It often seems that mortgage fraud is just like the weather – everyone talks about it, but no one seems to be able to fix it. This week, we explore the thorny subject of mortgage fraud with a leading expert on the topic: Brent Chandler, founder and CEO of Athens, Ga.-based FormFree Holdings Corp.
Q: In your opinion, how successfully is the industry addressing fraud prevention today? And are there areas where improvement is needed?
Brent Chandler: The industry is very aware of fraud and is working actively to remove it, but there is always room for improvement. Any part of the loan application process that still relies on the exchange of paper and manual processes is at the highest risk for tampering and the falsification of data. Thankfully, technologies have been emerging to automate a lot of the data collection. To the extent that you can remove people and paper from the lending process, you can mitigate fraud.
Q: What do you see as the most common fraud schemes going on today?
Brent Chandler: We still see a lot of origination fraud being perpetrated by borrowers. Lenders tell us that they receive between three to five fake bank statements on applications a day, and those are only the ones that they catch. The actual number could be much higher on applications in which the borrower’s income, assets and employment are being verified through paper manual processes.
Other common fraud schemes involve the inflation of assets through large deposits made into the borrower’s bank account in order to qualify for the loan; the use of mule accounts; and falsely inflating the price of the home. These are all schemes that are extremely hard to catch when lenders rely on paper documents—and many lenders still do.
Q: How has the migration to paperless transactions helped or hindered the efforts of fraudsters?
Brent Chandler: All paperless transactions are not created equal. If the borrower is simply providing an upload, scan, digital picture or even a PDF of their statements to the lender, the fact remains it is still coming from the borrower, and the borrower has an opportunity to edit these documents with something like Photoshop. There are many websites that offer tools to create fake bank statements (a simple Google search returns 1.6 million such sites) and there are easy ways to edit PDFs, too.
So just having a digital copy of something isn’t enough. To truly hinder fraudsters, you have to remove any opportunity for them to manipulate the data. That means getting the data directly from the source (such as the bank for bank statements, or the IRS for tax documents) and creating read-only views that get included as part of the loan file.
Q: The Inspector General of the Department of Justice recently issued a harsh report questioning the federal response to prosecuting mortgage fraud. Does this report surprise you?
Brent Chandler: In some ways, no. With upwards of 500 pages of information in each loan file, and multiple persons involved in every loan, it can be really hard to tell who tampered with information and at what point. The paper trail can be a real mess. I imagine that the time needed to investigate each case would be tremendous.
Do I think the FBI could be doing more? Absolutely. Will they actually move these investigations up in priority? Probably not. However, I am encouraged that the industry is focusing so much on fraud prevention, and not relying on discovery and prosecution after the loan goes bad.
Q: Can the industry ultimately ever get mortgage fraud stomped out?
Brent Chandler: I think it is unrealistic to think that you could prevent? all fraud in any industry. However, the more we automate systems and strive to get the highest quality of data possible directly from the source, the more we can limit the opportunity for tampering. We are introducing smarter systems that can learn to identify suspicious behaviors and suspect activity prior to loans being funded, which will definitely help reduce the level of fraud.
However, not all bad information in a loan file gets there by intentional tampering, but simply through human error. The more we rely on direct data sources and apply machine learning and?artificial intelligence to run calculations and conduct analysis, the more errors and fraud we can remove. I imagine in the coming years it will be harder and harder for fraudsters to overcome the advantages offered by these technology advancements.
FormFree Holdings Corp. is online at www.formfree.com.
Phil Hall has been (among other things) a United Nations-based radio journalist, the president of a public relations and marketing agency, a financial magazine editor, the author of six books and a horror movie actor. Also, as you will discover, he is not shy about stating his views.