actions• Credit history – offered through ChoicePoint• ID verification

Many of subscribers refer to MARI as the BBB of the mortgage (and financial services) world.


MIDEX Non-Public Cooperative Data

• Includes incidents of:– Alleged fraud– Material misrepresentation– Serious misconduct

• Nearly 700 subscribers (Agencies, MIs, Lenders)

• Approximately 90% of wholesale lenders (volume)

• Top prime and nonprime lenders

• Began sharing cooperative incidents in 1995

– MIDEX is Endorsed by MBA, NHEMA, and MHI– MIDEX has become a “Utility” in the mortgage industry (i.e., MERS,etc.)


Scope of MIDEX Public Sanction Data

• From 200+ State & Federal regulators• Data on companies and professionals• Primarily administrative actions• Some legal actions• Industries covered:

– Mortgage– Securities– Commercial banking– Real estate– Appraisal


Sources of MIDEX Licensing Data

Automated Continuous Monitoring is Available NOW!

Of all these sources:

• 50+ state mortgage regulators

• Federal regulators– FDIC– NCUA– HUD– VA


Types of Misrepresentation In MIDEX

Income

Credit Worthiness

Employment

Funds to Close

Property Value

Purpose of Loan

Occupancy

Liabilities

SSN


Types of Fraud in MIDEX

Churning and Chunking

Equity Theft

Property Flips

Foreclosure Rescue

Investment Clubs

Identity Theft/Creation

No Money Down/Cash Out Purchase

Air Loans, and many more!


MARI’s Litigation History

MARI has been sued several times, never lost, settled twice—data remained in MIDEX per settlement

May 4, 2005—a decision in U.S. District Court for Southern District of Ohio is of important note.

Flagstar Bank was sued by Prime Time Mortgage alleging Flagstar Bank defamed the character of Prime Time and one employee by reporting to MARI that Prime Time and the employee misrepresented the appraised value for a property and failed to report a flip on the property.


MARI’s Litigation, Page Two

• MARI was initially a defendant in the case but was dismissed when Flagstar asked MARI to take the report out of the database—which we did because the report is owned by Flagstar Bank.

• Flagstar Bank countersued Prime Time Mortgage for damages on the loan at issue based on the legal concept of “qualified immunity” and defended against the defamation claim.

• The judge ruled in favor of Flagstar Bank affirming that the qualified privilege applies in this type of reporting.

• Additionally, the judge awarded $39K in damages on the loan in question and ordered Prime Time to pay Flagstar Bank’s legal fees, which they did-with no appeal.


New Hampshire State Supreme Court Unanimously Rules in Favor of MARI in January, 2006

• MARI was sued in 2004 by Andrea Collins and A&B Mortgage for defamation, gross negligence, and willful misconduct

• Superior court ruled that MARI had “a conditional privilege as a mercantile agency, and that privilege could not be lost unless there was a showing of malice or willful misconduct.”

• New Hampshire State Supreme Court upheld the summary judgment ruling of the lower court.

• Plaintiffs did not appeal

MARI’s Litigation, Page Three


What is Mortgage Fraud?

Intentionally enticing a financial entity to make, buy or insure a mortgage loan when it would not otherwise have done so, had it possessed correct information


Report Mortgage Fraud Even. . . . . . . .

• If the Loan was not closed• If the Loan is not in default• If the Loan was not purchased• If the Loan was not insured


Fraud Types

• Fraud for:– Housing– Commission– Profit—local law enforcement economic

crime unit and FBI emphasisFraud and misrepresentation are fancy

words that mean THEFT—attracting attention from Organized Crime/Terrorists


Consequences of Fraud

Professionals

• Knowing about fraud but doing nothing can jeopardize one’s:– Reputation– License Status– Livelihood—Club Fed?– Bottom line



Consumer• Neighborhood deterioration

• Increased property taxes

• Inability to sell home

• Decline in quality of life


SAR Filings

Mortgage FBI Cases1996 1,318 2006--33,414 (52%+) 2003 4361997 1,720 2004 5341998 2,269 2005 7211999 2,934 Source: FBI

2000 3,5152001 4,6962002 5,623 ID Theft Increase2003 6,936 3,1652004 17,127 15,491 389%2005 21,994Source: FinCen


Why Are SARs Numbers Low?

SARS are currently only filed by federally insured financial institutions and their affiliates

• While there have been 150 independent mortgage banker acquisitions by federally insured banks and thrifts between 1997and 2005---a huge number of independent companies that originate loans are not required today to submit SARs

• Legislation/Regulation may soon require all lending companies to submit a SARs-like report

• Also, often times a loan can season 1-4 years before fraud is discovered. As a result, the SARs report may take 2-5 years to appear



China executed 4 people for bank fraud• 2 for fraudulent docs • 2 for theft• Total losses - $15 million

(9/14/04 Reuters)


What Causes Fraud to Increase/Decline?

• Property appreciation

• Interest rates

• Regional economic changes

• Laws and regulations

• Culture

• Focus by crooks on real estate transaction


What Causes Company Fraud to Increase?

• Buying the market

• Poor quality controls– Underwriting

– Broker/correspondent/appraiser approval-Employee Hiring

• Expanding w/o expertise

New products/new markets

• Improper use of lending programs

• Corporate culture


Guidance-NonTraditional Mortgage Risks

• October 4, 2006Comptroller of the Currency (OCC), Federal ReserveBoard, FDIC, OTS, NCUA published final guidelines on nontraditional mortgage product risks impacting government regulated/insured financial institutions and subs.

• CSBS and AARMR recognized the guidance does not cover a majority of loan originations and took action to help state regulators of mortgage brokers and mortgage companies not affiliated with banks.

• Why Guidance? Regulators concerns over S & S


Guidance-NonTraditional Mortgage Risks

• “Nontraditional, Alternative, or Exotic” loans include “interest-only” and “payment option” adjustable-rate mortgages

• Guidance addresses:Qualifying borrowers, Collatoral-dependent loans,Risk layering, Reduced documentation, Simultaneous second-lien loans, Introductory interest rates, Subprime borrowers, Investor loans

• http://www.compliancesource.com/etc/11-28-06 CSBS-AARMR FINAL GUIDANCE, RED-LINED VERSION.pdf

http://www.compliancesource.com/etc/11-28-06 CSBS-AARMR FINAL GUIDANCE, RED-LINED VERSION.pdf




MIDEX Story – Take the Money and Run

• Sally is a RE industry professional who:

– Purchases a residence in southern FL

– Obtains a high LTV mortgage

– Files a bogus lien release with the county

– Continues to make payments on her mortgage

– Sells the home and pockets all sale proceeds


MIDEX Story – Take the Money and Run V.2.

• Lender received 5 refinances with OH broker

• Broker owned by licensed attorney

• Owner was closing agent

• Closing agent failed to pay off 1st mortgages

• Mortgages recorded in wrong county


MIDEX Story – Change Your Passwords

• Former LO admitted to using broker’s login ID and password to obtain credit reports

• Broker’s tab was $1,200


MIDEX Story – Kansas City, MO ID Theft

• 26 loans originated by same lender

• All loans had forged signatures on the appraisal

• 10 loans contained ID theft for 2 loan officers


MFAS Story – Asset Rental Program

• Asset rental program advertised via web & email

• Professional marketing materials and contract

• NV firm establishes account in your name

• Place money in account

• Rental fee = 5% of rented funds

• Also provides an ‘Employment Verification Program’


MFAS Story – EBay Straw Borrower

• “RE investor/partner needed”

• “Licensed FL mortgage brokers (MBB)”

• “Looking for people with good credit”

• “Pay Scale Special”– 1 deal: $7,000– 2 deals: $11,000– 3 deals: $15,000– 4 deals: $18,000– 5 deals: $21,000

• One-stop shop


MIDEX Story – SC Stockbroker Fraud Case

• Jon put $10K of client funds in his bank account

• NASD debarred and fined Jon $50K

• Jon said it was all a big mistake

• What does Jon do for a job?

• He becomes a loan office manager with a major lender

• Jon also sets up his own mortgage company



• Jon originates several hundred loans for lender

100 were audited and included:– Fictitious documents– Inflated appraisals

• Lender’s losses up to $2.5MM-but, some good news!

• Jon pleads guilty to mortgage fraud--Sentenced to 5 years

probation (no jail time)



The Good News!

The Lender/

The MARI Subscriber recovered the

stolen amount!


MIDEX Story – Colorado Stockbroker

• ATTORNEY GENERAL SALAZAR ANNOUNCES INDICTMENT IN ALLEGED $3 MILLION SECURITIES FRAUD CASE - 8/23/2004

• Highlands Ranch Stockbroker Indicted Plea bargain in fraud case Ex-Douglas County broker pledges to repay victims - July 27, 2005

• Ex-trader given work-release deal. Former stock promoter must repay $2.3 million to mostly elderly clients - July 30, 2005

• Former Stock Promoter Must Repay $2.3 Million to Mostly Elderly Clients Rocky Mountain News - 7/30/2005


MIDEX Story – Detroit Flips

• Deeds forged on abandoned properties

• Properties sold through investment seminars

• One-stop shop investment properties

• Borrowers have high credit scores

• Loans processed through AU system


Mortgage Fraud

• Where it’s Hot and Where it’s Not

– Geographic hot spots

– File hot spots based on MIDEX incidents reported by

subscribers

– Hot spots based on serious early defaults compared to

MIDEX incidents reported by subscribers

– Let’s look at the states of interest to you!


Mortgage Fraud Trends

Quick Look at MARI’s 8th Annual Report to MBA:

• Shift in states with greatest fraud problems

• FL and Utah rank at the top

• GA and CA don’t rank as top states

• Serious Early Payment Default data correlates with MIDEX

findings

• Types of problems in non-prime loans relatively stable


Hot Spots-Prime Loans


Geographic Overview

Interesting conclusions-


What Table Two Tells Us

– Georgia has dropped to third position for frauds reported to date. This drop may be due to the aggressive legislation and enforcement Georgia officials have recently put in place.

– Utah’s fraud problems have given it a consistently high ranking despite increased requirements for professional licensing and education and beefed-up enforcement.

– Colorado shows the greatest “degradation” over the past five years.

– The greatest improvement in the last five years’ books of business can be found in South Carolina.


Massachusetts and Northeast

2005 2004 2003 2002 2001MASSACHUSETTS (MA) 40 41 46 45 44CONNECTICUT (CT) 24 37 37 25 32DIST. OF COLUMBIA (DC) 44 43 48 29 47DELAWARE (DE) 44 39 47 44 45MARYLAND (MD) 17 22 20 20 20MAINE (ME) 39 46 48 46 47NEW HAMPSHIRE (NH) 42 47 45 46 43NEW JERSEY (NJ) 35 12 17 22 25NEW YORK (NY) 12 9 16 14 10PENNSYLVANIA (PA) 25 27 33 27 24RHODE ISLAND (RI) 15 38 41 24 40VIRGINIA (VA) 16 25 26 33 38VERMONT (VT) 44 47 34 30 47


Arizona, Southwest, and West

2005 2004 2003 2002 2001Arizona 18 16 19 16 23California 8 17 18 23 18Colorado 4 3 5 18 21Montana 44 45 48 43 36New Mexico 21 24 36 17 28Texas 7 8 6 9 15Oregon 29 35 31 40 39Utah 2 4 3 3 3Washington 20 33 35 37 29Wyoming 23 47 39 46 47


Hot Spots-Subprime Originations


Subprime State Trends

• The preliminary data in this table reveal a number of interesting patterns.

• For the most part, the states that report difficulty with subprimefraud are the same ones that have problems listed in the more comprehensive Table 2.

• Georgia, while still among the top five states in subprime fraud loan reports, has dropped in dramatic fashion from 2002 and 2003, when its MFI rates were four to six times the national average.

• Rhode Island’s presence among the top ten states with subprime problems is clearly a statistical anomaly based on the fact that the increase of a few fraud cases in a very small state can create a large percentage change. Its present 2005 MFI is simply an aberration.

• South Carolina again shows the most improvement over the past five years.


Types of Mortgage Fraud


Types of Mortgage Fraud-Trends

Many of the percentage figures shown in the table above are similar to those MARI has reported for several years. There are two exceptions, however-

• First, compared to MBA/MARI Case Reports in past years, the level of reported appraisal fraud found in loans originated in the one-to-four year period prior to the report has increased.

• Second, the 2003-2005 problems found in credit reports, while still few in number, are much higher than the 1% to 2% historical figures.


Types of Mortgage Fraud-More Trends• Appraisal fraud reported lower than expected for every year• Incidents reported have more than one type of fraud—if on

VOE,etc.-don’t order appraisal• All appraisal numbers will increase over time as more problems

found• Lenders report that attempts at appraisal fraud are much

higher—many loans are not closed when values are compared to AVMs

• Some lenders are very concerned about using AVMs in major urban areas where the same neighborhood may contain diverse housing types—nearby comparables may not really be comparables—appraisals are far more accurate when reviewed by experienced appraisers familiar with the market

• Some lenders also concerned about accuracy of AVMs in areas hit by property flipping—models may be influenced by transactions not recognized as flips


Serious Early Defaults (SEDs)• Loans that become delinquent by more than ninety days or go

into foreclosure in the first 6 to 18 months, Serious Early Defaults (SEDs), do not necessarily involve fraud. However, many such loans contain some form of misrepresentation and should not have been made-as compared to zero payment defaults.

• LoanPerformance, Inc. collects monthly payment data on more than 40 million loans. An analysis of prime payment histories prepared by the LoanPerformance staff is presented in Table 5. It shows prime loan SED scores for various metropolitan statistical areas (MSAs) around the country. (These scores are based on the dollar volume of the problem loans, and an SED score of 100 indicates an area has an SED score that is average for the United States.) The years designated by columns in Table 5 refer to the origination years. The 13 MSAs listed in the first column of the table are those that have SED rates at least50% above the national average for the 2005 book of prime business.


Serious Early Defaults-Prime Loans


Prime MSA Trends

• New Orleans’ SEDs are, of course, far above any reasonable range due to the effects of Hurricane Katrina. However, the figures for years prior to 2005 also show that the city is no stranger to Serious Early Defaults.

• The other cities that rank high in 2005 SEDs have all been on this list in the past. However, it is notable that Atlanta’s rate has dropped significantly from levels reported in MARI annual reports for past years.

• The Table 5 figures confirm the concerns expressed by industry professionals over the past two years. Many report seeing much of their fraud problems shifting from the larger metropolitan areas to cities of more moderate size. Indianapolis, West Palm Beach, Memphis, Columbus, San Antonio, and Orange have only recently shown up as potential fraud hot spots.


Serious Early Defaults-Subprime Loans


Top 10 List for Preventing Mortgage Fraud

1. Develop a formal, written fraud policy– Senior management and BOD

• Backing • Commitment• Oversight

– Proper balance between QA and production– Make part of new employee training – Distribute to third-party contractors with whom you do

business• Brokers and correspondents• Appraisers• Title and closing agents• Investors• Insurers



2. Educate employees on fraud– Employee training

• AEs• Underwriters• QA and SIUs

– External training through classes and seminars• Trade associations• Others

– How to suspect and report• Not everyone should be a fraud expert

– Make it part of your corporate culture• Monitor• Recognition• Rewards



3. Establish routine fraud detection procedures– Pre- and post-funding

• Sampling• High risk areas

– Use external resources when necessary• 4506 verification• Loan-level screening• Investigations• Verifications• AVMs



4. Develop sources for fraud tips & leads– Hotline

• Internal, external and anonymous• No retribution to reporting party

– Investor repurchase requests– QC audits– Referrals

• Consumer disputes/complaints• Line of business (underwriters, processors, AEs)• Law enforcement

– Subpoenas– Media searches– Third-party due diligence– Industry contacts



5. Provide adequate resources to detect fraud– Funding for internal staff or outsourcing– Software systems– External resources

• Investigations• Legal• Database/research tools



6. Focus on high risk areas– Analyze internal data

• Early payment defaults• High concentration – clients, developments, neighborhoods• Tips and leads from hotline and other sources

– Higher risk product lines• Self-employed borrowers• NINA loans• Stated income

– Geographic areas• Regional economic changes (NV)• Unique economic characteristics (UT)

– Use external resources when necessary• Portfolio analysis (LoanPerformance)



7. Educate your business partners on fraud– Develop Best Business Practices– Establish formal communications for BBP policy

• Contract• Website• Newsletter

– Make it known that you do not tolerate fraud



8. Establish an exclusionary list– Criteria for addition to list– Review committee– By business type

• Retail (loan officers, underwriters and processors)• Third-party originators• Appraisers• Title and closing agents

– Distribute list to those who have a need to know:• Employees• Business partners



9. Conduct background checks– Hiring Employees– Business partners

• Appraisers• Brokers• Correspondents

– Initial and ongoing checks– Different screening levels based

on exposure


Background Checks

Type of Information Individual Company

Cooperative incidents of misrepresentation X X

Education & employment verification X N/A

Insurance coverage verification X X

Dun and Bradstreet N/A X

Financial services industry sanctions X X

Mortgage licensure data X X

ID verification X X

Credit report X X

Criminal records X N/A

Bankruptcy, Liens and Judgments X X

Drug screening X N/A

Other public records sets X X



10.Establish Consequences – Make Crime Cost– Exclusionary list– Licensing bureau complaints– Police reports– SARs– MARI’s MIDEX submissions– Employee disciplinary actions– Civil litigation

• In-house counsel• Law firm• Outsource – IMARC

– Task forces


MARIReston, VAwww.mari-inc.com703-620-6262

ChoicePointAlpharetta, GAwww.choicepoint.comNYSE:CPS

Available on MARI’s Website• Eight MBA Case Studies

• NHEMA Subprime Case Studies

• Fraud Cost Article

•Congressional Testimony

mortgage fraud conference crooks, fraud schemes, and … · 2006-12-27 · mortgage asset research...

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